Saccos jolted as bank loans interest falls to 15-year low

BySacco Review

Jul 10, 2020

By Staff Reporter

Savings and Credit Co-operative societies (Saccos) will face pressure to offer attractive interest rates on loans in the wake of prices of commercial loans falling to levels last seen in 2005.

The Central Bank of Kenya (CBK) has been pushing banks to lower interest rates despite the removal of interest rate cap law last year.

Low interest rates in commercial banks are set to reduce the gap between pricing in Sacco movement and banks. This will blunt the attractiveness of Saccos when viewed in the lens of affordable interest rates alone. This comes at a time banks have also been aggressive in restructuring loans of members at no additional cost in the wake of coronavirus pandemic that has led to widespread job losses and salary cuts.

Saccos are yet to take uniform approach to the pandemic with bodies such as Kenya Union of Savings and Credit Cooperatives Limited (Kuscco) asking members to be cautious in lending.

“We advise Saccos to reduce long term lending, retain interest on loans as agreed by respective SACCO boards and restructuring of loans where need be, on a case by case basis,” advised Kuscco managing director George Ototo.

Saccos had for long been preferred by customers because of lower interest rates in comparison to rates of as high as 25 percent in the banking sector.

However, commercial banks have now cut the price of loans to the lowest level in 15 years as CBK reduced the benchmark lending rate in the wake of removal of rate cap laws and onset of coronavirus pandemic.

Lending rates closed March averaging 12.09 percent, the lowest since January 2005 when it was at 12.12 percent in the reign of ex-CBK governor Andrew Mullei.

The drop is despite National Assembly in October last year having repealed the Banking (Amendment) Act 2016 and, allowing banks a free hand in deciding on interest rates to charge customers.

This is after CBK embarked on cutting the benchmark lending rate to signal cheaper credit.

Saccos are now under pressure to relook into their pricing models so as not to lose members to banks, especially when it comes to loans.

However, this comparative advantage of good rates previously associated with Saccos is slowly being encroached, and therefore competition with banks is set to get stiffer.

Stiff competition is also coming from other financial service providers, particularly with the growth in popularity of the digital credit service providers that principally specialize in unsecured microcredit loans issued via mobile phones.

Saccos traditionally pay good returns on members’ deposits, reports from Saccos Societies Regulatory Authority (Sasra) show.

Saccos normally pay interests on the members’ deposits and dividends on members’ share capital at such rate as may be proposed by the board of directors and approved by the general meeting of the members

For instance, deposit taking Saccos paid interest on deposits at an average rate of 7.1 percent as share capital on the other hand attracted dividends at the rate of 9.40 percent. Sector figures for last year are yet to be released.

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