Saccos warned on risky borrowing to acquire assets

BySacco Review

Sep 15, 2020
Mr Geoffrey Njang'ombe, Commissioner for Cooperatives. Photo/Courtesy
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By Azael Masese

Savings and Credit Cooperatives Societies (Saccos) must desist from investing members’ deposits or borrowing to put up rental or commercial buildings.

Acting Cooperative Commissioner Geoffrey Njang’ombe noted that with the high interest rates regime, it makes no economic sense for societies to venture into the businesses.

“This used to be a fashion but with high interest rate regime in the country, it has ruined many societies and they need to refrain from it,” he advised.

During an interview with Sacco Review, Njang’ombe noted that societies are welfare entities and their affairs should not be mistaken to putting up structures without due diligence.

Societies, according to the cooperative movement principles are meant to mobilize funds and extend affordable credit to members at affordable rates.

With the craze of urbanization, a number of societies have gone to developing office space or rental houses for a return of the members’ investments.

Other than using members’ deposits to construct buildings, a number of societies borrow from banks to undertake such investments.

Ironically, the interest rates on such loans is higher compared to the one extended to members who borrow from the society.

“They should refrain themselves from going into putting up buildings since a society is a welfare and can comfortably be accommodated even within the institution where it draws its membership from,” he offered, terming it a wrong investment move to use members’ savings to build rental or commercial structures.

One such society that has seen the decision to borrow and put up a structure is the Moi University Sacco Society (Musco), which borrowed to put up Moi University Towers, and this is where trouble started as its license was revoked and put under liquidation.

The Commissioner said that some parties believed that the liquidator was selling the building but the society had taken a loan from Cooperative Bank to put up the structure.

He noted that the building, whose current market value is Sh360m, was overvalued to about Sh400m.

During annual meetings with delegates or members, society boards seek approval for external borrowing to undertake such investments as part of the society’s resolution.

Consequently, informed members are able to dissect the performance of the society can reject such proposals hence the need to conduct education.

“Members need to make sound decisions on issues that touch on the society such as external borrowing,” he advised.

External borrowing to invest in unplanned properties, he warned, will impair the society’s liquidity ratios as those that depend on their own deposits have high liquidity due to less borrowing.

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