SASRA warns saccos over big rise in bad loans

By Jackson Okoth

The Sacco Societies Regulatory Authority (SASRA) has raised the red flag over an increase in the volume of Non-Performing Loans (NPLs) beyond the prescribed limits.
The Authority is also concerned that most DT-Saccos are not retaining sufficient earnings to build capital, proportionately to the growth of their asset bases.
“It also shows that many DT-Saccos tend to pay out dividends on shares or interests on deposits, most of their surpluses rather than retain the same to build capital,” said SASRA in its latest Annual Report on performance and operations of DT-Saccos in Kenya.
According to this report, the number of DT-Saccos that had a huge portfolio of non-performing loans (NPL) ratio in the loan books increased with only 88 DT-Saccos out of all the DT-Saccos licensed being able to keep these potentially bad loans within the stipulated limits.
Apart from 88 DT-Saccos who were able to keep their NPLs ratio below the 5 per cent threshold, the remaining DT Saccos had NPLs of over 5 per cent with 47 DT- Saccos registering NPLs of 10 cent and above thereby depicting a huge number of DT-Saccos with potentially bad loans
SASRA uses CAEL (Capital adequacy, Asset quality, Earnings and Liquidity) rating model to monitor the financial conditions, soundness and performance of the DT-Saccos.
At the close of financial year ended, a total of 168 DT-Saccos were fully compliant with the minimum core capital of Sh 10 million in 2016, as opposed to 173 DT-Saccos that maintained the compliance level in 2015.
This means that there was a drop in the level of compliance by 5 DT-Saccos in terms of the prescribed absolute core capital requirements.
The prescribed minimum core capital is Sh 10 million and core capital in the DT-Saccos legal framework is composed of the member’s shares, reserves, retaining earnings and donations.
An aggregate analysis by SASRA shows an increase in the aggregate core capital from Sh 41.7 billion in 2015 to    Sh 54.9 billion in 2016.
The number of DT-Saccos that held core capital requirements of between Sh5 million and Sh10 million also increased from one DT-Saccos in 2015 to 3 DT-Saccos in 2016 implying an increase in the number of vulnerable DT-Saccos.
The number of DT-Saccos that held core capital of less than Sh5 million also increased to 4 DT-Saccos in 2016 from 3 DT-Saccos in the previous year.
The DT-Saccos in this level are considered very weak and are operating on stringent conditional licenses with a view to protecting depositing members of the public, as well as strengthening these DT-Saccos to be sustainable in the long run.
SASRA regulations prescribes that DT-Saccos must at all material times maintain a core capital to total assets ratio of 10 per cent; as well as a core capital to total deposits ratio of 8 per cent, while the prescribed minimum ratio for institutional capital to total assets is also capped at a minimum of 8 per cent.
Only 69 DT-Saccos met and maintained the minimum institutional capital to total assets ratio of 8per cent while another 80 DT-Saccos were hovering between 2 per cent and 8 per cent.
Institutional Capital is principally built from retained earnings by DT-Saccos and forms a key component of their core capital.
The poor level of compliance with the institutional Capital to total assets ratio thus demonstrates that many DT-SACCOs are not retaining sufficient earnings to build capital, proportionately to the growth of their asset base. It also shows that many DT-Saccos tend to pay out (as dividends on shares or interests on deposits), most of their surpluses rather than retain the same to build capital.
Figures from the SASRA database shows that the ratio of total loans to total deposits for the entire DT Sacco sector stood at 108.39 per cent in 2016, which is a marginal improvement from 108.74 per cent in 2015 and 110.95 per cent in 2014.The totals loans to total deposits is the level to which DT-Saccos are able to fund their core mandate of lending from internally mobilized deposits from its members
The Authority mentions in its supervisory report that despite this marginal improvement, the high total loans to total deposits ratio is a demonstration of the fact that  demand for credit facilities among DT-Saccos still outweighs their ability to mobilize savings from members.

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