5 Minutes with David Mathuva on Savings and Credit Cooperatives in Kenya

Watch the full video on you tube via this link:

https://www.youtube.com/watch?v=Qx6WMYO20V4

Credit Union Governance: What You Need to Know

Often a thorny issue, credit union governance entails a conundrum and existential conflicts amongst a number of stakeholders. These conflicts are discussed in brief below:

• Members and the elected board of directors: this is often the most traditional source of conflicts. Whether to call it principal-agent or agent-agent or principal-principal conflict, the elected board members may end up not representing the best interests of fellow members. This could probably because when elected, they take up the mythical “it is our turn to eat” and make the most out of it. The good news is that the elected board members do not last for long. At least in Kenya, to survive for over a year in the board, you must have a myriad of “networks” and “connections”, not to say the least, political connections in some credit unions. 
• Owners and managers: This is one instance where the member-owners of the unions have conflicts with the management of the union. Often, the top managers in a credit union are vetted by the board or the central management committee. Once they take up office, they may engage in opportunistic behavior which may jeopardize the credit union. For instance, managers may engage in excessive and risk related party lending where they take up loans for themselves (and who knows, their spouses!). Research has shown that related party loans are associated with conflict of interest and are often abused. Remember that one of the sensitive dimensions of human existence is rationality, and if the human being assumes irrationality, it can be disastrous, to say the least.
• Net savers and net borrowers: One may wish to ask: aren’t these not one and the same thing. From a credit union perspective, the answer is: “probably yes”. But there is a distinction. In credit unions, members have varying levels of savings, with older members holding relatively more savings than younger members. Although the more savings you have the more borrowing you are entitled to, the borrowing levels in a credit union differ. This depends on the loan appetite for the borrowers. Problem arises if majority of the borrowers hold relatively lower savings levels. This literally dries up the credit unions liquidity. If an older member seeks a loan which takes long to be disbursed, then problems suddenly emerge.
• Employees and volunteers: there has been an improvement in the number of individuals employed and paid salaries and/or wages by credit unions in the recent past. This is a shift from the traditional model where the credit union officers were largely on a voluntary basis. As such, this conflict has over time been watered down.

Other governance related problems that bog credit unions include: growth, changing nature of membership, in that credit unions now have diversified membership, complexity of operations and products, regulatory pressures and competition from commercial banks, microfinance institutions and amongst the credit unions themselves. This means that according to Labie & Périlleux (2008), close attention should be paid to the following aspects to help I dealing with credit union governance woes: 

• Intentional and specific mechanisms such as the constitution of the board of directors and rewards given to managers;
• Spontaneous and specific mechanisms such as corporate culture, cross-control between managers and informal trust relationships;
• Intentional and non-specific mechanisms such as the legal framework, the role of legal authorities, etc.;
• Spontaneous and non-specific mechanisms such as the environment of the firm, the social and political environment, etc.

The paper by Labie & Périlleux (2008) conclude by recommending research that can help credit unions provide good governance and experience growth, without compromising on their essence. This research would look into:

• The networking structures of credit unions;
• The relationship between governance and growth;
• Suitability of mechanisms.

Additional information sought from: CGAP Microfinance Gateway Website: http://www.microfinancegateway.org/library/corporate-governance-microfinance-credit-unions

Reference: Labie, M., & Périlleux, A. (2008). Corporate Governance in Microfinance : Credit Unions. CEB Working Paper N° 08/003, Solvay Business School.

URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/14625/1/rou-0221.pdf

Governance Practices and Performance of Deposit-taking Savings and Credit Co-operatives: A Researcher's Reflections

Several lessons were learned in the course of doing the research. One lesson learnt was that there is need for SACCOs to embrace a higher level of disclosure of governance information. Whereas it is encouraging to note that a majority of SACCOs have websites, some critical governance information was missing from their websites. For example information on the names, gender, age, academic qualification, how long one has served as a board member could not be found from the websites.

It was also surprising to note that even some members in one of the largest SACCO in Kenya did not even know who their board members are. Some SACCOs were reluctant to give straightforward in formation on the gender of their board members. This indicates the high level of suspicion within SACCOs with regard to general enquiries on their operations. Whereas some SACCOs had posted details of their financial information on their websites, a majority did not. We would encourage SACCOs to post five year financial information on their websites to aid in promoting research in the Sacco sector.

On positive note, the SACCO Societies Regulatory Authority is a very open institution that allows researchers to walk in and collect data. This has helped a great deal in promoting SACCO research. However, we would encourage SASRA to benchmark with Central Bank of Kenya Supervision reports in which the performance of each bank by Return on Assets and Return on Equity is provided in the report. This promotes research since researchers rely on centrally generated performance data as opposed to computing the returns on their own.

In a nutshell, my study reveals that SACCOs in Kenya have complied with most of the SACCO Societies Regulatory Authority’s prudential regulations. However, they still experience challenges in liquidity management and the over involvement of board members in the daily operations of the SACCO. The study also reveals that SACCO performance has improved with continued compliance with SACCO regulations over the four year period being studied. 

Author: Joseph Taracha, 13 May 2015

Editor: David Mathuva

The Triple Bottom Line: does it apply to Savings and credit cooperatives?

Many studies have examined the contribution of sustainable business undertaking on the value and performance of various organizations. Performance has been looked at from both a social, economic and environmental performance. Whether you believe on the three tenets of performance or not is a story for another day.

The question of sustainability pervades almost all sectors, with greater importance being placed on for-profit, private organizations. Even still, if we had a "sustainabarometer", for-profit manufacturing organizations would be worst hit by sustainability debates and would score poorly if subjected to the barometer. Using the same barometer, organizations in the financial services sector would be least hit by the sustainability debate and would score favourably.

However, the question as to whether financial sector organizations should be involved in sustainability debates has not departed the academic circles and key World Forums on sustainability matters. 

For instance, if a key stakeholder at a micro finance asked:

• HOW DOES OUR MICRO FINANCE CONTRIBUTE TOWARDS ENVIRONMENTAL DEGRADATION?

How would you respond to that question? ...and suppose a [not-so educated] member of a savings and credit cooperative presents the following comment during the Annual Delegates' Meeting:

• I DO NOT UNDERSTAND WHY OUR SOCIETY IS CONTRIBUTING KSHS 200,000 TO THE RIVER CLEANUP, YET IT IS COMPANY XTY WHICH POLLUTED THE RIVER!

Again, how do you respond if you were the Mr[s] Chair of the society? What justification would you offer for committing hard-earned and sweated member funds into activities which have no connection to the cooperative? You tell me, what would be your response?

The two propositions highlighted above are key sustainability issues that financial institutions are often faced with when handling sustainability matters. My response to the both of them is as per the following reflective questions:

• We have been operating, thanks to the society around us.... so what are we giving back to the society in return?
• We, as a cooperative have always envisioned and sung the song "Concern for the Community" as one of our key principles...what have we done to live to the demands of this principle? Are we preaching water and drinking wine?
• We are taking of growth in business, but we must be seen by the society out there.. what is it that we can do to keep our memories active within the society?

What suggestions would you offer in response to the two sustainability issues? Please share....

David

The Overlooked factor in Social Disclosure Studies: Credit Union Social Accountability

Social Accountability: the overlooked factor in Credit Union Disclosure

With the quality of Accounting Disclosure having gained importance over decades now, there has been a paradigm shift towards Social Disclosure. Many researchers have examined Social Disclosure for various organizations, majority of who are large, or listed firms in developed, developing and less developed economies.

Apparently, one group of organizations has consistently been overlooked: CREDIT UNIONS. Credit unions exhibit that “social face” in the society which cannot be overlooked. Their very own creation, objectives and activities have a social bearing. Credit unions mobilize savings from their membership, provide loans to their members, contribute to the societal welfare by promoting the general economic well-being of their membership and the societies in which they operate, and many other contributions to the social good. All these demonstrate how important credit unions are in furthering social accountability. And this cannot be OVERLOOKED!

In this article, I highlight 5 key areas where credit union social disclosure should be focused towards as demonstrated below:

                                     Credit Union Social Pillars

With reference to the social pillars, it may seem that for Credit Unions, promoting member welfare should be placed number one in terms of priority. However, this may not always be the case in a sector which has experienced growth in operations, products and the human capital. With the recent conversions by Credit Unions into "bank-like" activities, the focus on that traditional common bond within a Credit Union's membership is likely to degenerate (and thus, the Degeneration Thesis by Cornforth [http://eid.sagepub.com/content/16/4/487.refs] will prevail). 

The implications of the changed landscape is that Credit unions should strive to uphold Social Accountability, along with Financial Accountability as both are equally important. Credit Unions should be seen as what is traditionally referred to as : Social Citizens"!

Author: David Mathuva

Did you Know?

A peek into Kenya's cooperative sub-sector: statistics

DID YOU KNOW?

Below are some facts about the cooperative sub-sector which I though you should know about:

• There are over 13,800 cooperatives in Kenya alone?
• That the first cooperative to be formally registered in Kenya was in Kenya Co-operative Creameries Limited (the famous KCC) on 8 February 1932?
• In 2015, KCC marked 84 years since registration?
• 1,029 cooperatives were registered between 1932 and 1963, just before Kenya’s independence?
• In 1963 alone, over 100 cooperatives were registered?
• To date (2015), there are over 6,878 savings and credit cooperatives?
• Out of this number, only 1,995 are active, meaning they take deposits and issue loans?
• As of December 2013, 215 savings and credit cooperatives were operating front office services?
• As of 2014, only 184 out of the 215 savings and credit cooperatives had been licensed by SASRA to operate front office services?
• The fate of the 31 unlicensed front-office operating savings and credit cooperatives is yet to be established.
• Over 60 savings and credit cooperatives have changed their names between 2010 and 2014 to reflect a national outlook and be more competitive in the changing financial services landscape?
• Savings and credit cooperatives, especially the front-office operators, have been participating in the Financial Reporting Excellence (FiRe) Award?
• The number of savings and credit cooperatives which participated in the FiRe award is as follows: 2010 participants [10 SACCOs]; 2011 participants [9 SACCOs]; 2012 participants [17 SACCOs]; 2013 participants [27 SACCOs]; & 2014 participants [17 SACCOs]?
• Interestingly, the licensed savings and credit cooperatives who participated and won in the FiRe awards have been the licensed type?

Key research questions arise from the simple statistics listed above. Below are some five examples:

(1) Why is the proportion of dormant savings and credit cooperatives so high (i.e., over 71%) in Kenya?

(2) Despite there being a regulator to oversee the front office savings and credit cooperatives, why is the conversion rate (3%) so low?

(3) What challenges have been faced by the 31 savings and credit cooperatives that never managed to obtain licenses from the SASRA as of 2014?

(4) What can be done to improve the number of savings and credit cooperatives participating in the FiRe awards?

(5) What are the characteristics of the cooperatives with over 50 years of experience? What has kept them going?

...and so forth....

Credit union accountability: to disclose or not?

Article by: David Mathuva

I have been studying credit union disclosure by credit unions in Kenya and other developing economies for a while now and I believe that I can make a few comments based on some quick observations:

• Credit union accountability pervades disclosure. Whereas disclosure can be used for impression management purposes, being accountable is just more that mere disclosure of financial (and or social) information;
• Better performing credit unions are those that a
  re more transparent and accountable to their members. Transparency in this case pervades accountability. To be transparent, credit union management and those charged with governance should avoid carrying out the so called "monkey business" and focus on serving their membership in the best way possible
  
  . It is only when the transparency level is surpassed can we talk of accountability. In other words, accountability without transparency may not yield much.
• Credit unions in a developing country setting are faced by numerous challenges: be it fraud, mismanagement, resources, capacity, professionalism and a myriad of other challenges. This makes it challenging to achieve higher order aspirations such as improved quality of disclosure. 
• Disclosure is a necessary [if not sufficient]  condition for any financial market, whether developed, developing or [un] developed. The implication of this is that, in economies where credit unions are opaque in their disclosures, then the sector is likely to be doomed.
• I am impressed by the efforts taken by a developing country like Kenya, Tanzania and Rwanda as far as improving the quality of disclosure is concerned. The regulators has taken the wisdom of engaging professionals in developing disclosure guidelines to assist credit unions in their disclosure processes. In Kenya, for instance, SASRA worked together with the ICPAK to develop the SACCO guidelines in 2010; in Tanzania, the regulator, with the assistance of professionals developed financial accountability guidelines in 2010. These are small but swift steps towards promoting the vibrancy of our credit unions sector. It is also an indirect step towards improving the quality of reporting in the sector and is also in line with the aims of the EAC integration.
  
• I believe  that with time, the credit union sector in developing economies, with sustained efforts  of all stakeholders, will attain the levels achieved by credit unions in Canada, the US and Australia. Kenya is already in the front-line!

In summary, these ideas illustrate that despite the numerous challenges any developing country has to grapple with, we can make simple, small steps towards improving what we cherish most. And credit unions are our core drivers of our financial and social well-being!

Authored by David Mathuva

Welcome message from the Editor

Welcome to the Kenyan Savings and Credit Cooperatives League. The Kenyan Sacco sector has been cited as one of the most vibrant credit union sectors in Africa and by extension, the whole world. Many innovative ways of running the Sacco business have been developed and more innovative products, services and business models for the cooperative organizations are underway. This blog serves to provide a platform where you can share your Sacco stories, whether you are Kenyan-based Sacco, East African Based Sacco or a credit union from the rest of Africa and the World. The author of this blog has substantial experience in credit union research with reference to Accountability, Disclosure and the Performance of credit unions. With the anticipated dynamism in the credit union sector, we expect more research themes to arise including but not limited to:

• the stability of the credit union/Sacco sub-sector;
• regulation in the credit union/Sacco sub-sector;
• performance of Saccos;
• strategic management in Saccos;
• innovations in the Sacco sub-sector;
• stress testing in the Sacco sub-sector;
• influence of the changes in the Sacco sector on certain micro- and macro-economic variables;
• reporting in the Sacco sector;
• professionalism in the Sacco sector;
• governance issues affecting the Sacco sector;
• financial inclusion in the Sacco sector;
• competition in the Sacco sector;
• among other themes.

I take this opportunity to invite practitioners, policy makers, Saccos themselves, researchers and other interested stakeholders to contribute to this blog and keep it vibrant just as is the case with the fast-growing Sacco sector!

David (author)