ABSTRACT
Savings and Credit Cooperatives (Sacco‟s) play an increasingly important role in the process of financial intermediation in the highly competitive financial market in Kenya. Various players in the financial sector are under regulatory arms and include Insurance regulatory authority, Retirement benefits authority, commercial banks under Central bank of Kenya and lately Sacco‟s under Sacco society‟s regulatory authority (SASRA). The Sacco societies Act of 2008 (SSA) and subsequently the establishment of the Sacco Societies Regulatory Authority (SASRA) came in against a compromised profitability, mismanagement issues, embezzlement of funds loss of members to banks, incompetent staff, backdrop of losses and poor corporate governance. The study‟s overall objective was to examine the strategic factors affecting compliance with the Sacco Act of 2008 by Deposit Taking Sacco in Nairobi County. The specific objectives of the study were; establish the effect of human resource capacity on compliance with the Sacco Act by Deposit Taking Sacco‟s, determine the effect of Information and Communications Technology on compliance with the Sacco Act by Deposit Taking Sacco‟s, establish the effect of Corporate Governance on compliance with the Sacco Act by Deposit Taking Sacco‟s and determine the joint effect of human resource capacity, information and communication technology and corporate governance on compliance with the Sacco Act by Deposit Taking Sacco‟s. The study adopted a correlational research design and a census survey of 42 Deposit taking Sacco‟s in Nairobi County. Data was collected using a questionnaire and analyzed using descriptive statistics with the aid of Statistical Package for Social Sciences computer software version 21. To test the relationship in the hypotheses HA1, HA2 and HA3 Pearson‟s correlation analysis was used while hypothesis HA4 was tested using multiple regression model in testing the strategic factors affecting compliance with the Sacco Act of 2008 by Deposit Taking Sacco‟s in Nairobi County. The findings include that Information Communication Technology capacity of the Sacco‟s in Nairobi County are inadequate; The Sacco‟s in the County have not attained the required human resource capacity and approximately 80% of the Sacco‟s have not fully complied with the Societies‟ Act of 2008. The research‟s conclusion and recommendations were that Information and Communication Technology capacity, corporate governance and human resource capacity were found to be important as far as compliance with the Societies‟ Act of 2008 is concerned. These factors present challenges that hinder deposit taking Sacco‟s from compliance. Therefore more time should be given to deposit taking Sacco‟s to ensure that they comply with the Act. The research recommends Sacco‟s to enhance management capacity on compliance issues, establish a training program, while on the other hand the board of directors should initiate change management with an aim of setting realistic user expectations objectives and goals.
CHAPTER ONE
INTRODUCTION
Background of the Study
Cooperative societies are formal organizations that enable their membership make efforts to achieve common objectives on voluntary and democratic basis. According to (Wanyama, 2009), the first ever Co-operative movement was started by Robert Owen in the year 1844. In recent history the Sacco sector has faced tough challenges globally as noted by (WOCCU, 2012) that include income generation, compliance with the Act, mission drifts, competition, insufficient capital among many others. The sectors‟ financial stability will broadly impact on the nation‟s employment creation and economic growth. The Sacco industry being part of the cooperative sector in Kenya has impacted on many lives of Kenyans over the years. The sector is categorized into financial and non-financial Cooperatives. Financial cooperatives comprise Sacco‟s, housing and investment cooperatives while Non-financial cooperatives deal with the marketing of members‟ produce and services such as dairy, livestock, coffee, tea, handicrafts and many more similar products in other cooperatives.
Deposit-taking Sacco Societies (DTS‟s) are part of the larger Sacco product sub-sector in Kenya which comprises the non-deposit taking and deposit taking Sacco Societies. The non- deposit taking Sacco‟s are composed of those Sacco Societies whose business is limited to mobilization of deposits for purposes of lending to members. The deposits are non- withdrawable in that they may be used as collaterals for loans only and can only be refunded upon the member‟s withdrawal (Annual Sacco supervision report, 2014). Besides the basic savings and credit products offered Deposit Taking Sacco‟s also provide basic banking services that include demand deposits, payments services and channels such as quasi banking services commonly known as Automated Teller Machines, Front Office Savings Activity (FOSA) and are licensed and supervised by the Sacco Societies Act of 2008. The trend is that Sacco‟s generally start as non-deposit taking Sacco business and convert to deposit taking Sacco business to expand their range of financial services offered to members (Ademba, 2012).
Deposit taking Sacco‟s are owned and controlled by its members and operated for the purposes of promoting thrift, credit at low interest rates and other financial services to members. The justification behind the Savings credit and cooperative organisations (Sacco‟s) regulation was to ensure that deposit taking Sacco‟s in Kenya operate under a certain set of stipulated regulations as in Sacco Societies Act (SSA) of 2008.The legislation came into being so as to mimimise misuse, embezzlement and mismanagement of members‟ funds. Stakeholders on the other hand observed that prior to the SSA; lack of regulation was the main reason for stagnation in the sector brought about by issues of mismanagement, poor risk management structure. Sacco regulation came with challenges in Africa out of which many Sacco‟s have not been able to meet the set requirements of the regulators.
According to SASCCO (2010), Malawi's Cooperative sector had the following challenges lack of technology, lack of good governance, financial viability and lack of products diversification. The head of Rwanda‟s Cooperative Agency Mabyarimana observed that Sacco‟s in Rwanda experienced the following challenges that include lack of managerial capacity in Sacco‟s committees and staff, low capacity of maintaining enough liquidity and Inadequate Management Information systems (MIS) in some Sacco‟s. Rural Sacco‟s in Kenya thrived following widespread bank failures in Kenya in the 1980‟s and 1990‟s, which led to banks withdrawing from these rural areas. Later many rural Sacco‟s became associated with Co-operative Bank of Kenya. The loan portfolio and deposit of Sacco‟s grew and amounted to approximately to 34 percent of national savings and approximately 24 percent of outstanding domestic credit. The World Council of Credit Unions (WOCCU) estimated that the Kenyan Sacco sector had the largest membership in Africa estimated to be above 2.5 million in membership with a share capital and deposits of US$1.66 billion and a loan portfolio of US$1.24 billion (WOCCU, 2005).
This study seeks to examine the strategic factors affecting compliance with the Sacco Act of 2008 by Deposit Taking Sacco‟s in Nairobi County. To attain this the study focused on the Savings & Credit Co-operative Societies (Sacco‟s) sector. The study‟s focal point was the Deposit Taking Sacco‟s compliance with the Sacco Act of 2008 in Kenya. It is envisaged that the D.T.S have various challenges to compliance with the Act. For the purpose of this study the strategic factors envisaged are corporate governance, Information and Communication Technology and Human resource capacity. Stakeholder theory was utilised in order to understand the corporate governance influence on compliance with Sacco Act of importance to the study was how leadership of the board, separation of powers, board calendar meetings, board charter and code of ethics affect compliance with the Sacco Act.
Diffusion theory was used to study the information and communication technology as an independent variable. The theory is concerned with the spread of innovation, ideas and technology through culture(s). The study thus looked at information preservation policy, automation of Sacco operations, Banking software, computer and networked systems, I.C.T infrastructural support system, backup-system, and the degree of adoption of information systems within the D.T.S. All Sacco‟s require resources to develop these variables. The study looked at the human resource capacity variable, of concern were the senior staff educational requirements, staff training, staff and board of directors training programme.
Savings and Credit Cooperatives (Sacco) Compliance
Worldwide the cooperative movement faces serious and fundamental challenges which include basic concepts as the nature and aim of the co-operative, as well as its structure and the principles on which it operates leading to calls of regulating the industry. The World Council of Credit Unions (WOCCU) is the leading international trade association and development agency for credit unions that equips cooperatives with the tools and techniques necessary to strengthen their financial management and deliver fairly priced financial services to large numbers of poor and low-income people (WOCCU, 2014). Additionally WOCCU also enables safe and sound institutions to reach greater efficiencies of scale, builds national credit union networks through working closely with credit union leaders, national government officials and policy makers to create appropriate and effective regulatory environments for credit unions.
In the past regulators have proved largely unaware of cooperatives. Despite its large share of the European market Basel II had no mention of cooperatives, Fonteyne (2007). In addition cooperatives were very large and the ability to deal with new requirements without their costs increasing going up too much. Regulators in the United States recognized this issue by exempting community banks from some of their requirements. In other countries across the world, micro- finance laws regulate small cooperatives while large ones come under the banking system (ILO, 2013).
Co-operatives in Africa are important tools for providing financial services to marginalised communities and therefore must be harnessed to help mitigate poverty. Sacco‟s, like other business entities in Africa, are faced with challenges in their quest towards survival and growth hence the need for regulation, Ademba (2012). Regulation and supervision of Sacco‟s in most African countries are under the Banking Supervisory Authority (Central Banks) with the exception of South Africa and Kenya who have their Act targeted specifically at Sacco‟s (SASCCO, 2010).
African countries have focused attention on the legislation of non-banking financial institutions and microfinance institutions, some have adopted prudential standards specific to Sacco‟s while others use existing banking laws to regulate the Sacco‟s. South Africa and Kenya have independent regulators with specific regulations that is Co-operative Banking Act and Sacco Societies Act respectively (Ademba, 2010). WOCCU in 1991 did an assessment of the viability of the movement in South Africa and found that only three of the existing 47 Sacco‟s were viable. This resulted in a shift in the movement towards a more business oriented approach focused on developing strong and sound Sacco‟s with the long- term interests of members in mind, as compared to short-term gains. In the year 1993 South Africa formed a self-regulatory body for all Sacco‟s in the Country the Savings and Credit Co-operative League of South Africa, (SACCOL, 2014).
Makori (2013) found that various players in the Kenyan financial sector are under regulatory oversight that is vested in the various authority arms, that is retirement funds under the Retirement Benefits Authority (RBA), commercial banks regulated by the Central Bank of Kenya (CBK), listed companies fall under the Capital Markets Authority (CMA) and insurance companies under the Insurance Regulatory Authority (IRA). Sacco‟s are the latest to be brought to the regulatory fold under the Sacco societies regulatory authority (SASRA) which was inaugurated in 2009 and charged with the prime responsibility to license and supervise D.T.S by ensuring that there is confidence in the public towards the Sacco‟s and to protect the interests of SACCO members .
According to Ademba (2012), out of the 19 million adult Kenyan population approximately 22.5% are served by commercial banks and micro financial institutions (MFI) while 17.6% are served by Sacco‟s. Hence, due to the combination of providing retail services to low income population and having a large coverage that Sacco‟s must be regulated. The new legal framework consist of the Sacco Societies Act of 2008 and Sacco Societies Regulations of 2010 particularly targeting the Sacco societies that carryout the deposit-taking business and operate Front Office Savings Activities (FOSA).
The justification behind an oversight agency for the FOSA, was that Sacco‟s were accepting deposits that was particularly considered a high-risk activity as depositors risked losing their money and savings in an event of liquidity squeeze. Five years after the implementation of the Act, many Sacco‟s are still struggling to meet the requirement and hence remain unlicensed. SASRA report in 2014 illustrate that seventy three Sacco‟s have been licensed against two hundred and sixteen Sacco‟s that applied while forty eight Sacco‟s issued with Letter of intent. The report cited various challenges including Capital adequacy, lack of responsible governance players as the major impediments to compliance of the regulations. It is from these that the study focused on Human resource capacity, Information and communication technology and Corporate governance as the key strategic factors that Sacco‟s have to put in place in order to meet the basic requirements.
Strategic Factors affecting Compliance
According to Robinson (2012), strategic factors are those things that an organization or business entity need to get right in order to succeed with their key stakeholders, that is customers, employees, owners and suppliers. Strategic Factors provide not only a common currency that links the way but also a pathway to success in which strategic planning and performance measurement are undertaken. Link being the key word and Strategic Factors form that link. Strategic Factors across other sectors also provide the tools to be able to address the needs not just of private sector profit-seeking organizations, but also of nonprofit organizations from both the private and public sectors. Strategic Factors act as integrators because all organizations have them at their core. According to Miller and Spoolman (2014) the term strategic means decisions or plans are designed to impact favorably the key factors on which the desired outcome of an organisation, game, system or venture depends. The strategic factors that savings and credit cooperatives have to put in place in order to satisfy the Act requirements are human resource capacity, information and communication technology and corporate governance, these words have been echoed by SASRA report of 2013.
There are several factors that Sacco‟s seeking to became deposit taking Sacco‟s, have to meet as stipulated by the Act in order to operate, they include putting in place a management information system, payment of a licensing fee of fifty thousand shillings for a head office and twenty thousand for every branch outlet, developing a comprehensive risk management framework and capital adequacy requirements including a Core capital of not less than Ten million Kenya shillings of total assets, Institutional capital of not less than 8% of total capital and Core capital of not less than 8% of total deposits and employing a competent internal auditor as per accountants professional standards.
According to SASRA in 2013 Capital adequacy Challenges, lack of responsible governance players were the major impediments to compliance of the regulations. Further, Governance Structure comprising of elected officers were heavily involved in the operational affairs of the Sacco to the exclusion of the technical staff is deeply entrenched limiting the effectiveness and efficiency of the Act and regulations in licensed deposit Taking Sacco‟s. The Internal audit function either does not exist or the Internal Auditor is not qualified as per the legal requirements. Some Sacco‟s opted to stop operating the FOSA and others have not bothered to apply for the License owing to these challenges.
There are several factors that affect Sacco‟s to compliance with Sacco Act of 2008, they include non-separation of shares from deposits, lack of liquidity monitoring system, high investment in non-earning assets, high independence on short-term external borrowing, inadequate ICT system, inadequate managerial competencies, political interference, size and diversity, inadequate technical skills both at management and board levels. In this research the term strategic factors have been used to mean key factors that have to be in place to enable a Sacco fully complying with the requirements as stipulated in the Act.
Savings Credit and Cooperative Societies (Sacco’s)
According to the International Cooperative Alliance (ICA) in 1995 a co-operative is defined as an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled Enterprise. Sacco‟s play a significant role in empowering their members Socio- Economic Status all over the world. In Western Europe there are around 11,000 local and regional saving and credit cooperatives banks, with over 56,000 outlets a 33 million strong membership and a staff of more than 400,000. Their market share is approximately 17% of savings, ranking third after the commercial and savings banks (Shaw, 2006).Regionally in Africa at least 28 countries have established Credit Unions (SACCOL, 2014). According to WOCCU statistical report in 2012 on 101 countries surveyed, Africa has a membership of 16 million making it third in membership size after North America and Asia which have 105 million and 41 million respectively. Africa has a total of 20,831 Credit Unions or 37% and is second only to Asia that has 21,934 Credit Unions or 39% with a Sacco membership of 16 million constitutes 8% of the entire world membership of 200 million. (WOCCU, 2012).
The first Kenyan Sacco was registered in 1964 after the Country became independent in 1963. The Kenyan sector is by far the largest Sacco sector in Africa with several of Kenya‟s largest Sacco‟s having large capital enough to rival banks (Owen, 2007). Ademba (2010) notes that the Sacco movement has evolved in the past 40 years into a formidable force for the economic and social transformation of Kenyan people with approximately 63% of the Kenya population directly and indirectly depending on the co-operative related activities for their livelihood. The Sacco sector has also mobilised over Kshs 200 billion in savings which is about 31% of the national savings and 70% of the total Africa continental portfolio is Kenyan, with Kenya sitting in the group of the 10 largest cooperative movement (G10) members countries and ranked seventh worldwide. According to WOCCU (2012), of the total savings mobilised by Sacco‟s in Africa and loans advanced, Kenya contributes 62% of the savings and 69% of the Sacco loans.
According to Ondieki, Okioga, Okwena, and Onsase (2011) Kenyan cooperative sector plays a significant role in the financial sector as it contributes approximately 45% of the Country‟s Gross Domestic Product. The total number of Sacco‟s in Kenya stood over 6,000 as at December 2013, this comprised of over 5,785 non-D.T.S and 215 D.T.S. (Sacco, 2013). The non-D.T.S are supervised by the Commissioner for Co-operatives while D.T.S are licensed and regulated by SASRA while (SASRA, 2012).
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