The Sacco Societies (Amendment) Bill recently went through its second reading in Kenya's national assembly. The bill, among other things, looks to ensure that SACCOs (Savings and Credit Co-Operative Societies) in Kenya are mandated to share credit information for both performing and non-performing loans to credit reference bureaus (CRB). Under the present rules, SACCOS are only required to share positive information among themselves, with listing on the CRB remaining under a third party.
This bill comes after President Kenyatta recently assented to the Central Bank of Kenya (Amendment) Act, 2021, which in addition to making the Central Bank of Kenya (CBK) the regulator for digital lenders, also required those lenders to report defaulters, except for lending amounts below KES1,000.
We view the upcoming regulation positively, as gross loans in SACCOs equate to c16% of gross loans in commercial banks. Additionally, customers borrowing from SACCOs typically also borrow from banks. As such, the sharing of information will be beneficial to the banks.
Co-op Bank has the highest exposure to SACCOs
65% of Co-op Bank is owned by Co-op Holdings Co-operative Society Limited, which in turn is owned by co-operative societies within Kenya. At the end of December 2020, Co-op Holdings had 3,799 individual co-operative society shareholders, who can trade the shares they hold amongst each other. As a result, Co-op Bank is the most interlinked bank with SACCOs.
While the regulation is positive overall for the banking sector, Co-op Bank does not directly lend to individual members of SACCOs but instead deals with the SACCOs from a corporate perspective. As such, the disclosure of credit information is beneficial to Co-op Bank if an individual SACCO member approaches Co-op Bank directly for a bank loan and not a SACCO loan.
We have a Hold recommendation on Co-op Bank
The three main reasons for our Hold recommendation are:
Relative to its Kenya peers, Co-op Bank is falling behind on efficiency with a higher-than-peer-average cost-to-income ratio. While management has been promising significant improvements in cost-to-income ratio, the bank has continued to face cost pressures from increasing staff costs and other operating costs, especially technology.
In terms of monetisation of digital channels, the bank lags its peers in agility, efficiency and deployment of digital banking solutions. As such, although the contribution of non-interest revenue from alternative channels is increasing, the pace of growth is slower than we believe is reasonable for a bank with its retail market share.
The bank has traditionally performed better on asset quality than its peers but, in the past three years, its asset quality has declined to the point where it is similar to other Kenyan Tier 1 banks. We do not see a quick resolution to this and expect asset quality to remain within the peer range.
SACCOs are an important sub-sector in Kenya’s financial landscape
Originally, SACCOs brought together people with a common vocation or values, enabling them to pool funds to access credit and other financial services. In essence, they improved financial inclusion by offering such services to the population. SACCOs, relative to the banking sector, make up 12%, 17% and 11% of total assets, net loans, and customer deposits.
SACCOs' community approach continues to attract clients
Even with banking becoming more accessible, SACCOs continue to attract customers as:
1. The primary aim of SACCOs is communal benefit rather than profit. As a result, for individuals, the interest rates on savings and share capital invested generates a higher return than saving with banks.
Banks can attract corporate deposits from SACCOs. However, this is a more expensive option compared to getting the deposits directly from individuals. Co-op Bank, which is owned communally by SACCOs, tends to have the largest market share of these deposits.
2. Access to credit from banks has traditionally been more expensive (prior to the loan rate cap) and requires a significant amount of documentation and a lengthy verification process relative to the SACCO process, which typically requires 3 to 4 guarantors for the loan as well a proof of income.
Sacco borrowers tend to also borrow from banks because:
Banks can offer much larger loans. SACCOs typically allow borrowing of up to three times the value of deposits that an individual has with the SACCO. Due to this, individuals often go to the banks for larger credit requirements. However, in the recent past SACCOs have included the option of offering other collateral to boost the amount of credit that can be offered.
Banks have unsecured credit options, unlike SACCOs where one has to offer either deposits, collateral, or present guarantors for credit to be issued. As such, banks manage to attract individuals that are seeking credit but have no access to significant collateral.
SACCOs' asset quality remains higher than for commercial banks
SACCOs command a total membership of 5.47mn adults in Kenya with KES474bn loaned out to individuals. The SACCO industry has a collective NPL ratio of 8.4% as of December 2020, compared to 14.5% for commercial banks. The main reason for the lower NPL ratio is because loans in SACCOs are linked to individual salaries, individual deposits held, guarantors' deposits or collateral held, which makes loan recovery easier. Also, due to the communal nature of SACCOs, individuals are easier to track in the event of default.
Given that banks share a customer base with SACCOs, we consider the new regulation to be positive for the overall financial sector as it increases transparency. With the bill having gone through the second reading, it will be taken to the senate for approval then return to parliament for the third reading and finally presidential assent. The exact timing of these processes is unclear. There may be amendments made at each stage but on the matter of information sharing, we expect it to remain unaltered and eventually passed as law.
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