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A star-laden technical committee comprising various financial experts, Chairpersons, and CEOs of savings and cooperative societies (Saccos), will rely on advisors cherry-picked by the World Bank to fast-track the development of a framework allowing Saccos to lend to one another.
In an interview with Financial Fortune Media, the Chairperson of the Steering Committee driving the Central Liquidity Facility (CLF) for inter-Sacco lending, Evans Kibagendi confirmed that the board had acquired two consultants from the global lender to guide with procedures in setting up an organizational framework, a business plan as well as ICT know-how in readiness for the critical platform.
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The Central Liquidity Facility (CLF) is ideally meant to improve the general financial stability of credit unions by serving as a liquidity lender to credit unions experiencing unusual or unexpected liquidity shortfalls.
“It is a model that was started in 2019 and now the World Bank has assisted us with two consultants, but we are also getting help from Sasra and the Ministry of Finance,” offered Mr. Kibagendi who is also the national Chairman of Hazina Sacco.
This follows a pledge by the government this week to put in place a working system within six months, at least by August this year, which will pave way for an inter-Sacco lending concept – a platform similar to the inter-bank market run by commercial banks.
The establishment of the Central Liquidity and Shared Technology platform had been on the cards since 2016 but was only approved in July 2021.
Its effective implementation will see Saccos drift away from external borrowing as a funding source for their assets, largely due to the expensive loans and stringent conditions by commercial banks. At the moment, Deposit-taking (DT) Saccos in Kenya have to borrow at expensive rates from banks.
“This will see Saccos begin to issue their own cheques and ATMs and the shared ICT platform will go a long way in cost reduction for members and customers,” commented Dr. George Ochiri – a member of the Steering Committee and the CEO of Harambee Sacco.
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Through, Sasra the industry regulator will be working with a multi-agency team comprising the State, Department of Co-operatives, the National Treasury, the Central Bank of Kenya (CBK) and the Kenya Law Reform Commission (KLRC), and has drafted the legal framework for the operationalization of the Central Liquidity Fund (CLF) –similar to the US model where Saccos can lend and borrow money from each other thereby cutting ties with Commercial banks whose loans are considered very costly.
“The government is also operationalizing the Deposit Guarantee Fund to protect members’ savings when societies collapse. We are hopeful that the fund will enhance operational efficiency in deposit mobilization and reduce the cost of funds in the medium to long term within the Sacco sub-sector, giving financial co-operatives a competitive edge,” said David Mategwa, the Chairman of Kenya National DT Police Sacco in a phone interview.
Adding that, the move will also create a robust cooperative culture where Saccos can lend and borrow to spur each other’s growth, decreasing their dependency on borrowing against high loan rates issued by external, non-cooperative lenders.
“The central fund will be well structured and secure, thus boosting Saccos’ efficiency in lending to their members and more competitive rates while dealing a blow to predatory lenders,” he said.
More than 55 Saccos, according to Kibagendi, have indicated their interest in joining the fund to lessen the burden of costly external borrowing from banks. It is estimated that Saccos borrows to the tune of Sh2 billion from local banks that charge high-interest rates.
Under the regime, Saccos will run their own inter-Sacco market where they can lend and borrow from each other at reasonable interest rates to offset their financial positions which were not possible in the past.
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“This idea has been under discussion for the last five years and unfortunately has received a lot of resistance from some mainstream financial institutions because it would mean that Saccos, which deals with the mass market, would become more competitive.
The Sacco movement has Sh1.5 trillion worth of assets and so it is a very important player in financial services,” Cooperatives and Micro, Small and Medium size businesses Cabinet secretary Simon Chelugui was quoted.
The Sacco movement is expected to borrow significantly from the banking sector in the design and implementation of this inter-market lending framework.
In the inter-bank market, players within Kenya’s commercial banking space extend loans to one another for maturities of predominantly a week or less.
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Such loans are extended at pricing referred to as the ‘interbank rate’.
“We are calling it Sacco Central and it will be a shared facility, which will help provide core banking and it will enable Saccos to borrow from one another. As we speak today, the World Bank came forth and sponsored a study to operationalize this and as we speak, the design is ready and I am just waiting for a presentation on a policy framework to guide the operation,” said Mr. Chelugui.