Developing a SACCO Supervisory Regime from the Ground Up Africa Sacco Regulators’ Round table, Malawi 1st December, 2010 By Carilus Ademba CEO, SASRA, Kenya

Presentation structure Where SACCO Supervision? Policy Incentive to Prudential Regulation of SACCOs? The Journey towards Prudential Regulation

Cooperative Society Act Saccos have operated under Cooperative Societies Act, (CSA) of the Laws of Kenya A general legislation for all Cooperative Societies CSA first enacted in 1966, amended in 1997 to give Management Committees of Sacco societies greater autonomy in running of Societies; Further amendments in 2004 to respond to growing challenges with SACCOs

Cooperative Society Act Being non prudential, the Act and the Rules thereunder stipulated such requirements as: Registration requirements; Annual audits and returns thereof; Conduct of elections; Approval of borrowing powers etc Several amendments made to address uniqueness of Sacco societies

Need for Prudential Regulation Need was recognized in CSA 2004, Section 91A that “ The Minister shall in consultation with the apex society constitute by notice in the Gazette a body to regulate the operations of savings and credit co-operative societies.” and “The composition of the body constituted under subsection (1), its powers, duties and the terms of office of its members shall be as may be prescribed in the rules.” Are subsidiary legislation and refers to a set of rules and standards issued by a supervisory authority with the aim of maintaining the integrity of the financial institutions. Are generally based on best practices and/or sound judgment in the specific sector.

Kenya Vision 2030: A people without a Vision Perish A globally competitive and prosperous nation with a high quality of life by 2030

Kenya Vision 2030: A people without a Vision Perish A globally competitive and prosperous nation with a high quality of life by 2030

Kenya Vision 2030 Gave new impetus to prudential regulation of Sacco societies given their significance in savings mobilization Government aims to increase Gross National Savings to 32 of GDP Are subsidiary legislation and refers to a set of rules and standards issued by a supervisory authority with the aim of maintaining the integrity of the financial institutions. Are generally based on best practices and/or sound judgment in the specific sector.

Vision for Financial Services Sector: Kenya Vision 2030 Vision for Financial Services Sector: “To create a vibrant and globally competitive financial services sector that will create jobs and also promote high levels of savings to finance Kenya’s overall investment needs.” Are subsidiary legislation and refers to a set of rules and standards issued by a supervisory authority with the aim of maintaining the integrity of the financial institutions. Are generally based on best practices and/or sound judgment in the specific sector.

Vision 2030: Financial Sector dvpt Strategy Based on three pillars: Provide wider access to affordable financial services, including rural areas, thereby creating employment. Enhance efficiency in the delivery of financial services to reduce cost of delivery. Strengthen the stability of the financial system to reduce risk of financial crisis.

Vision 2030 - Financial Sector Reforms Vision 2030 - envisages the strengthening of alternative (described as “Formal others” in policy documents) financial service providers e.g. MFIs and SACCOs with specific strategies Specific sub-sector strategies and programmes identified in the Sector plans Key Sacco subsector reform programme identified as prudential regulation of Saccos

Vision 2030 - Financial Sector Reforms SACCO subsector specific programmes: Enactment of a Sacco specific law Setting up a regulator for SACCOs through SACCO specific legislation; Establish and Operationalize Sacco Societies Act, 2008

Vision 2030 - Financial Sector Reforms Top level policy objectives in Sacco subsector being to: Improve governance; Protect member savings Drive efficiency gains in the sector and reduce incidences of NPLs Increase savings and credit in SACCOs – through increased membership

The Journey towards Prudential Regulations of SACCOs in Kenya The SACCO SOCIETIES REGULATORY AUTHORITY

Journey towards prudential regulation Laying the foundation Developing the Sacco Societies Bill Enactment of the Bill in to Law Challenges in developing the law Operationalization of the Sacco Societies Act, 2008 Reflections on the Regulations development

Journey towards SACCO Regulations Laying the foundation 2004:A Task Force comprising Ministry of Cooperatives, Sacco subsector representatives and other stakeholders is appointed Views are collected culminating in a Stakeholders workshop in 2005 First Sacco Societies Bill is drafted in 2006 but does get to National Assembly

Journey towards SACCO Regulations Developing the Sacco Societies Bill 2007, 2nd and more inclusive task force appointed: Commissioner for Cooperative Development (CCD) Central Bank of Kenya (CBK) State Law Office (Attorney General Office) Kenya Union of Savings and Credit Cooperatives(KUSCCO) Kenya Rural Sacco Societies Union (KERUSSU)

Journey towards SACCO Regulations Developing the Sacco Societies Bill Mandate of the 2nd Task Force Building on the work by the 1st Task Force Draft a new Sacco Societies Bill for introduction to the National Assembly The draft bill was ready by early 2008

Journey towards SACCO Regulations Developing the Sacco Societies Bill Sacco Societies Bill 2008 redrafted Part I: Preliminary Part II: The Sacco Societies Regulatory Authority(SASRA) Part III: Licensing of Sacco Societies …….continued

Journey towards SACCO Regulations Developing the Sacco Societies Bill Sacco Societies Bill 2008 redrafted Part IV: Governance of Sacco Societies Part V: Regulation and Supervision of Sacco Societies Part VI: Deposit Guarantee Fund Part VII: Miscellaneous

Journey towards SACCO Regulations Enactment of the Bill in to Law Strategy is to lobby through: Parliament’s Departmental Committee on Agriculture & Cooperatives in Parliament Sitting members of parliament who formally served as Sacco leaders Support of departmental committee crucial to success of a Bill

Journey towards SACCO Regulations Enactment of the Bill in to Law Bill introduced to the National Assembly in August 2008 Debated and enacted in October 2008 Huge support in National assembly because Sacco societies are well known in Kenya Became law in Dec 2008, - Sacco Societies Act, 2008

Journey towards SACCO Regulations Challenges in developing the Sacco law Resistance to change - Consensus building Initial focus was on Front Office Service Activity (FOSAs) Some provisions removed/amended

Journey towards SACCO Regulations Operationalization of Sacco Societies Act, 2008 Acts of parliament are operationalized through regulations and/or rules Required: Development of the Regulations Establishment of the Sacco Societies Regulatory Authority Publication of the Regulations for by the Minister for Cooperative Dvpt and Marketing

Journey towards SACCO Regulations Operationalization of Sacco Societies Act, 2008 In early 2009, the Minister appointed a Task Force (TF) Principal deliverables of the TF: Regulations to operationalize the Act; Institutional design of the Regulatory Authority Required staffing levels to kick off

Journey towards SACCO Regulations Operationalization of Sacco Societies Act, 2008 Task Force (TF) comprised key stakeholders in the Sacco subsector: Ministry of Cooperatives (Three Representatives) Central Bank of Kenya Treasury/Ministry of Finance KUSCCO KERUSSU Cooperative Bank of Kenya Chairman was Commissioner for Cooperative Development

Journey towards SACCO Regulations Operationalization of Sacco Societies Act, 2008 Task Force sought support from: Financial Sector Deepening Trust Kenya – Financial WOCCU – Technical

Journey towards SACCO Regulations Operationalization of Sacco Societies Act, 2008 In May/June 2009 the TF appointed two technical working committees namely: Regulations technical working committee; SASRA institutional design technical working committee

Journey towards SACCO Regulations Operationalization of Sacco Societies Act, 2008 Scope of work and composition guided by documented Terms of Reference approved by the TF but: Both committees comprises technical staff Both committees worked with consultants for technical advise and best practices Committees reported to the TF on their progress

Journey towards SACCO Regulations Institutional design and establishment of SASRA Technical committee focused on: Organizational structure and establishment Staff establishment and budget Job description, competencies and training Business process – policies and systems

Journey towards SACCO Regulations Developing the Sacco Societies Regulations Regulations Technical committee: Guided by the Act, developed detailed operational and prudential regulations Classified by the subject matter of law namely governance, credit, liquidity, licensing etc Took about four months to have 1st draft

Journey towards SACCO Regulations Developing the Sacco Societies Regulations The Regulations at a glance: Licensing Capital adequacy Shares, Savings and deposits Liquidity/Asset and Liability Management . ……Cont’d

Journey towards SACCO Regulations Developing the Sacco Societies Regulations 5. Credit management Risk asset classification and provisioning Investments Financial Performance Reporting Governance of Sacco Societies

Journey towards SACCO Regulations Developing the Sacco Societies Regulations 10. Information Preservation and Business Continuity 11. Regulation and Supervision Deposit Guarantee Fund Regulatory forms and reporting formats Miscellaneous provisions

Journey towards SACCO Regulations Stakeholder inclusion in developing Regulations Specifically Sacco societies Indirect involvement of Sacco societies: Through inclusion of union Direct involvement of Sacco societies: Request for written comments on final draft Stakeholder workshop

….. and the Journey ended with….. Commencement of the Regulations

Journey towards SACCO Regulations Challenges in developing the Regulations Setting prudential ratios/standards on: Capital adequacy Loans classification Loan loss provisions Liquidity Governance in Sacco societies

Journey towards SACCO Regulations Challenges in developing the Regulations Absence of credible data on financial performance of Sacco subsector; Reporting frequency given poor ICT adoption in most Saccos Transitional period for Saccos already deposit taking

Journey towards SACCO Regulations Challenges in developing the Regulations Influence of already existing Regulatory framework for Microfinance and Banks Technical committee members were full time employees in their parent institutions Time frame

Many thanks