1. FINANCIAL REPORTING FOR COOPERATIVE SOCIETIES 12 th – 13 th May 2016 HILTON HOTEL – NAIROBI Session: SASRA Required Reports (Financial Management Report) FINANCIAL REPORTING FOR COOPERATIVE SOCIETIES 12 th – 13 th May 2016 HILTON HOTEL – NAIROBI Session: SASRA Required Reports (Financial Management Report) Credibility.Professionalism.AccountAbility

2. Session Objectives The aims of the Session: Identify the reports that are required by SASRA and their respective due dates Understand the meaning of each report listed in SASRA regulations Obtain content and format (template) for each of the required reports Define the terms, line items and disclosure requirements in the reports

3. Introduction One of the main elements of compliance with regulations brought forth by SACCO Societies Act, 2008 and regulations there under is submitting various reports in specific formats to the authority on a monthly, quarterly, and annual basis. Currently, many of the SACCO’s ICT systems lack the capability of generating the regulatory reports in the prescribed format

4. Introduction cont.. Information in this session has been extracted from a)The SACCO Societies (Deposit Taking Sacco Business) Regulations, 2010, b)ICPAK guidelines, and c)other materials developed by SASRA over the past year. Therefore, if you comply with the guidelines and templates, and your data is accurate, your reports are guaranteed to be compliant with regulations

5. Responsibility of reporting Financial statements and reports should disclose relevant and useful information that supports the key objectives of governance to members, depositors, borrowers, employees and other stakeholders Collective and individual responsibility Supervisory committee Executive committee

6. Why Report? Measure financial soundness & growth Measures profitability/loss of the business When analyzed & interpreted - reflect areas of strengths & weakness Indicate periodic performance/growth Prepared at the end of the financial year in preparation of the General meeting Legal requirement

7. Why Report cont.. Ultimate goal of regulation is to ensure that rights and interests of the different stakeholders are respected and protected in pursuit of the entity’s objectives In many jurisdictions, the policy objectives of developing legislation are to: – Enhance Governance through improved transparency and accountability in the business conduct (or management) of the institutions. – Deepen access to financial services and thus contribution to the social-economic empowerment of the citizens

8. Role of SASRA To achieve a sound and efficient SACCO system in the interest of members To promote safety, soundness and stability of member assets To create an enabling environment for sustainable development of SACCOs To ensure the autonomy and independence of the supervisory authority

9. Legal requirements for SACCOs to Comply with IFRS 1. NON-DEPOSIT TAKING: The Co-operative Societies Act Cap 490 Section 25(1) provides that: “Every co-operative Society shall keep proper accounts which shall (a) be prepared in accordance with International Accounting Standards;” Sec. 25(3): “ It shall be the duty of every co-operative Society to cause its accounts to be audited at least once in every financial year by an auditor appointed under subsection (4). Sec.6 (a) “The accounts referred to in subsection (3) shall; conform with IFRS.”

10. Legal requirements for SACCOs to Comply with IFRS 2. DEPOSIT TAKING SACCOs (Licensed by SASRA): The SACCO Societies Act 2008 provides that: Sec. 40 (3): “The accounts and other financial records of a Sacco Society shall be denominated in Kenya Shillings and shall comply with the IFRS and such other requirements as the Authority may prescribe.”

11. SACCO Regulatory reports SACCOs are subject to adhering to monthly (capital adequacy, liquidity, and deposits), quarterly (risk classification of assets and loan loss provisioning, investment returns, financial performance) and annual (audited financial statements) reporting requirements to SASRA.

12. Legal Reports Provided in the 2 nd Schedule of the Sacco Societies Regulations, 2010 Form 1 – Sasra2/001-Capital Adequacy Return (every month 15 th of following month) Form 2 – Sasra2/002-Liquidity Statement Form 3 – Sasra2/003-Statement of Deposit Return Form 4 – Sasra2/004 –Return on risk Classification of assets and provisioning Form 5 – Sasra2/005- Return on Investment Return Form 6 – Sasra2//006-Statement of Financial Position Form 7 – Sasra2/007-Statement of Comprehensive Income Form 8 – Sasra2/008 –Other Disclosures

13. Monthly Returns Form 1 Capital adequacy report The capital adequacy return shows the balance of the capital account, the balance of on-balance sheet assets, and compares the core capital to the on-balance sheet assets to calculate capital ratios. End of every month (to be received by the 15th day of the following month) Form 2 Liquidity statement report This report shows the balance of the Saccos liquid assets as well as the balance of the Saccos liquid liabilities. End of every month (to be received by the 15th day of the following month) Form 3 Statement of deposit return This report shows the number and value of non-withdrawable, savings, and term deposit accounts within defined value ranges. End of every month (to be received by the 15th day of the following month)

14. Quarterly Returns Form 4 Return on the risk classification of assets and provisioning report This report reveals the number and value of loans within each risk classification, including the required provision amount for those accounts. End of every quarter (to be received by the 15th day of the following month) Form 5 Return on investments report This report compares land, building, and financial assets to the SACCO’s total assets and its core capital. End of every quarter (to be received by the 15th day of the following month)

15. Yearly Returns Form 6 Statement of financial position Statement of financial position, also referred to as Balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time. Within three months after the end of the financial year Form 7 Statement of Comprehensive income A report that begins with financial income and displays the items of other comprehensive income for the reporting period. Within three months after the end of the financial year

16. Yearly Returns Form 8 Other Disclosures A report describing non-performing loans & advances, insider loans & advances, off-balance sheet items, capital strength, liquidity, and investments. Within three months after the end of the financial year Statement of changes in equity A financial statement that summarizes the activity in the equity accounts for the period Within three months after the end of the financial year

17. Yearly Returns Statement of cash flows A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Within three months after the end of the financial year All financial statements should be audited ensuring compliance with international audit standards.

18. Key regulations To ensure that each SACCO Society maintains a level of capital which is adequate to protect or cushion member deposits and creditors against losses resulting from business risks that the SACCO, as a financial institution faces – Core capital NOT less than 10% of total assets – Core capital Not less than 8% of deposits – Institutional Capital NOT less than 8% of total assets The Authority may require higher minimum capital ratios

19. Capital Adequacy Capital adequacy requirements ensure that each SACCO Society maintains a level of capital adequate to protect or cushion member deposits and creditors against losses resulting from business risks that the SACCO, faces. These risks include credit, investment, legislative, liquidity, interest rate and competitive risks. Thus as a measure of a financial institution’s safety and soundness, adequate capital promotes public confidence in the institution.

20. Capital Adequacy Capital in a Sacco Society is composed of: a)core capital defined by the Sacco Societies Act, 2008 as fully paid up members’ shares, retained earnings, disclosed reserves, grants and donations all of which are NOT meant to be expended unless on liquidation of the Sacco society. b)Instituitional capital is core capital less the members’ share capital. Institutional capital is the portion of the core capital that belongs to the SACCO society as an institution such that no one member can individually lay claim on it. Thus, Core Capital = Fully paid up members’ share capital + statutory reserves + retained earnings + disclosed reserves + grants/donations; and;

21. Does this example pass the test Total assets67,500,000 Core capital5,000,000 Member shares contribution1,000,000 Institutional capital (statutory, revenue)4,000,000 Member deposits and liabilities62,500,000

22. CAPITAL ADEQUACY Minimum Core Capital The minimum core capital for a SACCO Society shall at all times be Kshs.10 million (ten million shillings). This must be met before a license is issued. A SACCO Society’s capital levels will be monitored on a continuous basis by the Authority and may be reviewed from time to time. All Sacco Societies carrying out deposit taking business had four (4) years to build their capital to the regulatory standards (expiry was June 2014). What about new ones?

23. CAPITAL ADEQUACY - Transition clause Sacco societies carrying out deposit taking business at the commencement of Sacco Societies shall at the point of applying for license be required to have: 1.A core capital of not less than 4% of total assets which shall graduate to 10% by the fourth year; 2.A core capital of not less than five per cent of its total deposit liabilities which shall, gradually graduate to 8% by the fourth year; and 3.An institutional capital of not less than two per cent of its total assets which shall graduate to 8% by the fourth year.

24. CAPITAL ADEQUACY Upon getting a license, a Sacco society shall prepare and submit to SASRA, at the end of every month to be received by the 15th day of the following month, a return on Capital adequacy. SASRA will validate the data provided on the returns from the balance sheet and independently compute the capital ratios. Additional information may be requited from the Sacco society in evaluating compliance with the capital adequacy requirements.

25. CAPITAL ADEQUACY The board of directors of each SACCO Society shall be responsible for establishing and maintaining, at all times, an adequate level of capital. The capital standards outlined are the minimum acceptable for SACCO Societies that are fundamentally sound, well-managed, and which have no material financial or operational weaknesses.

26. CAPITAL ADEQUACY Where a Sacco Society is undercapitalized SASRA may pursue these actions against a Sacco Society, its board of directors, or its officers: – prohibition from declaring or paying dividends; – prohibition from expanding existing activities or engaging in new activities; – suspension of lending, investment and credit extension operations; – prohibition from acquiring, through purchase or lease, additional property and equipment; – prohibition from accepting further deposits or other lines of credit; and – prohibition from declaring or paying bonuses, salary incentives, severances packages, management fees or reimbursement of expenses to directors or officers. – Any other action deemed appropriate by the Authority.

27. LIQUIDITY Liquidity is simply the ability of a Sacco to pay short-term obligations –members loans demand, Savings withdrawals, creditors etc It is usually expressed as a ratio or % age of current assets over current Liabilities (Deposits for a Sacco) Reg.13 (2)-15% Requirement of savings & short-term liabilities (exclude members non- withdrawable deposits) Reg.13(3)-Defines liquid assets i.e. cash, Bank balances, Short-term investments, Time deposits Reg.13(4)-Contingency measures of liquidity maintenance Reg. 21-27 - Terms of members shares prescribed, i.e. minimum, cannot pledge as collateral, transferability, earn a dividend Disclosures on; – Non withdraw able deposits – Withdraw able deposits Authority return end of every month

28. Limits on loans and credit facilities Application for loan or credit facility: Sacco societies must put in writing: Loan policy and procedure manual, an asset review system including review of the entire asset portfolio. SASRA prescribe the limit of societies’ core capital beyond which no loans or credit facilities shall be granted; loans/ credit facilities shall not be secured against the society’s core capital. Contravention may result in a fine not less than Kshs. 100,000 or imprisonment for a term not less than two years or both. Loans to members make the largest single asset Loans are made from member deposits Loans form largest earning asset Hence Loan portfolio quality must be a PRIORITY for a safe and sound SACCO financial status

29. Insider Lending A sacco society may only advance loans to its employees and members of the board of directors on terms similar to other members subject to limits on proportion of total assets as determined by SASRA.

30. Non-performing loans Reg. 39-46 Computing delinquency Basic Classification Loan loss allowances Authority return at end of every quarter on or before the 15 day Basis for classification Performance of a loan account against contract – Performing- – Watch-one instalment outstanding 1-30days – Substandard-Unpaid 30-180days – Doubtful-Unpaid 181-360days – Loss-Unpaid for over 360days

31. Investments by Sacco societies Sacco societies can invest their funds in: government securities, financial institutions, capital markets and in other co-operatives subject to limits on proportion of total assets as determined by SASRA. Investment in land should only be for conducting deposit taking business subject to limits on the proportion of total assets set by SASRA. Develop an Investment policy – Limits investment in non-earning assets -Not more than 10% of total assets – Restricted investments transactions – Investment in Land only for business use maximum 5% Authority return at end of every quarter on or before the 15 day

32. Reporting Financial year: twelve months ending 31, December in each year. Form of accounts: Sacco societies maintain proper books of accounts denominated in Kenyan shillings that show a true and fair state of affairs and comply with IFRS. The board of directors shall cause accounts of the Sacco society to be audited within three months after the close of each financial year.

33. Penalties Minimum capital requirements: Sacco societies shall maintain minimum capital requirements as prescribed by SASRA or else pay a penalty interest not more than 1% of the amount of deficiency for every day with deficiency. Minimum liquid assets: Sacco societies shall maintain minimum liquid assets as prescribed by SASRA. Prohibited business: Sacco societies shall only engage in businesse prescribed by SASRA. Place of business: A Sacco society can only open a branch or new place of business or change its location with approval of SASRA. Contravention may result in a fine not less than Kshs. 100,000 or imprisonment for a term not less than three years or both

34. The End Review of financial statements UN Sacco statements UNAITAS statements