SACCOs in Kenya: What You Need to Know

 Are you thinking about joining a SACCO? Savings and Credit Cooperative Organizations (SACCOs) have become popular in Kenya for providing affordable financial services to individual and group members. Let us explore how SACCOs work, how you can earn from them, the costs and benefits of joining, and the rules governing their operations, and maybe you can make an informed decision going forward.

How Does a SACCO Work?

SACCOs are cooperative societies where members pool funds to provide loans and savings facilities. Members contribute regularly to a common fund, which is then used to extend loans to members at relatively low interest rates. The institutions are structured around principles of mutual assistance, democratic control, and shared benefits. Here's a detailed look at how SACCOs function:

1. Membership and Contributions

Joining a SACCO: You become a member of a SACCO by purchasing shares and committing to making regular or monthly savings contributions. Depending on their rules and regulations, the amount required to join and the monthly savings rate vary between SACCOs. For instance, some SACCOs may require a minimum share capital of KES 2,000 to KES 10,000.

Regular Contributions: Members are expected to contribute a set amount of savings regularly. This collective pool of funds becomes the main resource from which the SACCO extends loans to its members. The continuous inflow of contributions ensures that the SACCO has sufficient liquidity to meet loan demands and other financial obligations.

2. Sacco Loans and Dividends

Loan Eligibility: Members can apply for loans after six months of membership based on their accumulated shares. The amount a member can borrow is often determined by a multiple of their savings, adhering to the SACCO’s policies and the 2/3 rule, which allows borrowing up to two-thirds of a member's total shares. The members can borrow up to 3 times the number of shares they hold if they can find other members to guarantee the amount exceeds their shares.

Interest Rates: SACCO loans are provided at a low interest rate (for most, around 1 % per month on reducing balance) compared to commercial banks. This is one of the main attractions for members, making borrowing very affordable.

Profit Distribution: SACCO's operations generate profits as dividends to members. Each member's dividend amount is proportional to the number of shares they hold. This profit-sharing mechanism incentivizes members to have more shares and contribute more savings.

3. Sacco Governance

Democratic Management: SACCOs are managed democratically, with each member having an equal vote in decision-making processes, regardless of the number of shares they own. This democratic structure ensures that all members have a say in how the SACCO is run.

Elected Leadership: Members elect a board of directors responsible for making decisions and overseeing the daily operations of the SACCO in line with provisions of the Sacco Societies Act No 14 of 2008. The directors are accountable to the members and must operate transparently to maintain trust and ensure the SACCO’s success.

Annual General Meetings (AGMs): SACCOs hold annual general meetings after closing their financial years, where members can discuss the SACCO’s performance, review financial statements, elect new leaders, and make decisions about the future direction of the organization. This open forum fosters transparency and member participation.

How Do You Earn from a SACCO?

1. Dividends: Members earn dividends on their shares, distributed annually based on the SACCO’s profitability.
2. Interest on Savings: Some SACCOs offer interest on the regular savings members' deposits.
3. Access to Affordable Loans: Lower-interest loans will help you save money and invest more in your activities than borrowing from commercial banks or MFIs.

How Much Do I Need to Join a SACCO?

The amount required to join a SACCO varies. Typically, you must contribute a set minimum share capital ranging from KES 2,500 to 20,000, then make regular savings deposits that account for your shares. For example, joining GDCSACCO will require an initial investment of KES 2,000 as share capital, then monthly contributions of at least KES 600.

What Are the Benefits of Joining a SACCO?

1. Affordable Loans: SACCOs offer loans at lower interest rates than commercial banks. This makes it easier for members to finance various needs such as education, housing, and business ventures.
2. Dividend Payments: Members receive dividends, which can be a significant return on their investment. In the period after COVID-19, leading saccos in Kenya paid divided at a minimum of 11% of member deposits.
3. Financial Education: SACCOs often provide face-to-face financial education to help members manage their finances better and understand budgeting, savings, and investment strategies.
4. Community Support: Being part of a SACCO fosters community and support among members.

What Are the Disadvantages of Being in a SACCO?

1. Limited Services: SACCOs may not offer as wide a range of financial products as commercial banks. For example, smaller SACCOs have fewer options for digital banking, international transactions, and specialized financial products like insurance and wealth management. This limitation can be a disadvantage for members who require comprehensive financial services.
2. Risk of Mismanagement: Poor governance or mismanagement has led to financial losses for some country members. Although SACCOs are regulated by the Sacco Societies Regulatory Authority (SASRA), instances of mismanagement can still occur. This risk underscores the importance of transparency, proper oversight, and active member participation in the governance of the SACCO.
3. Withdrawal Restrictions: SACCOs have strict rules on how and when members can withdraw their savings. The restrictions are in place to ensure the liquidity of the SACCO but can be a disadvantage for members who need immediate access to their funds. Unlike banks, where withdrawals can be made freely, SACCO members have to wait for 60 days to access their member deposits, and even so, share capital cannot be withdrawn.

What Is the 2/3 Rule in SACCO?

The 2/3 rule in SACCOs typically refers to the borrowing capacity of members. A member can borrow up to two-thirds of their total savings and shares. This rule ensures that SACCOs maintain sufficient liquidity and reduce the risk of default.

Can I Withdraw All My Money from a SACCO?

Yes, members can withdraw their money from a SACCO, but the process has restrictions. You need to apply for withdrawal from the Sacco in a formal signed letter giving the Sacco sixty days’ notice in line with Sacco laws. The letter should be accompanied by a copy of your ID/passport. You can also withdraw your deposits instantly, but Sacco will charge you a commission of at least 10% of the current deposit amount in place of a withdrawal notice of 60 days. Note: You cannot withdraw deposits pledged towards another member’s loan unless that loan is cleared or your guarantorship is substituted.

SACCOs in Kenya play a crucial role in promoting financial inclusion and providing affordable financial services. While they offer numerous benefits, such as lower-interest loans and dividends, you should know the rules and possible disadvantages. Understanding how SACCOs operate can help you make informed decisions about joining, quitting, or maximizing the benefits.