Why World Bank wants Saccos turned into banks

The World Bank now wants Savings and Credit Co-operatives (Saccos) to operate as banks so as to help lower the cost of credit in Kenya. The Bretton Woods institution has released a study sanctioned by the Central Bank of Kenya (CBK), outlining a set of reforms that should be introduced to replace the law capping interest rates

Part of the proposals is allowing Saccos to access more deposits via formal payment systems to allow them to offer higher facilitates while increasing competition for banks. Currently, Saccos tend to lend at rates below those of the market (generally 12 per cent), but the majority and often sole source of their funding is members’ deposits.

They are, therefore, highly constrained in terms of the amount and maturity of the loans they can provide.

“If Saccos could access the payment system, they could attract a substantially higher level of deposits and increase the competition vis-à-vis banks, leading to a more competitive financial sector overall,” say the report authors Mehnaz Safavian and Bilal Zia.

The World Bank says while the country already has 43 commercial banks, one way of increasing competition would be to allow Saccos to compete on a level playing field.

“Despite their popularity and substantial market penetration,Saccos currently cannot access formal payment systems, which greatly limits the services they can offer clients,” says the report. The World Bank also proposes that all customers should not be offered a flat rate but that financial institutions should utilise Credit Reference Bureau information to price loans for their customer as per their repayment history.

“The promotion of financial consumer protection can arm borrowers with the knowledge to make more informed credit choices, including demanding lower fees and interest charges if they can demonstrate a strong credit history,” says the World Bank.

The global lender also argues that higher loan charges come from the difficulty in enforcing repayments once loans become sour, suggesting that small and uncontested loans should be foreclosed easily. The country’s non-performing loans are at an all-time high at 11 per cent of the Ksh 2.4 trillion lent out.

“Risk premia can be reduced by more efficient loan foreclosure procedures, including in the space of small claims, summary procedures for uncontested debt and other resolution procedures that reduce the costs of debt collection,” say the World Bank experts.

They have also lauded the reforms around movable collateral, which can also reduce interest rate charges, especially for SMEs. The World Bank wants firms and individuals to leverage movable property as a security against debt, adding that a registry to make public those claims can give institutions more confidence to lend and borrowers more incentives to repay.