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Abstract
Savings have long been an essential source of funding for credit. Whether in Europe, North America, Africa, Asia or Latin America, community-based financial institutions have relied on deposits to make financial services accessible to moderate-income borrowers. Despite the foundational role savings and loans have had in financial sector development, emerging markets have largely overlooked the important role these institutions can have in providing shelter credit in their own contexts. Savings and Credit Cooperative Organisations (SACCOs) in the Republic of Kenya illustrate the potential model for deposit-based lending to deliver housing finance for many of the country’s underserved prospective borrowers. This study draws upon the experiences of several savings and loan associations in the industrialized world with applications towards improving the Kenyan SACCO model that provides the most extensive credit union loans on the African continent. The article concludes community finance institutions merit strong consideration towards helping overcome the housing finance sector underdevelopment too often experienced in the developing world.
Acknowledgement
No funding was utilized for this work. Further the authors have no financial interest or benefit arising from the direct applications of their research.
Disclosure statement
No potential conflicts of interest were reported by the authors.
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Notes
1 There is active debate about the accuracy of this figure (Wood, Citation2018). This article uses this figure as an indicator that SACCOs are a majority of housing finance loans accessed in Kenya.
2 The financial industry often refers to customer deposits as retail deposits.
3 Compared to checking accounts that are used for transactions and therefore pay no interest, money market mutual funds and savings accounts are less liquid and pay periodic interest.
4 This article defines financial cooperatives as mutually owned and operated savings and lending institutions. This term applies to building and loan associations (B&Ls), building societies, credit unions, mutual societies, saving and loan associations (S&Ls), thrifts, savings and credit cooperatives (SACCOs) as well as similarly named non-English entities, such as bausparkassen and caisse d’épargne (Fuller, Citation1998; Mason, Citation2004).
5 Regardless of the financial benefits from dividends distributed to shareholders, the building societies were governed by one vote per member regardless of holdings and deposit contributions.
6 A mutual savings bank, was already founded by this time in Hamburg, Germany in 1778 (Andersson & Rodriguez, Citation2011).
7 For example, the British colonial government worked with villagers in India to form savings and loan associations (Moody & Fite, Citation1984).
8 Caisse d'épargne translates from French into savings bank. Bauspar and Bausparkassen translate from German into building society and building societies respectively.
9 The 2008-09 financial crisis can exemplify the consequences of demutualization and the riskier lending practices that resulted (Birchall, Citation2011).
10 The close-ended bauspar system, for example, had been suggested as a solution to reorient Euarasian markets to the contractual savings mechanism in the aftermath of the Soviet Union’s dissolution (Diamond, Citation1998; Rishke, 1998). The argument was that the German savings and credit model could similarly facilitate improved access to housing finance as Germany had done from with the bauspar system and its housing shortage following the Second World War (Kohl, Citation2016; Reynolds, Citation2018).
11 The growth in the United States, for example, was so great that by the 1950s S&Ls were dominant players in the rapidly expanding mortgage finance industry.
12 The exclusive nature of housing finance is not all too dissimilar from other emerging markets where financial institutions have limited purchase loan issuance. In Africa, building societies have catered to upper-income borrowers and civil servants (Collier & Venables, Citation2014).
13 This statistic refers to all cooperatives in Kenya, including SACCOs and others, such as housing cooperatives that use non-deposit-based financing mechanisms to provide housing for members.
14 President Uhuru Kenyatta signed the Banking Amendment Act imposing interest caps on loans and deposits in late 2016. The Government of Kenya has recently indicated willingness to repeal the interest rate caps.
15 The critical nature of SACCOs is further evidenced with Kenya’s tax regime. Since 1973, SACCO income is tax exempt. SACCO members are also required to pay a 5% withholding tax on the dividends from their shares. In 2018, there have been active discussions for tax reform where among other measures SACCO members would pay 10% withholding tax and interest income would only be exempt for members (Lugongo, Citation2018),
16 Shares are critical since they qualify SACCO members to be owners of the financial cooperative.
17 SACCOs usually have minimum deposit amounts a member must make, like Ksh 1,000 each month at Imarisha SACCO.
18 Kenyans are legally prohibited from membership in more than one cooperative society with ‘unlimited liability’ (Co-Operative Societies Act, Citation2012: 8.18). Despite the law, there are Kenyans who claim membership in multiple SACCOs.
19 Loan terms can be greater. For example, United Women’s SACCO offers development loan up to 10-years. Often SACCOs that offer loans with higher maturities also have higher interest rates.
20 Certain SACCOs require greater equity shares for loans with higher principal. Mhasibu SACCO, for instance, has a sliding scale for development loans.
21 There are three CRBs, licensed by the Central Bank, in Kenya; they are Creditinfo, Metropol and Transunion (Finance Act, 2016).
22 Some SACCOs only require guarantors if the loan amount exceeds the borrower’s deposit amount. Others require guarantors on all loans. Deposits typically suffice as a form of collateral for SACCO loans.
23 In other places, financial cooperatives, like credit unions and building societies have reported lower NPL rates than commercial banks (Birchall & Ketilson, Citation2009).
24 SASRA also mandates a delinquency celling rate of 5% that licensed SACCOs can hold on their books (Manyuanda, Citation2013).
25 SASRA imposes progressive levies on deposits of deposit-taking SACCOs, up to Ksh 10 million per society (Ngigi, Citation2016). The levied funds go to SASRA’s General Fund and contribute to the authority’s activities, including risk-based supervision.
26 Deposit insurance must responsibly consider SACCO default risks so as not to waste Kenyan taxpayer resources and thereby promote unsound lending decisions.
27 The competition between SACCOs and commercial banks is already fierce. Commercial banks offer more convenient withdrawal processes and do not require that customers become members. The interest rate caps the Government of Kenya has imposed has given a strategic advantage to SACCOs that customarily offer lower interest rates on their loans. This illustrates the well‐documented regulatory tensions between the public and financial sectors that are not unique to Kenya (Peretz & Schroedel, Citation2009; Safavian & Zia, Citation2018).
Additional information
Notes on contributors
Christopher Feather
Christopher Feather is the Executive Director of Kalamu Consulting, a management consulting firm specialising in financial sector development in developed and emerging markets. Prior to establishing Kalamu Consulting, Mr. Feather worked at the United Nations Human Settlements Programme (UN-Habitat) where he led initiatives to promote inclusive access to affordable housing finance throughout Africa, Asia and the Middle East. Mr. Feather previously served in government with several positions at the U.S. Department of Housing and Urban Development (HUD), including the Government National Mortgage Association or Ginnie Mae. Mr. Feather is a graduate of the University of Southern California as well as Georgetown University’s School of Foreign Service.
Chris K. Meme
Chris K. Meme is a research economist with Kalamu Consulting. Chris holds a Bachelor of Economics from the University of Nairobi as well as a Post-Graduate Diploma in Procurement and Supply from the Chartered Institute of Procurement and Supply in the United Kingdom. He has previously worked at UN-Habitat and Kenya’s Ministry of Foreign Affairs and International Trade. His research interests include: governance, financial markets, public finance, housing finance and policy. He has worked in the fields of local economic development, housing finance, housing policy and international political economy.
