Why this new Sacco regulation could hurt banks

The government is in the process of paving the way for Savings and Credit Cooperative Societies (Saccos) to behave like banks. National Treasury chief, Henry Rotich, is expected to shed on more light on the Sacco transformation path when he reads the FY2016 national budget in parliament next month.
The new Sacco regulations would see Saccos integrated into the national payments system. The regulations would also give Saccos their own clearing house for offsetting inter-Sacco transactions the same way banks do. But commercial banks are expected to feel revenue and profit pressure in the new Sacco dispensation. Banks transact about Sh19 billion in loans originated by Saccos every year. Therefore, there is a potential loss of business for banks when Saccos are allowed to sidestep them in their transactions.

How banks will lose money
In the current arrangement, Saccos rely on banks for loans that they in turn lend to their members. As such, banks generate significant interest income by offering loans to Sacco members, but that source of income could soon dry up. The new regulations being worked out allow Saccos to borrow from and lend money to one another, thus sidestepping banks in their loan acquisitions. 

When Saccos are allowed to borrow and lend money among themselves, they can agree to issue loans to one another at lower interest rates than what banks typically charge them. The savings on borrowing costs can then trickle down to Sacco members in the form of cheaper loans. If you have been following the recent discussions around the issue of interest rates, Central Bank officials have repeatedly aired their frustration with commercial banks over higher interest rates that they charge customers. Therefore, allowing Saccos to borrow and lend money among themselves appear to be another strategy by the regulators to try and dilute the influence of banks and potentially force them to come up with better loan terms for their customers.

In addition to the potential loss of interest income from loans issued to Saccos, banks are also set to lose other transactional incomes. For example, currently Saccos depend on banks to issue them with cheque books and also to process the personal cheques they issue to members. But the new Sacco regulations will allow Saccos to issue cheques directly to members and clear cheques issued by other Saccos.

Loss of members to banks

Saccos have been losing their members to banks because of their inability to perform some transactions. But the problem of losing customers to banks could come to an end because the integration of Saccos into the national payments system will lift the current restrictions they face in the services they offer to members. When you look at it from a different perspective, you see that banks could lose a steady flow of new customers whom they recruit through Saccos. It’s been like Saccos are doing the heavy-lifting for banks when it comes to recruiting customers.

Who could be hurt most?
Almost all the commercial banks in Kenya depend on Saccos for third-party businesses, but banks that serve the low-income market could be the hardest hit by the new Sacco regulations because the target market for most Saccos in the country is the low-income population.
There are 7,000 registered Saccos in Kenya.