Agriculture-Based SACCOS

By CPA Michael Cheruiyot

SACCOs in Kenya are regulated by the Sacco Societies Regulatory Authority (SASRA). SASRA does this role by both off-site and on-site supervision. In their Annual Supervision report of the year 2023 (SASRA Database), there were a total of 357 deposit-taking SACCOs under their watch, the leading in membership being Agriculture-Based SACCOs. Other categories of SACCOs are government-based, Community-Based, and Private-Based SACCOs.

The membership in these regulated SACCOs has grown from 3.16 Million in 2015 to 6.32 million in 2023. Despite this growth, there have been those SACCOs whose licenses were revoked by SASRA. Some of the reasons cited by SASRA for revocation include failure to meet obligations owed to members and failure to comply with prudential ratios. My FOCUS is on the agriculture-based SACCOs, which reported the highest number of members at 2.85 Million, representing 42% of the total membership (Source: SASRA). They are classified into two categories: crop and dairy production.

Agriculture is the leading contributor to Kenya’s GDP. For the sector to grow, farmers who are mainly members of these agro-based SACCOs need seamless access to credit facilities to spur their crop and dairy production. This calls for strengthening the governance of the Sacco Societies in the sector.

The Board of directors, who are the ones charged with governance perform the following functions;

1. Governance
2. Compliance
3. Risk Management
4. Finance
5. Strategy
6. Technical Matters
7. Human Resource
8. Corporate Social Responsibility, among others.

To effectively perform these functions, SACCO Boards should develop and periodically review Board Charters, which sets out the roles, responsibilities and functions in the governance of the Organization. Unfortunately, most of the agriculture-based SACCOs are in rural setups, and the members are drawn from the delegates who the members elect without regard to any academic or professional qualifications. The minimum and basic criteria are the ability to read and write and the threshold for minimum member deposits. After the election of delegates, those from the same electoral zone elect a director. Most of the directors elected are farmers who might not have any technical competence in the business field and now rely on the management team to interpret the complex financial data.

SACCOs, who in the past have had their licenses revoked, could have suffered the lack of competence of those charged with governance to interrogate the progress of their societies proactively since they left their governance responsibility to the management team. The business environment is dynamic, and advancements in information technology have complicated everything. Measuring and reviewing the entity’s financial performance requires at least a board member with sound finance and/ or accounting knowledge.  

This calls for a co-option of professionals from diverse professions on the boards to help beef up the smooth running of these SACCOs.

I have worked in the internal audit function of the SACCO for over four years, and from where I sit, our recommendations can only add value if they are implemented. As internal auditors, we offer three primary services: Audit and assurance, Consultancy and Advisory. In most cases, which could be true for other SACCOs, the Board and Management only utilize the audit and assurance service. This amounts to our underutilization of our expertise. The Chief Executive Officer, the captain of the management team, is the one to champion the implementation. In cases where structures are not adequately established, the chances of failure to sustain operations are high. 

Such shortcomings can only be cured if the Board and Management could further seek the consultative and advisory roles of the internal auditors.

Based on my evaluation, poor organizational culture is the leading factor in failing to implement and fully adopt the internal audit reports. These reports could cushion the SACCO against adverse effects of non-compliance with the regulator in the financial reporting and observation of the prudential ratios. Familiarity and threat to independence are also key contributors to non-implementation. A conflict in the reporting structure ensues when the Board/ Management fails to comprehend the role of internal audit in the Organization.

The following are some mistakes that entrench poor organizational culture in most SACCOs. They include but not limited to:

1. Non-independence of the Board—Most Boards in agriculture-based SACCOs lack independence in discharging their roles. The decisions they make are biased, which affects their performance.
2. Domination by one person or sub-committee- Sometimes, a sub-committee invalidates the resolutions of the entire Board because of dominance.
3. The frequency of Board meetings—There should be a balance between the frequency and follow-up on the issues discussed.
4. The turnover of board members—In some cases, board members fail to return after their first term, affecting stability. In other SACCOs, there are no term limits, which causes the status quo and re-invention of the wheel in transacting business.
5. The independence of an independent audit function and the audit committee—In most SACCOs, the audit committee serves like any other subcommittee, unlike in state corporations that establish a supreme audit committee and others.

Therefore, the regulator should initiate governance audits, which will go a long way in liberating the SACCOs that have suffered from poor governance due to a traditional way of transacting business and a reluctance to adhere to the policies and by-laws.

ICPAK should also participate in revamping the effectiveness of SACCOs in the field of financial reporting and auditing. The Institute, through SASRA, should initiate legislation requiring every SACCO to co-opt an ICPAK member to their Boards and be the Chairperson of the audit committee. This will help the SACCO adopt best business and governance practices, aid in preparing financial statements that comply with International Financial Reporting Standards, and interpret these statements to meet the regulator’s requirements. This will also create opportunities for ICPAK members, and in so doing, the Institute will grow, and the health status of our SACCOs shall be enhanced.

In conclusion, I want to thank the Institute for offering us this platform to share our thoughts and experiences, which can help this country in various economic sectors.

Michael is an Internal Auditor at Kimbilio Daima Sacco Ltd, Bomet County.

Email: mcheruiyot@kimbiliodaimasacco.co.ke