Kenya's Savings and Credit Cooperative Organisations (Saccos), which manage approximately KES 759 billion ($5.9 billion) in loans across 357 regulated entities, are facing significant financial challenges. The sector, which serves 6.84 million members, has been plagued by allegations of financial mismanagement and corruption, with the Kenya Union of Savings and Credit Cooperatives (KUSCCO) under investigation for alleged irregularities worth KES 13 billion ($101 million).

The Sacco sector has long been a vital part of Kenya's financial landscape, providing essential services to households and individuals who may not have access to traditional banking services. However, the recent KUSCCO fiasco has raised concerns about the sector's governance and regulatory environment. A forensic audit by PwC has been handed over to the Inspector General of Police to investigate the alleged misappropriation of members' funds.

Despite the government's promises to take stern action against those responsible, there are concerns that Kenya's Sacco financial regulations are intentionally lax, allowing corruption to go unpunished. This is not an isolated incident, with at least three similar Sacco corruption cases reported in 2024 alone. The lack of stringent regulations has created an environment conducive to financial mismanagement and corruption.

Some Saccos have engaged in dubious activities, such as taking out bank loans to pay dividends, which contradicts sound financial management principles and jeopardises the cooperative movement's stability. There are also alarming disparities in dividend distributions across the sector, with some Saccos offering rates exceeding 20%. While attractive in the short term, such high payouts can mask underlying financial issues and threaten long-term sustainability.

The Central Bank of Kenya (CBK) has mandated that banks increase their core capital from KES 1 billion to KES 10 billion by December 31, 2029, with annual increments between KES 1 billion and KES 2 billion. In contrast, deposit-taking Saccos are required by the Sacco Societies Regulatory Authority (SASRA) to maintain a minimum core capital of only KES 10 million. This disparity highlights the more relaxed regulatory environment governing Saccos.

The government plans to oversee the appointment of Sacco directors and impose term limits to enhance corporate governance. This move may address issues such as embezzlement of members' savings and failure to refund share capital to exiting members. However, comprehensive reforms are desperately needed to safeguard members' interests and rescue the sector's already decaying public perception.

Aligning Sacco regulations more closely with those of traditional banks seems to be an obvious step towards mitigating risks associated with financial mismanagement and corruption. Dividend policies that tie payouts to actual financial performance can prevent the unsustainable high returns that some Saccos offer, which is also a policy that can protect members' savings.

If left unchecked, the Sacco sector will remain vulnerable to ongoing corruption and financial instability, undermining the progress made in financial inclusion and economic growth for the people who have benefited from these services. It is essential for policymakers and stakeholders to take decisive action to address these issues and ensure the long-term sustainability of the Sacco sector.