Considerations to SACCO governance, safety and soundness in the proposed SACCO Act

The implications of the New SACCO Act on the Governance, Safety and Soundness of SACCOs in Uganda

Part 1: Introduction

The Future of the SACCO Movement in Uganda under the Proposed SACCO Act

Savings and Credit Co-operatives (SACCOs) history in this country dates back to the early 1950s or there about. In 1972; SACCOs came together and formed a union (the Uganda Co-operative Savings and Credit Union Limited-(UCSCU)) that would represent their interests both to the Government of Uganda donors and also to the international cooperative fraternity. All these years, SACCOs have grudgingly operated under the cooperative societies act and then cooperative statute of 1991. The first initiative to address this short coming was taken up in 1997, when UCSCU affiliates recognized the weaknesses of the legislation under which they were operating and the consequences of this to the growth of the SACCO movement in the country. This came about after a realization that the law (the Co-operative Societies Statute) had a lot of inadequacies which were stifling the development of efficient and effective SACCOs able to compete under liberalized economy that started in the early 1990s. A draft bill was prepared and forwarded both to the Registrar of cooperative societies and also to the Ministry of Finance.

Changes in management and disinterest on the matter that followed after 1999 must have slowed the process dramatically. There was of course opposition from certain quarters of the rest of the cooperative movement and the bureaucracy related to it and these could have contributed to the slowing of this process. There were murmurs about UCSCU initiating the break up of the cooperative movement, murmurs which may now be adequately addressed by the proposed SACCO Act in case the reasons for those murmurs were at all well founded.

However, the realization by the government of Uganda of the important role effective SACCOs can play in the deepening of financial services has totally changed the environment. The Ministry of Finance has since stepped in and intends to regulate the operations of SACCOs. I am aware that the current management at UCSCU was asked to contribute to this effort. Since UCSCU had already developed such a draft and in any case spent sizeable amounts on the exercise it was prudent that they would not have to go over the costly exercise once more and as such reviewed and submitted the said draft which has formed the basis for the work in progress on the proposed SACCO Act.

I have to be careful and make it clear that the work on the said draft involved a cross section of people but most importantly SACCO leaders and some of the members. The ideas in the proposed SACCO Act were therefore not an imposition from above but carefully thought through ideas which members felt at the time were relevant and could contribute significantly to setting a new direction for the SACCOs.

When this Act becomes law, it will be repealing “The Co-operative Societies Statute, 1991”. For the SACCO movement it is my opinion that this has long been overdue. But what are the implications of this Act on the SACCO movement in this country. For any body with experience in cooperatives and SACCO operations in particular it is easy to appreciate the positive changes the new law will bring to SACCO businesses in general and SACCO members in particular. This paper attempts to highlight some of those changes.

Part 2: General

2.1 Definition

The proposed Act defines a savings and credit co-operative society (SACCO) as “a co-operative financial organization owned, used, and controlled by its members, according to democratic principles for the purpose of encouraging savings, using pooled funds to make loans to members at reasonable rates of interest, and providing related financial services to enable members to improve their economic and social condition”. In using this definition, the proposed Act clearly gives due recognition of the international credit union (SACCO) principles and sets forth that only organizations aspiring to those principles will be registered as SACCOs.

The proposed Act also defines the National Association of SACCOs; the Uganda Co-operative Savings and Credit Union Limited (UCSCU Ltd.) and its role as being that of promoting SACCO development and representing their interest locally and internationally.

The proposed SACCO Act also clearly delineates SACCOs from other financial institutions; SACCOs have as their objective “the promotion of the welfare and economic interests of their members”.

2.2 Registration

Recognition of any SACCO as an artificial person is granted by way of registration. In contrast with The Co-operative Societies Statute, the proposed Act introduces a SACCO Regulatory Authority (SRA) whose functions will be to:

a. register, regulate, supervise, and license SACCOs including the Savings and Credit

Co-operative Unions,

b. set standards and formulate procedures for SACCOs and unions and enforce the implementation of the Act and regulations made under the Act

c. promoting the development of SACCOs

d. do all such other things as may be lawfully directed by the Minister.

The proposed Act also specifies who will be on the Board of Directors of the SRA. This will be the Permanent Secretary to the Treasury or his designate, the Commissioner for Microfinance or his designate, the Governor Bank of Uganda or his designate, four members (not public officers) with years of co-operative practice and management, business law, financial and economic or any other relevant field.

Under the 1991 Co-operative Societies Statute, the registration and regulation functions have hitherto been carried out by the Registrar of Co-operative Societies as outlined in Part 1 of that Statute section 1 to 11.

2.3 Minimum requirements a SACCO has to meet for it to be registered

According to Münkner¹ there are two principle ways a registering authority can grant registration to a co-operative society. This can be done using either a system of normative conditions, or a system of concession. In a system of Normative Conditions, the lawmakers determine certain well defined minimum requirements for registration in the Cooperative Societies Act. Once those conditions are met, and the registering authority verifies that this is so then the applicants have a right to be registered. If the registering authority fails or refuses to register the society, the applicants can exercise their right by taking him to court.

In the System of Concession, the registering authority is empowered to decide at its own discretion whether or not to register a society despite the fact that the lawmakers have laid down certain minimum requirements for registration. Grounds for refusal could be that the registering society does not meet government policy, or that a similar society exists in the area or because it is considered undesirable to form such society.

The proposed SACCO act applies the system of Normative Conditions. Once the SACCO meets the conditions set out in the Act, then the SRA is under obligation to register it.

For a primary SACCO, the proposed Act requires that a SACCO seeking registration must have a minimum of thirty persons all of whom have to be qualified for membership and are of legal age. There is no departure from the Co-operative Societies Statute in this regard.

In case of a secondary SACCO, the proposed Act requires that two or more registered primary SACCOs can come together and form a SACCO union. This is still so even in the Statute.

The proposed Act outlines the procedure a SACCO has to follow in the registration process. A SACCO has to submit an application in the prescribed form (this will normally be obtainable at the SRA), founding members have to execute an application for the said registration, file their bylaws with the SRA, clearly spell out the name of their SACCO, location of its head office of business and the names and addresses of the founding members and last but not least the members have to elect an interim board of directors as well as a Supervisory Committee.

While the procedure remains the same in intent and purpose as has been hitherto in the Statute, the proposed SACCO Act recognizes the importance of a Supervisory Committee and makes it one of the requirements a SACCO must fulfill for it to be registered. This is a new and very important development in the movement. The creation of a Supervisory Committee was hitherto relegated and only provided for in the SACCO bylaws. This has been a major weakness in the current given that supervisory committee has a major role in ensuring compliance with all the laws relating to operations of the SACCO.

Finally it is also important to note that the proposed Act just as it is the case under the Co-operative Societies Statute will maintain the member friendly way SACCOs can be formed. This is reflected in the way the Act makes it simple and uncomplicated to start a SACCO, the minimum emphasis on initial capital and low administrative costs by eliminating unnecessary legal paper work that would require the services of lawyers.

Governance, soundness and safety issues

This section of the Act provides for the rights, responsibilities and obligations of SACCOs. SACCOs can only operate as such when they are properly registered by the SRA. They must have structures/organs created to run the day to day affairs of the SACCO on behalf of the members. All registered SACCOs are expected to run their operations in conformity with the provisions in the SACCO Act, Regulations, By Laws and Policies governing the SACCO. The provision introducing the supervisory committee as one of the organs brings into being a very important internal check mechanism that ensures that the SACCO is operated in conformity with the SACCO Act, Regulations, by laws and SACCO policy. The supervisory committee is there to oversee that the SACCO operations comply with all the relevant laws and thus the financial safety and security of the SACCO. It is a step towards self regulation within the SACCO and under the SACCO system in general.

PART 3: Governance

Before I proceed with the licensing of SACCOs, I want us to go back a little and look at one or two developments the proposed SACCO Act is bringing into the lives of SACCOs in this country. I will start with the supervisory committee. Any body who has worked with co-operatives in general and SACCOs in particular will realize the important role this organ can play in improving governance in SACCOs and in strengthening self-regulation among SACCOs. To get a deeper understanding of the difference between the board and supervisory committee, let’s look at the primary functions of each of those organs.

3.1 The Board

According to the credit union supervisory committee hand book², the primary function of the board is to ensure that it is legally accountable to the SACCO. Ensure long-term security and viability of the SACCO by overseeing its operations and planning for its future; make decisions in the best interests of the SACCO and its entire membership.

3.2 The Supervisory committee

The supervisory committee on the other hand has the primary function of ensuring that reviews and audits are carried out on an on-going basis, to confirm that the SACCO’s records are maintained properly, honestly, and accurately; that policies established by law and by the board of directors are carried out faithfully; and that members’ assets are safeguarded and used according to the purposes of the SACCO. This committee is expected to be fully informed on the financial condition of the SACCO. It has the duty to carry out an examination of all loan applications, verify pass books and accounts, audit the books, and report to the AGM, board and the SRA when necessary.

So important is the role of the supervisory committee that Molloy, President of the Credit Union League of Saskatchewan (1938-1952) described the supervisory committee as “the guardian of the equity which each individual member has in the credit union”³ (credit union equates to SACCO in our context).

It goes without saying that this is one of the most important safeguards that has been put in the proposed Act. And it is a new development, the Statute had not provided for this before. Many of the SACCOs having realized the importance of the Supervisory Committee decided to include this committee in their bylaws. The only problem was that the commit did not have enough powers to exercise its authority and in some cases compromised its functions to the extent that it became an appendage of the board. Now that the functions and roles of this committee have been legislated, all SACCOs will be required to have one such committee and indeed the proposed Act gives the committee the powers it requires to perform its duties without hindrance.

The proposed Act also spells out how the Supervisory Committee will come into being; namely through an election by the AGM (Section 1.30 Subsection j). In the 1990s SACCO Boards used to appoint this committee and it took a concerted member education for this to change. In fact it was in 1996 when UCSCU amended SACCO model by laws to bring about this change when SACCO supervisory committees started being elected by the annual general meetings.

3.3 Probationary registration

While the co-operative statute provides for a SACCO to be registered as a probationary SACCO (Section 5: 1-5), the proposed Act does not have this provision.

Summary: Governance, Safety and Soundness Issues identified

A new and very important structure that has been added to the SACCO structures in the SACCO Act is the Supervisory Committee. The introduction of the Supervisory Committee with clearly spelt out roles, responsibilities and performance expectations well defined in the Act will go a long way in improving the standards of SACCO operations. According to the proposed SACCO Act, the members of the committee shall be responsible for reviewing financial statements on a monthly basis, work with internal and external auditors to review the SACCOs activities and processes. This is an important check on the both the board and the management of the SACCOs. Supervisory committees were not provided for in the Act but many SACCOs adopted them following a revision of the SACCO model by laws by UCSCU in 1996. Because the by laws are subsidiary to the Act, the Supervisory Committee did not really have the matching authority to really fully check on the activities of the board. Now that both organs have been legislated in the Act each with matching powers to carry out its roles, this committee should be able to check any excesses of the board and managers of SACCOs.

Part 4: Licensing of SACCOs

A new introduction is the requirement for SACCOs to obtain licenses annually if they are to conduct SACCO business in Uganda. Section 3.35, subsection 1. States “Every SACCO registered under this Act shall within 3 months of enforcement of the SACCO Act apply for a license to conduct business in Uganda and shall within 24 months comply with provisions of this Act”. Subsection 2 of the same section states which body shall be responsible for issuing the licenses; and that is the SRA. This a new development in the SACCO movement in this country.

In considering issuing a license to a SACCO, the SRA will look at a number of requirements that the intending SACCO must fulfill before obtaining a license. Annex 1 of the proposed SACCO Regulations details out those conditions. These include:

1. Legal status: the SACCO applying for a license must be registered under the SACCO Specific Act 2008 and SACCO Regulations 2008. It must also meet the minimum standard of having been in operation for at least two years.

2. Membership: the SACCO members must have a common bond (a community, employment or trade association). The SACCO must have a “minimum of 300 active members comprising of individuals, groups and organizations founded on self-help reliance principle.”

The SACCO must also demonstrate that its members are aware of their membership rights and obligations. In ensuring that the SACCO meets the above, the SRA will satisfy itself that the SACCO has a distinct area of operation, the members have contributed a minimum membership of UGX 10,000/=, each member has subscribed to the minimum share capital of UGX 20,000/= and last but not the least the SACCO has to show that it has undertaken member education activities.

The need for a license, a minimum number of 300 active members and the obligation for the SACCO to demonstrate that it has undertaken member education activities are all new. The 1991 Co-operative Societies Statute granted SACCOs permission to carry on business once they had a minimum number of 30 members. It was left to the SACCO to build its membership upwards, carry out member education and do moral suasion to encourage its members to actively participate in the SACCO’s activities. These are now requirements that every SACCO must effect if it has to stay in SACCO business. The requirement adds value to safety and soundness in SACCO operations. SACCO officials can now not take their members for granted; the members must be enlightened about the objectives of their SACCO through concerted educational activities.

3. Governance: the SACCO has to prove that it regularly holds its AGMs at least once in a year, its board and committees must be effective (office holders will be expected to be senior four certificate holders and above), that its board holds regular board/committee meetings in line with the prescriptions set forth in the SACCO’s bylaws. Among other minimum standards a SACCO seeking to be licensed has to meet are ensuring that it has supervisory and credit committees in place, the terms of office of office bearers are clearly spelt out and staggered to ensure institutional memory. The new members must receive an extensive training upon election and the governance structures in general will have to demonstrate a good understanding of the SACCO’s bylaws, policies and procedures within 90 days after election. All these requirements are new but perhaps let me comment on the requirement of staggering the board.

Until now board members of SACCOs have tended to be elected and serve their term in one go. At the end of the term they have all had to relinquish office at the same time. In one of the AGMs of UCSCU in the late nineties⁴, while still in employment with UCSCU, I realized the disadvantage this created on UCSCU board’s performance and proposed that the AGM adopts the practice of staggering board members. However, because there was no provision for such an election procedure in the main law governing cooperatives, this proposal could not be adopted by the annual general meeting.

A staggered board allows for continuity, board members who remain behind will always know what progress or shortfalls were made/encountered in the previous period; why certain decisions were taken to arrive at certain courses of action; and what is expected of the course of action if what is expected is attained what should be done. The remaining board members have also attained insights into the running of the SACCO which skills they pass to the new members through practice. Simply put, the remaining board members become a bedrock for on going on the job training of new members. The SACCO does not suddenly start from scratch whenever an election of the board or supervisory committee takes place as would be the case when all serving board members retired at the same time.

Another minimum standard that will enforce transparency in the management of the affairs of SACCOs is the requirement for the SACCO management to post key information (membership requirements, lending/savings/shares, policies, terms and conditions, quarterly financial statements, roster of elected officials as well as announcements of up-coming events) on the SACCO’s notice board and reception area.

Again these are new conditions that are enforceable under law which hitherto have been voluntary or non existent.

4. Office facilities:

Minimum requirements set out in the Regulations under office facilities include;

a. a SACCO having a counter where members deposit savings, make withdrawals and apply for loans

b. secure infrastructure including a safe, strong room, burglar proofing and insurance for cash

c. a SACCO’s business must be open during regular business hours at least five days a week.

Many SACCOs have hitherto operated from very informal environment; an environment that never gave them a business like image. The introduction of these conditionalities will force SACCOs to operate like regular financial institutions. This will contribute positively to the SACCO’s image; promote professionalism among SACCO staffs and Board. It will also increase a sense of security and safety of members deposits in the SACCO not only in the eyes of the members but also the public in general.

5. Staff:

For a SACCO to be licensed it is going to be a requirement that the SACCO has qualified staff to run its business affairs. The person appointed in the office of a secretary manager will be expected to have a Diploma in Business Management as a professional qualification, have a working experience of 2-3 years working in a SACCO related field, on the job training in areas of business risk, computer application. Where a staff is a member of a SACCO, the regulations stipulate that this position should not entitle them to special privileges which are comparatively better than those of an ordinary member in say as far as getting loans is concerned. This means that SACCO staff will under go the same conditions that every”ordinary” member in the SACCO goes through to get a loan. It is also a requirement that any member of staff who obtains a loan should not be in arrears in his loan repayments for a period in excess of thirty days. This is enough ground for a staff to resign from his position. Non member employees are barred from borrowing but can obtain salary advances that the staff is expected to pay back within three months from the date of receiving such advance. Again this requirement, which was never an issue before in the current law is new and will improve the quality of management in SACCOs.

6. Policies and procedures:

The proposed Act introduces a new way SACCOs will have to be presenting their accounts as well as standardizing the financial year of all SACCOs. The Regulations spell that the SACCO has to “adhere to a common financial year”, use common chart of accounts, with all major accounts being identical and consistent with the Performance Monitoring tool (PMT).” This requirement will particularly make the measurement of SACCO performance easier. Performance monitoring tools like commonly used financial indicators (capital standards, liquidity standards, profitability standards and risk among others) will be easy construct across all SACCOs in the country and compare performance across the SACCOs using the same constant factor-time. Because time will be constant SACCOs will be able to evaluate themselves against each other over the same time period.

Individual SACCO members kin to see a successful SACCO will also have an opportunity to compare the performance of their SACCO against like size SACCOs and demand for better performance from their board and management. On the other serious boards and SACCO managers will now have a tool which they can use to whip up support from their members for improved performance of their SACCO. Consider this; assuming poor performance is due to low patronage by members. Any SACCO leader with keen interest in ensuring that his SACCO can perform as well as other better rated SACCOs should explore the reasons why his SACCO is not performing as well, what other SACCOs are doing and why they are better in those areas that he identifies as weak points to achieve the type of success they are registering. Based on those findings, openly educate their members on those findings preferably by inviting ordinary members and leaders from better performing SACCOs to come and share their experiences with their members. Another approach would be organizing inter-SACCO visits to expose members to see what other SACCOs are doing and how what they are doing is improving the members’ lives. In this way, the SACCO s will not only broaden the horizon of their members outlook, but they will also be motivating them when it dawns on the members that they after all belong to a large family with similar problems that can be overcome through co-operative self-help.

7. Under the proposed Act it is a requirement for SACCOs not to transact SACCO business unless the SACCO has a valid license issued by the SRA. Contravention of this rule makes the SACCO or any person contravening the rule guilty of an offence and liable to a fine of UGX 1,000,000/= and every officer of the SACCO liable to a fine not exceeding UGX 500,000/= or imprisonment for a term not exceeding one year or both (Section 3.45 License required for transacting SACCO Business).

Where a SACCO ceases to carry operations and goes into liquidation or is wound up; or fails to comply with any rules, regulations, orders or directions issued under the Act, the SRA can without notice revoke such SACCO’s operating license provided, however, that the SACCO was given reasonable time within which to make representations giving reasons why its license should not be revoked (section 3:40 Revocation of license).

Summary: Governance, safety and soundness issues

The requirement for members to be fully aware of their roles and responsibilities as a pre-condition for licensing is an important element in guaranteeing a SACCOs competitiveness. Members own the SACCO and use the services of provided by the SACCO. A deficiency on either side of (ownership or use) is not healthy for the long term development of the SACCO. Awareness about the operations of the SACCO can make members intelligently question and demand appropriate answers from those they have put into leadership positions of their SACCO. It can also make members responsive and responsible in their dealings with their SACCO. The proposed Act sets minimum requirements for persons aspiring for elective office so that they can appropriately fulfill their role of directing the management of the business affairs of the SACCO in honesty and good faith, exercise care, diligence and skill that any reasonable prudent person under similar circumstances would do, develop and require implementation of policies or require the development of such policies from hired management and approve such policies, hire competent and capable management with skills to manage the affairs of the SACCO. The minimum criteria for licensing outline minimum basic requirements that a SACCO must fulfill before its license can be renewed: legal status, minimum requirements of and on members, governance and what good governance should look and perform like, minimum requirements to be met on staffing matters, security of office facilities, well documented policies and procedures, and proper record keeping and accounting for SACCO finances. All these will and should have a very significant impact on the governance, safety and soundness of any SACCO if implemented to the letter and spirit of the law.

The licensing standards will make it difficult for “briefcase SACCOs” to emerge and disappear with members’ deposits as has been the case in the last two or so decades. Observation: To enhance safety and soundness in operations of SACCOs, what I observe to have been overlooked here is the importance of requiring any SACCO intending to renew its license to provide the SRA with a copy of its Strategic Plan. Such a plan helps a SACCO identify possible risks (strategic risks). These are risks that a SACCO’s future earnings or capital will be adversely affected by business decisions or their implementation. They also include those risks relating to the compatibility of the SACCO’s strategic plans and its markets, talents, abilities, resources, and resolve. All these risks can only be clearly identified and planned for when a SACCO develops a Strategic direction it wants to take in say three years. As a matter of course it should become a culture for all SACCOs to have such a plan despite this requirement not having been legislated.

Part 5: Powers of a SACCO

Section 4.10 subsection 1 of the proposed Act states “The registration and licensing of a SACCO under this Act renders it a body corporate with perpetual succession…”. This provision does not depart much from provision in the Statute (Section 5 subsection (5)) which states “Any society registered under subsection 1 of this section shall become a body corporate by the name under which it is registered with perpetual succession…”. Recognition as a body corporate makes the SACCO and the equity capital it raises from its members for the pursuit of the common objectives of the group technically independent from its members. The Act recognizes the SACCO as an artificial person with powers to hold property. It can acquire, lease, hold assign, pledge, mortgage, discount or dispose of property or assets, enter into contracts, sue and be sued, mobilize deposits and borrow.

The proposed Act gives the SACCO more powers which were hitherto not well articulated in the Statute. The SACCO can purchase assets of another SACCO, purchase membership in an association or similar institution for the furtherance of its objectives, serve as a fiscal agent for

and receive payments from a government body, collect, receive and disburse monies in connection with the provision of money transfers, and other money instruments and provision of services through automated devices, can act as a trustee, accept and hold in trust real estate and personal property. It can also act as a trustee or custodian of any form of retirement, pension, profit sharing, severance or differed income accounts in compliance with relevant laws. It can also purchase or make available various forms of insurance or risk management programs for its members, either on an individual or a group basis in compliance with relevant laws (Section 4.15 subsection 1 (a)-(g)).

Clearly these provisions go much further than has hitherto been the case in the Statute and expand the scope of a SACCO’s field of operations. These provisions also bring into the fore some of the issues that concern many SACCOs today, most especially rural SACCOs whose loan portfolios to a large extent go towards agricultural financing. The concerns about losses occasioned by unfavorable weather conditions are real. The question has been and continues to be how can SACCOs mitigate these effects through insurance? Collectively SACCOs could and in my should lobby government for an insurance scheme to cover loan losses that can be occasioned to them on their agricultural loans due mainly to inclimate conditions.

Summary: Governance, safety and soundness issues

The Act recognizes a SACCO as an entity with perpetual succession and gives it powers that should make it perpetuate itself. While the SACCO may have powers to borrow, its limited to borrow in excess of its capacity to repay (i.e. it can not borrow in excess of a multiple of capital that is prescribed in prudential standards to be established by the SRA). This is one way of limiting the SACCOs risks that could arise from uncontrolled external borrowing. The power to purchase or make available various forms of risk management is another mechanism not instituted before and which will contribute to the safety and soundness of SACCOs.

Observation: The challenge is for rural SACCOs that loan for agricultural production which is highly susceptible to both weather and market fluctuations. I am still convinced that there is need for government to work out a policy to support establishment of an insurance scheme to protect SACCOs and any other financial institutions loaning to the agricultural sector. As for the marketing side, revival of agricultural marketing cooperatives could go a long way in improving the marketing of members’ agricultural produce, what would ultimately increase their incomes and thus their capacity to save. For agricultural marketing cooperatives to function, however, there is need to still review the current Cooperative Societies Statute if the industry is to grow and sustain itself.

PART 6: Membership of SACCOs

Common bond of Association

In SACCOs; like other co-operative organizations members are co-owners and customers of the enterprise (the principle of dual identity- Draheim:..cited in Dülfer Eberhard Betriebswirtschaftslehre der Kooperative). The proposed Act states that a SACCO serves only its members, a person must be a member if that person is to save, borrow or receive other services from the SACCO. The proposed Act further states that “the bylaws of a SACCO will prescribe the requirements for membership including the field of membership, the number of shares to be subscribed to, and any membership fees to be paid” (Section 5.10 subsection 2).

For one to become a member of a SACCO, one must belong to the field of membership of the SACCO as set forth in the SACCO’s bylaws. The proposed Act further spells out that the field of membership must consist of a pre-existent common bond of association or community of interest among the persons who belong to it. The common bond could be based on occupation, profession, employment by a common employer, business district or market area. Other common bonds may include religious affiliation, social grouping, co-operative, labour, or educational grouping, residential that is community, rural or urban district or political sub division.

The proposed Act puts emphasis on prospective members belonging to a common bond. According to Dülfer characteristic number one of co-operatives is “an association of persons with at least one common interest bringing them together” (cf. Eberhard Dülfer: Betriebswirtschaftslehre der Kooperative, 1984, p. 24)⁵. Cooperatives depend considerably on the ability of their members’ to compromise and harmonize their individual needs into the needs of the cooperative enterprise. One way this happens is when members belong to a common bond.

The proposed Act defines the common bond in more detail than was the case in the statute. In order to be qualified for membership of a society, a person, other than…, shall, be a resident within or in occupation of land within the society’s area of operation as prescribed by the relevant bye-law (Section 12 (1) (b)). In contrast, the Statute left the definition of the common bond to be spelt out in the bye-laws (Section 12 subsection (1) (b)).

Other persons that can be admitted to membership of a SACCO are family members of SACCO members. Societies, associations, partnerships and companies composed primarily of individuals are also eligible for memberships in the SACCO. This provision legalizes the membership of groups in SACCOs as is now common particularly in rural areas. Many SACCOs have hitherto accommodated membership of groups through provisions in their by-laws. The other introduction which SACCOs have had to use their initiative has been that of admitting family members of their members. This has particularly been an issue among employee based SACCOs, where the common bond has been being a paid staff of organization or company X for example.

For instance members of Civil Aviation Authority (CAA) SACCO were initially only persons working and earning a salary with CAA. This provision will now allow CAA SACCO for instance to recruit new membership from among family members of its members.

6.1 Admission to membership

The proposed Act makes it a duty of the board of directors to admit new members into the SACCO. “The board of directors must act upon applications for membership or appoint one or more membership officers to take such action on its behalf. A person denied membership by a membership officer may appeal to the SRA” (Section 5.20).

The Statute was silent on this, leaving the prerogative of admitting members to be regulated in the SACCO’s by-laws. In many SACCOs, the new members have hitherto been admitted into the SACCO by the Annual General Meeting. This provision gave members an opportunity to evaluate the new members before admitting them into the group. In this way a member was evaluated more broadly than it is now going to be when the decision to admit is narrowed down to only five to nine members of the board as the case may be. The disadvantage was, however, that if a member joined the SACCO shortly after a SACCO had held its AGM, such a member would - following the law strictly not be able to enjoy the benefits of membership until he/she was admitted into membership at the SACCO’s AGM (nearly 12 months later).

6.2 Termination of membership

The condition for terminating a member’s membership in the SACCO has been left to be determined under the SACCO’s by-laws. The bylaws of a SACCO shall specify the conditions under which a person’s membership in the SACCO shall cease. For this to happen, however, two thirds of the members present at an annual or special meeting and the person affected must have been given proper notice and an opportunity to be heard by the members (Section 5.25 subsection 1 and 2).

While the Statute was silent on this, the proposed Act gives a guideline as to how a member can have his/her membership terminated in the SACCO.

6.3 Members’ rights and obligations

The rights and obligations of members result from the fact of their being members in the SACCO. These are normally set out in the law, regulations and by-laws of the SACCO. Members’

rights and obligations may be classified into: personal rights and obligations; and financial rights and obligations (cf. Münkner) ⁶.

6.3.1 Personal rights and obligations.

Under personal rights fall the rights to; attend meetings, to vote, elect office bearers or be elected, access to information on matters concerning the SACCO, to use the SACCO’s services, be heard even as minority (call a special meeting, put certain matters on the agenda and the like), and to withdraw from the SACCO.

Personal obligations include the obligation to; participate in the SACCO’s enterprise for the common good, be loyal by actively participating in the SACCO’s activities, use the SACCO’s facilities, take action when necessary to avoid damage to the SACCO, not to do anything detrimental to the SACCO, not to compete with the SACCO, comply with majority decisions, comply with the SACCO’s by-laws, give all information necessary for dealings with the SACCO, bring about change in the management of the SACCO enterprise, change objects of the SACCO for better performance, dissolve the SACCO or to amalgamate it.

6.3.2 Financial rights and obligations.

Under financial rights fall the rights to; make use of and draw financial benefits from using the SACCO’s services, receive patronage refund, dividend or interest on paid up share capital, claim repayment of paid up share capital upon withdrawal of membership, and receive a share of the liquidation of assets of the SACCO when it is dissolved and wound up.

To the financial obligations include the obligation to; make financial contributions and payments as set out in the SACCO’s by-laws, to save and borrow regularly from the SACCO, repay loans borrowed as set out in the loan repayment schedule, be liable for the debts of the SACCO arising out of the SACCO’s financial or other dealings with third parties. Section 5.30 of the proposed SACCO Act (Liability of Members) outlines the members’ rights and obligations. “The annual general meeting of the members of the SACCO will be held at the time, place, and in the manner indicated in the by-laws, except that the meeting must be held no later than three months after the close of the fiscal year”.

Sub section1 sets out two obligations for the members of a SACCO. One obligation is to see to it that the SACCO holds its annual general meeting, but also to see to it that the SACCO’s annual general meeting is held within the stipulated time. While this is a personal obligation for all SACCO members, it is also a right for members to demand and see to it that their elected officials comply with this requirement. The 1991 Cooperative Societies Statute was not forceful at best silent on this requirement. The primary reason why SACCOs hold their annual general meetings is to provide accountability to the members on the previous year’s performance and put forward a plan for the next financial year. If for one reason or the other this is not done timely, then the aspect of being accountable gets abused while planned activities for the ensuing year may already be undertaken without the authority of the business owners. The fact, that the proposed Act makes it a requirement for SACCOs to hold their AGMs no later than three months after the close of the fiscal year, puts an obligation on the members to hold their elected leaders accountable and demand that accountability within the prescribed time frame.

Subsection 2. “The by-laws shall also provide for the calling of special meetings by all the members, the board of directors, and by the supervisory committee. The by-laws shall specify the minimum number of members that must be present to conduct the business of any meeting of the members”.

The subsection obliges members to include in their by-laws a section that authorizes the members, the board or the supervisory committee to call a special general meeting of members specifying in that by-law the quorum that is required for the said meeting to conduct business. The second personal obligation for all members of the SACCO is to see that they attend such meeting whenever one is called upon. On the other hand, this section also grants an accompanying right to members, board members or the supervisory committee members that call for special meetings to be heard by the rest of the members when such members exercise this right. The 1991 Cooperative Societies Statute is silent on this.

Subsection 3. “At all such meetings a member will have but one vote, irrespective of how many shares owned. No member may vote by proxy, but a member may vote by absentee ballot, mail, or other method if the by-laws of the SACCO so provide”.

It is every member’s obligation to vote, but in fulfilling that obligation, the member is limited to only one vote irrespective of his share capital contribution in the SACCO. The section also sets forth the right to vote as a personal right which a member can not alienate to another person. The proposed Act has, however, recognized the possibility of a member exercising this right even when such member is absent by introducing the right of members to use absentee ballot, mail or other means as shall be specified in the SACCO’s by-laws.

As far as one member one vote is concerned, the proposed Act has not departed much from the requirement set forth in the 1991 Cooperative Societies’ Statute. Section 17 of the Statute states; “Each member of a registered society shall have one vote only as a member in the affairs of the registered society”. Voting by absentee ballot, mail or other means was not provided for in the Statute.

Subsection 4. “A person must have attained the legal age of 18 in order to vote at meetings of the members or hold office or both”. While a person below 18 years has a right to membership in a SACCO, he can not exercise his right to vote or be voted to office until he has attained the age of majority. Again the proposed Act does not depart much from the Statute on the age of majority and the member’s rights and obligations in the SACCO. Section 12 of the Statute states, “In order to be qualified for membership of a registered society, a person…shall have attained eighteen years” in subsection 2 of the same section the Statute states “A person above twelve years may become a member of a society, but such person shall not be eligible to act as a committee member of the society until he has reached the age of eighteen years.” While the Statute sets out the minimum age at which a person can become a member of a society (above 12 years) the proposed Act is silent on this. Both the Statute and the proposed Act deny a member who is below 18 years of age the right to be elected to and to hold office or to exercise a right to vote. Indirectly this section obliges the rest of the members to ensure that all voting members and members aspiring for office have attained a minimum age of eighteen years.

Subsection 5. “An organization having membership in the SACCO may be represented and have its vote cast by a designated member or shareholder of the organization”. Unlike the Statute, the proposed Act is silent on the number of votes an organization is entitled to cast as a member of a SACCO. The Statute in section 17 states “Each member of a registered society shall have one vote only as a member…: Provided that a registered society, a co-operative union or an apex society which is a member of any other registered society shall have as many votes as may be prescribed by the by-laws of such other society, and may, subject to such by-laws appoint any such number of its committee members, not exceeding the number of such vote, to exercise its voting power”. Both the Statute and the proposed Act recognize the right of organizations that have membership in the SACCO to exercise the right to vote just like any other member. While the proposed Act is silent on the number of votes an organization may be entitled to, the statute takes this into consideration and obliges the members to decide how many such votes organizations may be entitled to cast.

Section 6. “At the annual general meeting, the members shall elect from among themselves the members of the board of directors, including a chairman, a vice chairman, a treasurer and a secretary, and the supervisory committee. All other officeholders are elected for fixed three year term, except that terms are to be staggered so that an approximately equal number expires each year. No director may serve more than two full terms”. This section imposes a new obligation on the SACCO members and that is the obligation to retire and elect new (one third of their board members annually). This will not only enhance continuity in the leadership of the SACCO, but it will also bring into play higher levels of transparency than has hitherto been the case. Some SACCO boards that have held to power perpetually have tended to compromise their leadership roles with personal interest. Cases abound where boards that have held to power perpetually have turned their SACCOs into personal ventures, wielded so much power that attempts by enlightened members to remove such leaders from office have tended to be met stiff resistance orchestrated by such leaders. One can not rule out this as one of the major causes of defalcations in SACCOs and probably other types of co-operatives in this country. By all certainty this section is bound to bring in a higher measure of vibrancy in the SACCO movement.

For this requirement to function effectively and confer efficiency in the SACCOs performance at that, SACCOs will have to enlist many volunteers on board committees; from these pool of volunteers SACCOs will be able to identify potential leaders. The experience gained while volunteering can reduce on the time necessary to train “fresh” members, besides by volunteering an individual shows his commitment to the SACCO.

Summary: Governance, safety and soundness issues One of the most important characteristics of SACCOs is that the members come together voluntarily to overcome a common economic need. To be a member, therefore, one must identify themselves with that felt need. Once a person has agreed to this basic ideal, one is then admitted to membership of the cooperative society (SACCO in this case). On admission such member takes on roles and responsibilities that make the SACCO play its role in providing the necessary services that the members feel will help them overcome their felt need, which individually they could not do. These obligations are both personal and financial. The members are the supreme organ of the SACCO. They approve the SACCO’s by laws. The roles and responsibilities put on a member are the starting point to ensuring good governance, safety and soundness. Consider this; in a SACCO, a member is a saver and borrower. If he does not save, the SACCO has will have no funds to provide that members with the necessary financial services. On the other hand if members do not take up loans and repay such loans as agreed, the SACCO will be put at risk of insolvency. Further still if members realize that things are going wrong in the SACCO but remain convinced that they have no power to correct the situation, such members will be neglecting their duty to the SACCO. A member not fully informed of their rights is likely to fall pray to the above scenarios by default or by commission or omission. That feeling of helplessness is probably one of the cancers that have preyed on cooperatives in this country to the state where the movement has fallen to today. The minimum requirements set out for members to enable the SACCO obtain a license to operate address this important aspect and will therefore contribute to good governance, safety and soundness in the operations of the SACCO.

Oluka Peter

PART 7. MANAGEMENT AND ADMINISTRATION

When a SACCO is registered it acquires a body corporate structure under the law. The law specifies organs of such a body corporate and creates offices or positions that carry well defined powers and duties. Among SACCOs, such organs include the annual general meeting, board and offices under the board include the office the chairman, the treasurer and the like. Persons elected to those offices are empowered under the law to exercise the powers conferred to these organs. (The reason for this is because it is impossible for all members day in day out to come together to make daily decisions on the running of the SACCO’s business affairs).

Acts of the officers holding those offices are acts of the SACCO itself (cf. Münkner p. 39-40)⁷. It is therefore always important for the members while electing office bearers to be clear on this as they put forward candidates to hold SACCO offices. As a matter of fact it is an obligation for SACCO members to be informed of this whenever they exercise the right to vote and elect office bearers. SECTIONS 6.10 TO 6.55 set out roles and responsibilities of SACCO leaders as well as their accountability areas.

7.1 Authority of the board of director.

Before going into analysis of Section 6:10 of the proposed Act; it will be useful to get around some definitions that are used in this section.

Authority(1)Authority is the right to decide what should be done and the right to do it or require someone else to do it. Authority and responsibility go hand in hand. The SACCO board members have authority under the SACCO Act, but they must act responsibly to the members and carry out their authority in a manner that best serves the SACCO members interest.

Responsibility(2): Responsibility refers to the obligation of an individual to perform assigned functions to the best of his/her ability in accordance with directions received.

Accountability(3): Accountability refers to the requirement of answering for one’s performance.

1,2,3,(Canadian Cooperative Association (CCA), Credit Union Directors’ Development Program- module ii Roles Responsibilities and Relations).

Garoyan L. and Mohn, P. (1976). The Board of Directors of Co-operatives. Davis: University of California (in Canadian Cooperative Association (CCA), Credit Union Directors’ Development Program- module ii Roles Responsibilities and Relations)) define five functions of co-operative boards of directors.

1. Prime decision center function. The SACCO has one decision center for coordinating its enterprise and the board is more authoritative than other decision centers. Members hold ultimate authority, but the board is vested with overall management and leadership responsibility in the SACCO. The board is concerned with decisions which chart the broad course of the SACCO (strategic planning) rather than decisions that deal with implementing a course of action (tactical procedures).

2. Advisory Function. The board is a source of information given their expertise and background and is expected to provide advice to both the members and the SACCO manager. The board’s actions are supposed to be consistent with past practice and organizational values. In its advisory role, it is supposed to bring to the attention of members changes requiring their action and sanction for effective performance in an ever changing environment.

3. Trustee function. In representing the SACCO members and providing stewardship on their behalf, the board carries out trustee functions on behalf of the members, creditors, and the general public.

4. Perpetuating function. The primary responsibility of the board is to provide for the SACCO’s continuity through the following actions; employing capable management, guiding management, and making sure an effective and capable board is always in place to direct the SACCO’s affairs.

5. Symbolic function. The SACCO board of directors is a symbol of strength and leadership capable of motivating SACCO members towards attainment of the SACCO’s goals. This symbolic function goes beyond the SACCO and permeates the community in which the SACCO is situate, the SACCO industry and institutions with which the SACCO deals on a day to day basis.

I will now turn to the proposed Act and look at the requirements set forth in the Act.

Subsection 1. “The governing bodies of the SACCO are the general assembly of members, the board of directors/committee elected by the members, the supervisory committee, the loans committee, the audit committee and management and staff appointed by the board of directors”.

After defining these organs, the proposed Act then goes further in the subsequent subsections to define the roles, responsibilities and rights of the organs.

One of the safeguards that have been put into this proposed Act is the recognition of and creation of the supervisory committee as one of the organs of a SACCO. Candidates for the position of the supervisory committee should be able to demonstrate a sound knowledge of the operations of the SACCO and when elected operate independently of the board. Their role includes examining all loan applications for compliance with the SACCO policies and by-laws, Regulation and the SACCO Act, verifying any securities that the SACCO may be holding as collateral for loans, auditing or causing books of accounts of the SACCO to be audited (Section 4.3 of the Regulations subsections 4.3.1 and 4.3.2), verifying passbooks and accounts (sub sections 4.4.1, 4.4.2, 4.4.3 of the Regulations) and reporting to the board, AGM or the SRA (subsection 4.5.1. i-iv). In other words acting as eyes and ears of the individual SACCO member, being “guardians of equity for each individual member in the SACCO(⁵) (In: A history of Saskatchewan’s Credit Union Mutual Aid Board 1953-1983 p. 28 . In light of the importance of the supervisory committee to “each individual SACCO member”, the election of the supervisory committee should justifiably be carried out by the AGM and not be appointed by the board.

Subsection 2. “The general assembly shall elect a Board of Directors who are responsible for managing the affairs of the SACCO”. Here the election of board members can only be carried out by the general assembly (AGM). There is no other organ authorized to do this. The general assembly after electing the board, hands over the authority and responsibility of managing the affairs of the SACCO to that elected board.

Subsection 3. “The board of directors shall be responsible to the members for directing and controlling the business, funds, and records of the SACCO. It reports annually to the members on its management of the savings and credit co-operative society”.

The prime obligation of the board is to the membership as owners and users of the SACCO, the board is custodian of the SACCO’s assets on behalf of its members. Annually the board is obligated to account to the general membership on its custodial functions. The board carries out this custodial function in line with the requirements set forth under law, regulations, by-laws and policies of the SACCO. In providing accountability to the members, the board takes responsibility of the effects of its decisions on the members as well as the general community in which the SACCO operates.

Subsection 4. “The board of directors shall consist of an odd number of directors who shall be not less than five or more than nine in number, elected by members as provided in the by-laws. All board members shall hold office for a period of three years provided that appointments are staggered so that only one third of members retire each year”.

There are two key issues to note here; the requirement for an odd number of members and the restriction of that number to no less than five and no more than nine members. In deliberating on the SACCO affairs, a vote on an issue may be required. Where the number of members is even, chances can be that the vote is split between two in equal numbers. An extra vote can normally resolve this situation if one has an odd number of persons casting their votes. This is the reason why the law maker makes it a requirement for the board to have an odd number of members. On the issue of five minimum and nine maximum number of members on the board, SACCO boards will normally have a number of committees and a number of board members less than five (three in this case) would make it difficult for the board to function properly. A larger number than nine on the other hand would be an extra burden on the finances of the SACCO given that members are normally compensated for their expenses. There are also chances that a large number of board members would impair the performance of the board; as the adage goes “responsibility distributed among many hands is nobody’s responsibility”.

Subsection 5. “The board of directors meets at least monthly and on other occasions as necessary. The by-laws shall specify a quorum required to conduct meetings of the board and committees”.

The general meetings of SACCO members take place only once in a year, save for when there is an emergency general meeting. For the SACCO to function more effectively, the AGM elects a board of directors (a smaller number amongst the members) to make decisions on a more regular basis for the management of the SACCO. Monthly meetings are most appropriate from a practical point of view. Take granting of loans as an example; at this stage of development a SACCO will normally grant loans to its members on a monthly basis. Monthly board meetings are an avenue to ensure that members are served in a timely manner. On loan recovery, loans are expected to be paid back on a monthly basis. Regular meetings of the board will help take appropriate decisions and actions on delinquent loans before the situation gets out of hand.

Subsection 6. “The board of directors may appoint and dismiss top management and the committees as necessary, to effectively conduct the business of the SACCO”.

The Act vests the management of the SACCO in the hands of the board. In practice, however, the board does not implement operational decisions but rather delegates this to the manager it appoints. The board in the interest of protecting members’ provides a framework and policies within which management can carry out its operational decisions. If the manager does not perform to expectation as set out in the framework and the SACCO’s policies, the board has the authority to dismiss him or her.

As to whether the board can dismiss any committee other than the committees it appoints is what is not clear under this subsection. The supervisory committee for instance is elected by the AGM with specific functions to carry out and report to the members at the end of the fiscal year. Will these powers extend to such committees? The same thing would apply to any other committee elected by the AGM. If this provision is not properly defined, it is most likely to cause confusion between the board and other committees elected by the AGM.

However, where a committee is appointed by the board, its authority and responsibility are delegated by the board and it is thus accountable to the board for any of its actions. As a result, the board can dismiss it the same way it would dismiss a manager who fails to perform according to the board’s expectations. It is my opinion that additional safeguards are put in place against mismanagement of authority by the board. The German Co-operative law for instance takes care of this by putting in place a supervisory council (Aufsichtsrat) that meets frequently to control the work of office bearers. This council is empowered under the law to suspend a board-member pending ratification of an extra ordinary general meeting that has to be convened in such a case without delay (cf. Münkner p.58). According to the proposed SACCO Act the supervisory committee would perform similar functions in the case of Uganda’s SACCOs.

7.2 Eligibility of membership of Board of Directors/Committee of a SACCO

Section 6.15 spells out Eligibility for membership to a Board of Directors/Committee of a SACCO criteria.

Subsection1. “The SRA may prescribe from time to time the minimum educational and professional qualifications for eligibility for membership of the SACCO committees and the SACCO National”.

Earlier we discussed the five basic functions of boards of directors of SACCOs. The board of directors fulfills the prime decision function, the advisory function, trustee function, perpetuating function and symbolic function. In fulfilling the above functions, the board ensures accountability by protecting members’ assets, ensuring delivery of quality services to the members and always considering member needs in all its decisions.

In its accountability to the members, the board has to see to it that it establishes a two way communication with members, identifying their needs and reporting on its own activities with loyalty and in good faith. Other board responsibilities include organizing both the board itself and staff, establishing corporate standards for the SACCO, making policies that ensure soundness and stability of finances, planning. All these require a minimum level of formal education to carry out. It is no wonder that the law makers are providing this requirement in the proposed Act. The statute was silent on this and once again this requirement is likely to increase safety and soundness in the management of SACCOs provided there are adequate safeguards to protect the majority of the members who may not be as enlightened as their elected leaders.

Subsection 2. Subject to the provision of section 6.15 subsection 1, no person shall be eligible for membership of SACCO committee or remain member of such committee if:

i. He/she is under 18 years of age. While someone below the age of eighteen may

obtain membership in a SACCO, he/she can not vie for leadership until he/she has attained the age of majority. The proposed Act has not departed much on this from the Statute. Section 12 subsection 2 of the statute states “A person above the age of twelve years may become a member of a society, but such person shall not be eligible to act as a committee member of the society until he has reached the age of eighteen years”.

ii. He/she is not a registered member of the SACCO or he/she is a registered member but he/she does not patronize the SACCO. This is new, the Statute did not provide specifically for this. While no registered SACCO had any board composed of non members of the SACCO, it was not rare to find a chairman of the board of a SACCO who was neither saving nor fully paid up (in other words a dormant member), holding the highest but always undisclosed loan which was always in arrears in payments. In view of this, such leaders had no moral authority to mobilize their SACCO members to save more, pay up the required shareholding and service their loans in line with the agreements reached between the member and the SACCO. This in my view was one of the major reasons for failures of SACCOs to grow beyond their initial memberships and savings mobilization, and where they did either through arrangements of the SACCO with its member employers (in case of employee based SACCOs), the benefits of cooperation seldom reached all the members in adequate measure to motivate them to stand by their SACCOs both in times of abundance and also in times of need. Matters were made worse when such members could build “good relations” with the bureaucrats who were in fact supposed to check and rectify these anomalies, but would simply brush them aside and as a matter of fact cover up such SACCO leaders perpetually. Little wonder then that many members decided to vote with their feet to avoid this kind of free rider mentality and naked abuse of authority. This provision is going to promote election of leaders who are truly owners and users of the SACCO, but not the type of leaders with the free rider mentality whose only qualification is their oratory skills with a peppering of lies.

iii. He/she receives remuneration, salary or other payments which have not been lawfully approved by a resolution at a general meeting of the SACCO. The fact that one has obtained an unauthorized payment borders on criminality. It is therefore not in order to entrust such persons with members’ funds through an election. Such leaders would with reckless abandon use same methods to even reward themselves more once they would be in authority.

iv. He/she does similar business which is done by the SACCO. SACCOs are in the business of buying and selling money to their members. A SACCCO member or prospective SACCO member who is engaged in the same business as the SACCO could use his position in the SACCO to study the SACCO’s weaknesses and use that insider knowledge to out compete the SACCO. In the late 1980s and the 1990s when the SACCOs found themselves involved in all types of ventures outside their core business, it was not rare to find a member of the committee of the SACCO running the same business as the SACCO with funding obtained from the SACCO at favorable rates. This practice was not only limited to SACCOs but was fairly widespread even among other types of cooperatives too. I know of some cases where some cooperative organization ventured into hospitality business. A stone throw away from this cooperative's business was a manager's hospitality business too. You can guess what happened if you know our Ugandan society mentality.

v. He/she is a discharged bankrupt

This is a very important provision if you asked yourself the question what value would a bankrupt person be adding to the business of a SACCO.

vi. He she has been convicted of an offence involving immoral behavior.

The Credit Union Director Achievement Program developed by the Canadian Cooperative Association lists three key responsibility areas that SACCO directors have to fulfill; protect member assets, ensure quality services, and consider member needs. The board fulfills the above responsibilities by planning in three distinct component areas; people, money and development. The health and viability of a SACCO will depend on the quality of the board and management. A SACCO operates in a community with values.

SACCO leaders must uphold the values of their community and be exemplary at that. Where the leaders fail in this, their efforts to bring development to the SACCO would be futile given that SACCO development encompasses among other things marketing and community image. The SACCO’s image is reflected in the way its leaders conduct themselves. If the leaders portray an image that is upside down in the eyes of the community, the SACCO’s efforts to sell itself to a larger potential membership would probably be an uphill task. It is therefore important for the SACCO leaders to craft for themselves an image that engenders respect not only among the SACCO members, but equally so in the community in which the SACCO is domiciled.

vii. He/she has been charged or convicted of any offences under the SACCO Act or this regulation, or is a dismissed employee of a registered SACCO. SACCO leadership entails motivating members and staff to work to reach the SACCO’s stated goals. For a leader to motivate others, he himself has to be self motivated to do that. Where a leader has suffered the consequences of a conviction or dismissal for criminal offences his moral standing would be seriously dented making it difficult for that type of person to offer leadership to the SACCO.

viii. He/she is a defaulter to the SACCO. One can rightly ask oneself the question what business has a defaulter in the SACCO trying to offer in terms of leadership to the SACCO? SACCO members are supposed to demonstrate trust with members’ funds. A member who for one reason or the other fails to meet his/her loan obligations to the SACCO is a potential liability to the future operations of the SACCO if such person is put into leadership position. In the past SACCOs have had the misfortune of being led by defaulters’ year in year out in most cases without the members having the possibility of knowing that the very leaders sitting in front of them were in fact letting the SACCO down. Now that this is clearly spelt out as one of the conditions to be met by any leader and measures have been put in place to expose such leaders, any one aspiring to be a leader in any SACCO should be prepared to put their integrity to test to even higher standards than the ordinary members.

ix. He/she is a former manager, member of the board, credit committee or supervisory committee of an organization that was declared bankrupt as a result of these persons’ actions.

Again this requirement is going to bring sanity in the management of the affairs of SACCOs in this country.

7.3 Removal of a director of a SACCO

The removal of any director from office is regulated under section Section 6.20 Subsection 1.

A Director may be removed from the board under the following circumstances.

“Where a director has delinquent loans which he she has failed to bring up to date and has not resigned on his/her own accord”.

This is new; the nearest that the Statute came to, as far as legislating on this could be interpreted from sections 78 and 79 of the Statute. Section 78 subsection 1 and 2q “ (1) The Minister in consultation with the Board shall make regulations for the carrying out of the provisions of this Statute. (2) In particular and without prejudice to the generality of the foregoing power, such regulations may, (q) fix the conditions under which a society may grant loans to its members and the maximum amount of such loans and prescribe the payments to be made and the conditions to be complied with by members applying for loans the period for which the loans, may be made and the amount which may be lent to an individual. The SACCOs used this section to draft by-laws to guide credit committees on lending terms. In some cases loans were granted in total disregard of the SACCO’s by-laws and therefore in violation of this section of the Statute. The office the Registrar which is custodian of this law and supervisor and auditor of SACCOs repeatedly comes across these violations but has yet to take any action on those who have continued to violate this law. In one AGM, before the Registrar (I mean the office not the person), a member asked a chairman of a SACCO to step aside for violating all lending conditions of the SACCO. The matter was played down when the registrar asked members to vote on the motion brought by the member. The member as one would expect in an environment where intrigue plays a bigger role lost. A few years down the road the same SACCO board could not explain to members and the same regulatory authorities the where about of billions of members’ shillings. It is not that there was no law to curb this for under section 79 offences and penalties it is an offence for …”an officer or a member thereof to fail or to allow to be done any act or thing which is required to be done by this Statute”.

Section 3.2.2 of the proposed Regulations lists other grounds under which an officer or officials of a SACCO can be removed. These include; an officer/officials directly or indirectly violating the SACCO law, by-law or regulations, engaging in or participating in any unsound practice with respect to the SACCO, committing or engaging in any act or omission or practice that constitutes a breach of fiduciary responsibilities and as a result open chances of the financial loss to the SACCO, prejudice members’ interests or receive financial gain because of the violation or practice.

The regulations further provide for any official who has violated the SACCO with an option to resign or if such official feels that the removal was carried out unfairly, to appeal to the Minister or Courts of Law.

After removing any officer, “the SRA may call a special general meeting of members for the purpose of, but not limited to, electing a successor for any officer, director or committee member who has been removed from office.” (Regulations subsection 3.2.2.5).

In order to make good the damage caused by such officer or officials, section 3.2.4 provides for legal action to be followed against the culprit. “The SRA may institute legal proceedings of either a criminal or civil nature, against any officer, director, committee member, employee or agent of a SACCO with respect to whom there is substantial evidence that such person has committed a violation of a law, regulation, or order or has committed any of the criminal offences.” This provision has its merits but I would like to comment on its demerits. If we take the way our judiciary is crowded with cases and the length it takes for one to get a prosecution, then SACCOs which fall victim to fraud from their officials be they workers or elected leaders are in for a rude shock. There are many examples of ways thieving officials cover their loot and make it very difficult for the defrauded party to lay hands on such ill gotten wealth in recompense. Look at it this way. A manager dips his or her hands in the members’ savings and uses the proceeds to build himself an elegant mansion in one of the suburbs of the town or city. He or she however, does not build the said mansion in his/her names but rather in the names of a child who may have been born during or just after the commission of the offence. If the SACCO prosecuted and successfully worn the case against that staff and had the hopes of confiscating the house from the thieving manager or SACCO official the courts of law will not recognize the house as the culprit’s but rather as a legitimate house of the infant who by all fairness has never even started nursery let alone earned an income warranting him or her to own such a house. This being the asset the SACCO would have reclaimed and sold in order to recover its stolen funds is not a property of the thieving official but rather legitimate property of the infant. In the process the SACCO would have spent lots of money on some of our unscrupulous lawyers whose only interest is to levy fees on their clients and in most cases double deal with the culprit to destroy or delay justice.

In view of such difficult practical scenarios, prevention is the only effective remedy to ensure that members are not defrauded and denied justice by way the legal system operates. The SRA and the SACCO Stabilization Fund will have a key role in preventing the occurrence of fraud or nipping it at the bud to avoid relying on the work of courts to get a remedy. The Stabilization Fund in particular in the interest of protecting the members and the Fund itself will be a good safeguard to ensure compliance with the provisions of both the Act and the Regulations. After all the survival of the Fund will hinge on its ability to minimize its payments to failing SACCOs and as a result the Fund’s major interest will be seeing to it that SACCOs are managed in a safe and sound manner and nothing less.

A director may also be removed for failing to attend three consecutive Board meetings with permission or reasonable excuse (cf. Section 1 Subsection 1(ii)). Some board members are motivated to join SACCO boards in the hope that they could personally gain from their position. After two or three meetings and realizing that this is not possible, their enthusiasm is thrown to the lower ebb. Attendance at regular meetings starts to wane and where there is an effort; it is characterized by late coming and excuses to leave early “to sort out some very urgent personal matters”, but this after receipt of a sitting allowance of course. This makes effective board business a lot difficult. Clearly this provision should help the boards themselves also to sort out such members in the interest of their boards’ efficiency.

A SACCO official could also be removed from office if he is in breach of the Code of Conduct and Ethics for leaders. SACCOs normally develop a code of conduct and ethics as part of their policies. This may be adopted from such law in force in the country or it may be developed from past experience. Either way failure of the board members to abide by the code of conduct and ethics would make such officers liable for removal from office according to this provision.

Subsection 2. “Any director suspended from office may appeal to the General Meeting of the SACCO”. There are times when some SACCO leaders may fall victim of the law without their knowledge. It is my view that SACCO training programs develop mechanisms to empower good intentioned board members to say no to illegitimate acts of “powerful” board members and have such protests properly documented. A board member should have the right to say no and demand that that no is “minuted” in the board’s meeting proceedings. It is important to empower good intentioned board members to resign as a protest against wrong doings of some of their colleagues and register such resignation with either the SRA or the stabilization Fund. Unfortunately these are cultural issues and culture seems to shape every aspect of our life in this country. Is it not common for us to look the other way when our leaders (of whatever description) steal whatever is in their custody. Infact the more they can steal the more we accord them respect.

Section 3.3 of the SACCO regulations empowers the SRA to put any SACCO under supervision if any such SACCO was found to be operating in unsafe or sound manner or in violation of the Act or Regulations.

There are a number of ways a SACCO could find itself operating under what is known as operating in a not safe and sound manner. If a SACCO’s performance falls below a required reserve requirement such SACCO would be operating unsafely and unsoundly, where the leaders of the SACCO violate the conflict of interest provision such operation could lead to a SACCO being regarded as performing unsoundly. A SACCO whose loan repayment rates fall below a certain level say below 95% and the board fails to develop any contingency plans to improve the situation such SACCO could end up in this category. Subsection 3.3.1 states “where a SACCO is found to be operating in unsafe or unsound manner or in violation of the Act or the regulations fails to institute remedial measures ordered by the SRA, the SRA may issue an order placing the SACCO under supervision and appointing a caretaker to supervise the SACCO. The SRA will monitor the affairs of the supervised SACCO and recommend to the board of directors any course of action necessary to improve operations”. Although not spelt out supervision powers of the SRA could include inspection of the affairs of the SACCO, ordering audits, ordering correction of unsound practices, acting as an administrator and in the extreme ordering an amalgamation or liquidation of the SACCO. What would be the implications of supervision to any SACCO that would find itself under such supervision? It is a situation any board of a SACCO would like to avoid as much as is possible. It does not only destroy the authority of the board, (subsection 3.3.2 “the SRA may prohibit or restrict the supervised SACCO, its officers, directors, committee members, or employees from exercising any of their respective powers …”), but it also eats into members and in general the public’s confidence in the SACCO. This could lead to a run on the assets of the SACCO through savings withdrawals or make mobilization of new savings in the SACCO very difficult. One only needs to remember what happened in the 1990s with the Co-operative Bank, Greenland Bank among others to read the implications of this on their SACCO.

Subsection 3.3.3 of the regulation states “A supervised SACCO must notify the supervisor of all board and committee meetings and allow the SRA to attend such meetings and provide the SRA with all copies of all reports and minutes of meetings to the board of directors. The SRA shall also have access to all records of the SACCO”. Clearly a SACCO which finds itself under supervision, loses all its autonomy as all its activities would have to be sanctioned by the SRA, the SACCO loses its independence as a member owned and a member controlled organization. Even if the SACCO recovered from the reasons why it was put under supervision, it would take long for members and the public to regain confidence in it. Matters would be made worse if in the SACCO, members have split themselves in allegiances to individual SACCO leaders rather than to the SACCO.

To avoid this repercussions, it is advisable for the SRA to notify the members in a special general meeting called for the purpose on its course of action and what interest that action serves the individual member in the SACCO otherwise the above action can generate a wave of rumors and counter rumors that in the long run do not serve the interest of the SACCO member but rather the culprits who caused the problems leading to the supervision in the first place.

7.4 Compensation of Directors and committee members

It must be appreciated that the SACCO boards assume a lot of responsibility and carry out demanding work for free. They do this in the belief that a lack of pay makes it more likely that members will become involved because of a belief in the SACCO philosophy. “Unpaid service” according to the Credit Union Board of Director’s Handbook⁶ “may also make it a little bit easier for volunteer leaders to focus on what is best for members.” (⁶Credit Union Board of Directors Handbook 2nd Edition. CUNA & Affiliates, MADISON, Wisconsin 1996)

In the above spirit, the lawmakers have borrowed the above philosophy and made it into law in the proposed Act. Section 6.25 of the proposed Act states “No elected officer, director, or committee member, other than the manager (chief executive officer) serving as a director may be compensated for services to the SACCO by means of a salary. Such persons, however, may be reimbursed for necessary expenses incurred incidental to the performance of the business of the SACCO”. The proposed SACCO Act has maintained what was in the Statute. Section 76 of the Statute regulated remuneration of officers of cooperative societies. Subsection 1 of that Section states “No officer or member of a registered society shall receive any remuneration, salary, commission or other payment from the society for services rendered to the society unless the society has after consultation with the Registrar by resolution passed at a general meeting of the society, approved the payment of such remuneration, or salary…” Contravention of the said provision was actionable in a court of law and any person found guilty under this provision was liable to a fine on conviction not exceeding UGX 20,000/= or to imprisonment for a period not exceeding six months or both (section 76 subsection 3).

In practice, SACCO officials have respected this provision, however, the test of volunteerism has been what has been lacking and this needs to be encouraged especially among new upcoming SACCOs whose financial base is still very weak. Ideally payment for compensation of expenses (sitting allowances) should come from the SACCO’s earnings and not from either members’ savings or shares in the SACCO. What one tends to observe especially for very new SACCOs and SACCOs whose performance is very weak is the indiscriminate use of members’ savings and shares to pay for sitting allowances. In one newly registered SACCO where I was privileged to do training recently, we found that the SACCO had overstated its savings and shares in order to get itself registered and after getting registered its board started using the little shares mobilized to pay itself in sitting allowances. As a matter of fact, the officials had almost exhausted all the members’ shares in these payments in the hope that they would get a bounty from the government’s bona bagagawale funds. Of course what was lacking here were two things; the education of the board on their obligation to the members, and the necessary supervision from the regulatory authorities.

7.5 Prudence and Diligence in the running of the SACCO

Section 6.30 “In the conduct of the affairs of a SACCO the board of Directors shall exercise the prudence and diligence of ordinary men of business and shall be held jointly and severally, liable for any losses sustained through any of their acts which are contrary to the Act, regulations and the byelaws of the Society or the directions of any general meeting”.

SACCO board members owe a duty of care to the SACCO and its members. A breach in the duty of care by a board member is equal to being negligent. “The legal standard required to avoid negligence is to use the care that a reasonable person exercising sound judgment would take in a set similar circumstances.”⁷ If one is a board member and he/she acts in a way another reasonable person using common sense would have acted the way that board member did, then one would not be held liable for acting without a duty of care. The duty of care means that one has to use the skills and experience one has in making any decisions. When one is judged against a reasonable person, one is evaluated against a reasonable person with the same skills.

According to the degree of skill, SACCO directors are expected to:

 Act in what they believe to be the best interest of the SACCO;

 Act carefully and deliberately and examine possible consequences of a particular course of action;

 Act with care and in the scope of their powers;

 Avoid taking haphazard decisions.

7.6 Degree of diligence⁸

The duty of diligence requires that a SACCO board member keeps informed about the affairs of his SACCO. He is expected to make enquiries in the operations of the SACCO that any reasonable person in that position would make. In fulfilling the duties of diligence, a director assumes the rights:

 of reasonable communication with the manager;

 to inspect records of the SACCO;

 to receive notices of meetings;

 to receive minutes of meetings in advance of the next meeting;

 to be provided with timely and accurate reports from officers or employees of the SACCO and from people hired for their professional services for example lawyers and auditors.

For a SACCO director to be diligent he/she needs a working knowledge of the operation of his SACCO. Only in this way can one raise pertinent questions, demand answers that adequately satisfy the questions and distinguish between the duties of hired managers and those of the board. The board member also needs to attend meetings given that absence from any meeting does not exonerate one from the decisions taken by the rest of the board members. Only those dissentions that have been recorded in the board’s minutes can disassociate the member from the board’s decisions or indecisions.

7.7 Conflict of interest

The SACCO as an artificial person under the proposed Act and Regulations is expected to render all its services to the members in such a way that its image, and that of its leaders, and staff promoted positively. The board and management of any SACCO occupy a special position in the SACCO (servicing, counseling and providing leadership), they also have a legal and ethical responsibility to the SACCO. In pursuance of these ideals, Section 6.35 of the proposed Act legislates on the conflicts of interest; “No officer, director, committee member, agent, or employee of the SACCO shall in any manner participate in the deliberation upon or the determination of any question affecting that person’s pecuniary interest or the pecuniary interest of any member of the immediate family of that person or any company or organization (other than the SACCO) in which that person is directly or indirectly interested. Such person must also disclose any conflict of interest annually to the Board of Directors and the SRA”.

The requirement to declare any conflict of interest annually is not only new, but was not known among SACCOs and probably many organizations including government departments in this country. The purpose of making a statement of disclosure is to: protect the integrity of the SACCO officials and staff from being put into question; get those in authority to know of conflict of interest situations and recommend an appropriate action.

A conflict of interest situation arises when an officer of a SACCO finds him/herself in a position of conflict between his/her duties as an official of a SACCO and his personal interests⁹. There are a number of ways in which conflicts of interest may occur:

 A board member who has a personal interest in a contract, loan, or other transaction with the SACCO fails to declare the nature and extent of such interest;

 A board member learns of an investment opportunity because of he/she is a director and decides to invest personally;

 Receiving kick backs or fees from individuals or companies that sell goods or services to the SACCO or its members as a result of being an employee or official of the SACCO;

 Using the SACCO facilities for personal gains or percentage of income;

 Purchasing any fixed assets owned by the SACCO through foreclosure as a result of the SACCO’s lending, where such sale is effected without using the sealed tendering process and the purchase is effected without regard to whether such buyer tendered the highest price;

 A board member/SACCO employee who is an officer of another company with similar interests like those of the SACCO uses his position in the SACCO to promote the sale of products, services, goods to SACCO members or to the SACCO itself;

 A relative of a board member getting employed by the SACCO without adopting a policy statement which affirms such employment in accordance with the relevant sections of the SACCO Act or Regulations.

To prevent conflict of interest situations in the SACCO an officer of a SACCO:

 Should declare any interests and nature of those interests he may have in any transaction in the SACCO to the board and provide the board with the details of the potential of that conflict;

 Not take part in any discussions or vote on any matter in a transaction in the SACCO in which he/she is a party;

 Ensure that the abstention to take part in such a vote and discussion on the matter is recorded.

The SACCO itself must also:

 specifically detail out what it considers situations in conflict with sound standards of professional conduct;

 Sensitize all its board members and employees on their duties and responsibilities in pursuance of understanding of the subject of conflict of interest;

Conflict of interest situations are perhaps the most flouted rule in our Ugandan society today. It is considered normal to hold an office and obtain contracts to supply the same office either personally under spurious companies created for the purpose or in the names of ones close relatives and family friends. One only needs to take a look at a newspaper or listen to news on the radio and be certain to hear of abuses of this nature and how much the tax payer is being fleeced by the bureaucracy he pays his taxes to maintain. Unfortunately no prosecutions, and if there are any the justice system is so abused by those supposed to prosecute that the culprits are left off the hook and as if to add pain to injury, the culprits go about boasting about their accomplishments with total disregard of suffering of the people they are supposed to serve. In such an environment if SACCO leaders can uphold and respect this provision, then the battle against one of the many forms of corruption eating up the social fabric of this country would have been led by SACCOs.

Where violations of this rule occur, SACCO s will only be helped by a judiciary that is responsive to the needs of society. It is probably one of the rules that will test the integrity of SACCO officials.

It is perhaps fitting to mention some areas of standards of professional conduct that the SACCO board will have to formulate policies on in order to be in line with this proposed provision. There are times when a member of the board may develop interest in getting employment with the SACCO. It would not be in line with standards of professional conduct for a member to be considered as a candidate for any post while he is an elected official or within a time limit say 12 months from the time of the board member’s resignation or end of term.

Subsection 6.25 provides for the compensation for directors and committee members for necessary expenses incurred incidental to the performance of the business of the SACCO. While the SACCO Act does not specifically spell out that this money be shown separately, it is in line with good professional conduct for the SACCO to clearly disclose these reimbursements to the board in a separate item on the income statement and have this included in its annual financial reports to the members.

Reckless conduct like: falsification of documents to obtain favors; acting dishonestly, fraud and embezzlement; theft of SACCO property, equipment, or personal property of fellow employees; being drunk on duty; causing damage to SACCO property; neglecting one’s duties, under others are not in tandem with professional conduct and need to be steered clear of by both the board and staff.

Subsection 4.2.4 of the SACCO Regulations makes it a requirement for an individual participating in performing SACCO audits to keep all the information confidential except when discussing the results with the SRA, SACCO management and officials. It is good professional conduct for the board to develop and put into practice a Declaration of Office and Oath of Secrecy which each employee or board member would have to sign at the time they are appointed and assume office.

(⁷’⁸’⁹Credit Union Directors Development Program, Module iii Legal Responsibilities and Legislative Environment, p18, 21-22)

7.8 The Supervisory Committee

Section 6.40 subsection 1 provides for the election of a supervisory committee: “The annual general meeting of the members shall elect a supervisory committee of not less than three persons, which shall make or cause to be made, regular examination of the accounts, records, and affairs of the SACCO and review the actions of officers, board of directors, and credit committee for conformity with the law, regulations, bylaws, and policies of the SACCO and its is answerable to the annual general meeting”.

Among the many areas that the proposed Act has differentiated itself from the Statute is its recognition and incorporation of the Supervisory Committee in the SACCOs organs. An effective supervisory committee is the best internal mechanism that a SACCO can have to check all forms of excesses committed/omitted by both the board and/or the manager of a SACCO. The Supervisory Committee is a kind of watch dog for the members, “the guardian of the equity which each individual member has in the SACCO.”

It is responsible for making sure that the SACCO’s financial records are in order and those internal controls are in place to protect the assets of the SACCO and its members. In its actions, the Supervisory Committee is answerable to the annual general meeting.

Section 6.40 subsections 2 and 3 outlines the powers of the supervisory committee may exercise over the board. Subsection 2. “The supervisory committee by a unanimous vote may recommend to the board of directors that it suspend or remove any member of the credit committee”.

Subsection 3. “The supervisory committee by a unanimous vote may recommend to the members to suspend or remove any officer or member of the board of directors.”

From the above sections one can clearly see that the supervisory committee has exceptional powers with respect to the board, it is responsible for evaluating the board of directors and other elected officials and has been given the powers to suspend an elected official by unanimous vote. If it feels that it has sufficient cause, it has the power to suspend a director, or officer or member of the credit committee until a special meeting of the members is called to consider any violation of the law, regulations or bylaws or any practice of the SACCO deemed by the committee to be unsafe and unsound (subsection 4).

Subsection 5. “The supervisory committee shall make a record of all its activities available for inspection by the SRA and the SACCO’s auditors and shall present a report of its activities to the general meeting.”

The credit Union Supervisory Committee Handbook classifies the supervisory committee’s duties into three main categories:

 Monitoring the actions of the board of directors and other officials to ensure that they are acting properly and within their authority, and that they are carrying out their responsibilities in a timely and competent fashion;

 Overseeing all areas related to the financial management of the SACCO to ensure that it is soundly managed that is to say financial statements are accurate, management practices sufficiently protect the SACCO’s assets, and that assets are safeguarded from fraud, self dealing, and related carelessness;

 Reporting its findings to the board, members and in this case as spelt out in the Act to the SRA.

7.9 The Credit Committee

Section 6.45 regulates the formation, operations and powers of the credit committee. Subsection1. “The board of directors shall appoint a credit committee consisting of an odd number, not less than three persons, for such terms as the bylaws provide. The credit committee is responsible for the general supervision of loans to members. It may approve or disapprove loans, subject to policies established by the board of directors, and review loan collections and delinquency.”

Unlike the supervisory committee, the credit committee is appointed by the board from amongst the members of the board or with additions from outside of the members by recruiting volunteers from amongst the members. After being appointed, the committee sits and elects amongst its members the chairperson and the secretary of the committee. The chairperson chairs the committees meetings while the secretary is responsible for preparing and maintaining the records of all the committees meetings and transactions. In approving loans to members, the committee is guided by the fact that its decisions are fair to the members but at the same time beneficial to the SACCO.

Loans to members (all members) are approved based on the 5 Cs of credit namely; character, capacity to repay, collateral, capital accumulation, and circumstances or economic conditions. The committee may designate a loans officer among the staff (with approval of the board) of the SACCO to handle certain levels of loans, but the actions of such staff remain actions of the committee. The committee is also responsible for making loan policy changes to the board.

Another very important role of this committee is to review loan collections and loan delinquency and recommend to the board for appropriate action.

Subsection 2. “The credit committee shall meet as often as required to consider applications for loans. No loan shall be made unless it is approved by a majority of the committee, except if approved by a loan officer.”

This requirement puts an obligation on the members of the committee to regularly attend meetings for loan approval. Where the committee fails to do this, it is likely to have a backlog of loan applications which if not attended to could be a cause for dissatisfaction among loan applicants.

Subsection 3. “The board may appoint one or more loan officers and delegate to them the power to approve certain loans. All action taken on loan applications by a loans officer shall be reported to the credit committee. A member whose loan application is disapproved by a loan officer may appeal such action to the credit committee.”

7.10 General Accounting Provisions

Article IV of the Regulations details out the requirements SACCO s have to meet as far as accounting is concerned.

It is a requirement for all SACCOs to maintain properly written books of accounts, and be able to extract monthly trial balances, produce draft annual income and expenditure accounts and financial statements at the end of the fiscal year. (Subsection 4.1.1). Meanwhile, Subsection 4.1.2 obliges all SACCO managers to produce monthly financial reports detailing all accounting transactions for the month and present the said accounts to the SACCO board or supervisory committee for appropriate action.

Accounting is an important decision making tool for management of the SACCO, the members (owners of the SACCO), Government authorities and Creditors of the SACCO. While the SACCO members, government authorities and creditors normally utilize annual reports for most of their respective decisions, management on the other hand requires accounting information in shorter periods than a year (monthly or at most quarterly). Using the information obtained from accounts, management and the board of the SACCO can measure the progress of the SACCO towards its goals. They can also use the information to check outcomes of past decisions, make sound decisions regarding the way to run the SACCO in the future. The requirement of this section, for SACCOs to produce of monthly trial balances will help boards and management of SACCOs to utilize this tool for reflection on the previous month’s performance and take quick corrective actions where necessary. For the SACCO Stabilization Fund, these monthly income expenditure statements will also be very useful for monitoring performance of SACCOs and where deficiencies are detected apply necessary measures to bring about corrective action.

Subsection 4.1.3 “All SACCOs shall use the same fiscal year which shall start on January 1st of each year and terminate on December 31st. This requirement is new; up till now SACCOs’ financial years have varied from SACCO to SACCO. This requirement will be useful for the broader picture that is for rating the performance of all SACCOs over the same period of time. For monitoring purposes, common size income statement and balance sheet could for instance be used to rate amounts spent by each SACCO on expenses relative to income over the same period of time. The ratios obtained will show how efficient each SACCO manager (across the country) is at utilizing resources available to them.

Subsection 4.1.4 “All SACCOs shall use the chart of accounts and associated description as prescribed by the SRA account for all transactions.” (get a copy) Subsection 4.1.5 “All accounting transactions shall be performed and financial statements prepared in accordance with generally accepted accounting principles and International Accounting Standards (IAS).” (get details)

Subsection 4.1.6 “Every SACCO shall exhibit throughout the year in a conspicuous place at all offices and branches, a copy of its audited accounts and annual financial statements together with external auditor’s reports.” This requirement is new and it departs from the provision in Section 21 subsection (6) “The audited accounts and balance sheet referred to in subsection (5) of this section shall be open to for inspection to any member of the public upon payment of such fee as may be fixed by the Registrar.” The public can now have free access to this information without necessarily paying any fee. It will increase transparency in the management of the affairs of SACCOs not only to members (who will normally have discussed the said statements in the SACCO AGM), but also to the general public. It will also be a good marketing tool for SACCOs.

Subsection 4.1.7 “As required by the SRA, all SACCOs shall submit a copy of their audited final accounts and statements to the SRA not more than 90 days after close of the financial year.” In subsection 4.1.3 above we saw that a SACCOs financial year terminates on the 31st December of every year. Going by this provision, all SACCOs are expected to have submitted copies of their audited final accounts and statements to the SRA before end of March of the following year.

7.11 External Audit

The word audit has its origins from the ancient French term “contre rôle” which means to keep a double register in order to check the accuracy of one register by comparing it to the copy.(cf. Münkner, Six lectures on cooperative law,p.79).

Auditing is an “action of systematic examination of registers, accounts, vouchers and books kept in the course of business and of the balance sheet of an enterprise by a neutral observe at regular or irregular intervals in order to obtain an independent judgment as to whether the books are kept in a correct manner, whether the figures contained in the balance sheet are correctly carried forward from the books and other documents and whether the balance sheet exhibits a true and correct view of the affairs of the enterprise”.(Münkner P. 79). The audit could be carried out by internal auditor or external auditor. In a SACCO the internal audit function may be carried out by the supervisory committee (if it has qualified persons to do it) or by a staff of the SACCO who then reports to the supervisory committee and board on his/her findings.

7.12 Why do SACCOs need to have their accounts audited?

Münkner gives three reasons why cooperatives in general need to have their accounts subjected to a material audit.

Firstly, “committee or board members of co-operatives are not professional managers. Therefore a material audit in form of an analysis of their decisions by an experienced auditor is an important measure to improve management in the future, provided that the material audit is combined with advisory services”. (Münkner) p, 86

Secondly, “members of cooperative societies who are co-owners of the co-operative enterprise have – at least in theory- the task to supervise the committee or board of their society. However, as a rule neither the members in a general meeting nor a supervisory council (supervisory committee in the Ugandan context) composed of non-professionals will have the required know-how to exercise an effective control over the management of the cooperative enterprise. Therefore, a material audit by experienced external auditors is a necessary supplement for democratic control.” (Münkner) p. 87

Thirdly, a regular comprehensive audit of the cooperative enterprise conducted by a professional auditor helps to increase the confidence of business partners and the public in the quality of cooperative management and improves the credit worthiness of cooperative enterprise.”(Münkner) p. 87

A material audit thus serves more the interests of the members of the SACCO than any one else. For government a formal audit on the other hand is sufficient. Government is generally not interested in the internal management of private business organizations. Government’s interests are two fold: one is to prevent the misuse of the legal form of a business by any unscrupulous parties; and two as a tax collector government’s interest is to receive a correct complete and objective financial statement for purposes of taxation.

Section 6.50 of the proposed Act regulates the external audit requirements. It is a regulation that was originally contained in section 21 of the Statute. “It is the duty of every SACCO to cause its accounts to be audited every year by an external auditor appointed by the AGM and approved by the SRA. The SACCO shall have the accounts audited within 90 calendar days of the close of each fiscal year by an external accredited professional auditor who meets the standards prescribed in article iv section 4.2 of the Regulations”. New here, is the authority to approve external auditors. In the Statute, this was the prerogative of the Registrar; this is now the prerogative of the SRA in the proposed SACCO Act. The provisions 21 (1) (a) to (7) that are regulated in the statute have been moved to the Regulations section 4.2 with slight changes.

Subsection 4.2.1 “Each SACCO shall have an audit performed by an independent external auditor appointed by the annual general meeting of the SACCO and approved by the SRA.” The audit is expected to meet the requirements of a “full scope” audit that is to say include both a formal audit (examining the mathematical correctness of the balance sheet) and a material audit (examination and rating of management decisions) as prescribed by IAS and local accounting certification and/or SRA. The Statute provided for the audits to be conducted in accordance with generally accepted professional standards and in addition include audit of management efficiency that is to say formal and material audit. The provisions in the proposed Act don’t therefore depart much from the requirements in the Statute.

While approving external auditors, the annual general meeting will have to ensure that the auditor meets certain minimum requirements; one is that the auditor is certified and/or licensed, secondly that the said auditor is in good standing and is approved by the SRA and lastly that he has auditing experience preferably auditing SACCOs (subsection 4.2.3). This requirement does not depart much from that of section 22 (1) of the Statute which states “No person,…shall be appointed or approved as an auditor for the audit of the accounts of a

registered society unless that person, or in case a firm, is a member of a recognized accounting body.” Different now is the approving authority (the SRA) in place of the Registrar. Secondly, while the Statute provided for the Registrar’s office to carry out audits, the proposed SACCO Act does not provide for the SRA to carry out audits. This is a positive development. It has not been unusual to find books of cooperative societies being written and then audited by the same person from the office of the Registrar. This situation has in some cases led to compromises in the quality of the audits. In order to rule out this, the proposed SACCO regulations expressly prohibit an external auditor auditing and also carrying out accounting or other related consultancy functions in the SACCO. Subsection 4.2.5 “The external auditor shall not be allowed to perform an annual audit if: i) the auditor is related to officials of or SACCO employees; ii) the auditor has provided consulting services to the SACCO in areas of lending, accounting, finance, administration or any other operational areas; iii) the auditor has performed the external audit for three consecutive years (this is also new); iv) the auditor is a member of a SACCO.” These provisions will go a long way in preventing conflict of interest situations and therefore compromise of the quality of the audit. It has also been common for the same person to carry out a SACCO’s audits year in year out. Under these circumstances, personal relations and understandings/sympathies develop which cloud the professional judgment of the auditor in favor of appreciating sloppy performance instead of high standard performance. Matters are made worse if as has been the case, the same person is supposed to play the role of a last authority supposed to ensure that the affairs of the SACCO are run in the best interest of the members and not in the personal interest of the leaders and management.

7.13 The audit report

The audit report is supposed to be submitted to the SACCO giving information on the accounting and auditing procedures use to perform the audit, opinion of the auditors on the reliability of the financial statements, along with any necessary adjustments, corrections needed, recommendations for making corrections and any other audit conclusions. The auditors are also expected to submit a management letter to the SACCO management (subsection 4.2.6 i-iii).

7.14 Failure by a SACCO to initiate an audit

If a SACCO fails to initiate an audit, the SRA shall appoint an auditor to carry out such an audit (Section 6.50 subsection 2). This does not depart much from the requirement set out in the Statute. The Statute, however, went a step further and dissolved any SACCO board that failed to have its books audited in the stipulated time. “Where a registered society fails to cause its accounts to be audited in accordance with subsections (1), (2) and (5) of this section, the committee of that society shall be deemed to have relinquished its office; and the Registrar shall convene a special general meeting to elect a new committee unless the Registrar is satisfied that the failure was due to circumstances beyond the committee’s control.”(Section 21: subsection (7) of the Statute). It is worth noting that many SACCO’s have violated and continue to violate this rule without any such action by the regulator as set out in this section. The reason for this has been blamed on the inefficiency of Registrar’s staff who are known to stay with SACCO s books of accounts for lengthy periods leading to abuse of regular AGMs. Now that SACCOs are supposed to source auditors from the market, these delays might be appropriately sorted out as the SACCOs are bound to have leverage on which ever auditors they hire to audit their accounts.

It might on the other hand be a disadvantage for weak SACCOs that may not afford to pay auditors at market rates, a situation which used to be bridged by the Registrar’s office with its fairly low auditing fees. It must also be noted that SACCOs lost out on the advantage of having their accounts audited by audit unions had they gone for such an organization right from the time say UCSCU was set up in 1972.

It is in the interest of SACCOs to form an audit union or audit unions to which they could affiliate using Section 3.20 subsection (b) and charge this union with the function of carrying out regular annual or biannual audits of their books. According to Chukwu, (cf. Chukwu p,116) special advantages arise from the fact that in most cases, unlike in the case of non-cooperative auditors, auditing activities cover not only the formal legal requirements but also the quality of management and decision making in the affiliate, auditing is more detailed and thorough than in other cases. The audit costs are also lower than would be obtained from non-cooperative auditors. It is also in the interest of the cooperative system that the primary cooperative on which the secondary cooperative (audit union) depends is properly managed, after all the existence of the audit union depends on the existence of well functioning primary cooperatives. Audit unions do not normally end at only auditing, but also provide a variety of appropriate advisory services at lower prices.

Lessons can be learned from the German audit unions which were formed as way back as 1860 as cooperatives were just beginning to gain ground in that country. “After years of positive experience with this special co-operative audit system, comprehensive audit by co-operative audit unions was introduced in 1934 as a statutory obligation of all registered societies.” (Münkner, p.85-86). Audit unions could train special cooperative auditors in the particularities of co-operative work in addition to the usual qualification of a chartered accountant. In this way the auditors are able to give a well founded judgment on the performance of the cooperative. Institutions like the audit union and the proposed SACCO stabilization Fund are a foundation for long term self regulation in the SACCO movement. I would urge the SACCO leaders, members and staff to influence the future of the movement in this direction. There are more advantages than disadvantages in self regulation, just consider what a self regulated system functioning effectively and according to a code that lends it professionalism can do to lobby government on any key issues affecting the movement. A self regulated movement does not wait for government to identify its weaknesses, but places a duty on itself to do that and where there is a need, to request law makers to provide appropriate legislation to close gaps created by these weaknesses. The strength such SACCOs would have would lend them adequate muscle to lobby government and the law makers to effect changes in the legislation.

The other advantage of SACCO audit unions or union is the effect the unions would have on promoting the cooperative principle of co-operation among co-operatives as a way of best serving their members interests and their communities.

7.15 Creation of an audit fund

The proposed SACCO Act provides for the creation of an audit fund to subsidize the costs of full scope audit of SACCOs unable to meet their annual audits (section 6.50 subsection 3). It is not clear how the fund will be patronized as there seems to be no provision in the Act spelling out the source from which the fund will be built. Would it be from government funding or would it be levied on all SACCOs on annual basis as a percentage of their income or any other such criterion. This questions will I hope be answered before the proposed Act becomes law.

If SACCOs were to go the direction of forming audit unions, they would have to fund these unions through fees to be agreed between the SACCOs and the unions, plus probably annual dues or fees payable based on the SACCOs annual turnover.

Either way, SACCOs have to be prepared because even if government were to provide initial funding for this fund, there would come a time when that support would stop depending on government’s priorities.

7.16 Internal Audit Function

Article IV subsection 4.3.1 provides for the Supervisory Committee and/or employed professional auditor to carry out the internal audit functions. “If the Supervisory Committee performs the internal audit function, the committee members must have an educational background and/or work experience in accounting and auditing.” At this point in time many SACCOs may not be able to employ internal auditors and yet even the Supervisory Committees they have do not have the background required by this regulation. This calls for intensive training of this committee to tentatively fulfill this function but with a back up from UCSCU’s field staff. UCSCU could carry out this function at a fee. One way or the other, I see a strong possibility of UCSCU working with the Stabilization Fund and providing a similar service to the Fund.

7.17 Verification of Member Accounts

It will be a requirement under the proposed SACCO regulations for SACCOs to perform a 100% verification of all member loan, savings, and share accounts annually. This function is to be performed by the Supervisory Committee or someone it will designate to carry this function. Where the Supervisory Committee engages somebody to carry out this function such person is expected not to be an employee of the SACCO. (Subsection 4.4.1). The verification is expected to compare the amount on the SACCO records to the amount on the member statements or passbooks (subsection 4.4.2). SACCOs are also obliged to send members accounts statements for reconciliation with amounts in their passbooks and communicate any variances to the Supervisory Committee (subsection 4.4.3). All these requirements are new and will add quality to the loan portfolio of many SACCOs. Many SACCO leaders and managers have in the past taken advantage of a lack of member account verification to award themselves illegitimate loans which in many cases were not serviced according to schedule. This free rider mentality is one of the causes for unacceptable high levels of loan delinquency among SACCOs. This provision will make it difficult for leaders and managers to award themselves loans, given that their activities could be exposed through this provision (provided ofcourse that appropriate sanctions are taken against culprits).

7.18 Sanctions for Non-Compliance external and internal audit

There are sanctions for failure to comply with the audit requirements (both internal and external audits). If recommendations for corrective actions for anomalies detected in the audit process are not acted upon and corrected within a given time frame, then the SRA could use other forceful means. The SRA could also reject any external audit failing to meet the prescribed requirements and order that the audit be carried out by a qualified external auditor. The same is true of member verification accounts. In the case of a member account verification, the Supervisory Committee could be required to perform another member account verification and where the committee would be found unqualified to carry out this, the SACCO would have to engage an independent third party.(Section 4.5 subsection 4.5.1 (i)-(iii)).

For any external auditor who breaches the agreement relating to confidentiality, such auditor would bear “responsibility in accordance with the contractual agreement between the SACCO and the external auditor and other applicable laws and regulations.”(Section 4.5, subsection 4.5.1 (iii)).

7.19 Vacancies in Offices

During the course of the year, unforeseen circumstances could force some members to resign from their positions on the board; in extreme cases this could be caused by the unfortunate death of any of the board members or supervisory committee member/members. Section 6.55 subsection (1) provides for the board to fill such vacancies until successors are elected at the next annual general meeting. This provision saves the SACCO the burden of calling a special general meeting to fill any board positions.

Summary: Governance, safety and soundness issues

It is safe to conclude that the proposed Act and the Regulations have many detailed provisions that will go a long way in ensuring good governance, safety and soundness in the running of the affairs of the SACCO. The board for instance is now obliged to hold more board meetings than has hitherto been the practice. Insider dealings and conflict of interest situations are strictly considered illegal and can be actionable in a criminal court or such other legal constituted tribunal. The board is expected to conduct the affairs of the SACCO with prudence and diligence of ordinary men of business, a breach of this makes all board members jointly liable for acts contrary to the Act, Regulations and By laws of the SACCO. Loan approval guidelines have also been more spelt out than was hitherto in the Statute. An external audit is a must for all SACCOs and within a specified period of ninety days after close of the financial year. Loan monitoring and delinquency control is now a must and delinquency is one of the things that the SACCO must make reports upon. Loans are supposed to be adequately secured; loan write off guidelines have also been put in the law; guidelines to minimize operating risks have also been clearly spelt out. Where non compliance is detected, sanctions are also in place to make good what has been mismanaged. If the Act and Regulations are implemented according to the letter and spirit it is safe to conclude that adequate safeguards have been put in place to ensure good governance, safety and soundness of SACCO operations.

PART 8 SACCO FUNDING

Part VII of the proposed Act provides for the sources of funding by way of shares and deposits.

8.1 Shares

SACCOs like any other businesses require capital to carry on business. A SACCO mobilizes funds from its members by offering shares for members to buy. Money so mobilized is known as share capital and it may or may not be a precondition for membership. In Germany for instance share contribution is a result of membership, while in our case, it is a precondition for membership.¹ (cf. Samuel C. Chukwu, Economics of the Co-operative Business Enterprise, Marburg 1990).

The object of any SACCO like any other cooperative is the promotion of members. In view of this the legal framework has to take consideration of the dual nature of the SACCO, on the one hand being an association of persons and a business organization, and on the other hand with the object of member promotion. This dual nature of a SACCO makes it demanding on the lawmakers to make a legal framework that resolves this dual nature in as far as financing is concerned ²(Münkner, p.67). “The lawmakers have to solve the problem of providing a sufficiently strong capital basis for the co-operative enterprise and to stress the character of the co-operative society as a group of persons in which the personal participation of the individual members is more important than their capital contribution “³( Münkner, p.67).

Section 7.10 Shares subsection 1 provides that “A SACCO may offer an unlimited number of ownership shares at a par value established in the bylaws”.

Subsection 2 provides “The bylaws shall fix a minimum number of shares to a member must subscribe and may provide for installment payments of such shares.” This provision resolves one very important problem that affects SACCO members; they come together to look for possibilities of promoting their present economic situation and are in most cases than not, not in a position to make substantial capital contribution⁴ (cf. Münkner, p.67). On the other hand the provision has the implication that in the SACCO there will inevitably be a difference between the value of total shares bought and the paid up capital at each given time⁵ (cf. Samuel C. Chukwu, p.52). This is because the actual paid up capital is not the same in amount to subscribed shares.

Line 2 of subsection 2 further provides “The bylaws may also limit the number of ownership shares that may be held by any one member, but such limits must apply equally to all members”. This provision was originally legislated in Section 13 of the Statute which provided that “No member, other than a registered society, shall hold more than one third of the paid up capital of any co-operative society”.

According to Münkner, the reason for this limitation is because a SACCO being an association of persons with internal democratic structure members are discouraged to take over shares in excess of the required minimum, because the personal rights of membership remain the same for all members irrespective of their share capital contribution; dividend on share capital is limited and the accumulated reserve fund is indivisible (p. 69).

Allowing one person to hold majority shareholding of the SACCO has the dire possibility that such person could hold the SACCO at ransom and thus stifle the interests of the rest of the members. This could happen in a subtle way, but it could also be expressed aggressively by such persons dictating the terms on each and every action of the SACCO.

Subsection 3. “The bylaws shall identify the redemption condition of shares. Ownership shares can not be withdrawn above par value”.

Following the co-operative principles, membership in a SACCO is open and voluntary. Whether a member joins and stays in a SACCO after joining it can be explained using the benefit/contribution theory developed by Simon/March 1958 (Simon, H./March, J.G., Organizations, New York, London, Sidney 1958; in Dülfer p.48). This theory states that an individual will choose to join and/or stay and participate in an organization (SACCO) when he subjectively feels that the sum total of the benefits the organization (SACCO) is offering him are equal to or greater than the contributions he has to make to the SACCO. The contributions need not be monetary (cf. Dülfer p.48). Consider this, a member of a SACCO feels that the relations between himself and the SACCO members is giving him sleepless nights; for instance whenever he raises an issue the members don’t take him seriously and to make it worse even those in leadership don’t give him an audience. If among other motivating factors such a member joined the SACCO to gain recognition, then it is likely that even monetary benefits may not hold that member in the SACCO.

Matters are even made worse if out of a number of business functions carried out by such a member’s business enterprise, only a few of such functions are delegated to/supported by the SACCO’s activities; or if the business activity which is supported by the SACCO contributes to only a small portion of the member’s business enterprise (cf. Dülfer p.149). Under the principle of open and voluntary membership, such a member has a right to leave the SACCO and could opt out of SACCO’s bracket of membership.

In view of the above, the SACCO members have to provide for redemption of shares for members who feel that they have had enough and want to move on. In order to minimize unnecessary variability of share capital, the by-laws might (and in this case should) also have to include a provision when in the year a member who intends to voluntarily withdraw must have given the SACCO his/her notice of withdrawal (cf. Chukwu, p.69).

Another provision will have to be included to cater for members whom the SACCO feels are no longer an asset but rather a liability to the SACCO. This type includes those who may take loans and deliberately refuse to repay even when their economic conditions enable them to meet such repayments; such members may not only stop at that but they might also have gone around the community boasting about how they have managed to beat the system and actually encourage other members not to repay. The by-law provisions for such persons to redeem their shares will be different from those mentioned for a person who has decided to quit membership of his own free will. In this case, the SACCO is shading itself of undesirable members. In such a case, the SACCO has to make redemption of any such a member’s shares (if any balances remain after off-setting the loan balances) as easily as possible to avoid a scenario where such member might go around telling all with an interest to hear how the SACCO has failed to refund his share capital and how it is likely that it was having or was likely to have liquidity problems. Aside from that the SACCO would also avoid possible legal action instituted against it by such members knowing how costly this can be before final conclusion.

Another provision might cater for redemption of shares belonging to members who have passed away; and lastly probably in case where a SACCO is wound up.

Subsection 4. “A member’s ownership shares cannot be charged as security for a loan, but can be charged against if he/she has a debt outstanding to the SACCO”.

All members using the services of the SACCO are supposed to hold membership in the SACCO and that is to say have at least submitted an application for membership and subscribed for and paid at least one share. Shares are not savings, but represent risk capital and a member’s ownership in the SACCO, entitling the member to democratic rights. Funds on a member’s share account can not be pledged as security for a loan. However, where a member takes a loan and fails to service it beyond a period of time and in general to the time when such loan is written off the books of the SACCO, then the SACCO could offset part or the entire loan with the member’s share capital. The danger here is that such a member could find themselves no longer qualifying for SACCO membership given that all his/share capital could be wiped out by such write off of loan against shares.

8.2 Ownership Shares

Section 7.15 subsection 1 characterizes ownership shares as liabilities of the SACCO.

A SACCO finances facilities for the promotion of members through contributions made by the members; normally in the form of shares contributions. Share contributions are not an investment in a SACCO for a member to make capital gains; but rather money which a member makes available to his SACCO for the period of time he maintains membership in the SACCO (cf. Münkner, p.70). In view of this, ownership shares are liabilities to the SACCO.

Subsection 2 of the same section provides that “Ownership shares may only be considered to be equity as opposed to liabilities of the SACCO if the SACCO bylaws provide for the shares to be permanent and non-redeemable.” The same subsection continues “The bylaws should fix a level of share capital under which share capital must not fall as a result of redemption of ownership shares. That part of share capital that is fixed can be considered to be equity belonging to the SACCO”. What the members can do here is to fix a maximum percentage below which the share capital holding in the SACCO should not fall within a given period for instance one year. Within that period, shares could be redeemed and members could withdraw until the fixed percentage is attained. There after no more share capital can be redeemed. This measure is in practice in the French and the Cameroonian regulations. The French regulation requires that the share capital should never fall below 75%, while the Cameroonian one fixes it at 66.6% (Wind, D. (1972), Das problem des Eigenkapitals bei der Financierung landwirtschaftlicher Genossenschaften, in: ZfgG (Zeitschrift für das gesamt Genossenschaftswesen), vol.22, 1972, pp.34 ff. cited in Chukwu, p.70).

The withdrawal of ownership shares is regulated under Section 7.25 as well as in the Regulations Section 5.2 subsection 5.2.1. Section 7.25 of the proposed Act, which provides that: “Ownership Shares may be withdrawn only upon termination of membership subject to the provisions of section 5.2 subsection 5.2.1 of the Regulations. Ownership share withdrawals are subject to any notice by requirement imposed by the bylaws.”

Subsection 5.2.1 provides for the possibility of a member withdrawing ownership shares upon demand as will be prescribed in the SACCO’s bylaws and when a member terminates membership with the SACCO. However, the SACCO is stopped from allowing share withdrawals if it is not meeting institutional capital requirements and/or is facing a liquidity problem. Ownership shares which are permanent and non redeemable, according to the same subsection, are considered a part of institutional capital and are therefore non-withdrawable.

It has been a common practice among SACCOs not to allow members to withdraw their shares unless of course the member is terminating his membership. In a way this guaranteed the stability of share capital in many SACCOs. The opening up of a possibility of share withdrawals will have some consequences on this stability once this Act comes into force. One way this will be felt is going to be in the execution of the SACCOs’ plans. If by any reason members decide to withdraw their shares in an unprecedented way, the SACCO’s capital could be so affected that implementation of any on-going/planned projects would be put in jeopardy. Matters can be made worse if the SACCO has not had enough time to build reserves ( a fund created out of the annual surpluses of the SACCO). On the other hand if the SACCO ran into some really serious trouble and the members persevered and allowed the SACCO to overcome such hiccup, then such SACCO would measure this action of perseverance by the members as a strong sign of their loyalty to their SACCO.

8.3 Dividends

A dividend is “the portion of a company’s profits which the directors each year decide to distribute to ordinary shareholders. This is usually expressed as a percentage of the nominal value of the shares”. (Gilpin, A. (1973), Dictionary of Economic Terms, London cited in: Chukwu, p.151-152). In a SACCO this would be a portion of the surplus expressed as a percentage of the value of shares and distributed according to individual capital contribution. (cf. Chukwu, p.152).

Dividends differ from patronage refunds in that though they are also portions of surpluses; their disbursement is not according to the value of share capital distribution, but rather according to the magnitude/value of patronage that is to say use of the SACCO enterprise by the member. So while dividends are linked to capital contributions, patronage refunds are linked to turnover.(cf. Chukwu, p.152).

Section 7.21 subsection 1. Regulates how the SACCO can utilize dividends. “At the close of the financial year, the Board of Directors may declare dividends to be paid on ownership shares from available earnings. Dividends may be authorized only after making the required statutory reserve transfers.” This provision allows a board to declare and pay dividends to members once the necessary statutory reserve transfers have been made. It is different from the requirement in the Statute which prohibited such payments without the prior written consent from the Registrar. Section 45 (1) “No registered society shall pay a dividend or bonus or distribute any part of its accumulated funds without the prior written consent of the Registrar, and the written acknowledgement of the Registrar that a balance sheet has been lodged with him disclosing the surplus funds out of which the dividend, bonus or distribution is to be made.”

Subsection 2. “Dividends may be paid at various rates, taking into consideration the conditions pertaining to each type of share account established by the Board of Directors.” Again this provision departs from that provided under the Statute. The “No” in the Statute is replaced by the “may” in the proposed SACCO Act. Section 45 subsection (2) of the statute; “No society shall pay a dividend to its members exceeding the maximum rate prescribed by the regulations made under Statute.” Clearly under the proposed SACCO Act, the members have more autonomy on the decision as to how the dividends are managed once the SACCO has met its statutory obligations. The proposed SACCO Act departs from “the pattern of a cooperative movement under the supervision of a government department, headed by the Registrar of Cooperative Societies, and ...the tradition of viewing the cooperatives not so much worthwhile in themselves or to their members but as instruments of public policy.”(Youngjohns B.J., Cooperatives and Credit: A Reexamination, in: J.D Von Pischke, Dale W. Adams, Gordon Donald (eds), “Rural Financial Markets in Developing Countries: their use and abuse”, p.346,:EDI World Bank 1983).

8.4 Savings/Deposits

Savings come from income and income could be generated from many sources including salaries, wages and pensions (for persons engaged in government or other sectors of paid employment), trade, farming, interest, dividends, rent and other investments. Personal income less taxes equals personal disposable income. Savings on the other hand are a result of deducting expenditures from personal disposable income. Savings are important for the individual saver, the SACCO and the local and national economy.

To an individual (SACCO member), savings are important for several reasons: they put off consumption up to a time when it is most needed; they lessen the need to borrow on unfavorable terms; they increase a person’s capacity to borrow on favorable terms, savings create new assets; they are a form of liquidity management which an individual can use to even out cash flow; and they increase income through earning a return on investment. (cf. Dennis Schroeder, (1989), Savings Mobilization, A credit Union Development Resource, World Council of Credit Unions, Inc.)

For SACCOs, the core source of loanable funds comes from members savings/deposits. Small deposits from individual members form the largest portion of those deposits.

And for the economy in general, “The theoretical connection between savings and growth is a straight forward one. Other things equal, economies that save more can invest more, expanding faster in the process”. Examples cited to prove this case are “Korea and other East Asian countries which were able to draw upon ample domestic savings to finance their high levels of investments, which in turn played a major role in their phenomenal economic growth”. (Park Donghyun (1998), Savings and development: Some important lessons from Korea; in Arnaldo Mauri, Oscar Garvello, Mario Masini. “Savings and Development” Giordano Dell Amore Foundation Quarterly Review No. 4 1998 – XXI)I.

Section 7.30 to 7.60 of the proposed Act regulates acceptance of savings in to the SACCO and the management of those savings in the SACCO.

8.5 Acceptance of savings deposits

Section 7.30 subsection 1 provides that “A SACCO may receive deposits from members, SACCO Unions, cooperative societies other than SACCOs, government units in demand or fixed term accounts. The terms, rates, and conditions of deposits may be established by the board of directors and should be competitive with the financial market”. Subsection 2 of the same section differentiates between savings and ownership shares. “Deposits differ from ownership shares in that deposits have a prior claim on the assets and have a pre-agreed interest rate and term”. This provision is new, the Statute does not have any provision as explicit as this relating to acceptance of savings. This provision also opens up the possibility of SACCOs managing funds (including those from government) other than those pooled together by their members on terms, rates and conditions established by the SACCO’s board of directors. The SACCOs will however have to compete for these funds with other players in the financial market.

While the sources of deposits for the SACCOs will possibly be diversified by this provision, it is advisable that members’ regular passbook savings continue to be a focus in savings mobilization in view of the fact they remain the most stable source of funding for the SACCOs. This is because these deposits are generally speaking a source of low cost capital given that they bear lower interest rates compared to time deposits and have lower administrative costs compared to demand deposits with their high turnover. Deposits from government on the other hand are temporary and represent illusory liquidity or vault cash that cannot be used for on lending purposes; the largest portion of such funds is normally immediately disbursed to civil servants as salaries and other such payments. (cf. Sylvia Wisniwski, Micro savings compared to other sources of funds), in: Alfred Hannig/Sylvia Wisniwski, Challenges of Micro savings Mobilization- Concepts and views from the field, Consultative Group to Assist the Poor (CGAP), Eschborn, 1999).

8.6 Interest on deposits

Interest on deposits is the cost a SACCO pays for employing members funds (deposits) in the SACCO’s business. To the SACCO member, it is the price he/she receives in exchange for entrusting of his/her savings to the SACCO.

Section 7.35 subsection 1 provides that “At periodic intervals, the board of directors sets the rate of interest to be paid on deposit accounts, taking in consideration any minimum balance, notice, and term requirements, as well as prevailing market rates of interest and the SACCO’s ability to pay”.

This provision is a break with past practice among SACCOs whereby interest rates had to be “fixed by the AGM” of members and “subject to the Registrar’s approval”;(cf. SACCO model bylaws sections 29 and 35). While the SACCO boards had authority to determine the period and rate at which to pay interest on members’ deposits, the boards had first to get approval of the annual general meeting of members to fix the rate of interest on loans. This was a bit ironical given that members would always be interested to be charged as low an interest rate as possible. While there was a ceiling beyond which the SACCOs could not charge (“current bank lending rates”), even then the boards had to get loan rates approved by the Registrar. This process guaranteed a lot of inefficiency let alone compromised initiative from the leaders and management of SACCOs. If the economy demanded that it was prudent for the SACCO to adjust its rates of interest, the only way this could be done was at the next AGM short of that the board would have to call an emergency meeting. If the AGM approved the rate the SACCO board had there after to go through the Registrar’s bureaucracy for approval. By the time of implementation, the whole process would have taken months and of course economic conditions that prompted the board to initiate action in the first place would be different from those at time the action was initiated and those obtaining at the material time. No wonder that many SACCOs maintained static interest rates over many years.

The provision in the proposed SACCO Act will therefore not only encourage initiative from SACCO boards but it also gives due recognition of the fact that SACCOs are member owned autonomous enterprises that should as much as possible be free from government bureaucracy as long as they work within the confines of the law.

8.7 Deposit withdrawals

A SACCO uses members’ deposits to make loans to its members. Members’ deposits constitute the largest portion of the SACCOs liabilities in the balance sheet; it is the money the SACCO has in trust of its members and on the asset side of the SACCO’s balance sheet loans to members makes up the largest asset of the SACCO. For a SACCO to function profitably therefore it has to maintain a balance between deposits in its vaults and the loans to its members. To meet demands from members for loans, withdrawals and debts, the SACCO has to maintain a certain level of liquidity. The loans to members earn the SACCO income out of which it rewards members’ interest on their deposits. The difference between interest earned and interest paid on deposits is what is known as the spread. Loans to members mature differently depending on the terms of the loans; maturity could be short term or long term. SACCO boards and managers like managers of other financial institutions use asset-liability management to plan and manage assets and liabilities so that maturities, liquidity, and interest rates will produce a level of income that can competitively sustain the SACCO in the financial market.

Not all members’ deposits are loaned out to the members. A certain portion of those savings is always maintained by the SACCO to meet savings withdrawals from members.

Section 7.40 subsection 1 of the proposed SACCO Act recognizes this need and provides that “Deposits may be withdrawn for payment to members according to the terms and conditions under which the accounts were contracted and classified. Deposits may be withdrawn for payment of third parties as provided by the by laws and the policies of the SACCO”. Before the model SACCO by laws were amended in 1996, it used to be a practice for members not to withdraw savings from their SACCO unless such savings had been maintained on what was then popularly known as sight deposit accounts. Because of this, many members would maintain just the minimum amounts of savings that could qualify them a certain desired level of loan that they would require for their economic or social activity.

While the SACCO model by laws did attempt to rectify this short coming, they also carried forward one weakness as far as savings accumulation by the member was concerned. In what the bylaws termed recurrent deposits (what was supposed to be the member’s primary account with his SACCO) the by laws provided that recurrent deposits were withdrawable one year after deposit. By all means this provision did not provide for conditions conducive enough for a member to maximally utilize this savings account. The proposed SACCO Act will improve this anomaly. Subsection 2 of section 7.4 provides that “Withdrawal of deposits are to comply with any advance notice requirements contained in the by law or the terms of the agreement of the account”. The provision cited above in the by law could now be improved on by providing for advance notice requirements for withdrawing funds from the recurrent deposit account.

The Statute was silent on provisions to be regulated in this section.

8.8 Joint Accounts

A joint account is an account operated by two or more persons and unless specified as such in writing by all the joint owners, each of the joint owners would have equal rights of access to the proceeds of the said account. The joint account owners could be a man and his wife, family members, business partners or even just friends.

Section 7.45 subsection 1 provides for conditions relating to operation of joint accounts in the SACCO. “A member may designate any person to own a deposit account jointly with the member. On the death of one of the joint owners, the surviving owner(s) become the remaining owner(s) of the account”. Subsection 1a; further provides that “Payment of part all such joint accounts to any one of the joint owners shall, up to the amount of the payment to discharge the SACCO’s liability to all owners, unless the account agreement contains a prohibition or limit on such payment”.

Again there was no provision in the Statute on joint accounts.

8.9 Trust Accounts

A trustee is someone who represents another person/s (beneficiary/beneficiaries) and provides stewardship on behalf of the beneficiary/beneficiaries he/she represents. In the case of a SACCO, the trustee or beneficiary may be a member or non member.

Section 7.50 subsections 1 to 4 regulates how trust accounts will be managed in the SACCO. Subsection 1 “A share or deposit account may be owned by a member in trust for a beneficiary, or owned by a non-member in trust for a beneficiary who is a member”. The Statute did not provide regulation relating to trust accounts but rather the relation between a member and his nominee. Section 37. Subsection 1 provided that “On the death a member, a registered society may transfer the share or interest of the deceased member to the person nominated in accordance with any regulations made under this Statute, or, if there is no person so nominated to such person as may appear to the committee of the society to be the legal personal representative of the deceased member or may pay to such nominee or legal personal representative, as the case may be, a sum representing the value of such member’s shares, ascertained in accordance with any regulations made under this Statute or by laws of the society”

This new provision in the proposed SACCO Act now opens the possibility of either a member or non member opening an account in the SACCO and holding that account in the names of a specified beneficiary who may or may not be a member in the SACCO. SACCOs in an effort to mobilize savings should also utilize this provision to mobilize funds from outside their memberships to patronize trust accounts. Trust accounts promise SACCOs with stable long term deposits that a SACCO can also invest long term.

Subsection 2 provides for the rights of beneficiaries to trust accounts. “Beneficiaries may be minors, but no beneficiary unless in that person’s own right shall be permitted to vote, obtain loans, hold office, or be required to pay membership fees”.

Subsection 3 regulates the payments of money from trust accounts and the relation between the SACCO and the parties to the trust account after that. Once the SACCO has paid out the money to the person under whose names the account is held, the SACCO discharges itself from liability and has no interest in the way the money is utilized thereafter. “Payment of part or all of such a trust account to a party under whose name the account is held shall, to the extent of such payment, discharge the liability of the SACCO to that party and to the beneficiary. The SACCO is under no obligation to see to the application of such payment”.

Subsection 4 regulates how the funds on trust accounts will be administered after the death of the party who owns the trust account. “In the event of the death of the party who owns the trust account, if the SACCO has been given no written notice of the existence of the existence or terms of any trust and has not received a court order as to the disposition of the account, funds in the account and any dividends or interests therein shall be paid to the beneficiary”.

8.10 Recovery of loans through enforcement of a lien on deposits and shares

Sometimes members can fail to or at worst deliberately refuse to honor their loan obligations to the SACCO. Under these circumstances, the SACCO may have no alternative, but to place a lien on the member’s savings and shares in the SACCO to recover the balance of loans and charges relating to the loan. Section 7.55 sections 1 to 4 legislates how a SACCO can enforce such a lien on the member’s funds (savings, shares, dividends and interest) held by the SACCO in order to recover its outstanding loan with the member.

Subsection 1. A SACCO shall have a first charge against savings and deposits and ownership shares and upon any dividend or interest payable to the member, for any debt due to the SACCO from the member, either as a guarantor or endorser of a loan or any other obligation.

Subsection 2. A SACCO may offset any sum credited or payable to a member that is in arrears.

Subsection 3. A SACCO may refuse to allow withdrawals from any share or savings deposit account when an account holder is in arrears on a debt to the SACCO.

Subsection 4. A SACCO may at its discretion, charge against a member’s holdings while allowing the minimum amount of ownership shares required for membership to remain.

The provisions in subsection 7.55 do not depart from the provisions of section 33 of the Statute which provided for the same action against a member of a society who failed to meet their obligation with the society. However, the protection provided to a member’s share or interest in the society against attachment or sale under any decree or order of a court in respect of any debt or liability incurred by a member under law relating to bankruptcy has been omitted in the SACCO Act.

8.11 Dormant Accounts

New in the proposed SACCO Act is the treatment of dormant accounts. The Statute did not provide for this and interestingly enough even the revised bylaws of 1996 overlooked this.

Dormant accounts arise when, as may be specified in the bylaws, a maximum length of time is indicated, within which the member has not carried out any business transaction with the SACCO. They lead the SACCO to incur accounting costs as a result of continuously carrying forward such funds. In order to avoid such costs, it is wise for the SACCO management to transfer any funds outstanding on such accounts to a reserve fund.

Section 7.60 subsections 1 to 4 of the proposed SACCO Act regulate the management of dormant accounts in the SACCO. Subsection 1 regulates the administrative measures to be taken in regard to dormant accounts “If there has been no activity on a share or deposit account for two years, the board of directors may impose a reasonable maintenance fee on it. The SACCO must give notice of this action to the member, or known interested parties, at the last known address, allowing at least 90 calendar days for a reply. Any such maintenance fee may be fixed at a rate that covers administrative costs, but may not reduce a member’s interest in the SACCO. The SACCO must maintain a separate accounting record of all such accounts”.

Subsection 2 provides for the time period that the SACCO can continue to keep the dormant account open. “Share and deposit accounts, dividends, interest, and other sums due to a member or other person and held by the SACCO may be presumed abandoned unless the owner within five years has contacted the SACCO in person or in writing, or otherwise indicated an interest in the funds”.

Subsection 3 provides for the transfer of funds in dormant accounts to a special reserve fund after the lapse of five years as prescribed in subsection 2. “The board of directors may credit the abandoned funds to a special reserve fund of the SACCO and thereafter no dividends or interest will accrue to the notice of the intended action to the member or other person to whom the property is owing to the last address shown on the records of the SACCO”.

Lastly subsection 4 provides for rights of the member or other such person to access his/her funds declared abandoned and transferred to the dormant account. “The member or other person may reclaim the abandoned funds by proper judicial or extra judicial proceeding began within eight years after the SACCO credited the funds to the special reserve fund”.

8.12 Scale down of Shares

Share contribution by members is a source capital for the SACCO. The share entitles a member to a vote in the SACCO. SACCO shares unlike those of stock companies do not increase in value. Other than shares, another source of capital for SACCOs include reserves created from a number of possible sources including retained earnings, uncollected share/savings, uncollected dividends, grants and gifts and membership fees.

SACCOs build reserves in order to take care of unforeseen eventualities that could negatively impact on the financial performance of the SACCO. When a SACCO makes losses, the value of its reserves is depreciated by such losses. If the value of reserves is eaten into by the losses, then the next funds to be affected are the shares. Scaling down of shares is one way of appropriating net losses in the SACCO. It entails members agreeing to reduce their individual share contributions by specific amounts which are then used to make for the net loss. It reflects one form of the risk bearing nature of the share capital and membership in the SACCO.(cf. Chukwu Samuel C., P.163).

Section 7.65 provides for the treatment of shares in case a SACCO makes loan write-offs other such depreciation on investments against its reserves and such losses exceed the value of reserves and any undivided earnings. “Whenever there are losses in the SACCO which result from a depreciation of value in its loans and investments or otherwise, exceed its undivided earnings and reserves so that the estimated value of its assets is less than the total amount due its shareholders, the members at a general meeting or by mail ballot may by a majority vote of those members voting on the proposition order a reduction in the value of the shares of each shareholders so as to divide the loss proportionally among them”. The Statute was silent on this and there was no provision either in the SACCO model bylaws 1996.

Any excess of assets realized, greater than the amount fixed at the time of reduction are to be divided proportionally among stakeholders whose shares were reduced. This has however only to be done if the institutional capital of the SACCO () is met. (cf. subsection 2).

8.13 Loans

The core business of SACCOs is to buy savings from members and sell the said funds as loans to their members. Loans to members represent the largest asset as well as income earner for SACCOs. Failure by the members who have been granted loans to repay their loans on schedule causes cash flow interruptions and when many payments are missed by the loan holders at the same time, this could be a cause for liquidity or even solvency problems for the SACCO. And this could impair the very survival of the SACCO. It is therefore important that there are clear guidelines for the management of loans in the SACCO and that the said guidelines are understood by all members of the SACCO. The proposed SACCO Act gives fairly more detailed guidelines to the subject of loans with more details taken up in the regulations. It will now be incumbent upon the SACCOs to give more detail on this issue in their policy documents.

The proposed SACCO Act handles the subject matter in six distinct areas; purpose and conditions, loan limits and security, interest and other charges, loan application procedure, other loan programs and loans to SACCO officials.

8.14 Purpose and conditions

A SACCO can grant loans for provident and productive purposes under conditions provided by the regulations, bylaws and lending policies. The Act makes it an obligation for the board of directors of a SACCO to develop written policies and guidelines regarding granting of loans, terms of the loans, repayment conditions, maximum amounts that may be borrowed, and acceptable security. (cf. Section 8.10 subsections 1 and 2).

8.15 Loan limits and security

Section 8.15 subsection 1 to 4 regulate security conditions of the loans, maximum amounts a member can borrow, maximum amounts a SACCO may lend to its staff and officials as well as the type of security that artificial persons and associations admitted to membership have to place as security for loans advanced to them by the SACCO.

Loans may be secured (using personal property, deposits or wages) or unsecured, endorsed by a guarantor or co-guarantor. (cf. subsection 1). Regarding security, it is important for the SACCO’s policy to contain a method by which the SACCO establishes a fair market value of any real property obtained as security for a loan. The “policy for determining fair market value should include: certified appraisal which must reflect current market value, cost evaluations and income assessments; verified comparable sales of similar properties reflecting current market conditions to include, where applicable municipal tax assessments”.(Cf. Standards of sound business practice, Director Reference Guide-published by the Deposit Guarantee Corporation of Saskatchewan, March, 1995).

On the maximum amount of loan that any member can be granted or related parties, the Act provides that this should not exceed 10% of total assets or 25% of institutional capital subject to amendments from time to by the SRA. (cf. subsection 2). This provision departs from the traditional way this used to be handled by many SACCOs where a member would get a loan in multiples of his savings in the SACCO.

Sub section probably introduces the most important guideline on the subject of loans to officials and staff of the SACCO and if implemented to the letter and spirit of the law will help combat abuse by those in leadership. SACCO officials and staff may not borrow in excess of an aggregate percentage of the SACCO’s total assets that will be set by the SRA. It further provides for all loans to staff and board to be reported to the full board of directors and auditor to check that the said amounts comply with SACCO policies. (cf. subsection 3). As a matter that is settled, these loans must be approved based on the same lending criteria applied to arm’s length borrowers and must adhere to standards of sound business practice.

Finally a society, association, partnership applying for loans are to pledge as security property held by them in their individual capacities or some other acceptable form of security. (cf. subsection 4).

The regulations provide more guidelines on the criteria that the collateral must comply with. These should only be moveable or real estate property and the SACCO must hold 1st lien on such property. The collateral must also be located within the geographic boundaries of the SACCO’s field of membership as prescribed in the SACCO’s bylaws. Lastly if the collateral does not belong to the borrower, written consent must be obtained from owner of such property allowing his/her property to secure such a loan with proof that such property is adequately insured.

8.15 Loan policy and procedure

The regulations provide for 5 key issues that the loan policy and procedures have to address: the policies have to be approved by the board of directors and have to define and describe the goals of the SACCO loan activity; the loan policies and procedures have to be in writing; loan limits have to be set where the loan committee has delegated some of its loan granting authority to management; what criteria a loan that is secured by collateral must meet (the loan secured by collateral must be a certain percentage below the value of the collateral); how loans can be secured by guarantors.(cf. Section 9.7 subsections 9.7.1 to 9.7.5)

Both the provisions in the proposed Act and the Regulation are new.

8.16 Interest and other charges

Section 8.20 subsection 1 empowers the SACCO board to determine the rate of interest it may charge for its loans provided that such rates are in compliance with limitation imposed the Regulations and the SRA. The regulations section 9.5 subsection 9.5.1 provides that the rate so charged may either be fixed or variable and that the rate should be able to cover operating expenses and loan losses, provide for adequate profitability, and meet institutional capital requirements. Interest has to be calculated on the outstanding loan balance as of the payment due date.

Subsection 9.5.3 obliges the SACCO management to disclose to the member the effective loan interest rate he will pay on the loan before the member is granted a loan. The effective interest rate should include interest charges, fees, and compulsory savings or deposit requirements.

In the event that the member fails to meet his/her loan repayments as scheduled in the loan agreement, a SACCO can assess penalties for late payments on interest or principal or both. (Subsection 9.5.4).

8.17 Calculating interest on loan and savings

The regulations section 9.8 provides for the way SACCOs shall carry out interest calculations on both savings and loans. Subsection 9.8.2 provides that “SACCOs may use either cash accounting or interest accrual accounting”. (Simply put this means that a SACCO can choose to recognize income and expenses only when cash changes hands, or recognize income and expenses in the accounting period when they are earned or incurred, regardless of when cash changes hands).

Income may not be accrued without accruing expenses for the period. Interest on savings is to be accrued prior to preparing financial statements. Separate records are to be maintained for the accrual loan, savings and term deposit interest. (cf. Subsections 9.82 to 9.84)

Interest calculation should be based on the actual number of days elapsed from the last date interest was previously paid and in case it is the first payment, from the date the loan was granted or the deposit account was opened.(cf. Subsection 9.86)

While interest on term deposits is to be accounted for based on the terms of the deposit contract, interest on ordinary savings is to be accrued based on the current stated interest rate. And when a term deposit matures or such a term deposit is closed, the balance due to the member is to be determined only after accrued interest has been credited to the members/depositor’s account and after collecting interest and/or fees due to the SACCO. (cf. Subsections 9.86 and 9.87).

If a loan is past due by 60 days or more or it is believed that a loan (principal and interest) may not be paid back in full, no interest should be accrued on such loan regardless of the past due status. (cf. subsection 9.8.8).

A SACCO may continue recording interest on loans placed and maintained on “non-accrual status” in an off balance sheet account in accordance with the terms of the loan agreement. Past due interest is only to be recorded as income when it is received. Any interest accrued but not collected pertaining to such loan is to be reversed from the balance sheet. (cf. Subsection 9.8.9 (i) and (ii)).

For any non-accrual loan to be restored to accrual status on the balance sheet, all past due interest and principal must have been paid in full and the SACCO has to be sure that collection of principal and interest on such loan is no longer doubtful. (cf. Subsection 9.8.10 (i) and (ii)).

It is also important for the SACCO to note that a loan given non-accrual status has to be collected from the borrower-the borrower remains liable to such loan repayment. As to repayment of principal and interest on such loans, this should be done in compliance with the loan agreement unless the loan agreement has been amended and/or changed. (cf. subsection 9.8.11).

All the above provisions both in the Act and the regulations are new. This sorts out many of the sticking areas which used to cause accounting problems for SACCOs resulting in presentation of inflated incomes accruing to loans that in many cases could have been declared non recoverable, but continued to be maintained in the SACCOs’ balance sheets.

Section 8:20 subsection 3 empowers the board of directors to “authorize any refund of interest or such classes of loans under such conditions as it prescribes”.

8.18 Loan delinquency

The strength and survival of any SACCO (just like any other financial institution) depends entirely on its ability to collect loans from members. The regulations define a delinquent loan as one in which the full payment has not been received as per the loan contract.

If delinquency is not controlled, it “can eat away a portfolio without any one realizing it, and then suddenly explode out of control, like a hidden beast”. (Katherine E. Stearns, The Hidden Beast: Delinquency in Microenterprise Programs; Discussion Paper Series, Document No. 5 ACCION International, January 1991).

One way of judging the quality of a loan portfolio is by looking at its delinquency. The level of delinquency may sometimes be hidden depending on the way it is calculated. Some programs use the ratio of amounts of loans past due to the portfolio in calculating their delinquency rates. However, this formula has its short comings given that its results will differ dramatically depending on the figure in the numerator (larger figures increase delinquency while smaller values reduce it) as well as the length of term of the loan (a longer period reduces the amounts to be repaid and therefore the numerator hence reducing delinquency while shorter terms increase the figures to be repaid and therefore delinquency rate obtained using this formula).

One way to correct the above short coming is to use the formula “outstanding balance of loans with payments past due over portfolio”. This formula considers the entire loan with payments past due as being delinquent. In view of this the regulations subsection 9.9.4 provides that “when disclosing delinquency the entire outstanding loan balance is to be reported as delinquent, not just the amount of the delinquent payments”.

The regulations further provide for delinquency to be calculated as of the last day of each month.

8.19 Loan application procedure

It is a legal requirement that all loans are applied for in writing on a prescribed application form approved by the SRA. It is further required that each loan is evidenced by an appropriate legal document, such as a loan agreement or a promissory note.

8.20 Other loan programs

Lines of credit

A SACCO credit committee or a loan officer may approve a line of credit to a member upon a written application requesting for such a line of credit. Loan advances may then be made to such a member within the limit of line of credit. No other application is required once a line of credit has been approved as long as the member’s aggregate indebtedness (which include: loans where the borrower is the primary debtor; loans where the borrower is guarantor and loans to related parties of the borrower that is the source of repayment of the debt would be substantially dependent on a common source of funds, the debt would in substance be a single loan or would substantially serve the same purpose in the same or related transaction, the debt would be dependent on the same security) to the SACCO does not exceed the approved limit. It is incumbent upon the credit committee to regularly review the lines of credit granted to members. (cf. Section 8.30 subsection).

Pooling of financial resources

Subsection 2 of section 8.30 authorizes SACCOs to pool their resources together with other SACCOs or with a national association of SACCOs with a view of enhancing the SACCOs ability (especially smaller SACCOs) to meet members’ loan needs.

A SACCO may also participate in any guaranteed loan program of the government under such terms and conditions as may be specified by such a program. (subsection 3).

A SACCO may also purchase installment sales agreements, loan contracts, and similar loan instruments for its members (cf. subsection 5).

The provisions in this section are new except subsection 2 which authorizes SACCOs to pool their resources together. The provisions increase avenues for SACCOs to finance their members’ loan needs.

8.21 Loans to SACCOs Officials

A SACCO is authorized to grant loans to officers, directors, employees, loan officers, supervisory and credit committees’ members within the lending limits and conditions set by section 8.35 of the Act. The borrower will meet the following terms: they must be paid up members of the SACCO; the loan complies with all requirements under the SACCO Act with respect to loans to members and is not on terms more favorable than those extended to other members; the loan applicant does not participate or be present when the committee considering his/her application is sitting. (cf. subsection 1 (c).

The board is obliged to develop and adopt a policy on loans to officials including staff, directors, employees, and loan officers. In such loan policies any loan or aggregate loan(s) must meet the requirements of the official loan policy. Loans to officials of the SACCO are subject to be reported to and be reviewed by the auditor, the supervisory committee and the full board. (cf. subsection 1(d).

Where the loan applied for or the aggregate of the loans to the official exceed the amount of any shares not pledged as security on the loan of the official must be approved by three quarters of the credit committee and board of directors.(cf. subsection 1 (e)

The provisions in this section are new and will go a long way in checking on conflict of interest, but also control actions of some board members with self centered interests. The requirement to have such loans reported to and reviewed by the auditor is a welcome one to really check some of the excesses that have been obtaining in the SACCOs and which were not being questioned by the board members and the supervisory committees.

Officers, directors, employees, loan officers, and members of the credit and supervisory committees are stopped from being co-maker, guarantors, or endorsers of loans to other members. (cf. subsection 2).

Summary: Governance, Safety and Soundness Issues

The proposed Act defines in more details all issues pertaining to safety and soundness as far as loan risk goes. The issues of aggregate credit, related parties to the borrower have been clearly detailed out, emphasis is put on the building of reserves as one way of protecting the SACCO against shocks related to lending. The board is also under obligation to see to it they develop a credit policy which prescribes how lending risk should be kept as minimal as possible. The SACCO’s credit policy has been guided and the law requires that it addresses important areas of risk limitation which include: approval of loans, conflict of interest; terms and conditions for granting loans to SACCO officials, management and employees; proper analysis and documentation of credit, monitoring of loan portfolio through aging of loans and determining delinquency of portfolio on a regular basis; loan collection,; security requirements.

Observation: What is not properly brought out is how to deal with borrowers who have in the past defaulted on their loans. I guess and hope that this will be dealt with in the SACCO’s by laws and policies. Loans to an individual member should in aggregate not exceed 10% of total assets or 25% of institutional capital. The old practice of using multiples of savings is being scraped and the credit/loan committees will now have to develop their lending policies along these guidelines. What the Act or Regulations do not spell out is guidelines relating to methods to be used by the SACCOs to establish a fair market value of any real property pledged as security for a loan to avoid unfair assessments that could be misconstrued to be not consistent with standards of sound business practice. Again, I am hopeful that this will be clearly spelt out in the SACCO’s by laws and further detailed out in the policies of all SACCOs.

Observation: In setting credit policy the SACCO board is to ensure that the said policies are consistent with the Act, Regulations and the SACCO’s by laws. Working in compliance with the law is perhaps the biggest challenge that the SACCO’s will face when the proposed Act comes into force. The risks of civil and criminal action resulting from failing to comply with the law and the regulations can not be overlooked. In view of this, the board and eventually paid management of SACCOs might need to set up committees with one of their responsibilities being monitoring the SACCOs overall compliance with the Act and Regulations and other laws relating to all the SACCOs areas of operations.

Oluka Peter

Part 9: Investment of Funds

Section 9.10 subsection 1 obliges the board of directors to establish written policies for investing funds of the SACCO not used in loans to members. The secretary manager is then expected to make all SACCO investments in accordance with such written policies. The proposed Regulations Section 7.1 subsection 7.1.1 spells out what the investment policy should address and these include: the purpose and objective of investment activities; types of investments that can be made; who has authority to make the investments and the extent of this authority, and; the need for adequate investment diversification to reduce concentration risk.

The board is further obliged to designate one or more institutions to serve as depositories for the SACCO in accordance with regulations issued by the SRA. (cf. the Act Section 9.10 subsection 2).

Other general provisions on investments provided for in the regulations include: a requirement for the board to review the investment policy annually and make any necessary changes indicative of daily operations; the requirement for the board of directors to ensure that the investment policy is adequate and achieving the goals it was created for, make quarterly reviews of the portfolio to ensure compliance; that the manager on a monthly basis prepares an investment report detailing all investments held by the SACCO, interest rates and maturity dates, investment activity of the month, comparison of book value of the investment to the current market value if available and where the comparison indicates a loss to relate this loss to the SACCOs institutional capital so as to determine the impact of loss on the solvency of the SACCO; ensuring that the portfolio is properly diversified as one way of reducing risk of a large percentage of investments in any one entity; ensuring that investment maturities do not exceed one year save for shares invested in secondary cooperatives, in making investments with a one year maturity the board must take the seasonal demand for credit; ensuring that all investment certificates are kept in a fire proof safe and that access is limited to such certificates. (cf. regulations subsections 7.1.2 to 7.1.7).

The regulations further specify which investments are prohibited and these include: any investments that could place the SACCO’s capital at risk; investments where the SRA is of the opinion that the members could be harmed by the activities of the issuer or the SACCO does not have adequate management capability. (cf. regulations subsections 7.2.1 to 7.2.2).

Investments in non earning assets, shares or debt obligations of other cooperatives and other long term securities or obligations which increase interest rate risk are to be limited to not more than 5% of the SACCO’s capital and deposits. (cf. subsection 7.2.3).

The regulations strictly forbid investments in non-financial subsidiary business assets. (cf. subsection 7.2.4).

9.1 Other real estate and assets owned (OREAOs)

These include material assets that the SACCO acquires from members who have failed to meet their loan repayments to the SACCO. These assets and non-earning assets are to be kept to no more than 5% of total assets; they are to remain in the SACCO’s books of account for a period not exceeding one year from the date when ownership is transferred to the SACCO; where the SACCO is unable to sell of such assets it is a requirement that the SACCO depreciates them by 33% annually for 3 years until the OREAO is valued at zero. This reduction is to be made through a contra account-Provision for OREAO. After 4 years in total, the OREAO is to be written off the accounting records of the SACCO. (cf. regulations section 7.3 subsections 7.3.1 to 7.3.3).

All these provisions are new. The limitation on non-earning assets to a value of no more than 5% is particularly significant as it checks what was the norm after the 1986 currency reform when SACCOs migrated their funds in investments that were believed then as protecting the value of members’ savings against inflation and any future such action by government. What happened, however, did not serve the members interests in any significant way but rather increased the members’ woes in as far his/her interest of saving for economic growth at his/her household level was concerned. The funds migrated to construction of material assets did not yield anticipated returns that would be channeled to meets members loan demands as well savings withdrawals.

9.2 Authorized investments

The proposed Act section 9.15 lists what investments a SACCO can put the excess of funds which it can not loan to members. These permitted investments include: investment in securities (Treasury bills and the Securities Exchange market); deposits under obligations or in commercial banks organized under the banking Act; the Central facility of the national association of SACCOs; the deposit guarantee fund; shares, stocks, deposits, loans to other SACCOs and SACCO unions, registered cooperative societies, organizations, companies or associations providing services associated with SACCOs or engaged in activities related to SACCO operations (such investment in aggregate are expected not to exceed 5% of the SACCOs capital and deposits); and any other investments that may be authorized by regulations of the SRA.

9.3 Fixed Assets

The proposed Act makes it a requirement that a SACCO’s total investment in fixed assets does not exceed 5% of its capital and deposits save for where the SRA waives this limitation after a SACCO presents reasons why a greater investment in such assets is justified. (cf. Section 9.20 (1) and OREAOs above).

9.4 Liquid Funds

There are two main reasons as to why a SACCO may fail and that is a lack of liquidity (cash and assets that are readily convertible to cash). The other reason is the inability of the SACCO to operate at a profit. Liquidity shortages impair the SACCO’s ability to meet its members’ demands for cash; inability to operate at a profit on the other hand limits the SACCO’s ability to build an adequate capital base to cushion it against tough times when its financial margins reduce or to withstand loan and investment losses. (cf. Dennis Schroeder: A history of Saskatchewan’s Mutual Aid Board (1953-1983), 1983, p. 14-15). Both shortages as well as excess liquidity in the SACCO have negative implications. While the shortage can spark off problems cited above, an excess in liquid assets on the other hand can reduce the SACCO’s ability to earn adequate interest jeopardizing its ability to pay competitive rates on deposits. In order to resolve this dilemma, the law makers set minimum required levels of liquidity that the SACCO must hold at any one given time. (cf. Schroeder, 1983 pp. 14-15).

The proposed SACCO Act requires a SACCO to maintain liquid funds (cash on hand, deposits with banking institutions, government securities of less than 1 year, Central Finance Facility, SACCO union) as the SRA may determine. 10% of such liquid funds are to be deposited with the Central Finance Facility which will manage such funds on behalf of all SACCOs. Governance, Safety and Soundness Issues Investments are to comply with minimum standards set out both in the Act and Regulations. New is the requirement for SACCOs to recognize that they have a core business to which they must stick to. The Act clearly spells out investments that a SACCO is permitted to engage in. Those are investments that the SACCO can easily liquidate in case it realizes a liquidity problem that could threaten its ability to meet members’ savings withdrawals and loan demands. Investment in fixed assets is not expected to exceed 5% of the SACCOs capital and deposits.

Observation: This requirement now legislates out what has been a norm; whereby SACCOs have tended to lock up members’ savings and shares in fixed assets that have generally earned limited or no returns. As a result most SACCOs have tended not to meet members’ cash demands (both in withdrawals and in loans to members). Little wonder that members’ savings in their SACCOs have tended to be very small in comparison to what the same members might probably be holding in other financial institutions. On top of this, because the SACCO has not been attractive to even the members themselves, the ability of SACCOs to recruit more members in to their memberships has also been very limited. Reason for this must be because there have been no visible demonstration effects to show any observer that there is a positive difference between a SACCO member and a non member. The requirement to maintain a certain level of liquidity should go a long way in addressing this shortcoming. Investments are also supposed to be diversified to avoid concentration risk. On investment still, the board is obliged to review its investment policy on an annual basis to check that it meets the SACCO’s objectives.

Oluka Peter

Part 10: Reserves and allowances

10.1 Minimum institutional capital

It is an obligation for every SACCO to maintain a minimum institutional capital of 8% of its total assets. The institutional capital may include retained earnings, capital donations, statutory reserves, grants, other net-worth accounts owned collectively by all members. (cf. section 10.10 subsection) The regulations further provide that institutional capital is non withdrawable and no person has a legal claim to it. It represents an accumulation of net income from prior operations in the form of retained earnings, cash, donations, grants, and reserves. (cf. regulations section 5.1 subsection 5.1.2).

It is also a requirement for SACCOs to transfer all or part of their surpluses to either build capital or maintain it at the level required by the SRA before paying any dividends. (Section

subsection 10.10 (2)). The regulations section 5.1 subsection 5.1.3 sets this amount at 1% of the gross surplus.

The reserve transfers requirements may be decreased or waived off by the SRA for any SACCO in one or more accounting periods where the SRA deems this appropriate. (cf. the Act section 10.10 subsection (3)).

The proposed Act requires that SACCOs maintain an allowance for loan losses prescribed by the SRA for loans that are delinquent for 2 or more months. The SACCO is further obliged to enforce stringent collection efforts to recover any loan which is 90 days delinquent and seize any security pledged as collateral to such a loan. (cf. the Act Section 10.10 subsection (4)). If after 1 year there is still a balance unpaid, such balance has to be written off the loan portfolio as an expense, 100% loan allowance is also to have been established to cover this loss. (cf. the Act section 10.20).

10.2 Use of Institutional Capital

Section 10.15 subsection 1 provides that “The institutional capital belongs to the SACCO and may only be used to meet operating losses resulting from loans, investments, extra ordinary losses or losses to allow non earning assets to improve earnings of the SACCO. The institutional capital shall not be distributed except upon liquidation of the SACCO”.

Summary: Governance, Safety and Soundness Issues

The proposed Act clearly requires all SACCOs to build up institutional capital and states that such capital belongs to no member but to the SACCO and can only be used to meet operating losses resulting from loans, investments and non earning assets. This provision addresses the heart and matter of interest to the member, whose interest is contrary to what this provision is legislating. While the building of statutory reserves is written in the law and is therefore a legal requirement, the same can not be said of voluntary reserves. Members will generally be interested in seeing that surpluses are distributed to them instead of being retained in the SACCO. Members will only be interested in allocating surpluses to the voluntary reserve fund if they are convinced that this action in the long term serves their interest. Management has therefore to negotiate with the members to obtain their consent on allocations to voluntary reserves.

Oluka Peter

Part11: National Association of SACCOs

Cooperatives generally come together to form primary unions at district or regional level or even national levels. The reason for this is to enable a primary cooperative at local level to access services that enhance their competitiveness. On their own the costs of such services would be fairly out of reach for each cooperative. This cooperation among cooperatives can open wide opportunities for cooperatives enabling them to access services like training, education, auditing, insurance, credit, other investment options like leasing, factoring, capital markets (cf. Gunther, Aschhoff. Eckart, Henningsen. Das deutsche Genossenschaftswesen: Entwicklung, Struktur und wirtschaftliches Potential, Frankfurt am Main. 1985) as well as lobbying for appropriate legislation.

In Uganda, SACCOs have cooperated this way since 1972 when SACCOs came together and formed UCSCU. Section 11.10 provides for how SACCOs can organize themselves beyond local level. Two or more registered SACCOs can organize themselves for the purpose of fostering their organization and development and improving their performance by registering with and filing a copy of the bylaws of the association with the SRA. The Association so formed is to be directed by a board of directors elected by member savings and credit cooperative societies at the annual meeting. The registered by laws must spell out the duties of staff and the organizational structure of the National Association of the SACCOs. It is a requirement for all SACCOs to be members of such National Association. (cf. section 11.10 subsections (1)-(3)).

The National Association is expected to play advisory roles and as well as assisting SACCOs by providing programs and services that enable them to serve their members more effectively. Services include education and training, management consultancy, accounting and auditing, standardized systems, supplies and forms, marketing and procurement, risk management, insurance and advocacy. (cf. section 11.15).

11.1 Central Finance Facility (CFF)

The Act provides for a creation of a central finance facility which is to be registered with the SRA. The CCF has the following purposes: accumulating and prudently managing the liquidity of its members through investment services and inter-SACCO lending; sourcing liquid funds from other SACCO organizations and other sources; participating in financial systems designed to foster security and development of member SACCOs; acting between members as an intermediary; and performing other services authorized by the SRA for the benefit of its members. (cf. section 11.20 subsections (1)-(2))

11.2 The powers and privileges of the CFF

The CFF is expected to serve only its member organizations and not natural persons, its by laws may authorize it to exercise such additional powers necessary to fulfill its purposes; the CFF subject to the provisions governing investments of funds, capital adequacy and allowances for loan loss standards in the SACCO Act.(cf. section 11.25 subsections (1)-(2)).

PART 12 : STABILIZATION/DEPOSIT GUARANTEE FUND

(Notes on the Stabilization Fund have been adapted from: Dennis, Schroeder. A history of Saskatchewan’s Credit Union Mutual Aid Board 1953-1983)

12.1 About the Fund

The philosophy behind the SACCO stabilization fund is that of co-operatives co-operating with each other, extending existing SACCO activities; sharing resources and accepting responsibility for losses for the benefit of the whole, with the long term view of protecting the image of the SACCO movement.

12.1.1 Purpose and objectives of the Fund

Purpose

 Provide an unlimited guarantee of members’ funds on deposit with SACCOs

 Provide preventive services to avert financial difficulties in SACCOs

 Protecting the fund itself

Objectives

To protect member deposits.

To maintain a fund that guarantees member deposits and provides support services aimed at protecting the fund.

To communicate to SACCOs, members, and the public on the effective level of deposit protection, and to provide preventive services that enhance SACCO financial self-reliance.

Section 12.10 provides for the establishment of the SACCO stabilization/deposit guarantee fund, organized and SACCO registered under the SACCO Act. Its membership will be all SACCOs. According to the Act the Fund has the following objectives: provide financial assistance to member SACCOs that are insolvent or experiencing problems that may lead to insolvency; carrying out educational, technical and advisory programs designed to prevent insolvency of SASCCOs or to minimize the risk of insolvency; refund members’ deposits in case a SACCO becomes insolvent up to limits of the insurance.

12.2 Management of the Fund

The Fund will be directed by a board comprising of five directors, three from the SACCO system and two from the government. According to the draft SACCO Act, two of these members will be elected by the SACCOs, the third member will be the general manager of UCSCU, the fourth director will be the governor bank of Uganda or his designate and the fifth the Commissioner of Microfinance department.

While the Act does not specifically mention this, the management of the fund could initially be provided by UCSCU on a contract basis. But as the fund grows, it would have its own manager with a thin management given that most of the funds field operations would be contracted to UCSCU.

Some of the Funds most critical decisions would have to be authorized by the SACCO regulatory authority (SRA) (which according to the SACCO draft Act seems to be taking over the roles of the Registrar of Cooperative Societies). The presence of someone from the SRA on the Fund’s board would be useful since he would normally be required to authorize Board actions in a number of areas. In this way he would have more direct, first-hand knowledge of the Fund’s policies and programs.

Ideally therefore, one of the Board members would have to come from the SRA directly or indirectly. I am assuming that this would be so given that the SRA board would most likely have someone from Bank of Uganda and Ministry of Finance. If this is not the case, this is an oversight that the Law makers will have to correct before the draft becomes law. The UCSCU general manager would provide a wealth of knowledge about the SACCO movement through experience gained interacting with them. (cf. Section 12.15 subsection 1 (a)-(d))

Representation from the Finance Ministry on the other hand would be beneficial in that the “outside opinions” of someone with experience in financial management and knowledge of government financial policies would be of value in the Fund’s deliberations.

Bank of Uganda governor would be bringing not only a wealthy of banking knowledge but the bank itself being lender of last resort has experience that the fund would find useful in overseeing the SACCOs.

12.3 Funding of the stabilization of the fund

The Fund will be funded through annual assessments levied on each SACCO in the country as provided for in the draft SACCO Act. According to the draft Act, the Fund would be funded from three sources. During the first four years, government would contribute annually to the fund. The SACCOs would make an initial contribution equivalent to 1% of SACCO shares and deposits in the first year. In the subsequent years, the Board of Directors would establish an annual levy to be contributed by each of the SACCOs.

Since any SACCO can find itself in difficulties at some time and since the failure of any SACCO with a loss of members’ shares and deposits could jeopardize the future development of the entire movement, it is my strong opinion that membership to the fund should not be voluntary; assessments should be levied on all SACCOs.

On liquidation of any SACCO, the Fund could make up the losses of members or assist the SACCO in danger of insolvency.

Section 12.20 of the proposed SACCO Act provides for three options under which the Fund should be funded: an initial contribution for the fund in the equivalent of 1% of the SACCO’s shares and deposits; an annual levy to be established by the board of directors or education contribution; an annual contribution over a period of four years from the establishment of the Fund.

12.4 What will be the functions of the Fund

The Fund will carry out two key functions:

prevention and,

rehabilitation of SACCOs with greater emphasis on prevention through increased self regulation in SACCOs through monitoring of performance. Monitoring will look into the following key areas:

1. Ensuring that SACCOS are run according to sound business practices. The Fund will do this through updating policies and loans manuals. The Fund will also on a regular basis (where need dictates) work with government to revise the SACCO Act.

2. Putting SACCOs that find themselves in trouble under supervision, while providing financial assistance. Supervision will be imposed if a SACCO fails to develop adequate reserves; to develop adequate plans and policies; fails to operate in a sound and business like manner.

3. Where it would appear that a SACCO can not be rescued, the fund will implement the dissolution or amalgamation process with a view to protecting members deposits and shares

4. Operating a bonding and insurance; this provides standardized coverage for the entire SACCO movement. Improving security and reducing losses through the upgrading of safes and burglar equipment.

Section 12.10 of the Act provides for the following powers for the Fund in pursuit of ensuring that it maintains solvency among SACCOs: provide educational and advisory services to the SACCOs in their operational practices so as to avert financial difficulties; require SACCOs to submit quarterly financial reports of their affairs for necessary evaluation of each SACCO’s financial condition; make loan and grants to SACCOs that may need such help; purchase all or portion of assets of the insolvent SACCOs or assume or take over its liabilities; supervise, administer and organize the affairs of a SACCO that is experiencing financial difficulties; serve as a liquidating agent of a SACCO that is in process of winding up its affairs; exercise such incidental for it to effectively carry out its mandate including powers to make contracts, to sue and be sued, to borrow money and invest excess funds.

12.5 Government support

The government of Uganda has taken a very active role in promoting and developing SACCOs in the country. This close and rather unique relationship between the government and the

SACCOs will be beneficial to the SACCO movement during the short run, in the long run this may lead to a weak movement unable to rely on itself. The stabilization fund is one of the tools that will build the capacity of SACCOs to develop capacity to manage their own affairs.

In order for the fund to fulfill the function of self management among SACCOs it has to be conferred the following powers.

1. Providing preventive services necessary to avert financial losses to SACCO members. The preventive services should be all-inclusive and could include working with government and audit firms to carry out effective audits, following up problem areas uncovered by audits; developing procedures for supervision and administration of SACCOs; developing more effective asset management procedures; and assisting in SACCO amalgamations as one way of avoiding losses.

2. The SACCO Act also permits the Fund to establish a range of insurance programs, including fire insurance, bonding of employees, insurance against burglary and theft, deposit insurance, and public liability insurance.

3. In the long run the Fund should be empowered to establish a Central Credit Committee responsible for considering certain loans to be referred to it by SACCOs. The reason for this is to establish some controls over lending practices, which could lead financial difficulties in many SACCO. This could be exercised under the incidental powers granted to the Fund under the draft Act.

4. Most importantly the SACCO Act should give the Fund the power to put SACCOs under its supervision if SACCOs are found to be conducting their affairs in a manner that threatens to impair the safety of their members’ deposits. Again this is also already included in the draft Act.

5. The Fund should be empowered to inspect and administer SACCOs under supervision if they did not correct any practices that were likely to contribute to the unsound conduct of their affairs. This is also catered for in the draft Act.

6. The Act should provide a provision granting the Fund the authority levy an additional assessment from SACCOs if the capital of the Fund was about to be impaired.

12.6 Rehabilitative functions

One of the major aims of the stabilization fund is to nurse SACCOs with financial difficulties back to health (not preparing them for burial). The fund would fulfill this function through provision of interest free loans provided the SACCO has a potential of recovering; the capital of the members would be impaired and amalgamation or dissolution of the SACCO is not possible. The SACCO would be placed under supervision or management contract; all purchase and disposition of assets would have to be approved by the Fund; and all rates charged or paid by the SACCO would have to be approved by the Fund. Repayment would be on an agreed term, beginning not more than two years after the date of the loan.

12.7 Supervision and administration

The draft SACCO Act (12.25 Powers of the Fund) explicitly empowers the Fund to supervise SACCOs at its discretion. A SACCO whose performance would be found wanting in regard to its financial condition would be placed under administration. The Fund before taking this action would have to inform the SRA and the SACCO in question of this decision. The Fund would monitor all SACCOs at least annually, and would establish criteria for determining whether a SACCO was conducting its affairs in a financially sound manner. The draft Act provides for a quarterly monitoring compelling SACCOs to submit to the Fund quarterly or monthly financial reports upon which the SACCOs financial condition would be assessed.

Among the conditions under which a SACCO could be placed under supervision by the Fund can be cited the following and others as the Fund may deem fit: if the amount in statutory reserves after deducting loss exposure was less than a prescribed percentage of outstanding loans; or if the SRA advised the Fund that the SACCO was operating unsoundly. The supervision would continue up to such a point in time when the circumstances that caused its being put under supervision ceased to exist or the SACCO were liquidated; if a SACCO is unable to pay a dividend

unless indulgence was granted regarding its reserves covering loss exposure. This can be carried out under the provision of Section 11.20 subsection 2(e).

12.8 Supervision powers of the Stabilization Fund

The Fund could exercise the following powers in its supervising functions

 Exercising the SRA’s powers to grant indulgence on reserve requirement;

 inspecting the affairs of the SACCO;

 ordering the correction of unsound practices;

 requesting the SRA to appoint the Fund as administrator;

 recommending to the SRA the amalgamation or liquidation of the SACCO.

12.9 Dissolutions and amalgamations

The Fund would have the power to develop policies to deal with dissolutions and amalgamations involving SACCOs in which it has a financial interest.

12.10 Investments

In addition to ensuring that the size of the Fund is adequate, it would also be incumbent upon the Fund managers to see to it that the safety and soundness of the Fund is maximized and, that its ability to absorb the costs of preventive services by earning a reasonable return is maintained. For this reason, the SACCO Act needs to spell out a provision mandating the Fund to develop detailed investment policies for the sound management of the fund. Ideally the Fund’s funds would be invested in government bonds, Bank of Uganda Treasury bills and not in speculative ventures. A percentage of the funds would also be invested in UCSCU (provided ofcourse that UCSCU able to offer a competitive return on such investment).

12.11 Bonding and Insurance

Another important loss prevention function that the SACCO Act should empower the Fund to assume is that of bonding and insurance.

Areas of interest for the Fund under this bonding and insurance would include how the SACCOs deal with

 burglary and robbery

 losses caused by burglary, robbery, holdup

 valuable papers

In order to support its guarantee function, the Stabilization Fund would have the powers to prescribe standards of sound business and financial practices, inspection, supervision and administration of SACCOs. The primary role of the Fund in this is that of loss prevention.

(NB: Fidelity Bonds: SACCOs, like other financial institutions, are vulnerable to losses from crime because they handle cash. Embezzlement and other crimes perpetrated by employees can be protected with a bond).

A fidelity bond is a legal contract stating that an insurer agrees to pay, within stated limits, for financial damages caused by the dishonest acts or default of a third party (usually someone performing official business for the SACCO, such as an employee or director). SACCOs often buy a bond that will cover all employees, called a blanket bond. This type of bond will cover employees and directors as well as members of various committees for dishonest acts while they are performing official acts for the SACCO.

12.12 SACCO audits

Currently many SACCOs are audited by the registrar of cooperative societies. The few that can afford to pay open market audit fees enroll the services of external auditors. The quality of auditing services provided to the SACCOs varies considerably. In view of this, the draft Act intends to improve on this situation by empowering UCSCU in among other things carrying out audits. Under these circumstances, UCSCU could set up an audit department to carry out the auditing function of SACCOs. Another approach would be for SACCOs to set up an audit union/s whose sole function would be that of carrying out audits of SACCOs.

 carry out a balance sheet and operating statement verification (formal audit) and SACCO management efficiency (material audit),

 an examination of SACCO’s internal operations, policies, margins, liquidity, and markets,

 carry out any inspections to provide a follow up on special problems, loans, or loss exposure at the request of the Stabilization Fund,

 support the SACCOs internal audit (supervisory committees) to carry out examination of operations, procedures and internal controls in SACCOs,

 work with government authorities to ensure compliance with legislation and fulfill the government’s role as protector of the public interest.

12.13 Monitoring

Another area that the Fund is empowered to do is carrying regular monitoring of SACCOs. The Fund would work with UCSCU contracting this role to the latter given that UCSCU has already developed such a structure which is already working. This should be done either monthly or at the least quarterly. Areas of concern would include selected balance sheet figures and cash flow totals, interest rates and liquidity. The data so collected would be used by the Fund to monitor key performance areas: reserve ratios, surplus distribution potential, loss exposure, and expense revenue ratios. The performance of SACCOs would be compared with aggregate ratios of similar sized SACCOs and the combined ratios of all reporting SACCOs. The Stabilization Fund would use the statistics to prepare a quarterly risk ranking of all SACCOs, identify those under distress and place them on the Fund’s watch list.

The proposal to incorporate and adopt a Stabilization Fund in the SACCO Act is probably the best piece of legislation that will foster self regulation in the SACCO movement. Ideally, this is what SACCOs themselves should have asked the law makers in 1991 when the Statute was being prepared. It should have been an item in the Statute may be it would have saved the SACCO members from some of the losses they have had to bear the burden of loss of personal savings occasioned by unaccountable leaders and managers. It is a new piece of legislation that will not only promote safety and soundness among SACCOs but will also help government in its efforts to regulate the industry. Every SACCO member and potential SACCO member interested in a SACCO movement of tomorrow should support and embrace this legislation. Governance, Safety and Soundness Issues

Perhaps the most strategic introduction in to the proposed Act is the creation of the Stabilization Fund. The Fund is supposed to guarantee members’ deposits in the SACCOs; provide preventive services which protect members’ deposits and ensure the safety of the Fund itself; and manage the Fund. The major strategy in protecting the deposits is ensuring prevention through sound SACCO practices and policies. In pursuit of the above, the Fund will develop policies that will bring SACCO operations in conformity with standards of sound business practice. Observation: Government will initially fund the Funds activities for a period of four years. This commitment has long term implications of how the Fund will be perceived by the SACCOs and the most likely perception is a Fund created by government to rescue any failing SACCOs. Once the Fund comes into being, it will have as first duty to clarify that perception and create a perception of a member owned and controlled Fund created not primarily to rescue failing SACCOs, but rather to work with SACCOs to prevent SACCO failures from occurring or at least minimizing such possible occurrence. It is my opinion that the largest portion of government funding should primarily go towards creation of such awareness and letting all SACCO s know that it is an obligation for them to abide by policies developed by the Stabilization Fund and that failure to do so is a breach of the relevant SACCO laws and Regulations.

PART 13: CHANGES IN ORGANIZATION.

13.1 Merger and Consolidation

Two or more SACCOs may voluntarily decide to merge into one as a way to enhance their competitiveness. Normally such a move must be endorsed by a prescribed number of members as set out in each of the SACCOs by laws. A SACCO may also be forced to merge with another SACCO where the regulators find this a better alternative to dissolving a SACCO.

Section 13.10 subsection 1 to 3 provides the guidelines that SACCOs may either voluntarily merge or be forced to merge in case of insolvency. A registered SACCO may with approval of the SRA merge with one or more other SACCOs. The SRA may also a direct a SACCO which is insolvent or in danger of becoming insolvent to merge with any other registered SACCO. To

issue such an order the SRA will have to satisfy itself that: an emergency exists which requires prompt action; there are no other reasonable alternatives available; the merger would best serve the interests of the members of the SACCO. Where the SRA intends to force a SACCO which is insolvent or is in danger of becoming insolvent to merge with another SACCO or SACCOs, the proposed Act provides for such SACCO to receive 30 calendar days notice from the SRA and to be given an opportunity to be heard.

Any two or more SACCOs participating in a merger must agree to such merger and the agreement has to include: reason for the merger; location of the principal SACCO office and branch office locations after the merger; agreements reached to notify and pay creditors of the merging SACCO; assigning or transfer to the continuing SACCO from the merging assets, rights, property, liabilities, and equity along with any additional documents and instruments of conveyance which may be necessary; an agreement by the continuing SACCO to assume and agree to pay all liabilities of the merged SACCO; agreement that the share in the merged SACCO shall remain the same; information on any organizational changes in the SACCO (number of board members, new management positions, and or employees); procedures relating to any conversion of ownership shares in case the par values are different for each SACCO; procedures of transferring savings and loans to the continuing SACCO in case the products offered by each merging SACCO are different; procedures for merging the management information system if these are different; and any other important procedures or terms of the merger. (cf. regulations section 10.1 subsection 10.1.4 items i to xi).

The SRA requires the following documents to ratify the merger: minutes of the general or special meeting of the SACCOs approving the merger; pre-merger financial statements of the SACCOs planning to merge and a consolidated balance sheet, income statement, and delinquency list for the SACCOs as of the merger; documentation of the assignment of the merging SACCO’s assets, liabilities, and equity to the continuing SACCO; proposed changes to the continuing SACCOs by laws; and a combined list of members of the affiliating and continuing SACCOs. (cf. regulations subsection 10.1.5 sub items i to v)

The SRA is obliged to act on an application for a merger (approve or deny such a merger) within 30 calendar days of receipt of all necessary and required information. (regulations subsection 10.1.7)

A further pre-requisite for merging is that the SRA receives a 100% verification of member shares, deposits, and loan balances of each SACCO from the Supervisory Committee of each the SACCOs or their designee without the assistance of operational management. (cf. regulations subsection 10.1.9).

If the SRA denies any two or more SACCOs to merge, the SACCOs are entitled to receive grounds for such denial from the SRA. The merger is to be completed from within 6 months from the date of the SRA’s approval and is considered complete when the continuing SACCO receives the SRA’s approval and the merged SACCO’s registration is terminated.(cf. regulations subsections 10.1.10 to 10.1.12)

Section 24 subsections of the Statute provided for voluntary amalgamation of societies where two thirds of members of any two or more such societies approved such an amalgamation through a resolution two thirds majority of members present at the meeting. The Statute required that members of the two amalgamating societies received a clear notice of 15 days calling members for such a meeting. In the Statute, a creditor could object to a merger until his dues were fully settled, the proposed SACCO Act is silent on this.

The Statute on the other hand was silent on the issue of forced mergers.

13.2 Voluntary Liquidation

Members of a SACCO may by majority vote decide to voluntarily liquidate their SACCO; the SRA may also force a SACCO to liquidate; a SACCO may also be ordered to liquidate by an order of a court of law.

“A SACCO may liquidate voluntarily and wind up its affairs as provided in the Regulations.” (Section 13.35 Act subsection 1). A resolution with reasons recommending such liquidation must first be adopted by the board of directors and presented to the SACCO members. The SRA must be notified of the proposed action and a public notice is to be published to the effect.

The SRA may temporarily suspend the SACCO’s operations for a period of up to 30 calendar days if there is any appearance of bankruptcy or insolvency, or willful violation of the Act, or the SACCO is operating in an unsafe or unsound manner. A written notice of such suspension with reasons will be sent to the SACCO and upon receipt of such notice, the SACCO is under obligation to cease all operations with the exception of only those allowed by the SRA. The Board has a right to a hearing in which it can present a plan proposing corrective action in case it desires to resume operations of the SACCO. The Board may also request that the SACCO is immediately placed under liquidation and that a liquidating agent be appointed. (cf. the Act section 13.15 subsection 2-5).

13.3 Involuntary liquidation

The SRA may order and appoint a person to liquidate a SACCO where the SRA is of the opinion that a SACCO is in the long term not viable and there is no suitable or willing merger partner. A SACCO placed under liquidation is obliged to cease all deposit transactions as well as granting of loans. The liquidating agent will continue operating the SACCO until it has discharged its debts, paid any expenses, collected money owed to the SACCO plus performing all acts required to wind off the SACCO’s affairs. (cf. Act section 13.20 subsections 1-3).

The regulations provide for the general provisions for the voluntary and involuntary liquidation of SACCOs. According to subsection 11.1.2, the objective of the liquidation process is to rapidly settle the SACCO’s creditors in order to minimize losses. A SACCO may be liquidated under any of or a combination of the following circumstances: when two thirds of the members present at a general meeting or special membership meeting vote on the voluntary liquidation of the SACCO; when the SRA or court issues order court on the basis that the SACCO committed a serious breach of the law; when members in a general meeting decide to change or convert the SACCO’s legal status to another legal form; when the number of members falls below that required by the law; or when a SACCO is declared bankrupt by a court decision. (cf. regulation section 11.1 subsection 11.1.3).

Where the members in a general or special meeting positively vote to dissolve the SACCO, such decision should be communicated to the SRA within 14 days. The general meeting or special meeting affirming dissolution of the SACCO is also obligated to appoint a liquidation committee

to which may be delegated all or part of the SACCO board’s responsibilities. The Act also mandates the general or special meeting to authorize reasonable compensation to the committee for the services provided. (cf. regulation section 11.1 subsection 11.1.4 to 11.1.5). The liquidation committee or agent appointed to carry out the liquidation process is obliged to publish information pertaining to their work within a period of 7 calendar days from the date of their appointment. (cf. regulation section 11.1.10).

When the SRA approves the liquidation of the SACCO, the following process is to be followed: carrying out an inventory and examination of the SACCO’s assets; valuation of and sale of the said assets; allocation of sales earnings; and lastly completion of the liquidation process. Once the liquidation process is completed, the liquidation committee must within seven calendar days of the date of completion of the liquidation process submit a report to the SRA including SACCO liquidation balance sheet (containing zero balances for all accounts signifying that the SACCO has no remaining assets, liabilities, or equity). The entire liquidation process has to be completed within one year from the date the order to liquidate the SACCO was signed. However, where the process takes a shorter period than the one year prescribed, the term of the liquidation committee or agent may be terminated. (cf. regulation section 11.1.8 to 11.1.9).

Depositors holding passbooks with the SACCO under involuntary liquidation are deemed to have filed their claims for the amount of deposits posted in their passbooks. Once the liquidation process is completed, the SRA is required to make a public announcement confirming that the SACCO has been deleted from the SRA’s list of registered SACCOs; and thereafter cancel the registration of the SACCO (within 14 calendar days) after receipt of all necessary information and notify the SRA of such cancellation.

13.4 Conversions

The proposed Act provides for the possibility of a SACCO converting to a company or a company or any entity registered or incorporated under any law in Uganda to convert to SACCO. If such entity is registered under laws of another country, such entity must comply with the requirements of the country in which it is registered as well as the requirements of the SRA.

For a SACCO to convert to a company, the SACCO’s board must first adopt a resolution recommending such conversion to the members indicating reasons why such conversion is necessary. A notice recommending such conversion must be circulated to all members of the SACCO. The proposal to convert the SACCO to another entity has to be communicated to the SRA including a copy of a published disclosure notice. It is a requirement for the board to call a general meeting (giving members 30 days notice) of the members to inform them on the proposed conversion and to discuss the resolution to confirm such conversion. The SACCO must submit to the SRA minutes of the proceedings of the said meeting of members. (cf. section 13.25 subsections 1 and 2; section 13.30 subsections 1 to 6).

Governance, Safety and Soundness issues Allowing failed SACCOs to continue operating not only erodes the image of the SACCO movement, but can also makes members who have invested their shares and savings in the SACCO continue to lose their savings and investments. Providing for involuntary liquidation (having an external agency impose liquidation of the SACCO), is one way of checking that members do not continue putting their savings in a SACCO from which they will never recover those savings. Most importantly, voluntary or involuntary liquidation all call for ascertainment of all the SACCOs debtors. This is very important especially where the failure of the SACCO could have been occasioned not by external (for instance economic factors) but rather internal factors for instance mismanagement. Establishing who are holding the SACCOs funds in a way makes it possible for the members to recover those funds. This at least increases members and the public confidence in general that not all will be lost if they saved with SACCOs.

Part XIV: Supervision and Regulation of SACCOs

New in the proposed SACCO Act is the transfer of supervision and regulation of SACCOs from the department of cooperatives in the Ministry of Trade Tourism and Industry to the Ministry of Finance. The justification for this is that the Ministry of Finance has the capacity and skills required to carry out this task which the Cooperative Department does not have. The second reason given is that the Finance Ministry has a stake in the development of the financial industry in the country and therefore it is appropriate that the regulation and supervision of SACCOs falls under this ministry given their direct involvement in financial business. There have been counter arguments to the above position from among the cooperators who argue that moving an important sector of cooperative like the SACCO’s to the Finance Ministry alienates SACCOs from the rest of the cooperative movement. Instead of moving SACCOs to be regulated under the Finance Ministry, they argue, a special ministry for cooperatives should be set up which should be responsible for both regulation and supervision of SACCOS and all other types of cooperatives. (cf. recommendations of workshop participants (from Mukono, Wakiso and Mpigi Districts) on the Proposed SACCO Act and Regulations 2008, held at Colline Hotel Mukono from May 19th -20th, 2008).

Arguments for and arguments counter aside, the proposed SACCO Act places SACCO oversight under the Ministry of Finance, Planning and Economic Development (MFPED). Under section 14.10 Government Supervision, the Ministry of Finance, Planning and Economic Development (which has by the way been the lead agent in the preparation of the said Act) is responsible for overall registration, licensing, regulation, supervision of SACCOs and National Association of SACCOs under the proposed Act. Government will create an independent SACCO Regulatory Authority (SRA) to undertake the said mandate on behalf of the (MFPED) to which SACCOs will make all reports required as outlined in this paper.

General Powers of the Minister

The proposed SACCO Act confers the following powers to the Minister in relation to the management of SACCOs: prescribing the implementation of the SACCO Act and setting prudential standards for SACCOs; developing regulations that foster and maintain an effective

level of SACCO services and the security of members’ accounts; through the SACCO regulations provide guidelines requiring that SACCOs make timely reports to the SRA and providing penalties for non compliance; calling for inspection of or causing the inspection of SACCOs or the National Association of SACCOs or any critical service provided to SACCOs if there are any extenuating circumstances demanding such inspection. Where such an inspection is deemed necessary the Minister requires that the SACCO, its officers, employees and agents the SRA or his/her representative full access to all funds, securities, books, papers, records and other source documents under their control; a report of the findings is furnished to the board of the SACCO and within 30 calendar days of presentation such a report, the board to meet and consider the findings of such a report. The Minister can also accept an audit report on the SACCO in lieu of carrying out an inspection provided that such audit was carried out by an independent professional accountant or by a professional accountant (professionally accredited according to law) working for a National Association of SACCOs. The scope of an audit is to be prescribed by the SRA. (cf. Act section 14.15 subsections 1-3 (a)-(c)).

PART 15: GENERAL PROVISIONS

15.1 Documents and records

The proposed Act provides for the requirements pertaining to the administration of all the SACCO’s records and documents. All the SACCO’s books, records, accounting systems, and procedures are to be maintained in conformity with a program developed by the National Association of SACCOs (NAS) and approved by the SRA. The destruction of any such records can only be carried out in accordance with a schedule the NAS and approved by the SRA, prescribing times for retention of specific records. Certified photographic records of any SACCO constitute admissible evidence of the existence of such records. (cf. the Act section 15.10 subsections 1 to 3).

15.2 Criminal offences

The following constitute criminal offences which when committed by any SACCO officer, director, committee member, employee or agent thereof are actionable in a court of law or any

other such tribunal legally constituted to try such an offence. They include: an intent to deceive, falsify any books of accounts, reports statement, record or other document of the SACCO; signing, issuing, publishing, or transmitting to a government official any books of accounts, report, statement, record, or other document which the person knows to be false; knowingly obtaining a forged signature to a document with an intention to deceive; destroying any SACCO book of accounts, report, statement, record, or other document with an intention to deceive; engaging in a conflict of interest; failing to comply with a valid cease-or-desist order of the SRA; and failing to comply with SACCO Act or Regulations. (cf. the Act section 15.15 subsections 1(a)-1(g)).

On conviction of any of the offences listed above the offender is liable to a fine of 2 million (unit of currency not be defined) or imprisonment not exceeding one year or both, where no other penalty is provided for in the Act. Violating the provisions relating to the use of the name “savings and credit cooperative society” is an offence which when convicted attracts a fine or imprisonment. (cf. the Act section 15.15 subsection 2 and 3).

15.3 Exemptions

Section 15.20 subsection 1(a)-1(c) empowers the minister to reduce or remit certain taxes and fees levied upon any registered SACCO or class of registered SACCOs, including: duty or tax under any law for the time in force, which may be payable in respect of accumulated funds of the SACCO, dividends or other payments received by the members on account of funds accumulated in the SACCO; stamp duty chargeable to any SACCO or class of SACCOs executed by or on behalf of the SACCO by an officer or member relating to the SACCO’s business; any fee payable under any law for the time being relating to registration.

Where there is a division, amalgamation or the transfer of some or all assets of a registered SACCO, the Act empowers the Minister to remit the stamp duty with which, under any law for the time being in force; instruments executed by or on behalf of any such SACCO or any class of such instruments are respectively chargeable. (cf. the Act section 15.20 subsection 2).

15.4 Conflict of interest

The Act expressly prohibits any officer, director, committee member, agent, or employee of a SACCO from participating in any deliberations on any issue in which that person or the person’s immediate family member, or any company or organization he holds interest in, or the organization have a pecuniary interest in. The Act makes it a requirement for such person to disclose any conflict of interest to the board and/or the SRA. It is also in conflict of interest for an official of a SACCO engage in similar activities as a SACCO. (cf. section 15.25 (1)).

15.5 Compensation

Directors (other than a Secretary Manager serving as a director) or committee members are exempted from receiving salary payments from the SACCO, however, the SACCO may reimburse such directors necessary expenses incurred incidental to the performance of the SACCO’s business. (cf. section 15.30 (1)).

15.6 Insurance on Officials

The permits the board of directors to purchase adequate fidelity bond coverage for the Secretary Manager, and for other officers, committee members, employee or agents of a SACCO handling or having custody of SACCO funds. Insurance may be purchased by the SACCO on behalf of the above persons against any liability incurred by such person arising out of his/her official capacity provided such person acted honestly and in good faith with a view to safeguarding the best interest of the SACCO. (cf. 15.40 subsections 1 and 2).

15.6 The use of the name “Savings and Credit Cooperative Society”

Every registered SACCO is obliged to include the words “Savings and Credit Cooperative Society” in its official name. Names so similar to or identical with those used by other SACCOs that they could mislead or confuse are not to be adopted by other SACCOs. (cf. section 15.40 (1))

Only SACCOs registered under the SACCO Act are permitted to conduct SACCO business. The NAS or confederation of SACCOs, or an organization or confederation whose ownership consists primarily of SACCOs is authorized to use the words “Savings and Credit Cooperative Society” in its official name. (cf. 15.40 (2)).

Violations against the provisions of this section constitute a crime and are punishable by fines and/or imprisonment. The SRA may also petition the appropriate court to order a halt any violation of this section. (cf. 15.40 (3)).

Summary: Governance, safety and soundness issues

The requirement to maintain SACCO in accordance with NAS and SRA approved guidelines imposes a duty on SACCOs not destroy any document of the SACCO unless such document meets the requirement to be destroyed. Minutes of a SACCO for instance are permanent documents which can not be destroyed nor altered. The same is a true of a register of the SACCO’s members. This requirement prevents management of the SACCO to do away with records which they would rather elect to do away with because of possible incriminating evidence against such officers. Making it a criminal offence to destroy any SACCO records acts as deterrent for any would be errant officers. The provision to exempt SACCOs from certain taxes and fees in certain circumstances should help SACCOs build on their reserves that could be used to absorb shocks during potential hard times in future; provided of course that the SACCO’s philosophy goes beyond maintaining minimum capital levels so as to achieve higher levels of returns on equity. Under these circumstances, the SACCOs return on equity could rise rapidly but this rise might be a symptom of a shrinking equity. SACCO leaders are expected to avoid any conflict of interest situations in the conduct of the affairs of the SACCO. This requirement will contribute positively not only good governance but also to safety and soundness of SACCOs.

Observation: A SACCO’s future earnings or even its capital can be adversely impacted by business decisions or their implementation. This type of risk is known as strategic risk and it is a function of a SACCO’s strategic plan and its markets, talents, abilities, resources, and its resolve. One of the tools the SRA is most likely to use in analyzing a SACCO’s risk will be the SACCO’s strategic plan. A SACCO that will not have a strategic plan could have unacceptable levels of strategic risk due to lack of attention to external factors that could very easily impact its future. The presence of a strategic plan that is guiding the SACCO in its operations is thus one of the safety and soundness measures. It is therefore important that all SACCOs are obliged to make it a practice to develop and implement such strategic plans and this can be included in the law. As a monitoring tool, the SRA for instance would be using the strategic plan to check: Whether management is engaged in a systematic process that defines management’s course of action that assures that the SACCO will prosper in the next two to three years; Whether there is a systematic process carried out through the development of a strategic plan incorporating all the SACCO’s areas of operation, including setting of broad goals, such as capital accumulation; Whether there is a systematic process that will enable the SACCO to make sound decisions and help identify risks and weaknesses that may be amplified in hard economic times; and Whether the strategic plan is the basis for a business plan covering the next two or three years.