High dividends or low loan rates? The time to choose is now

By James Wambua

Across Kenya, Saccos have been one of the key pillars of financial inclusion with many citizens saving and getting loans at very competitive rates.

The industry is modeled such that every person who transacts with a Sacco must first and foremost become a member by subscribing in line with the set minimum shareholding rules.

This membership is usually configured to accommodate both natural persons’ as well as legal persons such as corporate or unincorporated entities as set out by the Co-operative Societies Act.

One of the greatest advantages that the Kenyan Sacco lending model has over other financial institutions is the fact a significant proportion of their lending is usually anchored on the collateral of non-withdrawable amounts of savings of potential borrowers.

This non-withdrawable cash is legally not accessible to the member for withdrawal, save for when the person is severing their membership.

According to the cooperatives industry survey 2020, Deposit-Taking Saccos made KSh30.61 billion payments as interest expense on deposits representing 35.58 percent of their total income.

Every reporting cycle, Sacco members, having invested the minimum prescribed share capital therein, expect to earn dividends whenever surpluses are declared.

As a result, the members derive financial benefits through interest on the deposits held, and as owners, through dividends paid for the shares they control.

In 2020, DT-Saccos in Kenya paid on average 6.01 percent interest on deposits this being a decrease from the 6.72 percent rate earned by savers in the previous year. The dividends earned on the share capital held by DT-Saccos was 8.26 percent in 2020 compared to 9.11 percent in 2019, the survey shows.

The drop in the rate of dividends paid was attributable to the need by the financial institutions to conserve their cash reserves to buffer against uncertainties in the face of headwinds triggered by the Covid-19 pandemic.

According to early available data from last year’s performance, nearly all Saccos have resumed paying higher dividends.

The latest financial records for a vast majority of societies show that societies are making competitively higher cash disbursements to members for the fiscal period ended December 2021 with many of them wiring double-digit rates of returns.

While many of the Saccos attribute the increased payouts to their uptick in profitability as well as a rebound in the economy, it might be wise to start recalibrating on a model that benefits the members even better in the long term.

Part of the reason for the adoption of high payouts is informed by the race among Saccos to attract membership simply on account of which institution declares the highest dividend.

In a way, however, the market risks shifting its focus away from its primary goal: mobilizing savings and providing credit affordably to members.

Take for instance a farmer in Keiyo or a teacher in Taita Taveta, who has struggled for years to mobilize KSh1 million in share capital with his Sacco.

Assuming his Sacco runs with a dividend policy of 10 percent per annum, he will only be looking forward to a KSh100,000 cheque at the end of the trading cycle.

With a cheaper loan rate policy, however, the same farmer or teacher would be encouraged to go for a KSh4 million home loan that would see him become wealthier and more fulfilled in life other than KSh100,000 that barely addresses his investments’ needs.

With a friendlier loan rate regime than we have today, members are likely to develop themselves more than in a market where some societies go to the lengths of locking themselves in huge commercial debt so as to appease savers by declaring the highest dividend.