#74 - Is it a Heist or Systemic Default: The Kenyan SACCO Crisis

Why mismanagement is baked into the Kenyan Sacco Industry, Why it's struggling in the 21st century and what the future looks like with Fintech in the Picture

Illustrated by Mary Mogoi - Website

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TL;DR
Kenya’s Savings and Credit Co-operative (SACCO) sector is beset by systemic fraud and mismanagement, epitomized by the recent KUSCCO scandal. Historically, SACCOs grew under strong state support when mainstream banks excluded lower-income Kenyans, but as Kenya’s banking and fintech sectors modernize—with digital loans, money market funds, and user-friendly bank products—SACCOs’ traditional advantages are fading. Large-scale SACCOs suffer from principal-agent failures and weak regulation, leading to recurrent theft and questionable governance. While small, trust-based co-operatives and informal rotating groups (Chamas/Tontines) still have value, Kenya’s evolving financial landscape indicates that SACCOs, unless regulated like banks or fundamentally reformed, face a bleak future in competition with more innovative, technology-driven finance solutions.

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Introduction

“I am, at the Fed level, libertarian; at the state level, Republican; at the local level, Democrat; and at the family and friends level, a socialist.If that saying doesn’t convince you of the fatuousness of left vs. right labels, nothing will.” - Nassim Taleb

In a twist of extreme irony, two years ago the Kenya Union of Savings and Credit Cooperatives (KUSCCO) posted an article on its website called “*State warns on Sacco fraud as Kuscco marks 50 years”. In the article, the Minister of Cooperatives in an event meant to mark the Golden Jubilee of KUSCCO, warned of fraud in the cooperatives sector and how the government will take stern action. ​KUSCCO, established in 1973, is the apex organization for Savings and Credit Co-operatives (SACCOs) in Kenya, providing advocacy, financial, and technical assistance to its members. Two years later, it has come to light that KUSCCO has engaged in the mother of all cooperatives fraud with executives from the organisation stealing over US$ 100 million from the organisation over a decade. That’s US$ 10m a year from an organisation whose balance sheet is a shade over US$ 200m. Whilst it's tragic to the cooperative movement in Kenya which is the largest cooperative movement in Africa and the seventh largest in the world, it’s a wake up call to the entire country about the future of the cooperative movement. Nassim Taleb’s quote comes in here, whilst the spirit of cooperation is critical, Nassim reminds us that this spirit works better at a micro level. As things scale, it’s better to trust the spirit of shared incentives such as the profit motive.

When I started my career all those years back, my mom was encouraging me to join a Sacco as this was the way her generation got ahead. In the 70s, 80s and 90s, Saccos enabled Kenyans to get an education, build houses and get access to decent financial services. It was therefore extremely logical for her to encourage her son to join a Sacco. My career started off in financial services particularly asset management and the logic did not add up for me. It was the 2010s and banking in Kenya had grown in leaps and bounds. Banks had sales staff camped across the city hawking not only accounts but loans. Moreover, retail financial services, particularly the ability to open stock brokerage accounts and mutual funds, was getting easier. In the company I worked for, one could open a Money Market Fund with as little as 2 dollars. As a young man with a bit of financial literacy, it was clear to me that the financial system in Kenya could enable me to achieve my goals. I wasn’t excluded and therefore the idea of joining a Sacco didn’t make sense to me.

This insight has always been at the back of my mind. Are Sacco’s going to make it? Is there a role for Saccos in a modern financial system?. Why does this issue matter for a Fintech newsletter? I recently wrote an article that went slightly viral about How to Evaluate a Fintech Market. The underlying thesis was that, the bigger the scale of market failure in a specific market, the bigger is the Fintech opportunity. Stablecoins are growing like a wildfire in Nigeria because of a broken FX market. Payment companies are growing in Egypt due to a bank-led payments market. Understanding fundamental issues such as the savings and credit market in a country enables founders, investors and incumbents to think clearly about how to approach the market.

In this week’s article, we will discuss the Sacco market in Kenya. We’ll go into how the Sacco movement grew in Kenya, the current state of the Sacco industry, the factors that are leading to massive theft and racketeering in the industry, the factors that are weakening their value proposition and what this all means for builders in the space.

History of Co-Operatives

Source: British Broadcasting Corporation

Co-operatives movements trace themselves back all the way to European co-operatives in the 19th century. These movements cropped up in newly industrialised countries like the UK and Germany as a result of modern working class citizens banding together to create support systems that would offer protection in the event of emergencies. In 1844 in particular, a group of 28 artisans and weavers formed the Rochdale Society of Equitable Pioneers. Struggling with poor wages and exploitative merchants, this group pooled their savings to establish a consumer co-operative store. They sold basic goods like sugar, flour, butter and oats. A key part of this story is that they formed the Rochdale Principles which remain a bedrock of the modern cooperative movement. Rooted in the Rochdale movement, these cooperative principles emphasize open membership, democratic control, shared economic participation, autonomy, education and training, cooperation among cooperatives, and a commitment to community well-being.

In Germany, Friedrich Wilhelm Raiffeisen (1818–1888) and Hermann Schulze-Delitzsch (1808–1883) pioneered credit co-operatives. Schulze-Delitzsch founded the first urban credit co-operative in the 1850s to help small artisans access affordable loans. Raiffeisen created rural credit unions in the 1860s, allowing farmers to pool savings and lend to one another, reducing reliance on loan sharks. These co-operative banks later inspired credit unions and SACCOs worldwide.

These later spread to France through “Mutuels” and the Catholic Church played a key role in the spread of co-operative movements in Italy. A key element of the co-operative movements was that they enabled co-operation and shared prosperity models particularly for people who had something in common particularly the type of communication. For instance, the Rochdale Society brought artisans and weavers. Similarly agricultural co-operatives cropped up as did mining co-operatives. It’s critical to keep this in mind when looking at modern Saccos.

Early Days of Co-operatives in Kenya

In Kenya, the unifying factor was agricultural co-operatives in a pre-independence era. These were co-operative movements based on white settler farmers who decided to unite under co-operative models to finance agricultural inputs and the distribution of their crops. The first co-operative was established in Lumbwa, present day Kipkelion. At the time, membership to co-operative movements was limited to white farmers only. In 1944, this was opened up to Africans and was enhanced by an ordinance in 1945, formally recognising African cooperative movements. In 1953, the Swynnerton Plan enhanced African participation in cooperatives as government policy. This is a critical point that helps one to understand why Kenya was such a core market for cooperatives. The Swynnerton plan was centred around driving the growth of African agriculture particularly cash crops which were a critical element for post-colonial trade engagement. Europe wanted coffee and tea in raw form as well as other crops such as pyrethrum to power their industries. To achieve this goal, it was important that Africans moved away from subsistence farming and towards cash crop farming. This required infrastructure, not only the infrastructure to get tea into the hands of British tea processors, but also the infrastructure to enable African farmers to access the inputs they need to produce.

Michael Blundell, Colonial Minister of Agriculture with Future President Mwai Kibaki and the late Kenneth Matiba - Blundell played a key role in implementing the recommendations of the Swynnerton Plan - Source The Standard

The Swynnerton plan set in motion the cash economy in Kenya as an entire swath of farmers now engaged in the modern trading economy. They earned cash and this cash was meant to enable them to cover their daily living expenses. The growth of not only Saccos but also Kenya’s internal remittance economy and subsequently M-Pesa can be traced back to such colonial economic policy. In a cash based trading economy, the demand for savings and loans would be high and Saccos would have a key role to play.

Post-Independence and an Aggressive Push Towards Co-operatives

‘If any society is to develop it must have capital for investments and this cannot come from without entirely but must also come from within . . . those who conceived this idea of forming a Co-operative Savings and Credit Society were not only trying to take care of financial problems but also trying to help in the Nation building. ‘Salary and wage earners in the urban areas who have so many demands on their earnings are faced with very many acute money problems and many find it extremely difficult if not impossible to make both ends meet in providing for their own needs and that one of their families. It is this connection therefore that this type of Co-operative Society may be of the greatest help.’ Speech by Masinde Muliro - Source FSD Research

As Kenya gained independence, the government saw co-operatives as a way of not only raising capital but unifying the country. Saccos could be used to unify people beyond their tribal groupings and create a sense of national solidarity. A number of deliberate actions by the government saw the expansion of the Sacco movement;

1. The government wanted to encourage savings to contribute to national development. A deliberate action was taken to use the term “Saccos” rather than credit unions as Savings had to come ahead of Credit;

2. It was decided to expand the market for Saccos beyond the agricultural sector to urban wage workers. In 1969, the government drove a program to encourage all government and parastatal workers to join Saccos. This saw the creation of Saccos such as Harambee Sacco (Civil Servants) and Mwalimu Sacco (Teachers). The task for driving the creation of Saccos fell under the Ministry of Co-operatives;

3. In addition to collecting savings, it was important to encourage saccos to lend to Kenyans as urban living created demands on peoples wages. People needed credit for personal growth such as buying land, building and financing education. Almost all urban Kenyans born in the 70s and 80s can trace their education to some form of Sacco finance;

The Boom of SACCOs (1980s - 1990s)

By the 1980s, SACCOs had transformed from small savings clubs into integral financial institutions within Kenya’s economy. Membership numbers surged:

Source: FSD Research

Co-operative officers received letters from groups of employees, asking for advice on creating SACCOs. They were also contacted by employers who wanted to help their staff create SACCOs. SACCOs were a popular movement – not just an official policy. In fact, officials in the Ministry of Co-operatives refused to register some of the suggested SACCOs, on the grounds that they thought they might not be stable. In particular, it became the policy that what was called the ‘common bond’ – the sense of community which all the members of the SACCO must share – should always take the form of working for a single employer. This policy was not rigidly enforced, but some groups who sought to create SACCOs were refused registration because officials decided that the common bond was simply not strong enough. - FSD Report on Saccos

SACCOs were no longer just urban wage earners’ institutions—farmers, transport workers, and religious groups also started their own SACCOs through an aggressive recruitment push by the Ministry of Co-operatives. At this period, the ministry was very strict on who could form Saccos and a core factor was that everyone had to either work in the same organisation or industry. These common bonds were thought to be critical for driving positive repayment behaviour.

“SACCOs have enabled a lot of workers to be able to purchase, at least, a house for themselves.” - Kenya National Assembly Debates, 1982

‘most of these co-operative societies have sprung up because of the difficulties or problems that wananchi (common citizens) face when they want to borrow money from the commercial banks’ - National Assembly Debates 1968

With government endorsement, SACCOs became workplace staples. New employees would be strongly encouraged (if not pressured) to join workplace SACCOs for financial security.

However, challenges emerged:

• Loan defaults: With no collateral required, SACCOs relied on members’ sense of community responsibility to ensure repayment. However, some borrowers fled their obligations, leading to liquidity problems.

• Mismanagement & corruption: Some SACCO officials gave themselves oversized loans and failed to repay, leading to collapses and mass member exits. A report from Thika Clothing Mills in the 70s showed that “In this society loans have been given that were never recovered since 1971/72. The former chairman . . . gave himself a loan in the tune of Shs 19,790/- which he stopped payment on 1st August 1973. From that date he has made no loan repayment or any share contribution at all. His share contribution stands at 3,100/- . Due to his bad management, so many members have inevitably resigned from the society.”

• Government withholding of check-off funds: Government and parastatal employers deducted SACCO contributions from workers’ salaries but failed to remit them, causing financial crises in some SACCOs.

Workers at the Thika Clothing Mills in the 70s - Source Thika Clothing Mills

These cracks in governance and accountability led to the establishment of the Kenya Union of Savings and Credit Cooperatives (KUSCCO) in 1973, which aimed to train SACCO officials and provide oversight. However, KUSCCO itself struggled financially and was later taken over by the government in 1982. It was meant to be the lender of last resort to Saccos.

Liberalization & SACCOs’ Growing Pains (1990s - 2000s)

By the 1990s, Kenya underwent economic liberalization, and the government withdrew direct support for SACCOs.

"The government will no longer be involved in their day-to-day management as has hitherto been the case." - Sessional Paper No. 6 of 1997

This “hands-off” approach had mixed results:

• Positives: SACCOs expanded rapidly, filling the gap left by failing commercial banks.

• Negatives: Without government oversight, mismanagement worsened, and some SACCOs collapsed due to risky investments in real estate ("plaza mania").

However, despite financial sector modernization, SACCOs remained indispensable to Kenyans. At this period one must remember that banks were turning away Kenyans. There was an episode in the 90s where Barclays turned away every Kenyan who had less than KES 100,000 (US$ 1,000) in their bank account. People lined up to pick up the “little money” they had and go find an alternative. It was a moment of extreme embarrassment for Kenyans and Barclays never really recovered from a reputational perspective. Despite the increasing incidences of Sacco theft and collapse, they were the only game in town.

"People do not like banks... SACCOs are more friendly. You work with them, you eat with them." - Interview done by FSD

This emotional attachment kept SACCOs resilient, even as mobile banking and microfinance institutions emerged.

Modernization & Regulation (2010 - Present)

By the 2000s, SACCOs had evolved into major financial players, prompting calls for stricter regulation. The SACCO Societies Act of 2008 created the SACCO Societies Regulatory Authority (SASRA), tasked with professionalizing the sector. Saccos were central to the Kenyan condition but it was an industry plagued by mismanagement and liquidity challenges. The government had to come up with a way of formalising the sector and creating structure. It would have been more logical to convert Saccos into banks but Saccos were an entire polity unto themselves.

"If SACCOs are regulated like banks, what makes them different?" - National Assembly Debate, 2008

Key changes:

• Separation of deposit-taking SACCOs (DT-SACCOs) and non-deposit-taking SACCOs.

• Stricter financial reporting and capital requirements.

• Reduction of risky lending practices through new governance structures.

This new regulatory framework helped stabilize SACCOs, but challenges remain:

• Some SACCOs struggle to meet compliance requirements.

• Digital banking and fintech competition are reshaping how SACCOs operate.

• The risk of consolidation, as smaller SACCOs might be absorbed by larger institutions.

Today, Kenya has over 10 million SACCO members, demonstrating their enduring importance. Moreover, the total asset base of Saccos in Kenya is over US$ 21 billion with over 8,700 saccos both registered and un-registered. In terms of regulated Saccos, the number is 359 Saccos with a balance sheet of US$ 7billion.

The Sacco Headache and the Challenges Facing Them

This walk down memory lane is useful for it points out some key elements that have shaped the current Sacco industry in Kenya;

1. The government played a key role in its growth and therefore is emotionally and politically invested in ensuring the survival of the industry;

2. With over 10 million members, the Sacco industry has “Too Big To Fail” dynamics at least politically;

3. The industry has had a history of mismanagement and default almost from the very beginning;

4. The core conditions that enabled the industry to thrive included a traditional financial industry that was exclusive to the ordinary Kenyan. This dynamic has changed.

It’s therefore useful to review the factors in my view that drive my conviction about Saccos not having a key role to play in the future and what makes them so prone to mismanagement. The KUSCCO scandal is just but a micro-cosm of a larger issue. In 2020, Harambee Sacco, a civil servant Sacco had a US$ 30m gap in its books due to loan loss provisions that didn’t exist. Of its then US$ 80 million loan book, only 14.5% was actually performing. Over 10 years ago, Mwalimu Sacco, which represents teachers, engaged in a botched adventure where they sunk teachers' savings to buy a bank. This adventure ended in disaster leading to losses of close to US$ 20 million for teachers. So why are all these Sacco’s failing and what are the lessons to learn? It’s lazy to say that Sacco leadership is corrupt and they should do better. You always have to dig deeper. Why are banks well-run whilst they recruit from the same national pool of workers? Why do Nigerians in the US produce great doctors and technologists whilst Nigeria as a whole is mismanaged? It’s always lazy thinking to say “X People are bad”.

A Fundamental Principle-Agent Problem