PricewaterhouseCoopers (PWC) carried out a forensic audit of the Kenya Union of Savings & Credit Co-operatives (KUSCCO) books. The audit revealed that there was cooking of books by top-level officials, which resulted in non-performing loans totalling KSh.3.7 billion, overstated profits of nearly KSh.798 million over the last six years, irregular commissions amounting to KSh.2.7 billion, and mismanagement of the central finance fund to the tune of KSh.1.3 billion.

The State Department of Cooperatives and Micro, Small, and Medium Enterprises (MSMEs) officially handed over a forensic audit report on KUSSCO to national security agencies to carry out investigations. While the government does not direct security agencies, it expects them to take appropriate legal and administrative actions, including criminal investigations and potential assets recovery. The loss of funds through mismanagement has led to Saccos breaching global accounting standards over the decision to cover the loss of funds through KUSCCO fraud.

Breach of IFRS 9

IFRS 9 of the international accounting standards requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or liability at its fair value plus or minus, in the case of a financial asset or  liability not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. This provision requires that financial entities, in this case Saccos and Cooperatives, report any losses on loans to the regulating bodies. 

To circumnavigate these losses, SASRA has mandated Saccos to set aside the IFRS Provisions and instead ordered that Saccos and cooperatives provision them.  Some top Saccos have set aside partial funds or provisions to cover the expected loss of billions of shillings worth of deposits and shares at KUSCCO. This position has been criticised by the Institute of Certified Public Accountants Kenya (ICPAK), which has stated that it was not involved in the decision to provide cover for losses at KUSCCO – this is also a violation of accounting standards.

SASRA has defended its position, stating that insisting on upfront provisions would have triggered a run on the co-operatives’ deposits.  It further said that compliance with IFRS 9 is not possible as this could cause a run on Sacco deposits and risk the institution as a going concern. Some Saccos like Qona, Sheria, Nyati and Mhasibu have breached the standards and made the provisions up-front, while others have spread their risk over two to three years.

There has also been opposition from Nyati Sacco against SASRA, which has filed a lawsuit against the authority. It argues that the guideline not only inappropriately attempts to protect KUSCCO from its financial responsibilities but also contradicts the primary objectives of the Sacco regulator. It claimed that, while the guideline mentioned KUSCCO Ltd was experiencing financial difficulties, it failed to reference any credible source for these claims. Nyati Sacco highlighted that SASRA mandated the immediate implementation of this guideline. The G4S Kenya-affiliated Sacco had invested funds in KUSCCO, set to mature on April 30, 2024. The Central Finance Fund’s deposits included shares (6,900 at KSh.100), totalling KSh.690,005, Jungu Kuu Savings amounting to KSh.4.1 million, and a special Sacco deposit of KSh.86.4 million. Nyati Sacco expressed that, upon maturity, it intended to withdraw the funds, but KUSCCO reportedly withheld them without providing a convincing explanation.

Compelling Saccos who have invested with KUSCCO to write off the investments would destabilise the financial institutions in the long run as they made the investments on the assumption they would realise returns. 

What next for Saccos?

Engagement with ICPAK: SASRA needs to work with ICPAK to review and clarify the accounting standards, particularly handling provisions for bad loans and losses. It is important that both bodies are aligned on a  regulatory approach and that there is clear guidance on handling such crises in the future. This would also avoid any future breaches of international standards from the Authority down to the individual Sacco.

Rehabilitation of SASRA and KUSCCO images: There needs to be a clear, transparent communication strategy for Saccos, their members, and the public. This includes providing regular updates on the investigation’s progress, legal proceedings, measures being taken to resolve the issue, and how Saccos are managing provisions. The government and SASRA should engage directly with Sacco members and the general public to rebuild confidence in the cooperative sector, which may have been shaken by this crisis.

SASRA and KUSCCO should issue statements that explain the steps being taken to resolve the crisis, including the investigation, asset recovery, and efforts to stabilise the financial position of affected Saccos. This transparency is essential in ensuring that members and investors understand the situation to  make informed decisions.

In conclusion, the crisis at KUSCCO highlights significant governance and financial management challenges within Kenya’s Sacco sector, requiring urgent and coordinated actions from regulatory bodies, financial institutions, and government agencies. The immediate focus should be on legal accountability for the mismanagement and fraud, as well as ensuring financial stabilisation through proper provisioning and liquidity support.

SASRA must balance the need for regulatory compliance with the practicalities of safeguarding Saccos’ financial health. Long-term reforms, including stronger oversight, improved accounting standards, and enhanced governance structures, will be vital to restore trust and prevent future crises in the cooperative sector. Transparent communication, legal accountability, and strategic financial management will be essential in navigating this crisis and rebuilding the sector’s stability and credibility.