Skip to content
Entrepreneur's Corner

Why Banks Should Fear And Why Every Entrepreneur Needs A Sacco Account

BY Steve Biko · October 15, 2024 08:10 am

KEY POINTS

Banks have historically leaned on stringent lending terms, sometimes alienating entrepreneurs who need quick and flexible credit options. Conversely, Saccos’ approach to credit is built around member-centric principles, which ensure loans are more accessible and less financially burdensome. 

KEY TAKEAWAYS

The disparity in lending terms between Saccos and banks also emphasizes the need for the banking sector to reassess its approach. Banks’ high-interest rates have become a deterrent, with borrowers now preferring the cost-effective loans offered by Saccos. If banks do not reduce their rates or streamline their loan approval processes, they may find themselves facing an irreversible exodus of customers to Saccos.

As we delve into the recent data from the Central Bank of Kenya, a clear trend emerges: Saccos (Savings and Credit Cooperatives) are outpacing traditional banks in loan disbursements. Within the first eight months of the year, Saccos issued loans totaling Ksh 746 billion, surpassing commercial banks’ Ksh 703 billion. This shift signifies a rising preference among borrowers, especially entrepreneurs, to rely on Saccos rather than banks. For entrepreneurs, who often struggle to secure affordable credit, this trend represents a lifeline, while banks must contend with an undeniable shift in borrower behavior.

The appeal of Saccos lies in their lower interest rates, often averaging around 12 percent, compared to the high double-digit rates typically charged by banks. The banking sector has maintained interest rates in the 20s, making borrowing costly for individuals and small businesses alike. As Saccos become an attractive alternative for credit access, they are reshaping the competitive landscape, positioning themselves as the go-to choice for cost-effective financing. This competition could spark a much-needed shift in the banking sector’s approach to credit, but without adaptation, banks risk losing a substantial segment of their loan market.

Banks have historically leaned on stringent lending terms, sometimes alienating entrepreneurs who need quick and flexible credit options. Conversely, Saccos’ approach to credit is built around member-centric principles, which ensure loans are more accessible and less financially burdensome. Saccos offers tailored lending solutions that resonate with the financial needs of small and medium-sized enterprises (SMEs), providing an edge that commercial banks lack. For entrepreneurs, the decision to turn to Saccos is one of pragmatism—affordable credit enables them to grow their businesses without crippling debt.

The impact of Saccos’ rising prominence is also visible in the significant loan disbursements made to small business owners. As Saccos deployed Ksh 746 billion in loans, much of it has been absorbed by entrepreneurs and SMEs, who form the backbone of Kenya’s economy. In contrast, banks issued Ksh 703 billion, reflecting a relatively stagnant or even contracting loan book in the face of rising credit demand. With these numbers in mind, one can foresee the trajectory of Saccos growing as a key player in Kenya’s financial sector, especially if banks fail to recalibrate their approach to meet the needs of small businesses.

Another critical factor setting Saccos apart from banks is the non-performing loan (NPL) rates. Commercial banks have experienced an increase in NPLs, driven partly by their lending model, which prioritizes large corporate clients and high-risk borrowers over SMEs. Saccos, benefiting from a member-focused lending model, reports comparatively lower NPLs, as their lending practices are built on collective responsibility and peer accountability. This risk mitigation mechanism allows Saccos to maintain healthier loan books, offering reassurance to entrepreneurs about the stability of Sacco lending.

Read Also: NCBA Partners With SACCOs On Strengthening Cybersecurity Measures

Regulation within the banking sector poses another challenge that banks grapple with, often limiting their flexibility in terms of interest rates and loan terms. The Sacco sector, while regulated, enjoys a degree of freedom that banks do not, allowing them to remain competitive in loan pricing. This flexibility has enabled Saccos to thrive and respond effectively to market demands. However, as Saccos grows, there is a need for regulatory frameworks that can protect members’ deposits while still allowing for operational efficiency. Balancing regulation with freedom is crucial to ensuring the stability of this burgeoning sector.

Predicting the future trajectory of the financial landscape, if banks continue with their current model, Saccos will likely dominate the credit market within the next five years. Entrepreneurs will increasingly turn to Saccos, leading to an ecosystem where traditional banks serve only a niche segment. This potential dominance is not just conjecture; it’s based on current growth patterns and the unsatisfied demand among SMEs for accessible credit. As Saccos evolves, they may start offering even more diverse financial services, transforming into a full-fledged financial institutions.

A significant part of Saccos’ success stems from the community-driven model that fosters trust and mutual accountability, something banks struggle to replicate. For entrepreneurs, this translates to a more supportive financial environment where they are treated as members rather than mere clients. Saccos’ commitment to reinvesting in their communities further deepens this trust, giving entrepreneurs confidence that their money is being managed responsibly.

The Sacco model also promotes financial inclusivity, welcoming members from various socio-economic backgrounds, including those who might be deemed too high-risk by banks. This inclusivity enhances financial resilience among entrepreneurs, as it provides a safety net that banks fail to offer. The role of Saccos in supporting grassroots financial growth is a testament to their value in Kenya’s economy, especially as banks face criticism for sidelining smaller clients in favor of larger, more profitable accounts.

In terms of technology, banks have traditionally held an advantage, with robust digital platforms that facilitate online banking, mobile apps, and other tech-driven solutions. However, Saccos is catching up, investing in digital platforms to improve service delivery. As Saccos modernize, they are likely to capture a broader market, particularly among tech-savvy entrepreneurs seeking the convenience of digital banking combined with affordable credit options.

Read Also: Oparanya Calls On Saccos To Diversify Their Investment Portfolio

The disparity in lending terms between Saccos and banks also emphasizes the need for the banking sector to reassess its approach. Banks’ high-interest rates have become a deterrent, with borrowers now preferring the cost-effective loans offered by Saccos. If banks do not reduce their rates or streamline their loan approval processes, they may find themselves facing an irreversible exodus of customers to Saccos. The trend indicates a shift in borrower loyalty, where entrepreneurs are prioritizing financial sustainability over brand allegiance.

Saccos have not only filled a gap in credit provision but also contribute to financial literacy by encouraging members to save and invest responsibly. Many Saccos incorporate financial education programs, equipping members with the knowledge needed to manage their finances prudently. For entrepreneurs, this added value is invaluable, as it prepares them for long-term financial success, something banks rarely prioritize.

As we examine the trajectory of Kenya’s financial sector, it’s evident that the Sacco movement is not a passing trend but a growing revolution. With continued member-centric services and competitive loan products, Saccos could very well reshape the financial landscape. If current growth rates persist, the future may see Saccos stepping in as the primary source of affordable credit, particularly if banks remain rigid in their high-interest lending structures.

Banks must adapt by recognizing the unique needs of SMEs and recalibrating their offerings. Failure to do so may result in an irreversible shift where Saccos take over as the backbone of Kenya’s financial ecosystem. For every entrepreneur looking for affordable credit and community-focused support, a Sacco account may soon be not just an option but a necessity.

Read Also: Stima Sacco Marks 50 Years Of Empowering Lives In Kenya

Trending Stories
Related Articles
Explore Soko Directory
Soko Directory Archives