Shock As Kenyan Saccos Are Taking Bank Loans To Pay For Dividends To Their Members

The practice of Saccos borrowing loans to pay dividends is a glaring red flag for financial mismanagement that jeopardizes the fundamental principles of cooperative movements. Saccos are designed to promote financial inclusion by pooling member resources and generating returns through prudent investments.

When management resorts to debt to sustain dividends, they distort the very purpose of these institutions, transforming them from vehicles of empowerment into fragile entities teetering on financial collapse.

This approach undermines the financial stability of Saccos, creating an illusion of profitability while burying the institution deeper into debt. Borrowing to pay dividends is not only unsustainable but also a betrayal of member trust.

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Members entrust their savings to Saccos, expecting transparency, accountability, and prudent financial management. The decision to use loans for dividends breaks this trust and creates a ripple effect of disillusionment, with members likely to withdraw their savings en masse, further destabilizing the cooperative.

Such actions also represent a gross deception in financial reporting. By paying dividends through borrowed funds, Saccos presents an artificial picture of profitability, concealing underlying losses and inefficiencies. This deceptive practice misleads members, potential investors, and regulators, making it difficult to identify struggling institutions before they collapse entirely. The fallout from such collapses affects not just individual members but also the broader financial ecosystem, given the sector’s significant role in holding over KES 1 trillion in member deposits.

The implications extend beyond individual Saccos to threaten the entire cooperative sector’s reputation and stability. Saccos are pillars of financial inclusion, particularly in underserved communities. Allowing them to engage in reckless practices like borrowing to pay dividends risks systemic instability and undermines the broader financial inclusion agenda. It is not just poor judgment; it is a deliberate act of incompetence that signals a lack of internal controls, sound leadership, and adherence to cooperative principles.

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For these reasons, the call to hold Sacco management accountable is both urgent and necessary. Mismanagement of this nature must be met with severe consequences to protect members’ hard-earned savings and restore confidence in the sector. The government’s directive to jail Sacco leaders who engage in such practices is a step in the right direction. However, this must be accompanied by robust regulatory reforms, including mandatory audits by competent, reputable firms capable of handling the complexities of Sacco’s finances. Audits should not be mere compliance exercises but critical tools to detect and deter financial mismanagement.

The ongoing discussions around the Cooperatives Bill 2024 provide an opportunity to introduce safeguards that prevent such malpractice. This legislation must enforce strict financial oversight, require transparency in financial reporting, and ensure that all Saccos, regardless of size, are adequately supervised. Additionally, the ministry’s emphasis on cybersecurity and modern financial technologies should complement efforts to strengthen internal controls, making it harder for mismanagement to go undetected.

At its core, this issue is not just about poor financial decisions; it is about leadership failing its mandate to serve the interests of members. Borrowing to pay dividends is akin to a business cannibalizing itself for short-term gain, leaving behind a trail of destruction that affects millions of Kenyan families. This level of incompetence must not be tolerated. Management teams engaging in such practices should not only be jailed but barred from holding leadership roles in any financial institution. This sends a strong message that the cooperative movement is not a playground for reckless decisions but a cornerstone of Kenya’s economic resilience.

The cooperative movement holds immense potential to drive economic growth and financial empowerment, but this can only be realized if Saccos operates with integrity and sound governance. Borrowing to pay dividends is a betrayal of these principles, and any management team engaging in this malpractice must face the full force of the law. It is time to set a precedent that protects members and ensures that Saccos remains a trusted institutions of financial empowerment, not a vessel for incompetence and deceit.

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