Liabilities Management in Co-operatives Sector By CPA Peter Waithaka Kariuki
CO-OPERATIVE PRINCIPLES (i) Voluntary and open membership (ii) Democratic member control (iii) Economic participation by member (iv) Autonomy and independence (v) Education, training and information (vi) Co - operation among co - operatives (vii) Concern for community in General
OBJECTIVES FOR WHICH CO- OPERATIVES ARE FORMED (i) To promote thrift among its members by affording them an opportunity for accumulating their savings and deposits and providing them with credit exclusively for provident and productive purposes, at fair and reasonable rate of interest; thereby enabling them to use and control their money for their mutual benefit.
OBJECTIVES FOR WHICH CO-OPERATIVES ARE FORMED (cont.) (ii) To ensure personal growth through the introduction of new products and services that will promote the economic base of the members. (iii) To ensure progress of members and Sacco society through continuous education programs on savings and proper use of credit, reduction of poverty, human dignity and co-operation.
Definition Liability management is the practice of maintaining a balance between the maturities of assets and liabilities in order to maintain liquidity and to facilitate lending while also maintaining a healthy balance sheet.
BALANCE BETWEEN ASSETS & LIABILITIES A surplus of assets over capital and reserves creates a funding gap that requires to be bridged. A surplus of liabilities over assets creates a need to find avenues of making efficient use of the surplus funds.
ASSETS IN A CO-OPERATIVE 1. Fixed Assets (Land & Buildings, Motor Vehicles, etc.) 2. Loans to Members (Long-term and Shortterm) 3. Accounts Receivable (Check off, Suppliers, etc.)
LIABILITIES IN A CO-OPERATIVE 1. Members deposits (non-withdrawable, withdrawable). 2. Dividend Payable / Interest on Deposits payable. 3. Loans from bank. 4. Tax payable.
IMPLICATIONS OF ASSETS FIXED ASSETS Expected returns from the asset (e.g. Building, M/Veh. is it comparative to the liability associated with it?) Cost of maintenance of the asset (is it growing the liabilities?). The worth of the asset to stand as an acceptable collateral to access bank loans Ease of resale and value thereon vs the liability
IMPLICATIONS OF ASSETS Loans to Members The main cause of liabilities in Co-ops How much is disbursed vs available funds? Effectiveness in loan repayment by members (for others to access credit). Possibility of default and provision for delinquent loans. Loan repayment period by members vs loan repayment period by Co-operative to the bank
IMPLICATIONS OF ASSETS (Cont.) Check Off Receivable The most active asset. Generates funds to meet liabilities. Timely remittances Interest on delayed check off remittances (5% pm after 7 days of deducting). Other Accounts Receivable How much the Sacco have out there (e.g. in form of deposits for service
IMPLICATIONS OF LIABILITIES Members Deposits This is the reliable source of funding in a Co-operative. Though a liability, it is rarely withdrawn. Cost of these funds not fixed (based on Co-operative s performance. Trends in co-operatives (minimum deposits, rates of interest at year end)
IMPLICATIONS OF LIABILITIES (Cont.) Dividends & Interest on Deposits High rate encourages increased capital/deposits but increases liabilities Low rate maintains liabilities at low level but discourages savings.
IMPLICATIONS OF LIABILITIES (cont.) Loans from Bank Interest on loan (CBR + 2% margin) Variance in rates As last resort. Tax Payable Income from doing business with members not taxable. Income from other financial businesses 30% on 50% VS INSTALMENT TAX. This liability can turn out very expensive.
STATUTORY REQUIREMENT ON LIQUIDITY - SASRA Liquid Assets/Savings Deposits and STLs (Liquidity Ratio) - >=15% External Borrowings/Total Assets - <=25%
DEPOSITS & LOANS STRUCTURE SACCOS VS BANKS 2016 Comparative performance of DT-SACCOs and Commercial Banks DT Societies Commercial Banks 2015 2016 2015 2016 Total Assets (Kshs. Billion) 342.85 393.49 3,492.64 3,695.94 Gross Loans and Advances (Kshs. Billion) 258.18 297.6 2,165.32 2,293.19 Customer Deposits (Kshs. Billion) 237.44 272.58 2,485.92 2,618.39 Loans as percentage of Total Assets 75.30% 75.63% 62.00% 62.05% Deposits as percentage of Total Assets 69.25% 69.27% 71.18% 70.85% Source: SASRA & CBK Annual Supervision Reports 2016
Comparative interest rates on savings and deposits by DT- SACCOs and commercial banks SOURCES: SASRA Supervision Report 2017
Distribution of deposit liabilities in the DT-SACCO system Distribution of Deposit Amount (Kshs.) Proportion to Total Deposits Liabilities 2017 2016 2017 2016 Withdraw-able Deposits (Savings) 56,558,076,200 45,833,009,364 18.53% 16.81% Fixed Term Deposits 10,872,171,534 11,768,410,563 3.56% 4.32% Non-withdraw-able Deposits 237,874,359,170 214,977,182,160 77.91% 78.87% Total 305,304,606,903 272,578,602,087 100% 100% SOURCES: SASRA Supervision Report 2017
SACCOS BEHAVIORS THAT AFFECT LIABILITY MANAGEMENT Paying dividend for political goals Borrowing to pay dividend Borrowing at high rates to lend out at low or equivalent rate. Loosing focus on growing deposits alongside loans growth.
LOANING POLICY AND LIABILITIES MANAGEMENT Manage new members waiting period. Manage multiplier on deposits. Manage repayment period. Fix limits for loans (how many loans, how much, conditions for more loans). Adhere to rules relating to boosting of deposits. Loan recovery / guarantee.
LIABILITY MANAGEMENT AND DIVIDEND PAYOUT 1. Very sensitive and affects all members. 2. Payout as much as possible (unhealthy for the organization s balance sheet) politically the best 3. Maintain a dividend payout of a percentage of Profit after Tax (balancing act) common in banks 4. Pay minimal dividend and plough back surplus for growth unpopular in Saccos
OTHER OPTIONS OF GIVING BACK SURPLUS TO MEMBERS Low cost credit upon increased retention If all members were borrowers minimal dividend rate would not be an issue
EXPLOITING INTERNAL SOURCE OF FUNDING (i) Efficient cashflow management to ensure maximum return on any surplus cash. (ii) Disburse Dividend/interest early and charge. (iii) Timing of loans disbursement vs recovery and reporting. (iv) Timely recovery of loans. (v) Develop attractive savings products to mobilize savings (competitive rates) (vi) Peg deposits contribution to loan taken.
EXPLOIT INTERNAL SOURCE OF FUNDING (cont.) (vi) Consider an ideal sustainable rate of dividend and interest. (vii) Paying dividend/interest later than earlier. (viii) Have members capitalize dividend / interest
Important considerations in opting for external funding (i) Negotiate for funds at reasonable and predictable costs. (ii) Be careful how the contract is crafted (does it have unfavorable exit clauses, unfavorable clause on tax, etc.?). (iii) Consider funding mix in sources and tenor (short, medium, long-term).
STRIKING THE BALANCE 1. Analyze your clientele (savers/borrowers). 2. Analyze your product profile. 3. Analyze your external credit options (cost). 4. Consider investment mix (maturity and interest rates) for surplus funds. 5. Avoid borrowing more funds than you need. 6. Involve and move with the members.
Thank you Q & A