Is RBM trying to kill Saccos?

Savings and Credit Cooperatives (Saccos) have—since their introduction in Malawi by Catholic Fathers in 1960s—been an important source of financial services for hundreds of thousands of Malawians.

With our commercial banks’ rigid and cumbersome demands for one to borrow from them, Saccos’ flexible, faster and simplified loan access has helped many households—especially those on payrolls—to ease their financial burdens.

Yet, despite having less complicated transactions, the Reserve Bank of Malawi (RBM) reported that generally, the microfinance sector remained stable, with robust growth and soundness indicators attesting to the strong performance of the industry.

Thus, Saccos are now an important player in the country’s financial system. There are 46 Saccos today with an estimated membership of 110 540, according to RBM.

The central bank also estimates that last year, Saccos’ savings, including shares, stood at $17 million (K7 billion); assets were $21 million (K9 billion) whereas loans amounted to $15 million (K6.3 billion).

These are not small numbers. The figures demonstrate Saccos’ respectable contribution to the financial sector and the microfinance industry in general.

No wonder Hugh Sinclair, the British author and microfinance veteran who is also a celebrated critic of microfinance institutions, appears to have spoken of Malawi’s Saccos when he said: “Microfinance does not apparently require evidence to prove it works—since, on the face of it, it seems to work. It works because the poor repay loans, and this is all the proof the sector requires.”

Of course, the microfinance industry in general has come under intense criticism both globally and locally for their overly aggressive loan collection tactics, hidden costs and interest rates that can go to as high as 200 percent.

For example, David Korten, the Harvard economist, notes that many micro-credit programmes are nothing more than predatory lending schemes rebranded as socially responsible investment opportunities.

But Saccos—because of their member ownership business model—are by far better than the microfinance institutions that have terrorised the poor in both rural and peri-urban areas who have been enslaved by what can only be described as organised loan sharks.

The predators have cannibalised the original “core values of entrepreneurial vision—of teaching a man to fish rather than handing him a fish on a plate” that microfinance institutions were known for and which helped attract such big names as Microsoft founder Bill Gates, eBay founder Pierre Omidyar, hedge fund billionaire ace George Soros, former United States president Bill Clinton and other celebrities who have invested heavily into the sector with the belief that they are helping to pull millions out of poverty through small loans.

So far, Saccos appear to have escaped the exploitation that most microfinance institutions are known for; hence, the need to avoid throwing the baby with the bath water.

The point is that it is important for authorities in Malawi not to over-regulate Saccos because doing so could cause more harm than good to the savings and credit groups.

I have in mind the recent directive from RBM that Saccos should not lend money to people with liabilities that are more than 50 percent of their net salaries.

As a result, most people who were borrowing from Saccos suddenly do not qualify. And these are mostly lowly paid employees who are now being denied credit. These are the folks that have powered Saccos nationwide for almost half a century as they constitute the bulk of membership.

If these people cannot access Sacco loans—the major source of income of the cooperatives—it will not be them suffering alone. Most Saccos will go under.

Already, I know of folks who are withdrawing their memberships from their Saccos because they believe, and rightly so, that it is of no use to be depositing their savings with the cooperatives if they cannot access loans simply because government wants to regulate their spending patterns when Capital Hill cannot even control its own! And the idea that people survive on salaries alone is ridiculous. The Centre for Social Concern (CfSC) has done and published enough research on this and it is clear that most salaried Malawians heavily supplement their salaries with small businesses and part-time work. It is, therefore, a waste of time trying to control how much take-home pay people must have. It does not serve any purpose and, in this case, only penalises people and the Saccos. It also has an impact on the national savings rate, which is already pathetic at the moment.

Indeed, as more frustrated salaried people withdraw from the cooperatives, they will also be walking away with their shares—which are basically the capital that Saccos operate on. The ramifications across the nation are not too hard to imagine.

I know that the 50 percent rule is simply an alignment with the labour laws, but it is counterproductive. While implementing this rule will substantially help to ensure that lending standards remain high and that the loan quality does not deteriorate, it defeats the very reason that made Saccos so popular: flexibility.

Taking away flexibility equals taking away Saccos from the financial industry, which in turn will expose people to loan sharks—the sort that loiter around Victoria Avenue and those in offices that lure the poor into loans they can never repay in their lifetime.

For the sake of the survival of Saccos, RBM must reverse that directive.