DRAFT VAT BILL, 2011 FACES ACID TEST
BY JACKSON OKOTH
The next President of the Republic of Kenya will be required by law to pay Value Added Tax (VAT). This is if proposals contained in the draft VAT Bill 2011, is passed into law.
Similarly, members of the armed forces, who have previously obtained their supplies from duty free canteens within the barracks, will now be taxed at 16 per cent.
The draft VAT bill 2011, now under scrutiny, also plans to rope those previously VAT exempt including charitable organizations, British Council, the Aga Khan Development Network and Kenya Military and Police Officers returning from the United Nations peace keeping missions outside Kenya.
While more privileged classes in society will come under the tax bracket, the ordinary consumer will also hurt. This is because milk and cream, maize and wheat flour, computer software, animal feeds, agrochemicals, sanitary towels, medical dressing, exercise and textbooks and newspapers, all previously zero rated, will now attract a 16 per cent VAT.
The cost of electrical energy and heavy diesel, previously taxed at 12 per cent, will now be subject to 16 per cent, pushing up the price of an already expensive electricity supply.
Suggestions have been made that this increase will inevitably lead to increases in the cost of electricity and therefore locally manufactured goods. Treasury had been urged to be prudent and retain the 12 per cent rate or introduce a lower 10 per cent applicable to electricity and industrial oils as these have far reaching effects on the cost of commodities.
Plans to overhaul the VAT legislation comes when this tax system has been under a lot of strain, especially a cumbersome refund process that is seriously hurting businesses. The draft VAT bill is less voluminous and aims to fine tune current provisions.
But even as parliament prepares to debate the VAT Bill 2011, there is already a feeling that some of the proposed tax reforms contained here piecemeal, unwarranted and not focused.
“It appears that there is a clear lack of creativity to expand the tax base. For instance, why bring text books, sanitary pads or even bread and milk under VAT while there is no effort to tax a booming real estate in this country,” said Davis Adieno, national coordinator, National Taxpayers Association (NTA).
At present, the tussle between Members of Parliament (MPs) and the Kenya Revenue Authority (KRA) on whether legislators should pay tax remains unresolved.
Further, the economy is estimated to be losing billions each year in capital flight as multinationals operating in the country set up in tax havens abroad to avoid the country’s tax system. This is through what is known as transfer pricing.
“We have a bubbling informal sector that is still outside the tax bracket. What KRA should be thinking about is how to get this segment of the economy in to the tax bracket,” said Adieno.
He adds that the inability by KRA to resolve the prevailing tax refunds problem, where the authority is holding billions belonging to businesses, is unfair.
“This process should be streamlined to ensure that those business affected do not remain vulnerable and exposed as they are now,” said Adieno.
The tax association feels that subjecting things like computer software and text books to VAT could jeopardize efforts by the country to achieve its Vision 2030 economic goals.
To deal with VAT refunds, the draft bill proposes that any excess VAT shall be paid to the registered person by the commissioner where this officer is satisfied that such excess arise from making zero rated supplies.
“A requirement of an auditor’s certificate has been dropped in the bill. This will however lead to delays in processing of refunds as KRA may not cope with the processing of refunds,” said a report by Ernst & Young.
Of all the changes proposed in this VAT bill, the status of items listed in the first and second schedule to the bill are considered most profound and far reaching.
“Items constituting basic commodities such as processed milk, maize flour, and wheat flour should continue to enjoy zero rated status,” said Nikhil Hira, a tax partner at Deloitte&Touche.
With the proposed increase in electricity rate to 16 per cent, it is feared that cost of manufactured goods will increase. On the other hand, zero rating electricity could provide ordinary consumers with the much needed reprieve.
The VAT Bill 2011 provides the legal framework upon which KRA will impose value added tax on goods and services delivered in or imported into Kenya.
An overhaul of the VAT system is coming when this type of tax is riddled with complains from the public over the fact that it is cumbersome, patched up and outdated.
“We are committed to reforming entire tax system, including VAT, whose compliance burden is huge,” said Geoffrey Mwau, Economic Secretary, Ministry of Finance in a previous interview.
VAT is an indirect tax, which is collected on the value added proportion of goods and services occurred in all the processes, ranging from manufacturing, circulation, provision of services to consumption.
Pressure has been building on Treasury to reform the VAT system, owing to its cumbersome, patched up and complex nature.
GLANCE BOX
• The 125-page VAT Bill, 2011 contains far reaching alterations to the present law as was promised by the Finance Minister Uhuru Kenyatta when he presented the budget on June 8th, 2011.
• The present VAT system has been described as cumbersome and difficult to implement. It is also riddled with many exemptions with three different rates charged on various goods and services.
• Under the proposed VAT law, the only tax rates proposed are 16 per cent and the zero rates. However, there are concerns that this increase in the VAT rate for certain supplies such as electricity will inevitably increase their prices and therefore hurting consumers.
Tuesday, November 15, 2011
DRAFT VAT BILL, 2011 FACES ACID TEST
BY JACKSON OKOTH
The next President of the Republic of Kenya will be required by law to pay Value Added Tax (VAT). This is if proposals contained in the draft VAT Bill 2011, is passed into law.
Similarly, members of the armed forces, who have previously obtained their supplies from duty free canteens within the barracks, will now be taxed at 16 per cent.
The draft VAT bill 2011, now under scrutiny, also plans to rope those previously VAT exempt including charitable organizations, British Council, the Aga Khan Development Network and Kenya Military and Police Officers returning from the United Nations peace keeping missions outside Kenya.
While more privileged classes in society will come under the tax bracket, the ordinary consumer will also hurt. This is because milk and cream, maize and wheat flour, computer software, animal feeds, agrochemicals, sanitary towels, medical dressing, exercise and textbooks and newspapers, all previously zero rated, will now attract a 16 per cent VAT.
The cost of electrical energy and heavy diesel, previously taxed at 12 per cent, will now be subject to 16 per cent, pushing up the price of an already expensive electricity supply.
Suggestions have been made that this increase will inevitably lead to increases in the cost of electricity and therefore locally manufactured goods. Treasury had been urged to be prudent and retain the 12 per cent rate or introduce a lower 10 per cent applicable to electricity and industrial oils as these have far reaching effects on the cost of commodities.
Plans to overhaul the VAT legislation comes when this tax system has been under a lot of strain, especially a cumbersome refund process that is seriously hurting businesses. The draft VAT bill is less voluminous and aims to fine tune current provisions.
But even as parliament prepares to debate the VAT Bill 2011, there is already a feeling that some of the proposed tax reforms contained here piecemeal, unwarranted and not focused.
“It appears that there is a clear lack of creativity to expand the tax base. For instance, why bring text books, sanitary pads or even bread and milk under VAT while there is no effort to tax a booming real estate in this country,” said Davis Adieno, national coordinator, National Taxpayers Association (NTA).
At present, the tussle between Members of Parliament (MPs) and the Kenya Revenue Authority (KRA) on whether legislators should pay tax remains unresolved.
Further, the economy is estimated to be losing billions each year in capital flight as multinationals operating in the country set up in tax havens abroad to avoid the country’s tax system. This is through what is known as transfer pricing.
“We have a bubbling informal sector that is still outside the tax bracket. What KRA should be thinking about is how to get this segment of the economy in to the tax bracket,” said Adieno.
He adds that the inability by KRA to resolve the prevailing tax refunds problem, where the authority is holding billions belonging to businesses, is unfair.
“This process should be streamlined to ensure that those business affected do not remain vulnerable and exposed as they are now,” said Adieno.
The tax association feels that subjecting things like computer software and text books to VAT could jeopardize efforts by the country to achieve its Vision 2030 economic goals.
To deal with VAT refunds, the draft bill proposes that any excess VAT shall be paid to the registered person by the commissioner where this officer is satisfied that such excess arise from making zero rated supplies.
“A requirement of an auditor’s certificate has been dropped in the bill. This will however lead to delays in processing of refunds as KRA may not cope with the processing of refunds,” said a report by Ernst & Young.
Of all the changes proposed in this VAT bill, the status of items listed in the first and second schedule to the bill are considered most profound and far reaching.
“Items constituting basic commodities such as processed milk, maize flour, and wheat flour should continue to enjoy zero rated status,” said Nikhil Hira, a tax partner at Deloitte&Touche.
With the proposed increase in electricity rate to 16 per cent, it is feared that cost of manufactured goods will increase. On the other hand, zero rating electricity could provide ordinary consumers with the much needed reprieve.
The VAT Bill 2011 provides the legal framework upon which KRA will impose value added tax on goods and services delivered in or imported into Kenya.
An overhaul of the VAT system is coming when this type of tax is riddled with complains from the public over the fact that it is cumbersome, patched up and outdated.
“We are committed to reforming entire tax system, including VAT, whose compliance burden is huge,” said Geoffrey Mwau, Economic Secretary, Ministry of Finance in a previous interview.
VAT is an indirect tax, which is collected on the value added proportion of goods and services occurred in all the processes, ranging from manufacturing, circulation, provision of services to consumption.
Pressure has been building on Treasury to reform the VAT system, owing to its cumbersome, patched up and complex nature.
GLANCE BOX
• The 125-page VAT Bill, 2011 contains far reaching alterations to the present law as was promised by the Finance Minister Uhuru Kenyatta when he presented the budget on June 8th, 2011.
• The present VAT system has been described as cumbersome and difficult to implement. It is also riddled with many exemptions with three different rates charged on various goods and services.
• Under the proposed VAT law, the only tax rates proposed are 16 per cent and the zero rates. However, there are concerns that this increase in the VAT rate for certain supplies such as electricity will inevitably increase their prices and therefore hurting consumers.
BY JACKSON OKOTH
The next President of the Republic of Kenya will be required by law to pay Value Added Tax (VAT). This is if proposals contained in the draft VAT Bill 2011, is passed into law.
Similarly, members of the armed forces, who have previously obtained their supplies from duty free canteens within the barracks, will now be taxed at 16 per cent.
The draft VAT bill 2011, now under scrutiny, also plans to rope those previously VAT exempt including charitable organizations, British Council, the Aga Khan Development Network and Kenya Military and Police Officers returning from the United Nations peace keeping missions outside Kenya.
While more privileged classes in society will come under the tax bracket, the ordinary consumer will also hurt. This is because milk and cream, maize and wheat flour, computer software, animal feeds, agrochemicals, sanitary towels, medical dressing, exercise and textbooks and newspapers, all previously zero rated, will now attract a 16 per cent VAT.
The cost of electrical energy and heavy diesel, previously taxed at 12 per cent, will now be subject to 16 per cent, pushing up the price of an already expensive electricity supply.
Suggestions have been made that this increase will inevitably lead to increases in the cost of electricity and therefore locally manufactured goods. Treasury had been urged to be prudent and retain the 12 per cent rate or introduce a lower 10 per cent applicable to electricity and industrial oils as these have far reaching effects on the cost of commodities.
Plans to overhaul the VAT legislation comes when this tax system has been under a lot of strain, especially a cumbersome refund process that is seriously hurting businesses. The draft VAT bill is less voluminous and aims to fine tune current provisions.
But even as parliament prepares to debate the VAT Bill 2011, there is already a feeling that some of the proposed tax reforms contained here piecemeal, unwarranted and not focused.
“It appears that there is a clear lack of creativity to expand the tax base. For instance, why bring text books, sanitary pads or even bread and milk under VAT while there is no effort to tax a booming real estate in this country,” said Davis Adieno, national coordinator, National Taxpayers Association (NTA).
At present, the tussle between Members of Parliament (MPs) and the Kenya Revenue Authority (KRA) on whether legislators should pay tax remains unresolved.
Further, the economy is estimated to be losing billions each year in capital flight as multinationals operating in the country set up in tax havens abroad to avoid the country’s tax system. This is through what is known as transfer pricing.
“We have a bubbling informal sector that is still outside the tax bracket. What KRA should be thinking about is how to get this segment of the economy in to the tax bracket,” said Adieno.
He adds that the inability by KRA to resolve the prevailing tax refunds problem, where the authority is holding billions belonging to businesses, is unfair.
“This process should be streamlined to ensure that those business affected do not remain vulnerable and exposed as they are now,” said Adieno.
The tax association feels that subjecting things like computer software and text books to VAT could jeopardize efforts by the country to achieve its Vision 2030 economic goals.
To deal with VAT refunds, the draft bill proposes that any excess VAT shall be paid to the registered person by the commissioner where this officer is satisfied that such excess arise from making zero rated supplies.
“A requirement of an auditor’s certificate has been dropped in the bill. This will however lead to delays in processing of refunds as KRA may not cope with the processing of refunds,” said a report by Ernst & Young.
Of all the changes proposed in this VAT bill, the status of items listed in the first and second schedule to the bill are considered most profound and far reaching.
“Items constituting basic commodities such as processed milk, maize flour, and wheat flour should continue to enjoy zero rated status,” said Nikhil Hira, a tax partner at Deloitte&Touche.
With the proposed increase in electricity rate to 16 per cent, it is feared that cost of manufactured goods will increase. On the other hand, zero rating electricity could provide ordinary consumers with the much needed reprieve.
The VAT Bill 2011 provides the legal framework upon which KRA will impose value added tax on goods and services delivered in or imported into Kenya.
An overhaul of the VAT system is coming when this type of tax is riddled with complains from the public over the fact that it is cumbersome, patched up and outdated.
“We are committed to reforming entire tax system, including VAT, whose compliance burden is huge,” said Geoffrey Mwau, Economic Secretary, Ministry of Finance in a previous interview.
VAT is an indirect tax, which is collected on the value added proportion of goods and services occurred in all the processes, ranging from manufacturing, circulation, provision of services to consumption.
Pressure has been building on Treasury to reform the VAT system, owing to its cumbersome, patched up and complex nature.
GLANCE BOX
• The 125-page VAT Bill, 2011 contains far reaching alterations to the present law as was promised by the Finance Minister Uhuru Kenyatta when he presented the budget on June 8th, 2011.
• The present VAT system has been described as cumbersome and difficult to implement. It is also riddled with many exemptions with three different rates charged on various goods and services.
• Under the proposed VAT law, the only tax rates proposed are 16 per cent and the zero rates. However, there are concerns that this increase in the VAT rate for certain supplies such as electricity will inevitably increase their prices and therefore hurting consumers.
Lack of finance hinder Kenya’s carbon trading effort
BY JACKSON OKOTH
The banking sector and players in the capital markets have been accused of not being up to speed with green funding. As a result, those intending to engage in this business are discourages from doing so.
“This is a key barrier to successful implementation of renewable clean development mechanism(CDM) projects whose initial capital outlay is much higher than the alternative oil-driven projects,” said Edward Njoroge, CEO Kenya Electricity Generating Company Limited(KENGEN).
He made these remarks during a recent capacity building workshop on development and trading of carbon credits, at Hilton Hotel Nairobi.
It is estimated that CDM transaction costs for project identification, design, validation, registration and monitoring & evaluation range as high as US$ 500,000 for a single project.
Kenya has been on the journey towards creation of a local carbon market. This follows the onset of a global carbon market which started way back in 1992.
“Today, as we schedule to attend COP17 in Durban South Africa later this month, it is instrumental to remember the COP3 held in Japan in 1997 when the Kyoto protocol was adopted,” said Njoroge.
It is at this milestone that the CDM was introduced. Kenya ratified the Kyoto protocol in February 2005 and is today among the 191 countries that have signed and ratified this protocol.
“ There have been key milestones with close to 7,000 CDM projects currently in the pipeline worldwide. Out of this, only 2.6per cent are from Africa. Kenya lags behind South Africa with only 21 projects, a paltry 0.3per cent of the global CDM market,” said Njoroge.
Carbon credit has now become a common link as a source of finance to an extent of even reducing public debt such as the case in Costa Rica. Carbon-backed loan schemes for financing green energy projects are now becoming a norm. Governments are setting up Green Energy Fund facilities with sole purpose of promoting investment in viable Renewable Energy projects at concessional rates.
“CDM activities are now being institutionalized with private sector in the forefront in supporting carbon markets. It is these opportunities that we need to pursue and ensure we tap the full potential that exist in the carbon market,” said Njoroge.
“Currently KenGen has taken the lead in initiating the CDM projects under the Kyoto protocol and six projects have already been cleared by the World Bank and more are planned,” said Job Kihumba, Chief Executive, Africa Carbon Exchange(ACX)
While opportunities are enormous particularly as a source for investment capital, some key challenges exist. These challenges are not unique to Kenya but also cut across Africa.
“ There is inadequate technical and managerial capacity to develop and implement CDM projects by potential project developers and consultants,” said Njoroge.
Further, it is a relatively long and complex CDM process from project inception up to registration. There is limited understanding of Emission Reduction Purchase Agreements (ERPA) and the whole process of negotiating and sale of Carbon Emission Reductions(CERs); There is also lack of favourable policies and regulations specific to CDM in supporting carbon investors.
“We need to create forums for CDM networking with relevant experts and financiers. A critical mass of CDM practitioners is required to accelerate project development,” said Njoroge.
The Africa Carbon Exchange (ACX), which is pioneering a carbon trading platform in Kenya, is seen as a way of opening new channels in accessing carbon funds for investment.
Kenya also need to put in place policies that reduce CDM processing, transactional time and developmental costs. Standardizing baselines would also potentially reduce transaction costs; enhance transparency and project registration predictability.
GLANCE BOX
• Carbon credits are a reality despite the pitfalls that still exist.
• KenGen, one of the players in the carbon credit market, has already about $225,000 from its first CDM project.
• This money is being ploughed back to the community by implementing social projects.
• KenGen has established a CDM Centre to provide carbon project development support, consultancy and collaboration with other project developers, financiers, development agencies and other institutions in the voluntary and compliance carbon markets.
BY JACKSON OKOTH
The banking sector and players in the capital markets have been accused of not being up to speed with green funding. As a result, those intending to engage in this business are discourages from doing so.
“This is a key barrier to successful implementation of renewable clean development mechanism(CDM) projects whose initial capital outlay is much higher than the alternative oil-driven projects,” said Edward Njoroge, CEO Kenya Electricity Generating Company Limited(KENGEN).
He made these remarks during a recent capacity building workshop on development and trading of carbon credits, at Hilton Hotel Nairobi.
It is estimated that CDM transaction costs for project identification, design, validation, registration and monitoring & evaluation range as high as US$ 500,000 for a single project.
Kenya has been on the journey towards creation of a local carbon market. This follows the onset of a global carbon market which started way back in 1992.
“Today, as we schedule to attend COP17 in Durban South Africa later this month, it is instrumental to remember the COP3 held in Japan in 1997 when the Kyoto protocol was adopted,” said Njoroge.
It is at this milestone that the CDM was introduced. Kenya ratified the Kyoto protocol in February 2005 and is today among the 191 countries that have signed and ratified this protocol.
“ There have been key milestones with close to 7,000 CDM projects currently in the pipeline worldwide. Out of this, only 2.6per cent are from Africa. Kenya lags behind South Africa with only 21 projects, a paltry 0.3per cent of the global CDM market,” said Njoroge.
Carbon credit has now become a common link as a source of finance to an extent of even reducing public debt such as the case in Costa Rica. Carbon-backed loan schemes for financing green energy projects are now becoming a norm. Governments are setting up Green Energy Fund facilities with sole purpose of promoting investment in viable Renewable Energy projects at concessional rates.
“CDM activities are now being institutionalized with private sector in the forefront in supporting carbon markets. It is these opportunities that we need to pursue and ensure we tap the full potential that exist in the carbon market,” said Njoroge.
“Currently KenGen has taken the lead in initiating the CDM projects under the Kyoto protocol and six projects have already been cleared by the World Bank and more are planned,” said Job Kihumba, Chief Executive, Africa Carbon Exchange(ACX)
While opportunities are enormous particularly as a source for investment capital, some key challenges exist. These challenges are not unique to Kenya but also cut across Africa.
“ There is inadequate technical and managerial capacity to develop and implement CDM projects by potential project developers and consultants,” said Njoroge.
Further, it is a relatively long and complex CDM process from project inception up to registration. There is limited understanding of Emission Reduction Purchase Agreements (ERPA) and the whole process of negotiating and sale of Carbon Emission Reductions(CERs); There is also lack of favourable policies and regulations specific to CDM in supporting carbon investors.
“We need to create forums for CDM networking with relevant experts and financiers. A critical mass of CDM practitioners is required to accelerate project development,” said Njoroge.
The Africa Carbon Exchange (ACX), which is pioneering a carbon trading platform in Kenya, is seen as a way of opening new channels in accessing carbon funds for investment.
Kenya also need to put in place policies that reduce CDM processing, transactional time and developmental costs. Standardizing baselines would also potentially reduce transaction costs; enhance transparency and project registration predictability.
GLANCE BOX
• Carbon credits are a reality despite the pitfalls that still exist.
• KenGen, one of the players in the carbon credit market, has already about $225,000 from its first CDM project.
• This money is being ploughed back to the community by implementing social projects.
• KenGen has established a CDM Centre to provide carbon project development support, consultancy and collaboration with other project developers, financiers, development agencies and other institutions in the voluntary and compliance carbon markets.
Africa’s infrastructure needs faces funding challenges
BY JACKSON OKOTH
Over half of Africa’s improved growth during last decade has been attributed to infrastructure spending. Yet, Africa’s infrastructure lags behind other developing nations, consistently ranking at the bottom on many indicators of infrastructure development.
This disclosure was made yesterday during the Africa Congress of Accountants, at the Kenyatta International Conference Centre (KICC), whose theme is Accountancy and Infrastructure in Africa.
“Eliminating the large infrastructure deficit could boost GDP growth by up to 2-3 per cent,” said Josephine Ngure, an officer with the African Development Bank (ADB).
In Africa, a large bulk of infrastructure funding comes from Central Governments and public institutions, which account for about 50per cent of current spending.
“We have seen a gradual participation of private investors, particularly in ICT and energy,” said Ngure.
In Kenya and other African states, the participation of China has been strongest. In 2010, it committed an estimated $ 9 billion to infrastructure projects in Africa, ahead of Arab funds, India and Brazil.
“In gross terms, Sub-Saharan Africa needs to spend about $ 93bn per annum until 2015 to meet its infrastructure needs,” said Ngure.
This is about 10-15per cent of its GDP, compared to about 5 per cent average spending at present.
With Africa’s estimated infrastructure spending at $ 45billion per annum, roughly half of this is not funded.
Matters have been made worse by the low fiscal revenues of most African countries, unpredictable flow from donors and debt sustainability concerns.
“The capital base of multilaterals is limited while weak institutional, legal and regulatory environment in most countries hinder public private partnerships, “said Ngure.
But whatever the funding options, accountants play a crucial role by providing reliable financial information, ensuring value for money and also giving out advisory services.
“Infrastructure funding requirements for most African nations is estimated at about 10per cent of GDP per annum until 2020,”said Paul Nyaga, Chief Finance Officer, Equity Bank.
While Kenya spends 23 per cent of its budget resources in infrastructure, this is not enough considering the country’s needs. All traditional sources are not considered adequate, necessitating the need to explore alternative sources.
GLANCE BOX
• Africa’s underdeveloped infrastructure has been a major obstacle for the continent’s development and its efforts to achieve a strong growth.
• Africa, especially sub-Saharan Africa (SSA), ranks consistently on the bottom of developing regions in access to infrastructure service.
• According to Africa Infrastructure Country Diagnostic (AICD) estimates, Africa’s total infrastructure financing needs amounted to $93 billion a year in 2008, with only $45 billion financed.
BY JACKSON OKOTH
Over half of Africa’s improved growth during last decade has been attributed to infrastructure spending. Yet, Africa’s infrastructure lags behind other developing nations, consistently ranking at the bottom on many indicators of infrastructure development.
This disclosure was made yesterday during the Africa Congress of Accountants, at the Kenyatta International Conference Centre (KICC), whose theme is Accountancy and Infrastructure in Africa.
“Eliminating the large infrastructure deficit could boost GDP growth by up to 2-3 per cent,” said Josephine Ngure, an officer with the African Development Bank (ADB).
In Africa, a large bulk of infrastructure funding comes from Central Governments and public institutions, which account for about 50per cent of current spending.
“We have seen a gradual participation of private investors, particularly in ICT and energy,” said Ngure.
In Kenya and other African states, the participation of China has been strongest. In 2010, it committed an estimated $ 9 billion to infrastructure projects in Africa, ahead of Arab funds, India and Brazil.
“In gross terms, Sub-Saharan Africa needs to spend about $ 93bn per annum until 2015 to meet its infrastructure needs,” said Ngure.
This is about 10-15per cent of its GDP, compared to about 5 per cent average spending at present.
With Africa’s estimated infrastructure spending at $ 45billion per annum, roughly half of this is not funded.
Matters have been made worse by the low fiscal revenues of most African countries, unpredictable flow from donors and debt sustainability concerns.
“The capital base of multilaterals is limited while weak institutional, legal and regulatory environment in most countries hinder public private partnerships, “said Ngure.
But whatever the funding options, accountants play a crucial role by providing reliable financial information, ensuring value for money and also giving out advisory services.
“Infrastructure funding requirements for most African nations is estimated at about 10per cent of GDP per annum until 2020,”said Paul Nyaga, Chief Finance Officer, Equity Bank.
While Kenya spends 23 per cent of its budget resources in infrastructure, this is not enough considering the country’s needs. All traditional sources are not considered adequate, necessitating the need to explore alternative sources.
GLANCE BOX
• Africa’s underdeveloped infrastructure has been a major obstacle for the continent’s development and its efforts to achieve a strong growth.
• Africa, especially sub-Saharan Africa (SSA), ranks consistently on the bottom of developing regions in access to infrastructure service.
• According to Africa Infrastructure Country Diagnostic (AICD) estimates, Africa’s total infrastructure financing needs amounted to $93 billion a year in 2008, with only $45 billion financed.
Al-Shabaab threat drive business for security firms
By JACKSON OKOTH
It is now on the back of everyone’s mind that a grenade or a bomb could go off inside a shopping mall, on a parking lot or a crowded bus stop. The fact this deadly arsenal can be hurled into a crowd of innocent persons by someone who is not in uniform, can easily mingle with the population and is an everyday person to the untrained eye, has raised antennas everywhere.
Take Hussein Ali, a Kenyan Somalia residing and working in Nairobi. One day, when he decided to carry a rug sack to work, there was an uneasy crowd of onlookers near him at the bus stop. On reaching his destination in town, he encountered a visibly shaken man narrating how suspected Al Shabab militants threw a grenade at patrons at a bar in downtown Nairobi.
"Everyone is scared because no one knows where the next explosion is going to take place. I always feel so scared and insecure while walking the streets with all eyes on you, suspicion written all over their faces, given my Somali origin”, said Ali.
He is part of a large group of law abiding Kenyan Somalis, who are walking the streets but are apprehensive and afraid of what might happen next.
Recent deadly explosions of hand grenades within Nairobi city has prompted tighter security measures around homes, office buildings, bus parks, crowded shopping malls, all open spaces having regular police patrols. In the meantime, security firms are doing brisk business.
“We are living in a climate of fear and facing a threat that is real, posed by a recent resurgent activities of what is thought to be Al Shabaab elements,” said Mark Lipton, Director-Risk and Security, G4S Security Services Kenya Limited.
The regional security situation is also precarious. Many are concerned about their own safety and that of their businesses and assets. We have seen indiscriminate hand grenade attacks here in Nairobi. This has caused panic and generated fear because it is not clear where the next attack is going to come from.
Individuals and organisations are now looking for a reassurance from their security services provider or professionals.
We are getting a lot of interest from our clients on various security services available, including guards, CCTV cameras, additional help and advice to those moving around the city,
We are employing x police and ex military officers, disciplined security management professionals.
We are reminding them of best practice in security business, including quality training.
What solutions do you provide?
A wide range including man guarding services, cctv, alarm response, security risk management training to clients, secured movement solutions, significance presence in sports events such as the Safaricom sevens and Standard Chartered Bank marathon.
We provide refresher courses in counter terrorism, fire and safety, incident management.
Kinyanjui Murigi, CEO Crime Scene Investigations(CSI) Limited.
“We are providing bomb detectors, a garget that has been missing in this market. It is cheaper and more effective than the mirrors currently being used at most hotel establishments in the city, to check for any hidden explosives under the car,” said Kinyanjui Murigi, Chief Executive, Crime Scene Investigations(CSI) Limited.
A bomb detector goes for between Sh 2.5 million and Sh 3.5 million. This is compared to a trained sniffer dog that goes for close to Sh 4 million, minus a handler, upkeep and trainer costs.
Security experts have also dismissed metal detectors, currently in use at the entrance of most office buildings. This is due to the fact that these gargets cannot detect TNT bombs or even fertilizer explosives.
“ While the bomb detector is expensive and high end, it is worth it for those who need to be absolutely secure,” said Murigi.
Although most establishments including hotels and big restaurants screen those passing through its doors using metal detectors, most security guards appear unprepared to react to someone with explosives strapped on them.
“ We are still doing well below par in this respect, leaving potential terrorists with more soft targets,” said Kinyanjui.
By JACKSON OKOTH
It is now on the back of everyone’s mind that a grenade or a bomb could go off inside a shopping mall, on a parking lot or a crowded bus stop. The fact this deadly arsenal can be hurled into a crowd of innocent persons by someone who is not in uniform, can easily mingle with the population and is an everyday person to the untrained eye, has raised antennas everywhere.
Take Hussein Ali, a Kenyan Somalia residing and working in Nairobi. One day, when he decided to carry a rug sack to work, there was an uneasy crowd of onlookers near him at the bus stop. On reaching his destination in town, he encountered a visibly shaken man narrating how suspected Al Shabab militants threw a grenade at patrons at a bar in downtown Nairobi.
"Everyone is scared because no one knows where the next explosion is going to take place. I always feel so scared and insecure while walking the streets with all eyes on you, suspicion written all over their faces, given my Somali origin”, said Ali.
He is part of a large group of law abiding Kenyan Somalis, who are walking the streets but are apprehensive and afraid of what might happen next.
Recent deadly explosions of hand grenades within Nairobi city has prompted tighter security measures around homes, office buildings, bus parks, crowded shopping malls, all open spaces having regular police patrols. In the meantime, security firms are doing brisk business.
“We are living in a climate of fear and facing a threat that is real, posed by a recent resurgent activities of what is thought to be Al Shabaab elements,” said Mark Lipton, Director-Risk and Security, G4S Security Services Kenya Limited.
The regional security situation is also precarious. Many are concerned about their own safety and that of their businesses and assets. We have seen indiscriminate hand grenade attacks here in Nairobi. This has caused panic and generated fear because it is not clear where the next attack is going to come from.
Individuals and organisations are now looking for a reassurance from their security services provider or professionals.
We are getting a lot of interest from our clients on various security services available, including guards, CCTV cameras, additional help and advice to those moving around the city,
We are employing x police and ex military officers, disciplined security management professionals.
We are reminding them of best practice in security business, including quality training.
What solutions do you provide?
A wide range including man guarding services, cctv, alarm response, security risk management training to clients, secured movement solutions, significance presence in sports events such as the Safaricom sevens and Standard Chartered Bank marathon.
We provide refresher courses in counter terrorism, fire and safety, incident management.
Kinyanjui Murigi, CEO Crime Scene Investigations(CSI) Limited.
“We are providing bomb detectors, a garget that has been missing in this market. It is cheaper and more effective than the mirrors currently being used at most hotel establishments in the city, to check for any hidden explosives under the car,” said Kinyanjui Murigi, Chief Executive, Crime Scene Investigations(CSI) Limited.
A bomb detector goes for between Sh 2.5 million and Sh 3.5 million. This is compared to a trained sniffer dog that goes for close to Sh 4 million, minus a handler, upkeep and trainer costs.
Security experts have also dismissed metal detectors, currently in use at the entrance of most office buildings. This is due to the fact that these gargets cannot detect TNT bombs or even fertilizer explosives.
“ While the bomb detector is expensive and high end, it is worth it for those who need to be absolutely secure,” said Murigi.
Although most establishments including hotels and big restaurants screen those passing through its doors using metal detectors, most security guards appear unprepared to react to someone with explosives strapped on them.
“ We are still doing well below par in this respect, leaving potential terrorists with more soft targets,” said Kinyanjui.
HOUSEHOLDS, SMALL BUSINESSES SUFFER HIGH COST OF BORROWING
”We hope that when inflationary pressure eases in the coming months, CBK will act fast and reverse its tight monetary policy stance,” said Edward Gitahi senior investment manager
BY JACKSON OKOTH
Fredrick Chumo, a software specialist in one of the leading IT firms in the country, is a worried man and under intense financial pressure. This is after receiving a letter from the bank, advising him that his monthly loan repayment has been adjusted upwards.
Chumo, who has been repaying his loan at the rate of Sh 15,000 per month, will now have to top up this amount to Sh 25,000. He took out a Sh 100,000 unsecured loan from a retail commercial bank, using his payslip as security. While this loan was supposed to attract an interest of 15 per cent, the bank has pushed this up to 25 per cent.
“The bank says this upward adjustment in repayment rate is in response to a recent hike in Central Bank Rate to 16.5 per cent,” said Chumo.
He is in a class of most middle and low income earners, who are struggling to repay their loans. Even those who were previously thinking of approaching a bank for financial help have fled for the hills.
“For those borrowers who took up loans that have variable interest rates, there is growing pressure to service this debt as banks hike their base lending,” said Edward Gitahi, senior investment manager, PineBridge Investments Limited.
High lending rates have also hit the profit margins of several businesses, most of whom will have no option but to pass this extra cost to consumers.
“There are those ongoing projects whose rate of return is much lower than cost of financing. These may have to be abandoned or work interrupted as cost of credit increases,” said Gitahi.
In recent weeks, a number of commercial banks have raised their base lending rates, the highest hike being that of Equity Bank at 25 per cent up from 15 per cent. This is in reaction to a decision by the monetary policy committee (MPC), a top policy organ of the Central Bank of Kenya (CBK) to increase the Central Bank Rate (CBR) from 11 per cent to 16.5 per cent.
“This steep rise in base lending rates will result in a significant slowdown in new loans uptake. Only short-term borrowers, who mostly engage in cash –only business, are unlikely to be affected by the rate hikes,” Gitahi.
Also hit by expensive credit those firms which do business on credit. These companies are currently experiencing a pile up in the number of debtors on their books.
In the coming month, CBK is not expected to raise the CBR further as the new cash reserve ratio takes effect.
”We hope that when inflationary pressure eases in the coming months, CBK will act fast and reverse its tight monetary policy stance,” said Gitahi.
Already, the interbank rate has risen above 30 per cent. This is an indication that the CBK measures are working.
“We expect high default rates in the banking industry as the mostly low income borrowers find it hard to repay their loans,” said Cynthia Omondi, an analyst at African Alliance.
Those commercial banks with strict credit rules such as Barclays are expected to shy off from lending any further to the private sector, due to rising default risks.
A move by CBK to increase the Central Bank Rate from 11 per cent to 16.5 per cent has had the effect of reducing the amount of liquidity and cash available to banks.
“The effect of this monetary policy adjustment is going to be felt by banks in the fourth quarter and probably the first months of next year,” said Omondi.
In the third quarter, most banks recorded an increase in their loan books, customer deposits and interest income, a situation that is bound to change in the last quarter.
Official data from the Central Bank Kenya indicates that spreads on commercial bank loans remained above
10 per cent throughout the year, reflecting high risk perception by banks. Market data also indicates that most banks consider the risk of loan default to be the highest at the bottom of the market and for short term loans.
GLANCE BOX
• The monetary policy committee (MPC) recently increased the CBR by 550bps to 16.5 per cent.
• Inflation has continued to rise unabated to 18.9 per cent) in October, with persistent exchange rate volatility.
• The MPC has decided to tighten monetary policy by raising the Cash Reserve Ratio 50bps to 5.25 per cent, effective 15 December 2011.
”We hope that when inflationary pressure eases in the coming months, CBK will act fast and reverse its tight monetary policy stance,” said Edward Gitahi senior investment manager
BY JACKSON OKOTH
Fredrick Chumo, a software specialist in one of the leading IT firms in the country, is a worried man and under intense financial pressure. This is after receiving a letter from the bank, advising him that his monthly loan repayment has been adjusted upwards.
Chumo, who has been repaying his loan at the rate of Sh 15,000 per month, will now have to top up this amount to Sh 25,000. He took out a Sh 100,000 unsecured loan from a retail commercial bank, using his payslip as security. While this loan was supposed to attract an interest of 15 per cent, the bank has pushed this up to 25 per cent.
“The bank says this upward adjustment in repayment rate is in response to a recent hike in Central Bank Rate to 16.5 per cent,” said Chumo.
He is in a class of most middle and low income earners, who are struggling to repay their loans. Even those who were previously thinking of approaching a bank for financial help have fled for the hills.
“For those borrowers who took up loans that have variable interest rates, there is growing pressure to service this debt as banks hike their base lending,” said Edward Gitahi, senior investment manager, PineBridge Investments Limited.
High lending rates have also hit the profit margins of several businesses, most of whom will have no option but to pass this extra cost to consumers.
“There are those ongoing projects whose rate of return is much lower than cost of financing. These may have to be abandoned or work interrupted as cost of credit increases,” said Gitahi.
In recent weeks, a number of commercial banks have raised their base lending rates, the highest hike being that of Equity Bank at 25 per cent up from 15 per cent. This is in reaction to a decision by the monetary policy committee (MPC), a top policy organ of the Central Bank of Kenya (CBK) to increase the Central Bank Rate (CBR) from 11 per cent to 16.5 per cent.
“This steep rise in base lending rates will result in a significant slowdown in new loans uptake. Only short-term borrowers, who mostly engage in cash –only business, are unlikely to be affected by the rate hikes,” Gitahi.
Also hit by expensive credit those firms which do business on credit. These companies are currently experiencing a pile up in the number of debtors on their books.
In the coming month, CBK is not expected to raise the CBR further as the new cash reserve ratio takes effect.
”We hope that when inflationary pressure eases in the coming months, CBK will act fast and reverse its tight monetary policy stance,” said Gitahi.
Already, the interbank rate has risen above 30 per cent. This is an indication that the CBK measures are working.
“We expect high default rates in the banking industry as the mostly low income borrowers find it hard to repay their loans,” said Cynthia Omondi, an analyst at African Alliance.
Those commercial banks with strict credit rules such as Barclays are expected to shy off from lending any further to the private sector, due to rising default risks.
A move by CBK to increase the Central Bank Rate from 11 per cent to 16.5 per cent has had the effect of reducing the amount of liquidity and cash available to banks.
“The effect of this monetary policy adjustment is going to be felt by banks in the fourth quarter and probably the first months of next year,” said Omondi.
In the third quarter, most banks recorded an increase in their loan books, customer deposits and interest income, a situation that is bound to change in the last quarter.
Official data from the Central Bank Kenya indicates that spreads on commercial bank loans remained above
10 per cent throughout the year, reflecting high risk perception by banks. Market data also indicates that most banks consider the risk of loan default to be the highest at the bottom of the market and for short term loans.
GLANCE BOX
• The monetary policy committee (MPC) recently increased the CBR by 550bps to 16.5 per cent.
• Inflation has continued to rise unabated to 18.9 per cent) in October, with persistent exchange rate volatility.
• The MPC has decided to tighten monetary policy by raising the Cash Reserve Ratio 50bps to 5.25 per cent, effective 15 December 2011.
BANKS SHOULD NOT OVERCHARGE ON LOANS
Banks should not overcharge on loans
BY JACKSON OKOTH
Commercial banks have adjusted their base lendiong rates in response to actions by Central Bank of Kenya(CBK) tighten supply of cash available for circulation.
But while banks have to make profit, it is unreasonable for them to charge as much as 25-30 per cent per cent for loans, a spread of more than 10 per cent.
This is not only exploitative but also unreasonably high given the financial strain most households and businesses are under.
Banks should realise that their customers are part of the business models. It does not make good business judgement to pushing clients to the wall each time CBK tightens purse strings only to return and hawk cheap credit when the conditions change.
Although Central Bank of Kenya has licensed several credit reference bureaus, it appears that banks are yet to use these facilities.
Official data from the Central Bank Kenya indicates that spreads on commercial bank loans have remained above 10 per cent throughout the year, reflecting high risk perception by banks.
Market data also indicates that most banks consider the risk of loan default to be the highest at the bottom of the market and for short term loans.
With commercial banks increasing their lending rates, the unfolding scenario will be that of high default rates and customers lose their property to auctionners and debt collectors.
Perhaps, this is the time for borrowers to seek for alternative sources for loans such as savings and credit co-operative societies(SACCOs). This is until the situation in the banking industry gets back to normal.
At the moment, Savings and Credit Co-operative Societies(SACCOs) are charging an average interest rate of 12 per cent on a reducing balance compared to a high of 25-30 per cent for commercial bank loans.
A key indicator of financial performance and efficiency is the spread between lending and deposit rates. If this spread is large, it works as an impediment to the expansion and development of financial intermediation.
While commercial banks are charging between 19 and 30 per cent for loans, depending on a customer’s risk profile, banks pay a paltry 2-3 per cent for deposits. This rates not only discourage potential savers due to low returns on deposits but also limits financing for potential borrowers.
When banks push the cost of credit beyond ordinary borrowers, this scenario not only affects level of investment in the economy and also slows down its growth.
At a time when this economy is battling negative effects of drougt, a weak Kenya Shilling and high oil prices, the last thing one needs if expensive credit.
Commercial banks have for long used the excuse that lending to individuals is a risky venture to push up their lending rates. However, we know that the banking industry is riddled with inefficiencies and high operating costs.
There is also lack of competition in the sector, the entire credit market controlled by four of five large commercial banks.
Matters for the financial sector are made worse by a CBK whose monetary policy stance is at the whim and beckon of the International Monetary Fund(IMF). It does not reflect well on the Moneraty Policy Committee(MPC) atop policy organ of the CBK to move only when pushed by the IMF.
As a regulator, CBK shoull come up with a rule on the level that banks can charge above the Central Bank Rate(CBR), to safeguard the interest of consumers. Allowing commercial banks to adjust their lending rates without any form of guidelines is not only irresponsible but also a careless attitude from an institution that is supposed to act as the public’s watch dog.
It is not fair for CBK to leave customers at the mercy of banks, who will go ahead and sell off propertiers when the number of defaulters increase on the loan book.
To narrow interest rate spread, it is important to maintain a stable macroeconomic environment and thus reduce credit risks.
There is also a need to minimize implicit taxes like reserve and cash ratios, accompanied by fiscal discipline to reduce the demand for financing budget deficit with low-cost funds.
Banks should perform more intermediation/screening functions than simply investing in Treasury bills each time the CBK pushed up the CBR, cash reserve or any other moneraty tool.
BY JACKSON OKOTH
Commercial banks have adjusted their base lendiong rates in response to actions by Central Bank of Kenya(CBK) tighten supply of cash available for circulation.
But while banks have to make profit, it is unreasonable for them to charge as much as 25-30 per cent per cent for loans, a spread of more than 10 per cent.
This is not only exploitative but also unreasonably high given the financial strain most households and businesses are under.
Banks should realise that their customers are part of the business models. It does not make good business judgement to pushing clients to the wall each time CBK tightens purse strings only to return and hawk cheap credit when the conditions change.
Although Central Bank of Kenya has licensed several credit reference bureaus, it appears that banks are yet to use these facilities.
Official data from the Central Bank Kenya indicates that spreads on commercial bank loans have remained above 10 per cent throughout the year, reflecting high risk perception by banks.
Market data also indicates that most banks consider the risk of loan default to be the highest at the bottom of the market and for short term loans.
With commercial banks increasing their lending rates, the unfolding scenario will be that of high default rates and customers lose their property to auctionners and debt collectors.
Perhaps, this is the time for borrowers to seek for alternative sources for loans such as savings and credit co-operative societies(SACCOs). This is until the situation in the banking industry gets back to normal.
At the moment, Savings and Credit Co-operative Societies(SACCOs) are charging an average interest rate of 12 per cent on a reducing balance compared to a high of 25-30 per cent for commercial bank loans.
A key indicator of financial performance and efficiency is the spread between lending and deposit rates. If this spread is large, it works as an impediment to the expansion and development of financial intermediation.
While commercial banks are charging between 19 and 30 per cent for loans, depending on a customer’s risk profile, banks pay a paltry 2-3 per cent for deposits. This rates not only discourage potential savers due to low returns on deposits but also limits financing for potential borrowers.
When banks push the cost of credit beyond ordinary borrowers, this scenario not only affects level of investment in the economy and also slows down its growth.
At a time when this economy is battling negative effects of drougt, a weak Kenya Shilling and high oil prices, the last thing one needs if expensive credit.
Commercial banks have for long used the excuse that lending to individuals is a risky venture to push up their lending rates. However, we know that the banking industry is riddled with inefficiencies and high operating costs.
There is also lack of competition in the sector, the entire credit market controlled by four of five large commercial banks.
Matters for the financial sector are made worse by a CBK whose monetary policy stance is at the whim and beckon of the International Monetary Fund(IMF). It does not reflect well on the Moneraty Policy Committee(MPC) atop policy organ of the CBK to move only when pushed by the IMF.
As a regulator, CBK shoull come up with a rule on the level that banks can charge above the Central Bank Rate(CBR), to safeguard the interest of consumers. Allowing commercial banks to adjust their lending rates without any form of guidelines is not only irresponsible but also a careless attitude from an institution that is supposed to act as the public’s watch dog.
It is not fair for CBK to leave customers at the mercy of banks, who will go ahead and sell off propertiers when the number of defaulters increase on the loan book.
To narrow interest rate spread, it is important to maintain a stable macroeconomic environment and thus reduce credit risks.
There is also a need to minimize implicit taxes like reserve and cash ratios, accompanied by fiscal discipline to reduce the demand for financing budget deficit with low-cost funds.
Banks should perform more intermediation/screening functions than simply investing in Treasury bills each time the CBK pushed up the CBR, cash reserve or any other moneraty tool.
Wednesday, October 26, 2011
The Sacco industry has been long associated with poor corporate governance and such financial atrocities as the infamous pyramid schemes. But all the past is changing with the entry of Savings and Credit Co-operatives Regulatory Authority (SASRA) which has set up rules and regulations to govern this industry. Staff Writer JACKSON OKOTH spoke to the SASRA Chief Executive Carilus Ademba on challenges, strides made so far in the industry and future outlook. Below are excerpts.
What progress has been made in registration of deposit-taking Saccos?
At the moment, we have already licensed 73 deposit-taking SACCOs as per the law which required that all such SACCOs offering front office services reapply to the authority to be allowed to continue with the business. Out of a total of 219 such SACCOs, only 7 such SACCOs did not reapply for a license when the one year period expired. We have been looking at among requirements looking at how these SACCOs have been able to reorganise their books of accounts, reformed their business plans and had their policies approved by shareholders, before renewing the license. We have also issued ‘cease and desist’ orders to all those SACCOs that do not comply with the new licensing requirements. At the moment, we are still going through some 140 applications from those SACCOs that have already submitted their requests for licenses.
Could you briefly mention some of the key elements you are looking at before issuing a license to a SACCO offering front office services?
We are looking at a SACCOs investment and loan policies as well as its guarantees. The authority has also to approve a SACCOs technology platform to ensure that it has the required software that can generate the periodic reports required by SASRA. Those SACCOs seeking for a fresh license also have to submit a list of its board and senior management for vetting purposes. Presently, all the 73 licensed SACCOs submit monthly reports to the authority, similar to what commercial banks do with the Central Bank of Kenya. Those applying for license must also meet the Sh 10 million capital adequacy requirement. Investment of SACCO funds in non-core business must not be more than 10 per cent of its total assets. In addition, some 15 per cent of the SACCOs total assets must be in cash form to adequately provide for its liquidity requirements. SACCOs will also be expected to make adequate provision for loan losses, as is done by commercial banks and other financial institutions.
What will happen to those SACCOs that fail to meet the requirements set by SASRA?
We shall be giving conditional licenses to those who fail to comply with laid down requirements. A window of six months will then be provided for those failing to meet the licensing requirements, including a credible business plan. We are also encouraging those SACCOs that fail to meet our licensing threshold to merge their operations, especially those operating within the same geographical area. In certain circumstances, we shall be encouraging some SACCOs to shut down their front office operations and upgrade their technology platforms before they reapply afresh.
Your focus is still on SACCOs that offer front office services. When will SASRA’s supervision and oversight extend over the entire industry?
Figures indicate that the entire SACCO industry is worth Sh 210 billion with those societies with front office controlling some Sh 171 billion of this amount or 75 per cent of the sector. In the long run, we shall extend our supervision to the rest of the 25 per cent. We are already developing guidelines for the non-deposit taking SACCOs, controlling funds worth an estimated Sh 39 billion. We are still building capacity at SASRA to enable it supervise the entire industry.
What progress is being made to increase SASRA’s supervisory capacity?
We are currently getting a lot of support from the World Bank on capacity building, including setting up a risk-based supervision model. There is already a plan to invest in the required IT platform that will allow SASRA effectively monitor and police the entire industry. Once we have the required software in place, we shall be able to generate the required reports. The World Bank has already provided a resident consultant to support SASRA’s capabilities and capacity. We already have a support staff of 30 people with technical skills, seconded from such institutions as the Central Bank of Kenya and anti-corruption watchdogs.
Will SASRA weed out sticking corporate governance issues long associated with the SACCO movement?
In the past, the SACCO sector has been affected by serious mismanagement issues, especially by their management boards. In most cases, insider loans to committee members end up unrecovered. But with the new regulations in place, including a requirement that reports on insider loans be given to SASRA ON 15th of every month, we have been able to seal this loophole. There are SACCO’s still run by boards that have since entrenched themselves and unwilling to let go of their control. We are insisting that chief executives should take charge of the daily running of SACCO activities, away from the board. The authority has already directed that those SACCOs run by powerful executive committees dismantle these units and leave the society’s staff to run the organisation’s daily routine. Although we have seen some resistance in this area, we are educating SACCOs on the need to embrace this change. The authority is also insisting that all SACCO boards must be composed of professionals, which must include a qualified finance officer, legal counsel and an auditor. The law requires that the SACCO’s internal auditor reports to its audit committee periodically.
How have SACCOs responded to the new rules?
I am that Saccos have responded well to the new regulations. This is fundamental in the sense that there is now increased confidence in this industry. Saccos are financial institutions that must operate under the rules of best practice. A well run SACCO sector will assist the Government to channel its devolved funds, such as the Youth and Women Fund, to intended beneficiaries.
What will happen to those SACCOs that engage in errant behaviour or break the law?
The authority can dissolve the SACCOs board if any errant behaviour is detected. We can also dismiss and or surcharge the society’s chief executive or any of its officers engaged in fraudulent activities. SASRA can also do statutory management of a SACCO until a new board is put in place. If periodic reports are not submitted to the authority, then financial sanctions may be taken against either the board or staff
What progress has been made in registration of deposit-taking Saccos?
At the moment, we have already licensed 73 deposit-taking SACCOs as per the law which required that all such SACCOs offering front office services reapply to the authority to be allowed to continue with the business. Out of a total of 219 such SACCOs, only 7 such SACCOs did not reapply for a license when the one year period expired. We have been looking at among requirements looking at how these SACCOs have been able to reorganise their books of accounts, reformed their business plans and had their policies approved by shareholders, before renewing the license. We have also issued ‘cease and desist’ orders to all those SACCOs that do not comply with the new licensing requirements. At the moment, we are still going through some 140 applications from those SACCOs that have already submitted their requests for licenses.
Could you briefly mention some of the key elements you are looking at before issuing a license to a SACCO offering front office services?
We are looking at a SACCOs investment and loan policies as well as its guarantees. The authority has also to approve a SACCOs technology platform to ensure that it has the required software that can generate the periodic reports required by SASRA. Those SACCOs seeking for a fresh license also have to submit a list of its board and senior management for vetting purposes. Presently, all the 73 licensed SACCOs submit monthly reports to the authority, similar to what commercial banks do with the Central Bank of Kenya. Those applying for license must also meet the Sh 10 million capital adequacy requirement. Investment of SACCO funds in non-core business must not be more than 10 per cent of its total assets. In addition, some 15 per cent of the SACCOs total assets must be in cash form to adequately provide for its liquidity requirements. SACCOs will also be expected to make adequate provision for loan losses, as is done by commercial banks and other financial institutions.
What will happen to those SACCOs that fail to meet the requirements set by SASRA?
We shall be giving conditional licenses to those who fail to comply with laid down requirements. A window of six months will then be provided for those failing to meet the licensing requirements, including a credible business plan. We are also encouraging those SACCOs that fail to meet our licensing threshold to merge their operations, especially those operating within the same geographical area. In certain circumstances, we shall be encouraging some SACCOs to shut down their front office operations and upgrade their technology platforms before they reapply afresh.
Your focus is still on SACCOs that offer front office services. When will SASRA’s supervision and oversight extend over the entire industry?
Figures indicate that the entire SACCO industry is worth Sh 210 billion with those societies with front office controlling some Sh 171 billion of this amount or 75 per cent of the sector. In the long run, we shall extend our supervision to the rest of the 25 per cent. We are already developing guidelines for the non-deposit taking SACCOs, controlling funds worth an estimated Sh 39 billion. We are still building capacity at SASRA to enable it supervise the entire industry.
What progress is being made to increase SASRA’s supervisory capacity?
We are currently getting a lot of support from the World Bank on capacity building, including setting up a risk-based supervision model. There is already a plan to invest in the required IT platform that will allow SASRA effectively monitor and police the entire industry. Once we have the required software in place, we shall be able to generate the required reports. The World Bank has already provided a resident consultant to support SASRA’s capabilities and capacity. We already have a support staff of 30 people with technical skills, seconded from such institutions as the Central Bank of Kenya and anti-corruption watchdogs.
Will SASRA weed out sticking corporate governance issues long associated with the SACCO movement?
In the past, the SACCO sector has been affected by serious mismanagement issues, especially by their management boards. In most cases, insider loans to committee members end up unrecovered. But with the new regulations in place, including a requirement that reports on insider loans be given to SASRA ON 15th of every month, we have been able to seal this loophole. There are SACCO’s still run by boards that have since entrenched themselves and unwilling to let go of their control. We are insisting that chief executives should take charge of the daily running of SACCO activities, away from the board. The authority has already directed that those SACCOs run by powerful executive committees dismantle these units and leave the society’s staff to run the organisation’s daily routine. Although we have seen some resistance in this area, we are educating SACCOs on the need to embrace this change. The authority is also insisting that all SACCO boards must be composed of professionals, which must include a qualified finance officer, legal counsel and an auditor. The law requires that the SACCO’s internal auditor reports to its audit committee periodically.
How have SACCOs responded to the new rules?
I am that Saccos have responded well to the new regulations. This is fundamental in the sense that there is now increased confidence in this industry. Saccos are financial institutions that must operate under the rules of best practice. A well run SACCO sector will assist the Government to channel its devolved funds, such as the Youth and Women Fund, to intended beneficiaries.
What will happen to those SACCOs that engage in errant behaviour or break the law?
The authority can dissolve the SACCOs board if any errant behaviour is detected. We can also dismiss and or surcharge the society’s chief executive or any of its officers engaged in fraudulent activities. SASRA can also do statutory management of a SACCO until a new board is put in place. If periodic reports are not submitted to the authority, then financial sanctions may be taken against either the board or staff
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