SACCOs are classified as the cornerstone of vision 2030 in mobilizing savings from current 16% to the desired 30%. SACCO movement started as social in nature and it operated for decades this way. I believe it is possible to maintain the social nature of SACCOs while positioning them to evolve in the new age of disruption. Is it not time SACCOs seek ways to evolve in order to survive in the modern age of financial technology companies that are introducing new and innovative models of saving and lending?
Changing landscape. One is the nature of jobs nowadays are changing. The SACCO movement was mainly formed in order to pool funds for advancing affordable credit to people with a similar common bond. This led to formation of SACCOs with members being predominantly employees of one corporation or entity. For example Stima SACCO was formed by employees of Kenya Power, Mwalimu SACCO by teachers, Afya SACCO, Kenya Police SACCO and so on. However in the last decade or so there has been evolution in the nature of jobs. More and more people are doing freelance work; informal sector is becoming more and more vibrant, creative economy, entrepreneurship culture and so on. These new crop of workers are going to have different characteristics than their predecessors. Differences in terms of work culture, nature of jobs, employment terms, earnings etc. These people also need financial services in terms of savings and credit that reflect their unique situation. SACCOs could be in the forefront to harness this opportunity.
Alternative credit scoring?: In the current state, SACCOs loan to members based on two major aspects: the amount of savings and guarantor-ship. For smaller loans, savings and guarantee from other members is enough to secure a loan. However, for larger amount there needs to be some form of collateral, in most cases it is land, car or any other physical assets. Now this is where I think improvements should come in. Younger people in job settings that I have highlighted above may not have physical assets such as land and cars. Furthermore, they may not have regular paychecks that would enable them to access credit. However, they have income, though irregular. The challenge and opportunity is aggregating useful data about them that can be used as credit score and it’s already happening. For example farmers that rely on approved warehouses to store their produce such as maize, sorghum, wheat and barley can use warehouse receipts to access credit. see more here. Farmers with cows are able to access loans based on amount of milk produced that they take to the dairy. With correct data capture about the amount of milk produced, the health of the cow, feeding etc, the data can be aggregated and used to assess credit worthiness. Imagine if this is extrapolated to other areas that there are people with irregular incomes? Huge opportunity.
Grameen 2.0: The current developments are what i would call Grameen 2.0. Professor Muhammad Yunus conceptualized the idea of group lending whereby members of a group are used as collateral for a loan. The micro-credit system was devised to enable the poor in Bangladesh to access credit and it led to formation of Grameen Bank in 1980s. This has been one of the great pillars that has made chamas, investment groups ,merry go-rounds and SACCOs to thrive. Could we now be entering into Grameen 2.0 whereby instead of using other members support, your own digital footprint is used to aggregated data as a basis of lending? The use of digital traits has been conceptualized since 2011 and growing. Some startups are currently experimenting with non-traditional forms of data for assessing credit worthiness of a potential borrower. Algorithm and big data analytics are allowing companies to use social media activity, location, and mobile phone usage to identify, score and underwrite credit to low and middle income consumers that lack formal credit history. Using data processing facilities, it is possible to analyze a person’s digital footprint in a new way that is not captured in the traditional ways. Some other new startups are using metrics such as amount of credit in your phone, frequency of topping up credit, number of people you call, length of each call to evaluate credit worthiness. The examples are many. A good example would be: https://www.lenddo.com/. These are mainly being used to lend for smaller denominations.
Another area that I think is going to witness changes is the repayment models. Majority of the above borrowers are not likely to have stable, consistent income to enable them make rigid loan repayments. This results to missed payments and defaults. There is probability of new and flexible ways of repaying that could be favorable to both the lending institution and the borrower. I think SACCOs have a grand opportunity to offer even better products than even banks and other financial technology companies. They have a pool of members, they have data, they know their trends. However, all the data silos is rarely used to inform credit scores that would see evolution of financial services offered. You can get more details on this concept here and here.
All these alternative ways of lending are in their early stages and there are risks involved just like in any innovation. The default rates are still high as they work to improve the models. Embracing a long term view is crucial in order to work out the best model. It remains to be seen which of these models will be robust enough to ultimately move the needle and disrupt the credit scoring model especially for informal markets. Ultimately, these credit scoring alternatives will reduce costs of borrowing and therefore interest rates on loans will also reduce. I remember the way equity was among the first banks to cuts costs of opening a bank account to attract low income earners. The current battleground is on use of alternative data to rate credit worthiness of a borrower as well as structuring repayment schedules.
Another area is the nature of investments that SACCOs undertake. Established SACCOs command sizable amount funds that are channeled mainly into safer investments like real estate and stock market. There is also other opportunity for SACCOs, and chamas to diversify their investments. If a chama or SACCO is well endowed financially, it can diversify its investment portfolio, say invest in a pool: real estate, stocks and venture capital, particularly, venture capital. Understandably, VC investments are long term oriented, 5-10 years and are not very attractive in Kenya at the moment. However, channeling some funds so that they are invested through holding companies could be attractive. The SACCO then holds majority shares in the holding company and invite other participants, say 2 or 3 investors. The pool of funds can be used for venture capital investing. To resonate well with members, the funding can go towards projects within the community at first and then expand thereafter. For example investing in areas such as light processing industries in the area etc. This model was proposed by Stephen Gugu and Wilfred Mworia in Chapter 14 of the ‘Digital Kenya Publication’ titled ” Venture Capital in East Africa, is There a Right Model?
This could work well because it becomes part of larger social fabric that cements the SACCO as being part of the larger community because of job creation in the area and uplifting the living standards of local people. This approach could benefit in improving funding for local SMEs to bridge the funding gap. The long term effect would be that the SACCOs would morph to be multi-faceted investment vehicles that serve many functions within the community and the country at large: improve savings culture, low lending rates, increase the banking reach, improve access to capital for SMEs in the local area, promote creation of job opportunities, more taxation and others. The wealth creation cycle therefore grows even further and becomes a fabric that shapes communities and a country at large.
Majority of innovations boils down to the fundamental laws. Innovation could be improvement of an existing product or service. The first mobile phone that was made is not the same as one today, although the fundamentals that make it a phone remain: communication. Even in SACCOs, the fundamentals laws should always remain, savings and lending, pooling of funds, affordable credit etc. but other things should evolve in order to transform it to be ready for disruptive 21st century. I believe what is true is that people will continue to demand affordable credit. Saving in order to advance affordable credit is the basic principle. Now we should build on that and see how we can improve on it going forward.
If you are interested in further reading you can check out some of the links i have provided below in text. Just click the links and read away…
In the next post, I will explore more in VC funding in Kenya. check out soon…