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Law Thesis and Dissertations
2018-11-19
REGULATING SAVING AND CREDIT
COOPERATIVES IN ETHIOPIA: THE
NEED FOR REFORM
ASNAKE, GASHAW
http://hdl.handle.net/123456789/9167
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REGULATING SAVING AND CREDIT
COOPERATIVES IN ETHIOPIA: THE NEED FOR
REFORM
BY: - ASNAKE GASHAW
School of Law,
Bahir Dar University
June, 2018
i
REGULATING SAVING AND CREDIT COOPERATIVES IN
ETHIOPIA: THE NEED FOR REFORM
Thesis
Submitted in Partial Fulfillment of the Requirements for the Degree of
Master of Laws (LL.M.) in Business and Corporate Law Program at the
School of Law, Bahir Dar University
By
Asnake Gashaw
Advisor
Solomon Abay Yimer (LL.B, LL.M, Ph.D.,
Assistant Professor)
School of Law,
Bahir Dar University
June, 2018
ii
Thesis Approval Page
The thesis titled “Regulating Saving and Credit Cooperatives in Ethiopia: The Need for
Reform” by Mr. Asnake Gashaw Mhretu is approved for the degree of Master of Laws
(LL.M.)
Board of Examiners
Name
Signature
Advisor Solomon Abay Yimer (Dr., Assistant Professor of Laws)
______________________
Internal Examiner _____________________
______________________
External Examiner _____________________
_______________________
Date:
_____________________
iii
Declaration
I, the undersigned, declare that the thesis comprises my own work. In compliance with
widely accepted practices, I have duly acknowledged and referenced all materials used in
this work. I understand that non-adherence to the principles of academic honesty
and integrity, misrepresentation/fabrication of any idea/data/fact/source will
constitute sufficient ground for disciplinary action by the University and can also
evoke criminal sanction from the State and civil action from the sources which have
not been properly cited or acknowledged.
_______________________
Signature
Asnake Gashaw
Name of Student
BDU0908002
University Id. Number
_______________________
Date
iv
Dedication
________________________________________________________________________
______
To my beautiful daughter Dania Asnake…You gave my life a
meaning!!!
______________________________________________________________________________
_______
v
Acknowledgement
First and foremost, I would like to thank the Almighty Allah for everything……..Al-
Hamdu Lillah!!!!!
Next, my acknowledgement goes to Dr. Solomon Abay Yimer and those key-informants
willing to accept my interview and gave me information….Mrs. Bethelehem Zerihun
from Awach SACCO….Mr. Sileshi Hailu, Yisak Betel, Birhanu Duffera, Getachew
Ketema, Yenebithon Simegn, Chane Adane all from FCA, thank you very much.
Then, I‟m very grateful to my all family and especially to my beloved wife, Amira
Ali….I have nothing to say but love you!!
And then, I‟m very indebted for my friend…Mustefa Hussien….for your hospitality and
cooperation….I really thank you!!
Last but not least, my special thanks go to my classmates…particularly Tajebe Getaneh,
Israel Woldekidan and Khalid Kebede…thank you guys!!!
vi
Table of Contents THESIS APPROVAL PAGE ............................................................................................. II
DECLARATION .............................................................................................................. III
DEDICATION .................................................................................................................. IV
ACKNOWLEDGEMENT ................................................................................................. V
ACRONYMS/ABBREVIATIONS................................................................................... IX
ABSTRACT ....................................................................................................................... X
CHAPTER ONE ................................................................................................................. 1
1. INTRODUCTION ....................................................................................................... 1
1.1 General Introduction ................................................................................................ 1
1.2 Background of the Study ......................................................................................... 5
1.3 Statement of the Problem .............................................................................................. 7
1.4 Literature Review.......................................................................................................... 9
1.4 Objectives of the Study ............................................................................................... 10
1.4.1 General Objective ................................................................................................. 10
1.4.2 Specific Objectives ............................................................................................... 10
1.5 Research Questions ..................................................................................................... 10
1.5.1 Main Research Question ...................................................................................... 10
1.5.2 Specific Research Questions ................................................................................ 10
1.6 Significance of the Study ............................................................................................ 11
1.7 Scope of the Study ...................................................................................................... 11
1.8 Limitation of the Study ............................................................................................... 11
1.9 Research Methods and Methodology.......................................................................... 12
1.9.1 Research Approach .............................................................................................. 12
1.9.2 Data Sources and Data Collection Methods ......................................................... 13
1.9.3 Data Analysis Technique ..................................................................................... 14
1.10 Organization of the Paper ......................................................................................... 14
CHAPTER TWO .............................................................................................................. 15
2. THE CURRENT REGULATION OF SAVING AND CREDIT COOPERATIVES IN
ETHIOPIA ........................................................................................................................ 15
2.1. Introduction ................................................................................................................ 15
vii
2.2. The General Overview of Financial System and Development of SACCOs in
Ethiopia ............................................................................................................................. 16
2.2.1. The General Overview of Financial System in Ethiopia..................................... 16
2.2.2. Historical Development of SACCOs in Ethiopia ................................................ 17
2.3. The Current Regulatory Framework of SACCOs in Ethiopia ................................... 20
2.3.1 Substantive Regulatory Regime/Legal Framework ............................................. 20
2.3.1.1 Proclamation No.985/2016 and Other Implementing Secondary Legislations
................................................................................................................................... 21
2.3.2 Institutional Regulatory Regime .......................................................................... 54
2.3.2.1 The Regulatory Authority .............................................................................. 54
2.3.2.2 The Powers and Responsibilities of the Regulator ........................................ 55
2.3.2.3 Administrative Action and Sanctions ............................................................ 57
CHAPTER THREE .......................................................................................................... 60
3. THE LIMITATIONS OF THE CURRENT REGULATORY REGIME OF SACCOS
........................................................................................................................................... 60
3.1 Introduction ................................................................................................................. 60
3.2 Problems Related to Legal Framework of SACCOs .................................................. 60
3.2.1 Formation Related Problems ................................................................................ 61
3.2.2 Operation related Problems .................................................................................. 63
3.2.3 Management and Governance Related Problems................................................. 66
3.2.4 Accounts and Reporting Related Problems .......................................................... 67
3.2.5 Market Exit Problems .......................................................................................... 68
3.2.6 Other Problems ..................................................................................................... 70
3.3 Problems Related to the Institutional Regulatory Regime .......................................... 75
3.4 Should Ethiopia reform its Savings and Credit Cooperatives Regulatory Regime? .. 79
CHAPTER FOUR ............................................................................................................. 82
4. INTERNATIONAL EXPERIENCES IN REGULATING SACCOS AND LESSONS
TO ETHIOPIA .................................................................................................................. 82
4.1 Introduction ................................................................................................................. 82
4.2 Regulation of SACCOs in Different Jurisdictions ...................................................... 83
4.2.1 Administrative Regulations .................................................................................. 87
viii
4.2.2 Prudential and Operational Regulations ............................................................... 93
4.2.3 Accounting and Audit Regulations .................................................................... 101
4.2.4 Governance Regulations .................................................................................... 104
4.2.5 Consumer Protection and Information Related Regulations .............................. 108
4.2.6 Enforcement Regulations ................................................................................... 110
4.3 Lessons Drawn to Ethiopia ....................................................................................... 120
CHAPTER FIVE ............................................................................................................ 125
5. CONCLUSION AND RECOMMENDATION .......................................................... 125
5.1 Conclusion ................................................................................................................ 125
5.2 Recommendations ..................................................................................................... 127
BIBLIOGRAPHY ........................................................................................................... 131
ix
Acronyms/Abbreviations
CFI Cooperative Financial Institutions
CSA Cooperative Societies Act (Malawi)
CSA490 Cooperative Societies Act (Kenya)
DT-SACCO Deposit Taking Savings and Credit
Cooperative Societies
ETB Ethiopian Birr
FCA Federal Cooperatives Agency/Financial
Cooperatives Act
FSA Financial Societies Act
MUSCCO Malawi Union of Savings and Credit
Cooperative Societies
NBE National Bank of Ethiopia
NFIS National Financial Inclusion Strategy
RBM Reserved Bank of Malawi
SARSA SACCO Societies Regulatory Authority of
Kenya
SSA SACCO Societies Act
SSR SACCO Societies Regulations
SACCO Savings and Credit Cooperatives
USD United States‟ Dollar
WOCCU World Council of Credit Unions
x
Abstract
In many countries, SACCOs are recognized as veritable tools for poverty alleviation and
economic development because they enhance individual savings and access to investment credit.
In cognizance of this, countries paid a great endeavor to create a sound operating SACCO sector
and to attain its sustainable development through providing effective and enabling regulatory
framework. Particularly, designing special legislation and proper supervision boosts SACCOs’
growth and increase their role in poverty alleviation and socio-economic development of a
country.
In this study, Ethiopian SACCOs’ substantive and institutional regulatory regimes, along with
their limitations, are analyzed in order to examine the adequacy of the existing Ethiopian
regulatory framework in the effective regulation of SACCOs and based on the finding to suggest
possible adjustment to enhance the regulation. The thesis also juxtaposes the best regulatory
experiences of comparative jurisdictions on how they tried to regulate SACCOs for the purpose of
drawing lessons for Ethiopia. To that end, the research adopts qualitative legal research
methods. As a result, the current Ethiopian primary and secondary legislations and supervisory
institution of SACCOs and regulatory experience of selected jurisdictions are consulted. The
researcher also had interviews with personnel at FCA and Awach SACCO. Therefore, the whole
issues related to the central theme of this study are discussed briefly and presented in five
chapters.
The findings of the study showed that currently SACCOs are not governed by the legal framework
specifically designed for them and their regulator also is not appropriate and capable to
supervise the operations of SACCOs involves financial intermediation. Consequently, different
problems and issues that affect the operation of SACCOs are evident in practice. Based on this,
the thesis argued that the current Ethiopian regulatory framework is not adequate to effectively
regulate SACCOs and hence the country required to undertake reforms thereon. Finally, the
research recommends that Ethiopia should enact new SACCOs’ specific legislation that
recognizes the unique nature of SACCOs as a financial institution and strength their regulation
through establishing a separate and independent regulatory authority with sufficient knowledge
of the area of regulation in order to foster the sustainable development of the SACCOs’ sector.
1
CHAPTER ONE
1. INTRODUCTION
1.1 General Introduction
Saving and Credit Cooperatives, as cooperative financial institution1 and albeit highly pervasive
in most countries, are among the poorly understood entities that comprise the existing
institutional base for financial intermediation.2 The history of Saving and Credit Cooperatives
(hereinafter SACCOs) was evolved from the consolidation, by two community business leaders
Freidrich W. Reifeisen and Herman schultze- Delitsche, of two different small self-help financial
cooperatives (created as a response to basic financial service needs of the less-fortune rural and
urban unbanked citizens), “Raiffeisen” and “Schulze-Delitzsch”, in Germany during the late
1800s and the merger marks the formation of the first credit union (financial cooperative)
movement.3 The overall modern development of SACCOs around the world shows that they
were formed critically for the purpose of financial outreach and inclusion or in order to create
access to finance for the poor or the unbanked segment of the population.4 This is because of that
the financial development is generally accepted to exert beneficial effects on both growth and
poverty alleviation.5 Therefore, a savings and credit cooperative is a “self-help cooperative
financial organization whose aim is to promote economic, social and cultural needs and
aspirations of its membership through a mutually owned and democratically controlled
1 The term cooperative financial institutions (CFI) include institutions that bear different names but are essentially
identical, such as SACCOs, Credit Unions, Thrift and Credit Cooperatives, Saving and Credit Associations,
Cooperative Banks, etc. In most parts of the world, Savings and Credit Cooperatives are called Credit Unions, so the
writer in this study used these two names interchangeably and has the same meaning.
Thrift and Credit Cooperatives, Saving and Credit Associations, etc., In most parts of the world SACCOs are called
Credit Unions, so that these two terms have been used in this study to refer to the same entity. 2 Carlos E. Cuevas and Klaus P. Fischer, „Cooperative Financial Institutions: Issues in Governance, Regulation and
Supervision‟, World Bank Working paper No.82, The World Bank, Washington, D.C., U.S.A., 2006, p.1,
[hereinafter Carlos and Klaus, Cooperative Financial Institutions]. 3 Rural SPEED, Sustainable SACCO Development: Training Material, Rural SPEED, USAID, 2006, P.1,
[hereinafter Rural SPEED, Sustainable SACCO Development]. 4 Id, P.2
5 Philip Kostop, et al,‟ Banking the Unbanked: The Mzansi Intervention in South Africa‟, Indian Growth and
Development Review, 2014, Vol.7, Issue 2, PP.118-141, at P.118, available at < http://doi.org/101.1108/IGDR-11-
2012-0026> last accessed on 25th
March, 2018.
2
enterprise”.6 SACCOs have multiple functions but two of them are fundamental; i) financial
intermediation, taking members‟ money in the form of saving and lend them back to the
members through loan, and ii) investment, selling shares to members.7 SACCOs have been
important contributors to economic and social development for long period of time and still now
they are significant participants in the national financial markets of many countries. In 2016,
there are about 68,582 SACCOs with 235,762,076 members around the globe according to the
2016 statistical report of the World Council of Credit Unions (hereinafter WOCCU), established
in 1958 as an umbrella organization for credit unions.8 Have a total asset of 1.7 Trillion USD,
total savings of 1.4 Trillion USD, total loan of 1.2 Trillion USD and 170 Billion USD in
Reserves.9
Regulation is a distinct set of rules or law designed to govern certain conduct through creating
limits, constrains, duty or responsibility.10
It is established by a regulatory institution, which in
the area of financial markets can be a government, a central bank as a regulator, or the regulated
financial market participants by themselves.11
Where a regulation aimed specifically in
safeguarding the financial system stability in general and protecting the safety of small deposits
in individual institutions in particular, it becomes prudential regulation.12
Obviously, SACCOs‟
collectively represent only a small percentage of the financial sector‟s total assets in most
countries because of their customers being the poor, low and middle income individuals and as a
result of their local level of establishment. Although their assets may be low by comparison,
credit unions serve large numbers of small depositors and, as such, should be regulated and
6 David M. Mathuva, „Drivers of Financial and Social Disclosure by Savings and Credit Cooperatives in Kenya: A
Managerial Perspective‟, Journal of Cooperative Organization and Management, 2016, Vol.4, PP.85-96, at p.86
[hereinafter David Mathuva, Drivers of Financial and Social Disclosure] 7 Zerfeshewa Betru, Determinants of Saving and Credit Cooperatives (SACCOs) Operational Performance in
Gonder Town, Ethiopia, MA Thesis, Mekelle University, College of Business and Economics, 2010, P.4,
[unpublished, available online] [hereinafter Zerfeshewa, determinants of SACCOs]. 8 World Council of Credit Unions, Statistical Report, 2016, at< www.woocu.org/impact/global/reach/statreprt>,
accessed on 15th
April, 2018 9 Ibid
10 Biwott Kevin, The Effect of Regulation by SARSA on Performance of Small SACCOs in Kenya, MA Thesis,
Kabarak University, 2014, p.3, [unpublished, available online], [hereinafter Bitwott Kevin, The Effect of
Regulation] 11
Michel Fiebig, Prudential Regulation and Supervision for Agricultural Finance, Agricultural Finance Revisited,
Food and Agriculture Organization of the United Nations (FAO), Rome, Italy, 2001, P.1, [hereinafter Michel Fiebig,
Prudential Regulation and Supervision]. 12
Onafookan O. Oluyomba (ed), Cooperative Finance in Developing Economies, Soma Prints Limited, Lagos,
Nigeria, 2012, p.64, [hereinafter Onafowokan, Cooperative Finance in Developing Economies].
3
supervised.13
Accordingly, the regulations of SACCOs were introduced in many places around
the world, but the degree of their formal legislation and regulation varies widely.14
In some
countries, they are subject to extensive legislation and they operate in a highly regulated
environment, while in other countries legislation and regulations have not been developed
specifically for SACCOs, or if legislation and/or regulations do exist, they are often weak and
ineffective.15
These deficiencies are concerning for the reason that lack of enabling regulations
affects the safety and soundness of SACCOs.16
There are different regulatory principles that make a prudential regulation prudent. These
principles or regulatory commandments are intends to indicate the optimal type and degree of
regulation (how much and what type of regulation to implement) includes competitive neutrality,
regulation should allow for a level playing field or fair competition between financial
institutions; ii) efficiency, regulation should ensure allocative, operational and dynamic
efficiency of financial institutions; iii) subsidiarity and incentive structures, regulation should fit
into incentive structures for owners, managers and clients of financial institutions; iv) cost-
benefit analysis, regulations should be reviewed from a cost-benefit perspective or the regulation
should strive to achieve an optimum balance between control and the market; v) dynamic
perspective and financial deepening, the regulation must follow dynamic or prospective approach
than static approach in order to incorporate small but growing financial institutions; and vi)
government prudential regulation and social mission, the regulation must control an institution
consistent with its original missions and objectives (including social goals) in order to avoid
overregulation that retard innovation and alter market outreach.17
13
World Council of credit Unions, Credit Union Regulation and Supervision Technical Guide, WOCCU, U.S.A.,
2008, P.2, available at www.woccu.org/publication., last accessed on 3rd
March, 2018, [hereinafter WOCCU
Technical Guide]; and Onafowokan, Cooperative Finance in Developing Economies, P.65 14
Onafowokan, Cooperative Finance in Developing Economies, P.64 15
Michel Fiebig, Prudential Regulation and Supervision, P.24 16
Mtchaisi Chintengo, Regulation of Financial Cooperatives: the Case of Malawi, 14th
SACCA Congress, 28th
Oct-
1st Nov, 2013 P.5, available at http://www.treasury.gov.za/coopbank/conference.aspx , accessed on 15
th May, 2018,
[hereinafter Mtchaisi Chintengo, Regulation of Financial Cooperatives] 17
Rodrigo A. Chaves and Claudio Gonzalez-vega, „Principles of Regulations and Prudential Supervision: Should
They be Different For Microenterprise Finance Organizations?, Economics and Sociology Occasional Paper No.
1979, Rural Finance Program, Department of Agricultural Economics and Rural Sociology, The Ohio State
University, 1992, P.17-24, [hereinafter Rodrigo and Claudio, Principles of Regulation and Prudential Supervision];
and Michel Fiebig, Prudential Regulation and Supervision , P.3-4
4
Different countries apply different instruments of prudential regulation in order to regulate the
entry, operation and exit phases or areas of institutions.18
Despite the variation on type and scope
of the regulations on depository financial intermediaries, the two frequently adopted instruments
of regulation are preventive and protective regulation.19
Preventive regulation (pre-crisis
measure) is the regulatory actions that aim to control the risk exposure of the institution or to
reduce the probability of failure and it include the various requirements related to market entry
and operation.20
Protective regulation, on the other hand, refers to rules and regulations that
address post-crisis situations (avoiding runs on deposits as a result of the crisis) and it comprised
deposit insurance schemes, access to a lender of last resort, as well as the formalized process of
restructuring and reforming the institution affected by the crisis.21
Prudential regulation also embraces prudential supervision, which is the process of enforcement
that consists of the examination and monitoring mechanisms through which the authorities verify
compliance with legitimate financial regulations.22
Regulators may apply either traditional
approach or risk based approach of prudential supervision. Traditional approach or compliance
based approach is supervision that “focuses largely on the extent to which firms adhere to rules,
requirements and directives, often involved rigid on-site inspection schedule and penalties for
non-compliance”.23
On the other hand, risk based approach deals with assessing and identifying
the greater prudential and operational risks of firms and take supervisory measures on the
selected risks and institutions.24
In addition, an adequate system of regulation should balance
off-site supervision and on-site inspection. Off-site supervision is the process of analyzing
reports of financial institutions and based on that, identifying problem areas and providing
solutions are take place.25
The ascertainment of whether any institution is operating in a sound
manner, in compliance with the law and regulations and determination of the accuracy of the
periodical financial reports that have been submitted to the regulator and the public is the target
18
Yigalem Kassa, Regulation and Supervision of Microfinance Business in Ethiopia: Achievements, Challenges
and Prospects, Presented at International Conference on Microfinance Regulation, March 15-17, 2010, Dhaka,
Bangladesh, P.16, [hereinafter Yirgalem, Regulation and Supervision of Microfinance] 19
Rodrigo and Claudio, Principles of Regulation and Prudential Supervision , P.24 20
Id, P.28 21
Michel Fiebig, Prudential Regulation and Supervision, P.42 22
Rodrigo and Claudio, Principles of Regulation and Prudential Supervision, P.6 and 34 23
Toronto Center, Risk Based Supervision, TC Notes, 2018, P.12, available at
http://www.torontocenter.org/publications, last accessed on 8th
May, 2018, [hereinafter TC Notes] 24
Ibid 25
Food and Agriculture Organization of the United Nations, Safeguarding Deposits: Learning from Experience,
Agricultural Service Bulletin 116, FAO, Rome, Italy, 1997, P.84, [hereinafter FAO, Safeguarding Deposits]
5
of on-site supervision or inspection.26
Inspection can either be routine (periodical) or special in-
depth investigation to uncover risk exposures.
1.2 Background of the Study
In Ethiopia, though cooperation is the way of life of Ethiopians and has a long year of experience
as a tradition, the first modern savings and credit cooperative in Ethiopia was established in 1964
by employees of Ethiopian Airlines.27
After that, co-operative savings and credit societies in the
country have gained a wide recognition, as critical financial institution with the ability to reach
people in both urban and remote rural areas, for the role of improving financial services to the
low income households and thus contributing to economic development. Now a day, there are
20,067 primary SACCOs in the country with around 4.3 Million members, a capital of 4.2
Billion (ETB), a total saving of 15.5 Billion (ETB) and loans of 8.3 Billion (ETB) according to
the December 2017 data of Federal Cooperative Agency of Ethiopia.28
And also, based on the
same source, the total number of Unions (Secondary SACCOs) reached to 126.
For the proper development of SACCOs, there should be sufficient, effective and enabling
regulatory situation in the country. In fact, developing effective regulation and supervision may
be an important means of increasing SACCOs outreach in order to meet the government policy
and strategy and the overall development of the sector.29
Without sufficient regulation and
supervision of the sector, its growth and outreach could not be as expected. In cognizance of this
fact, the regulation of SACCOs started in the country besides the emergence of the first SACCO.
Specifically, regulation of SACCOs, as cooperative, in Ethiopia dates back to 1960, when the
first directive of cooperatives was enacted, Directive No. 44/1960.30
During the Transitional
Government, “SACCOs were initially licensed and supervised by the National Bank of Ethiopia
26
Ibid 27
Melkamu Engida Zemede, Operating Performance and Capital Structure of Rural Saving and Credit Cooperatives
in Ethiopia, Application of Panel Threshold Method, MA Thesis, Addis Ababa University, School of Graduate
studies, 2008, P.10, [unpublished, available online] [hereinafter Melkamu, Operating performance]; and Zerfeshewa,
Determinants of SACCOs, P.29 28
Interview with Mr. Sileshi Hailu, Financial Marketing Linkage Senior Officer at Federal Cooperatives Agency,
Financial Cooperatives, Development Directorate, on the current status of SACCOs in Ethiopia, 18th
June, 2018 29
Carlos and Klaus, Cooperative Financial Institutions, P.2-3 30
Bezabih Emana, Cooperatives: A Path to Economic and Social Empowerment in Ethiopia, The Cooperative
Facility for African Working Paper No.9, International Labor Organization, Cooperative Program (EMP/COOP),
Geneva, Switzerland, 2009, P.3, [hereinafter Bezabih, Cooperatives].
6
(hereinafter NBE) under the Monetary and Banking Proclamation No. 84/1994.”31
However,
since the issue of Proclamation No. 147/1998 (hereinafter Proc.No.147/1998), there has been a
separate authority for cooperatives, including SACCOs, which is now called the Federal
Cooperative Agency (hereinafter FCA).32
Proclamation No 147/98 incorporated all the
International Cooperative Alliance principles and the standard legal aspects of cooperatives. It
was amended by Proclamation No. 402/2004 and the latter also repealed by the current
Cooperative Societies Proclamation No.985/2016 (hereinafter Proc.No.985/2016).33
However, the adequacy or otherwise of Ethiopian SACCOs regulation has been questioned by
different studies34
conducted in the area. SACCOs are regulated under the cooperatives laws
which are designed for multipurpose cooperatives and there are no specialized laws for
specialized cooperatives such as SACCOs. Even the by-laws and guidelines developed by the
FCA, based on the general cooperatives law, for the promotion of saving and credit cooperatives
are failed to accommodate financial norms and standards for SACCOs‟ kinds of cooperative.35
Furthermore, they were regulated and supervised by the FCA which is not financial authority and
its capacity to supervise financial institutions like SACCO is also in doubt. Generally, legal and
regulatory framework related problems of SACCOs, if any, should be addressed in order to
improve their soundness, stability, effectiveness, governance, product diversity and integration to
the formal financial system. Otherwise, the sector will stand stagnantly and eventually collapse.
This in turn requires one to explore and investigate Ethiopian legal and regulatory frameworks
31
Alison Brown, et al, Microfinance and Poverty Alleviation in Ethiopia, Cardiff University, School of Geography
and Planning, 2015, P.6, [hereinafter Alison Brown, Microfinance and Poverty Alleviation]. The researcher tried to
find the reason behind this situation, but unable to get full and reliable information. 32
Cooperative Societies Proclamation, Federal Negarit Gazette, Proc.No.147, 5th Year, No.27, Article 55,
[hereinafter Proc.No.147/1998] Based on this article, „Cooperatives‟ Commission Establishment Proclamation,
Federal Negarit Gazette, Proc.No.274/2002, 8th
Year, No.21, [hereinafter Proc.No.274/2002], established the
Commission/ currently it is known as the Agency. 33
Cooperative Societies (Amendment) Proclamation, Federal Negarit Gazette, Proc.No.402, 10th
Year, No.43.
Cooperative Societies Proclamation, 2016, Federal Negarit Gazette, Proc.No.985, 23rd
Year, No. 57, [hereinafter,
Proc.No.985/2016] 34
See Kifle Tesfamariam Sebhatu, „Management of Saving and Credit Cooperatives from the perspective of
Outreach and Sustainability: Evidence from Southern Tigray of Ethiopia‟, Research Journal of Finance and
Accounting, 2011, Vol.2 No.718, PP.10-23,[hereinafter Kifle, Management of SACCOs]; Todd Benson,‟ Building
Good Management Practice in Ethiopian Agricultural Cooperatives through Regular Financial Audits‟, Journal of
Cooperative Organization and Management, 2014, Vol.2, PP.72-82; Martine Wiedmaier Pfister, et al, Access to
Finance in Ethiopia: Sector Assessment Study, Vol.2, 2008, [hereinafter Martine, Access to Finance in Ethiopia];
and others. 35
Martine, Access to Finance in Ethiopia, P.44.
7
on SACCO sector. Against this backdrop, this research aims to explore and assess the current
regulation of SACCOs in Ethiopia and pinpoint its problems.
1.3 Statement of the Problem
Despite SACCOs‟ huge role in the economic development, in many countries, however,
regulation has not kept pace with the development of SACCO‟s movement or legislation and
regulations have not been developed specifically for them, or if legislation and/or regulations do
exist, they are often weak and ineffective. The absence of adequate substantive and institutional
regulatory regime can imperil the safety and soundness of SACCOs and restrict their ability to
meet their members' financial service needs.36
As a result, recognition of the unique nature as
well as ascertainment of the safety and soundness of SACCOs has forced various jurisdictions to
take regulatory reforms.
In Ethiopia too, as part of global economy and as a result of the country‟s economic policy as
well as of the existing socio-economic situation of the country, the past half century has
witnessed the formation of tremendous number of SACCOs in the financial private sector of the
economy. Whereas, the adequacy or otherwise of the existing Ethiopian substantive and
institutional regulatory regimes of SACCOs is under question mark. Since the law was prepared
for multi-purpose cooperatives, it may miss some areas of regulation which are specific to
SACCOs. Consequently, absence of recognition of the unique nature of SACCOs will make their
proper regulation difficult. Besides, for the proper regulation of SACCOs, the appropriateness
and capacity of the regulatory organ (institution) to the sector that needs to be regulated should
be properly determined.
Currently, Ethiopia has taken great strides to develop an inclusive and modern financial sector
including SACCOs.37
Consequently, “….Ethiopia will devise options for strengthening the
structure of saving and cooperatives sector, based on international best practices, and supported
by a series of learning events.”38
36
World Council of Credit Unions, Model Law for Credit Unions, World council of Credit Unions, INC.,
Washington D.C., U.S.A., 2015, P.7, available at www.woccu.org/publications, last accessed on 15th
April, 2018,
[hereinafter Model Law] 37
National Bank of Ethiopia, Ethiopia: National Financial Inclusion Strategy, April, 2017, [hereinafter NFIS] 38
NFIS, P.34
8
Accordingly, with regarding to the substantive and institutional regulatory frameworks, the
following main problems are the subject of inquiry in the study.
First, the inadequacy of the legal framework from the perspective of Ethiopian cooperative law
and/or other directives of SACCOs on the one hand, and the increasing number and proliferation
of SACCOs on the other is considered as one of the main problem in the study. When the growth
of SACCOs was that much, we may not thought them to pose a significant risk on the financial
system of the country, but when their number is high the related effect could be to the opposite
of our thought. The existence of adequate regulation may allow these institutions to attract
deposits from public which may lead them to grow in a sustainable way and greater linkages
with other financial sectors, with an improved operating network and higher standards of control
and reporting. There is a rapid growth of SACCOs in the country and with the aggregate savings
in billions ETB, they are no longer insignificant player in financial markets. So, assessing the
adequacy of legal framework vis-a-vis the pace of growth of SACCOs could be one triggering
factor for this study.
Second, absence of special regime is the other problem which is related to the first one. In spite
of the fact that Ethiopia has various piecemeal directives on SACCOs, it does not yet have
special, comprehensive (explicit) primary legislation specifically enacted to regulate the issues of
SACCOs. The special regulations may facilitate an environment which allows SACCOs to
mobilize savings and also reduce the problems in enforcing normal cooperative regulations. And,
the regulations could also be important as they are meant to provide minimum operational and
prudential standards in SACCOs. In this regard, therefore, the question related to whether
Ethiopia really needs to have a special regime governing SACCOs should be answered.
Finally, assessment of the current trend of regulation and supervision and determination of the
relevancy or otherwise of the country‟s institutional regulatory framework is another inquiry of
this study. This is because when the appropriateness and capacity of the regulatory authority is
compromised, there might be ineffective trend of regulation and supervision. This may, in turn,
pose different problems and effects on SACCOs. Unregulated financial institutions lack good
governance that maintains the financial discipline and prudent management and thus, as a
solution, we need effective prudential supervision since it could provide incentives for good
governance. The existence of efficient regulator and proper supervision also enables to achieve
9
the desired effect of regulation. In this regard, therefore, the questions related to the relevancy
and capacity of the regulatory organ and the current trends of regulation as well as the effects of
the regulation need to be investigated.
1.4 Literature Review
Despite the fact that there is a wealth of literature in respect of legal and regulatory aspects of
SACCOs in foreign jurisdictions, not much is written about the issue in Ethiopia. Most of the
literatures written on the subject matter under study were social science one, not legal researches,
and some of them tip on legal and regulatory reforms without treating the issue in depth. Among
these paper works, Access to Finance in Ethiopia: Sector Assessment Study39
, studied about
microfinances institutions, including financial cooperatives or SACOs, and focused generally on
the idea of access to finance. Though it founds the absence of legal and regulatory framework of
SACCOs in Ethiopia, the study did not explicitly talks about regulation of SACCOs. Another
empirical study conducted by Mr. Dejene Aredo40
emphasized merely on substantiating the
possible linkage between SACCO and other formal and informal financial sectors. Other
previous studies, Zerfeshewa 2010, Yared 2008, Kifle 2011 and 2015, Niguise 2015, Tadele
2014, Melkamu 2008, etc.41
were focused mainly on SACCOs‟ development; problems;
outreach; performance and factors that affect their performances; etc., and have not looked at
specifically on the regulatory aspect of SACCOs.
The purpose of this study, therefore, is to investigate the regulation of SACCOs in Ethiopia.
Specifically the study will seek to examine the current Ethiopian legal, regulatory and
supervisory framework, and its limitations. By doing so, the writer hopes that, this study will
able to fill the gap.
39
Martine, Access to Finance in Ethiopia. 40
Dejene Aredo, The Informal and Semi-Formal Financial Sectors in Ethiopia: A Study of the Iqqub, Iddir, and
Saving and Credit Cooperatives, African Economic Research Consortium Paper 21, Nairobi, Kenya, 1993. 41
Zerfeshewa, Determinants of SACCOs; Yared Gebremichael, Development of Saving and Credit Cooperatives in
Mekelle Zone: Performance, Challenge and Proposed Intervention, MA Thesis, Mekelle University, Department of
Cooperatives, 2008 [Unpublished, available online]; Kifle, Management of SACCOs; Kifle Tefamariam, „Saving
and Credit Cooperatives in Ethiopia: Development and Challenges‟, Journal of Economics and Sustainable
Development, 2015, Vol.6, No.5, PP. 140-146, [hereinafter Kifle2]; Nigusie Dibise, Determinants of Saving and
Credit Cooperatives Societies (SACCOs) Outreach in Addis Abeba, MA Thesis, Addis Abeba University, College
of Business and Economics, 2015[Unpublished, available online]; Tadese Tilahun, The Role of Rural Saving and
Credit Cooperatives in Enhancing Financial Inclusion: A Case of Biftu Batu Rural Saving and Credit Cooperative,
MA Thesis, Addis Abeba University, Department of Public Administration and Development Management, 2014
[Unpublished, available online]; and Melkamu, Operating Performance and Capital Structure.
10
1.4 Objectives of the Study
The study was aimed to achieve the following general and specific objectives.
1.4.1 General Objective
The general objective of this study was to critically scrutinize the adequacy of the existing
Ethiopian regulatory framework in the effective regulation of SACCOs.
1.4.2 Specific Objectives
The study was designed to achieve the following specific objectives:
To assess the current SACCO regulatory framework,
To investigate and identify the limitations/gaps of the existing substantive and regulatory
framework which need to be reformed,
To review the international best regulatory experience and draw a lesson to Ethiopia, and
To suggest possible adjustments towards effective regulation of SACCOs.
1.5 Research Questions
The study was sought to find out answer for the following main and specific questions.
1.5.1 Main Research Question
Should Ethiopia reform its Savings and Credit Cooperatives regulatory regime?
1.5.2 Specific Research Questions
The specific questions of this research are:-
Is the existing substantive and institutional regulatory framework sufficient to regulate
SACCOs?
What are the basic limitations and weaknesses of the current regulatory framework which
need to be reformed?
What lessons can Ethiopia draw from the international regulatory experience?
11
1.6 Significance of the Study
In countries such as Ethiopia, where the poor is the dominant one, the existence of strong and
capable SACCOs is essential for the overall socio-economic development. This show SACCOs
has a significant contribution to nationwide as well as household‟s level financial growth.
However, little is known about how they are regulated and properly supervised, what are the
legal and regulatory limitations and other relevant aspects. Therefore, studies are required on
these and other aspects of SACCO‟s regulation.
So, this study will have vital significances in various aspects. Firstly, it will have a piece of
contribution on the development of the current knowledge in the area of regulation of SACCOs.
Secondly, it will also have significance for the interested parties in creating awareness in general
and the study result might initiate legislative action, in particular. Thirdly, the study could also be
a base or good yardstick and may call the attention of those who want to conduct further research
in the field. Finally, it may serve as a reference material in the academic sphere.
1.7 Scope of the Study
Generally, the study was limited to assess the existing regulation of saving and credit
cooperatives in Ethiopia and investigate whether Ethiopia has to make regulatory reforms in
order to alleviate substantive and institutional regulatory limitations, if any. More specifically, it
was restricted with answering the research questions only from legal and regulatory perspectives,
with a view to achieve the objectives of the research. Besides, the regulatory approach and
experience of other countries was discussed in order to draw possible lessons for Ethiopia and
for the purpose of adopting relevant solutions. The area and data collection scope of this study
was confined to federal government and does not include the regional government level for the
reason that the federal government is the source of all regulations (federal laws empowered the
regions to make their own laws in consistent manner) and the researcher believed that, since
regions follows the federal as role model, reform at federal level will eventually affects the
regions (helps to create harmonization).
1.8 Limitation of the Study
In terms of limitation, the concept of SACCOs did not yet get full attention by legal scholars in
Ethiopia. Accordingly, it was not easy to find adequate published legal researches and
documents. In the other disciplines, such as business, there is a large body of non-legal literature
12
on the topic. However, these studies do not analyze the regulatory perspective of SACCOs
briefly and make them less significant for this study. And hence, the researcher tried to lessen
this gap by using foreign legal literatures even those to be found were not sufficient for the
reason that they were found in the form of electronically via internet sources and not freely
accessed. In addition, the data collected from the concerned bodies through interview might not
be adequate because of the interviewers‟ ability to provide all information and necessary data.
Therefore, because of this limitation‟s continuing effect on the research, the researcher kindly
invites readers to understand the issues discussed in this study by considering such limitation.
1.9 Research Methods and Methodology
1.9.1 Research Approach
In the study, the qualitative approach was employed. Since the focus of the study was to provide
a qualitative assessment of the existing Ethiopian SACCO regulation, the researcher preferred to
choose qualitative research method. This is for the reason that qualitative approach is appropriate
if the aim of a given study is to produce a holistic description and understanding of a
phenomenon, so my study was, rather than to investigate individual variables and their
correlation, which is a common aim in quantitative research. It is also more flexible and is
suitable to simultaneously utilize different research methods.42
The study used doctrinal method
because it has involved scrutiny of legal documents (primarily and extensively) and other
secondary sources, like journal articles, books, and so on in order to see the experiences both at
country level and globally. In order to see the international regulatory experience, the study
makes use of comparative research method, in which the legal literatures and materials from the
selected jurisdictions were investigated and analyzed systematically. Using comparative method
is justified by its benefit as the comparative investigation and analysis of the international
experiences would help to draw lessons for Ethiopia on a contextual basis. Empirical research
method was also used in the study because the researcher wanted to explore problems on the area
from practical point of view and some of the research questions also deserved so. Therefore, the
42
Scott W. Vanderstoep and Dierdre D. Johnson,‟ Research Methods for Everyday Life: Blending Qualitative and
Quantitative Approaches‟ (Published by Josse-Bass, San Francisco, 2009), p.169
13
study is qualitative in that it will devote on the reasons, justifications or logical arguments on
legal provisions and different literatures.
1.9.2 Data Sources and Data Collection Methods
Research data had been collected from primary, including mainly legislations and interview
results, and secondary sources, such as, books, official government reports, articles, notes and
theses available in domestic and foreign literature on the subject matter. The research used
qualitative data gathering methods, interview and document or material analysis. These methods
are primarily selected because they enabled the researcher to closely investigate the legal and
regulatory framework of Ethiopia with regarding to savings and credit cooperatives and in order
to get genuine output. Interview was used with a view to gather necessary data and information
from the concerned bodies, key informants of different Directorate Officials at FCA and legal
experts of Awach SACCO. To select the sample from the total participants, the researcher
employed purposive sampling method as it enables to use the researcher‟s judgment in selecting
the samples based on different criteria or to deliberately select the units, as the researcher thinks
fit. And also, the goal of the qualitative research is to deeply analysis of the problem, not to
generalize, and this is also the factor to select purposive sampling. The interview was semi-
structured and open ended for the purpose of modification in the process and not to lose
important information which may happen when the interview is too structured. With regards to
the number of participants of interviews, since the study was qualitative empirical one, their
number was not pre-determined. Therefore, the frequency of the interview was determined by
the “Criterion of redundancy”.
On the other hand, two countries, Kenya and Malawi, and one International organ, WOCCU, are
selected for comparison of the international regulatory experience and the respective
jurisdictions legislations were analyzed. The two countries were selected for the reason that these
countries‟ economic development and the paths they have been through (related to SACCO
development) are similar to the current situation of Ethiopia. The justification for selection of
WOCCU is based on the assumption that the organ is, as international trade association and
development agency of global credit unions, an international standard setter in regulation of
credit unions. So, it may be logical to expect something useful for Ethiopia from WOCCU‟s
model legislations which are full of minimum regulatory standards and international accepted
best practices. In general, selection of these jurisdictions is the culmination of the researcher‟s
14
endeavor to envisage the idea, as P. Ishwara writes, “[w]hile presence of minimum similarity
avoids absurdity in comparison, and prevalence of differences avoids monotony and
repetition.”43
1.9.3 Data Analysis Technique
A qualitative data analysis technique was employed to analyze the data gathered through the
above mentioned data collection methods. Data obtained through interviews was subjected to
content analysis in accordance with the procedures of data coding, categorizing, theming, and
finally concepts which enable to reach on a certain generalized statements were developed.
Accordingly, first the audio recorded responses of the interviewees were changed in to written
form and grouped based on the similarity of opinions the respondents share about the problem
under study. Then each group was given its own code. After this, the researcher systematically
examined the relationship between the grouped data. Finally, conclusion had been drawn from
the result of the analysis of the relationship of the grouped data.
1.10 Organization of the Paper
The research paper was structured in to five chapters. The first chapter is all about the
introduction and methodologies of the study. The second chapter presents the analysis of how
Ethiopia regulates the saving and credit cooperatives. Accordingly, the existing substantive and
institutional regulatory regimes of Ethiopia with regarding to SACCOs have been discussed.
Chapter three is provided with brief discussion about the substantive and institutional problems
or limitations of the current regulatory regime of SACCOS. Chapter four is devoted to present
discussion about experiences of other countries in relation to regulation of SACCOs. This
chapter tried to look into the prudential rules and principles that regulate SACCOs of selected
countries hoping to enrich legal principles for the regulation of SACCOs. In addition, the
identification of different possible lessons Ethiopia can draw from the international regulatory
experience had been taken place in this chapter. Finally, the last chapter will come up with
conclusion and recommendation of the research based on the findings and lessons from other
jurisdictions.
43
P. Ishwara Bhai, „Comparative Method of Legal Research: Nature, Process and Potentiality‟, Journal Of the
Indian Law Institute, 2015, Vol.57, No.2, PP.147-173, at p.160, [hereinafter P. Ishawara Bahi, Comparative Method
of Legal Research]
15
CHAPTER TWO
2. The Current Regulation of Saving and Credit Cooperatives in
Ethiopia
2.1. Introduction
Regulation of SACCOs, as a financial intermediary, could be triggered by different reasons. As
we know, financial intermediation involves someone else handling one‟s money and many issues
are involved in this process. The information asymmetry problem from the perspective of
depositors, the issue of institutional viability and reputation, and the overall market structure
concerns are the major issues.44
Hence, prudential regulation is a must in order to solve these
issues and to secure all the stakes involved in the financial intermediation. In short, protecting
depositors, achieving safety and soundness of the financial system and assurance of competitive
market structure are the main rationale of regulation.45
In general, regulation of SACCOs has a
dual role; safeguarding and protecting the depositors and the financial sector in one hand, and
promote SACCO sector on the other.46
In Ethiopia, regulation of SACCOs started in 1960 and they were regulated as one form of
cooperatives. The Federal Cooperatives Agency is the institution currently functions as the
regulators of the SACCOs. In this chapter, an attempt is made to look in to the existing
substantive and institutional regulatory framework of SACCOs in Ethiopia. To do so, following
this introductory section, under the second section of the discussion, the general overview of
financial system and development of SACCOs in Ethiopia will be made, and the next coming
section is devoted to the critical analysis of the current regulatory framework by focusing on the
laws relating to entry, operation and exit of SACCOs. Besides, there is also a great emphasis,
under this section, on the institutional regulatory regime by focusing only on FCA. However, it
should be noted that the chapter does not address all SACCO laws of Ethiopia; rather it is
restricted only on the legislations at the federal level. Hence, the regional laws relating to
SACCOs are not the scope of this chapter in particular, and the overall study in general.
44
Michel Fiebig, Prudential Regulation and Supervision, P.2-3 45
Ibid 46
Bitwott Kevin, The Effect of Regulation, P.11
16
2.2. The General Overview of Financial System and Development of SACCOs
in Ethiopia
2.2.1. The General Overview of Financial System in Ethiopia
Despite its rapid growth, Ethiopia is among the World‟s poorest countries with a gross national
income per capita of USD 863 in 2016/2017.47
The country is always strives to achieve its two
main reform agendas, accelerated agricultural and private sector development, including
financial sector development.48
Consequently, the Ethiopian financial sector has passed through
significant reform processes under different regimes. In general, the sector‟s evolution is better
portrayed by Getnet Alemu Zewudu;
“The Ethiopian financial sector/policies have evolved through three stylized stages: first,
financial repression and fostering state-led industrial and agricultural development
through preferential credit (in the socialist regime); second, market-led development
through liberalization and deregulation (post 1991); and third, financial inclusion
through allowing private banks and MFIs (since second half of 1990s).”49
[emphasis
added].
After the downfall of the Socialist regime, since 1992, the Ethiopian Financial System has passed
through substantial reform process as a part of “transition from a planned to a market
economy”.50
Re-establishing the NBE as the central bank and regulator of financial markets and
institutions, opening the banking and insurance sectors for domestic investment through different
financial supervision laws, commencing the operation of inter-bank money and foreign exchange
markets, introduction of the formal establishment of microfinance institutions under the direct
regulation of NBE are among the financial sector reforms that Ethiopia has conducted following
the change in government and economic policy in 1991.51
In general, the Ethiopian financial
system categorized as formal, semi-formal and informal financial system.52
The formal financial
system, consists of banks, insurances companies and microfinance institutions, is a regulated
sector well organized and provides financial services mainly to urban areas since the institutions
47
National Bank of Ethiopia, Annual Report, 2016/17 48
Martine, Access to Finance in Ethiopia, P.9 49
Getnet Alemu Zewudu, „Financial Inclusion, Regulation and Inclusive Growth in Ethiopia‟, ODI Working Paper
408, 2014, P.3, [hereinafter Getnet Alemu, Financial Inclusion] 50
Yirgalem, Regulation and Supervision of Microfinance, P.28 51
Solomon Abay Yimer, Financial Market Development, Policy and Regulation: The International Experience and
Ethiopia‟s Need for Further Reform, PhD Thesis University of Amsterdam, Netherland, 2011, [unpublished,
available at the author‟s hand], p.355, [hereinafter Solomon Abay, Financial Market Development]; and Getnet
Alemu, Financial Inclusion, P.3 52
Yirgalem, Regulation and Supervision of Microfinance, P.28
17
are usually situated in urban areas.53
The saving and credit cooperative are considered as semi-
formal financial institutions, which are not regulated and supervised by NBE and hence they are
not part of the formal financial system, and the informal financial system includes Equib, Eddir
and others, which are also not regulated.54
As of March 2016, the Ethiopian financial sector
consists of 2 public and 16 private banks, 16 private and 1 public insurance companies, 35
microfinance institutions, 5 capital (finance) lease companies and over 18,000 SACCOs in
both rural and urban areas.55
Regardless of the reforms undertaken by government, the formal financial sector of the country
is not in the anticipated stage of development. Regarding to this, Solomon Abay asserted that
“[t]he banks, insurers and microfinance institutions are weak in their fixed capitals, service types,
governance and competitiveness; and their services are at their beginning stage of development
(not diversified, modernized, automated and networked) and hence the substantial size of the
population still lives without them.”56
In fact, the Ethiopian financial sector is not diversified in
terms of the types of institutions delivering the service and the type of financial products being
delivered as well as area of operation.57
There is high dominance of banking sector in service
providing and the private banks are outplayed by state owned banks, especially Commercial
Bank of Ethiopia. The financial service of the country is also largely founded on a cash based
payment system.58
On top of that, “there is no stock market and the financial market comprising
the interbank money and foreign exchange markets as well as the bond and Treasury Bonds
market is at an infant stage accommodating limited amount of transactions.”59
2.2.2. Historical Development of SACCOs in Ethiopia
SACCO in Ethiopia has its origin in traditional informal method used to accumulate saving and
access credit by people who lacked access to formal financial institutions. The history of formal
establishment of SACCO in Ethiopia has a half century long origin.60
The first modern SACCO
53
Ibid 54
Alison Brown, Microfinance and Poverty Alleviation, P.4 55
NFIS, P.5 56
Solomon Abay, Financial Market Development, P.356 57
In terms of location or branching, most financial institutions‟ branches were concentrated around big towns and
leave the rural areas underserved. For instance, in accordance to the NFIS data, as of March 31, 2016, 36% and 54%
of banks and insurance branches respectively were operating in Addis Ababa. 58
Getnet Alemu, Financial Inclusion, P.4; and Solomon Abay, Financial Market Development, P.356 59
Ibid 60
Melkamu, Operating Performance, P.10
18
was established in 1964 by the Employees of Ethiopian Airlines and the initiative of interested
individual Ethiopians who have foreign countries exposure and peace-core workers of foreign
citizens.61
The enactment of the first cooperatives directive in 1960 (Directive No.44/1960), later
changed in to proclamation (Proclamation No.241/1966), paved the way to modern development
of cooperatives in Ethiopia.62
During the Derg regime, “cooperatives were considered as
instruments for planning and implementation of socialist policies and were forced to operate in
line to the socialist principles, where production and marketing of produce were done
collectively and members pooled their land resources under communal tenure”.63
For the pursuit
of achieving its objectives and proper regulation of cooperatives, the then government
promulgated Cooperative Societies Proclamation No.138/1978.64
In general, the regime used
cooperatives to ensure equitable mobilization and distribution of resources. Because of this
mistaken assumption, most cooperatives, especially the rural one, were forced to be dissolved
and their properties to be looted when the Derg regime falls.65
After the fall of Derg regime, however, in cognizance of the importance of cooperatives for
economic development and because of its new market oriented economic policy, the new coming
government gave due recognition for cooperatives and undertake different policy and legal
measures which fosters the development of the sector.66
The government has enacted cooperative
proclamations and established federal and regional government institutions that promote
and support the cooperative movement. In December 1998, the current government enacted
Proc. No.147/1998. However it was later amended by the Amendment Proclamation
No.402/2004 in order to ensure that the cooperatives policy is fully consistent with the
“Universal Cooperatives Principles” and the International Labor Organization‟s Promotion of
Cooperatives Recommendation 193.67
For the implementation of the former proclamation,
Council of Ministers issued Regulation No.106/2004 in June 2004 (hereinafter Regulation
61
Ibid,; and Zerfeshewa, Determinants of SACCOs, P.30 62
Bezabih, Cooperatives, P.3; and Lamesgin, The Role of Community based Saving and Credit Cooperatives, P.16 63
Id, p.4 64
Zerfeshewa, Determinants of SACCOs, P.30 65
Ibid 66
Id, P, 30; and Bezabih, Cooperatives, P.4; The main Policy document is the Agricultural Cooperatives Sector
Development Strategy 2012-2016, prepared by Ministry of Agriculture and Agriculture Transformation Agency,
2012, [hereinafter MoA/ATA 2012] 67
Bezabih, Cooperatives, P.vii and 3
19
No.106/2004).68
In May 2002, because of the need to establish autonomous organ responsible for
registering and supporting cooperatives organized at federal level, Cooperatives‟ Commission
was established by Proc. No.274/2002. After its establishment, by using its law power provided
by the Regulation, the Commission has issued various directives in relating to cooperatives as a
general and SACCOs in particular.69
Currently, the cooperative sector is governed by the new
cooperatives law, Proc. No.985/2016.
The organizational structure of the Ethiopian cooperative sector is generally divided in to four
hierarchical levels; first level/Primary Cooperatives, second level/Cooperative Unions, third
level/Cooperatives‟ Federation, and the fourth level/League of Cooperatives.70
Primary
cooperatives are, found at the base of the structure, operate autonomously at “Kebele” level and
serves as a primarily shareholder/member of the cooperative union.71
The cooperative unions are
responsible for ensuring liquidity at the primary level and providing services, which are beyond
the primary cooperatives.72
The cooperatives federation is a collection of shareholder members‟
cooperative unions. Lastly, the cooperative league, is the apex organization of cooperatives and
expected to be establish at the national level, which will not be involved in usual cooperatives
business, rather it will be an advocator for cooperatives, participate in policy dialogue and
represent cooperatives in national and international forums.73
In Ethiopia, however, there is no
formation of cooperatives league yet.
After 1992, Ethiopia witnessed the proliferation of SACCOs and their economic importance
increased gradually. Despite the challenges they faced in the process, SACCOs offer
considerable potential for financial outreach in terms of populations and locations that are
unattractive for the formal financial sectors.74
SACCOs played a pivotal role in satisfying their
members‟ financial needs and they also have a huge impact in creating saving culture in the
country and encouraging investment.75
The sector has taken, and still taking, part actively in the
68
Council of Ministers Regulation No.106/2004 to provide for the implementation of Cooperative Societies
proclamation No.147/1998, Federal Negarit Gazette, Regulation No.106/2004, 10th Year, No.47, [hereinafter
Regulation No.106/2004] 69
Regulation No.106/2004, Art.28 and Proc.No.985/2016, Art.76 (3) also gives law making power to the regulator. 70
Proc.No.985/2016, Art.2 (2-5 71
Melkamu, Operating Performance, P.10 72
Ibid 73
Bezabih, Cooperatives, P.10; and Proc.No.985/2016, Art.2 (5) 74
Alison Brown, Microfinance and Poverty Alleviation, P.11 75
Zerfeshewa, Determinants of SACCOs, P.17
20
economic development of the country by mobilizing saving and providing loans for their
members. Accordingly, recently SACCOs mobilize a total saving of 15.5 Billion ETB and holds
4.2 Billion ETB as Capital.76
In general, because of these and other bold contributions of
SACCOs in poverty alleviation and economic growth of the country, the sector has gained wide
recognition in Ethiopia and hence it is currently in blossom.
2.3. The Current Regulatory Framework of SACCOs in Ethiopia
2.3.1 Substantive Regulatory Regime/Legal Framework
Currently, the Ethiopian government has issued several legal documents to regulate SACCO‟s
sector. These legal documents include primary legislation, i.e., proclamations, and implementing
secondary legislations, regulations and directives, as legal framework that govern the operation
of SACCOs. Among the primary legislation issued by the Ethiopian parliament, Proc.
No.985/2016 and Proc.No.274/2002 are the main functioning laws of the country right now.
With regard to regulation, there is a single law applicable on SACCOs which is enacted by the
Council of Ministers, Regulation No.106/2004. On the other hand, when it comes to other types
of secondary laws applicable on SACCOs, various directives of FCA take the lion-share owning
to legal authorization of FCA as chief regulatory organ on cooperatives. However, all of the
directives of the authority may not applicable on SACCOs and among such directives; around
ten of them are relevant and applies on SACCOs in one way or other.77
In general, such
secondary legislations were enacted before the coming into effect of Proc.No.985/2016 and
hence Regulation No.106/2004 and other relevant directives may apply on SACCOs as long as
such laws are not inconsistent with Proc.No.985/2016. Because the accontrario reading of Art.74
(2) of the said Proclamation gives us such interpretation and it also does not repeals such
secondary laws explicitly. One legal officer at the FCA reiterate this position by pointing out that
since the latest proclamation does not explicitly repeal the laws, such secondary legislations have
application on SACCOs consistently with the Proclamation.78
The point we should not forget
76
Supra note, Section 1.2, Para.1 77
Currently, FCA has prepared around 19 directives that govern the operation of all cooperatives on. Among them,
two directives touch SACCOs particularly (specifically prepared for SACCOs) and other around five different
directives, applicable on all types of cooperatives, also govern SACCOs as one type of cooperative. 78
Interview with Mr. Yisak Betel, Legal Officer at Federal Cooperatives Agency, Cooperatives Regulatory
Directorate, on the current functioning SACCOs‟ laws of Ethiopia, 18th
June, 2018
21
here is that, in addition to the above mentioned laws, other laws of the country, tax or
employment related laws for instance, have some bearing on SACCOs.
Generally, Proc.No.985/2016, Regulation No.106/2004 and the directives of FCA as well as their
own bylaws approved by the authority are the existing legal frameworks governing SACCOs in
Ethiopia. And the next coming section is full of the analysis of such laws main regulatory
features.
2.3.1.1 Proclamation No.985/2016 and Other Implementing Secondary Legislations
As we know, Cooperative Societies Proclamation No.985/2016 is a general cooperatives law,
applicable on all types of cooperatives operating in the country, enacted for the purpose of
enabling cooperatives to play their role in the country‟s economic and social development
through a uniform cooperatives society‟s proclamation. This implies that, Ethiopia has not
adopted a specific regulatory framework to SACCO sector yet. And also, this proclamation is the
primary legislation that governs the issues of cooperatives in the first place. The secondary
legislations are simply promulgated for the purpose of implementing the then Proc.No.147/1998
which was repealed by Proc.No.85/2016. In general, Proc.No.985/2016, Regulation No.106/2004
and directives issued by FCA contain a comprehensive package of rules for licensing,
registering, and regulating SACCOs. The government has tried, as much as possible, to include
the two commonly used instruments of regulation (Preventive and protective regulatory
measures) in these laws. So, a detailed discussion of main components of the substantive
regulatory system of SACCOs in Ethiopia is presented herein after. With regards to the
directives, the researcher wants readers to understand that since all the directives of FCA are
prepared only in Amharic language, the statements and expressions made related to the directive
in the entire part of the study are translated by the researcher.
2.3.1.1.1 Definition of SACCO
Proc.No.985/2016 defines a saving and credit cooperatives society as „a society established to
provide saving, credit and loan-life insurance services to its member.79
However, in order to
understand the whole concept of SACCO, we need to see the definition of cooperative society
from the law. As per Art.2 (1) of Proc.No.985/2016, „cooperative society‟ is:
79
Proc.No.985/2016, Art.2 (7)
22
….an autonomous association having legal personality and democratically controlled by
persons united voluntarily to meet their common economic, social and cultural needs and
other aspirations, which could not addressed individually, through an enterprise jointly
owned and operated on cooperative principles;[emphasis added].
Now the whole picture comes out. And hence, SACCO is an autonomous association/enterprise
having legal personality and democratically controlled and jointly owned by its members, united
voluntarily to meet their common economic or financial service needs like saving, credit, and
loan-life insurances. According to this definition, SACCO members are the joint owner of the
society and at the same time the clienteles/customers of such society. This feature, therefore,
make SACCOs member-based financial institution that is totally different from other financial
institutions, say bank or microfinance, which provide different financial intermediation services
for the whole population openly as a business. In short, the biggest difference lies between
SACCOs and other formal financial institution is that the latter, e.g. banks, operate to generate
profits for their shareholders, while SACCOs function as non-for-profit organization designed to
serve their members, who also are „de facto‟ owners.
2.3.1.1.2 Types of Activities that could be carried out by SACCOs
SACCOs may be formed to carry out different kinds of activities related to finance. In this
regard, according to Proc.No.985/2016, Ethiopian SACCOs, generally as a cooperative, shall
mainly engage in activities that are beyond the capacity of their individual members and solve
common economic and social problems.80
However, since it is the general cooperative law of
the country, the proclamation does not briefly explain what kinds of activities SACCOs are
particularly allowed to operate. A few insights about the specific activities of SACCOs are
provided in general and similar terms under Art.2 (7) and Art.21 (9) of the proclamation.
Accordingly, SACCOs generally could participate in activities related to saving, credit and loan-
life insurance services.81
Although the proclamation lacks details about the activities of
SACCOs, we get a long list of specific activities that could be carried out particularly by
SACCOs under the SACCO‟s Organization Directive No.007 (Directive No.007) of FCA.82
80
Id, Art.21 (2) 81
Loan life-insurance, as per Art.2 (8) of the proclamation, is an insurance given by a cooperative society to its
members to cover loan taken by a deceased member before full repayment of debt. 82
የ ህብረት ስራ ኮሚሽን የ ገ ን ዘ ብ ቁጠባና ብድር ህብረት ስራ ማህበራት አደረጃጀት መመሪያ ቁጥር 007,[hereinafter መመሪያ
ቁጥር 007]
23
According to Art.8 & 37 of this directive, SACCOs are allowed to carry out the following
activities.
Collect members‟ saving by setting different saving schemes based on their bylaws,
Providing saving, loan, money transfer, etc., services for non-members residents of the
community83
,
By setting up different credit schemes based on their bylaws, provide credit services for
members and collect their loans,
Accepting borrowings from members, other societies, and lending institutions,
By conducting studies on profitable business areas, enable members to invest their money
thereon,
Providing banking services for the community users,
Giving the necessary education and training for their members, management bodies and hired
employees,
Undertaking to have uniform account system in the society,
Selling shares, and
Collecting registration fees from new coming members of the SACCO.
Cumulatively, based on the provisions of the above mentioned laws, SACCOs as a financial
service supplier, could carried out different financial intermediation activities such as collecting
member saving, providing loan and accepting borrowings, providing micro life-insurance for
members loan or saving, and they may also participate in member-consulting activity.
2.3.1.1.3 Entry Requirements
The current substantive regulatory framework of SACCOs (Proc.No.985/2016 and other
implementing secondary laws) has defined entry requirements that have to be fulfilled by those
who interested in joining the SACCO sector. These different entry requirements includes number
of members, location and registration, institutional legal form, initial capital, ownership
83
Providing services to non-members is either prohibited or restricted by the new Proclamation No.985/2016. For
instance, provision of loan service for third party other than similar cooperative society established by the same law
is forbidden as per Art.48 of the said proclamation. In addition, based on Art.23 of the same proclamation, provision
of services to non-members is conditional or restricted to some purposes which are related to government,
development and other social service objectives.
24
restriction, business plan and bylaws, management and ownership quality and other conditions to
be fulfilled by SACCOs before registration.
A. Number of Members
Sometimes SACCOs are unviable because too few members join the institution. The existence of
low threshold for numbers of members needed to start a cooperative may not be suitable for
financial intermediation unless additional members join the institution after its formation.
Therefore, the minimum number of members set in legislations should be adequate enough to
make the expected institution viable. In Ethiopia, SACCOs may be established at different levels
from primary up to federation level.84
The primary SACCO shall be established by the number
of members not less than fifty as per Art.7 (2b) of Proc.No.985/2016. This proclamation and
Regulation No.106/2004 also state that the threshold for number of members may be
compromise by the relevant authority based on the nature of work and economic feasibility.85
However, the minimum number of members needed to start primary SACCO should not be less
than ten. The directive currently in work, Directive No.007, stipulated that in order to establish
primary SACCO, the law required the number of members not to be less than fifty.86
Since the
purpose of this directive is to implement the proclamation and the regulation, it could be the final
governing law for the matter and hence we can conclude that the current applicable threshold
number seems like fifty members. This conclusion might be acceptable for the reason that
working with fifty members is far better than ten members when we justify such number in terms
of financial viability and outreach of SACCOs. Even fifty members threshold may not ample to
achieve the basic objective of SACCOs, satisfying the financial need of the unbanked and poor
segment of the population, considering the average amount of the income of most SACCO
members in Ethiopia. Therefore, in order to increase the financial performance of SACCOs, the
sufficient threshold number of members, as much as possible, must be greater than fifty or if it is
not possible, it should at least be fifty members and not less than that.
When we come to the other tiers/hierarchies of SACCOs, we get different threshold for number
of members than the primary SACCO. It is obvious that primary SACCOs having similar
objective may establish a secondary level SACCOs Union, and in turn such kind of other unions
84
Proc.No.985/2016, Art.7 (1) and መመሪያ ቁጥር 007, Art.9 85
Id, Art.7 (3) and Regulation No.106/2004, Art.3 (1) 86
መመሪያ ቁጥር 007, Art.10 (1.1)
25
may also establish a tertiary level of SACCOs or SACCOs‟ Federation in similar fashion.
According to Ethiopian laws, there should be two or more primary SACCOs and two or more
SACCO Unions having similar purposes in order to form a SACCOs Union and SACCOs
Federation, respectively.87
Besides, in addition to the SACCOs or their Unions, an individual
who carries out similar activities to that of a union or federation and as long as he/she is willing
to observe the principles of the same may become a member of the union or federation based on
Art.4 (2) & 5 (2) and Art.10 (2f) & (3f) of Regulation No.106/2004 and Directive No.007,
respectively. However, since these laws are secondary legislations and enacted before the
enactment of Proc.No.985/2016, allowing an individual to be member of SACCO union or
federation is contradict to the position of the proclamation which allows only societies to be
member of such unions or federations. The proclamation, under its section that provides the
requirements necessary for membership in a cooperative society, dictates that if the membership
is for a cooperative society above a primary cooperative society, the member shall be a
cooperative society registered by the appropriate authority and have legal personality.88
Hence,
only societies not individuals those are capable to be member of unions or federations under the
law. So, the position of the above mentioned Regulation and Directive is not in consistent with
the provision of the proclamation, and consequently they have no current application on the
specific issue at hand.
B. Location and Registration
Since Ethiopia has follow federalism state structure, the formation and registration of SACCOs is
decentralized in to federal and regional state level. The issue of decentralization of regulation
better envisages by the Proc.No.985/2016 which enables the appropriate authority to establish
and register SACCOs at federal or regional level.89
The appropriate authority is the FCA, at
federal level, or an organ established at regional levels to execute the proclamation, lead and
regulate the cooperative sector.90
In addition, as per Art.76 (2) of the same proclamation, the
constituting regions of the country may issue their own laws in a manner which is not contrary to
this proclamation and it‟s implementing regulation to be issued subsequently. Accordingly,
87
Proc.No.985/2016, Art.14 (1) & Art.15 (1); Regulation No.106/2004, Art.4 (1) & 5 (1); and መመሪያ ቁጥር 007,
Art.10 (2.1) & (3.1) 88
Proc.No.985/2016, Art.24 (3) 89
Proc.No.985/2016, Art.7 (5) 90
Id, Art.2 (20)
26
SACCOs may be established, in different tiers from primary up to federation, and registered at
the federal or regional government level by fulfilling the required formation requirements
provided under the federal or regional laws. The law required all types of SACCOs, except the
League which operate national wide, to determine their operational area by their bylaws.91
However, primary SACCOs which carry out similar activities may not established in the same
(one) operational area according to Art.10 (1.4) of Directive No.007. There is no any rule with
regarding to branches and the law requires SACCOs only to disclose the address of their place of
operation and to inform, within 30 days, the appropriate authority of any change in such
address.92
Absence of branch and geographical location restriction under the SACCOs‟ legal
framework is justified by the government‟s interest in increasing outreach and spreading the
financial services of such institutions national wide in order to achieve the financial
inclusion/access to finance strategy of the country eventually.
C. Institutional Form and Legal Personality
Any SACCO, after registered before the appropriate authority, shall get a juridical personality
from the date of its registration and has a limited liability or it shall not be liable beyond its total
asset.93
A given SACCO should have its own lawful name which is followed by the phrase
“Cooperative Society with Limited Liability”.94
Therefore, the current substantive regulatory
framework requires SACCOs to be formed as a cooperative society which has a limited liability.
As we know cooperative society is an association of persons or grouping that is organized to
provide an economic service without profit to its members. As per this form, the
members/shareholders of SACCOs have limited liability or they are not liable to pay anything
more than the face value of shares held by them. Even when the SACCO becomes insolvent they
may not be called upon to pay from their personal property to service the debts of the society.
Beside, pursuant to Art.11 (1) of the above mentioned proclamation, any SACCO registered
under this law is conferred with juridical personality from the date of its registration. And hence,
as a fiction person of law, it may enjoy the rights resulted from being juridical person, such as
the right to sue and be sued, owning property in its name, using the “cooperative society”
institutional form, defending its name not to be used by others, etc.
91
Id, Arts.14 (2) & 15 (2); Regulation No.106/2004, Arts.3 (2) & 7; and መመሪያ ቁጥር 007, Art.17 (1) 92
Proc.No.985/2016, Arts.10 (2j) & 69 (2) 93
Id, Art.11, and Regulation No.106/2004, Art.13 (2) 94
Proc.No.985/2016, Art.9 (2) and መመሪያ ቁጥር 007, Art.18 (1)
27
D. Initial Capital and Ownership Restriction
Initial capital is a SACCO‟s capital at the time it is given license to start operation. In Ethiopia,
accordingly, the minimum capital requirement to establish a new SACCO is a certain amount
that is capable to cover such SACCO‟s, at least, one year operation cost based on its plan and
feasibility study.95
Here the hesitation of the law from fixing the exact amount of the initial
capital is may be justified by the legislator‟s consideration of the necessity to accommodate the
difference between SACCOs and the government‟s intention to encourage market entry by
making it affordable for all. In addition, the existence of affordable initial capital requirement
could also play a vital role in the attainment of the country‟s access to finance strategy. And
hence, in order to obtain such capital, the SACCO shall sell shares that have equal par value as
per the approval of the General Assembly.96
The law requires SACCOs, up on its formation, to
collect from its members at least one fifth of the amount of the share that has been decided to be
sold and to deposit it in a bank account or if there is no bank in the area, in a financial institution
where the appropriate authority has designed.97
The remaining number of shares (the balance)
should also be sold to members within four years from the date of establishment of the SACCO
or after the commencement of its operation. In related, an initial capital of at least 25% raised
from the member primary SACCOs through special resolution of the General Assembly to
implement the plan developed for the union based on its feasibility study and start-up capital of
at least 30% collected from member unions in similar ways is required by law to form SACCO
Union and Federation, respectively, based on Art.22 (2-3) of the same proclamation. Generally,
SACCOs, before commencing operation, are required by law to have fully subscribed and
partially paid up (20% of the total share capital) capital that is equivalent to their one year cost of
operation. It seems Ethiopia has provided floating start-up capital for SACCOs and this may
facilitates easy entry to the sector on one hand and it could also pose a challenge to create
SACCOs having strong financial capacity.
95
Proc.No.985/2016, Art.22 (1) 96
Id, Art.27 (1) and መመሪያ ቁጥር 007, Art.25 (2.1 &2) The reason that the law required the decision and approval of
the General Assembly in determination of share par value might be for the purpose of fixing par value of shares
based on members‟ ability to pay. 97
Proc.No.985/2016, Arts.27 (2) & 10 (2h) and መመሪያ ቁጥር 007, Art.25 (2.4); The declared share of SACCOs may
be divided in to two; sold shares, which are the initial fully subscribed and partially (1/5) paid up member shares,
and shares prescribed for future sale, are shares determined to be sold in future for new members or for the existing
members when the entity wants to increase its capital.
28
On the other hand, when we see the ownership or shareholding limitation of SACCOs, no
member of primary SACCO is allowed to hold more than 10% of the total share sold by the
SACCO.98
Similarly, according to Art.27 (6) of Proc.No.985/2016, any member of SACCO
Union or Federation shall not hold more than 50% of shares out of those the General Assembly
decided to be sold. The law seems relaxed in fixing such amount of shareholding by single
member. This may be because of the absence of undue dominance, result from majority
shareholding, of few members in SACCOs that need to be restricted. Ownership restriction in
SACCOs is not to discourage accumulation of votes or veto power since share has no value in
voting rather than membership. But, it is to protect unlimited credit access by a person who has
more shareholding than other members in the SACCO. In Ethiopia, a SACCO member, without
any additional guarantee, may get loan that is equivalent to his/her deposits or shares in the
SACCO. Consequently, owning more shares enables the owner to access more loan than other
members who have less shareholding. Therefore, the existence of highly restrictive shareholding
rules is important to address such kind of issues.
E. Business Plan, By-laws, Organizational Structure and Disclosure Requirements
In addition to the above mentioned entry requirements, the regulator may require any SACCO
applied for registration to submit different particulars related to its business which enables the
former to ascertain the future development and sustainability of such institution. And hence, in
Ethiopia, any SACCO to get registered as cooperative society requires to submit an application
for registration together with other details like minutes of the founders meeting; its three-five
years action plan (it includes objectives, assets, short and long term planned activities with their
cost and time schedule, statements about expected profit and loss and assets and liabilities,
feasibility study demonstrating its viability, etc., of the SACCO); its credit administration rule in
three copies, documentary evidences showing its initial capital, the capital that has been
collected and deposited in bank or other financial institution; and the description of its place of
operation.99
The law also requires the applicants of SACCO registration to provide three copies
98
Proc.No.985/2016, Art.27 (5) 99
Id, Art.10 (2) and መመሪያ ቁጥር 007, Arts.14, 15, 16 & 19 (5) The description about the place of operation
comprises particular information regarding to, among other, the geographic and weather situation of the place,
infrastructures, demographic patterns of the residents, and the number and coverage of such SACCO users in the
area.
29
of the society‟s by-laws.100
The by-laws shall include the name and address of the SACCO, its
objectives and activities, requirements for membership and conditions of membership
termination, the rights and duties of members, allocation and distribution of profits, auditing, its
fiscal year (it is mandatory from July 1st- June 30
th), procedures of loan, shares, its proposed
administrative structure (the powers, responsibilities and duties of management bodies;
conditions for election, appointment, term of office and suspension and dismissal of the members
of the management committee or other management bodies; administration and employment of
workers; conditions for calling of meeting and voting procedures), and other appropriate
particulars.101
The existence of these all requirements is important to evaluate and determine the
institutional capacity of any SACCO to enter into the market and continue as sound and prudent
financial institution.
F. Management and Ownership Quality
Good governance should be promoted in SACCOs to make them sustainable and strong
organizations. Through practicing good governance, SACCOs can develop highly accountable
and responsible management and leaders with capacity to formulate and implement good
strategic, business and succession plans as well as adequate organizational set up and transparent
operational system. To promote good governance in SACCOs, their management bodies and
even owners should be qualified and competent enough to manage the institution. This is the
reason why regulatory frameworks provide different requirements related to quality and
competency of management bodies. In Ethiopia, the management bodies of any SACCO
comprises the General Assembly, Management Committee, Control Committee, the Manager
and other sub-committees, if any.102
Except the manager, who is the employee of the SACCO,
other organs of the management are run by the whole (general assembly) or elected members of
the SACCO. Under the current legal framework of SACCOs, however, there are no sufficient
qualification and competency requirements for such management bodies. For instance, when we
see the management and control committee, the law stipulates only the tenure of members of
such committee and left their number and manner of election to be determined by the by-laws of
100
Proc.No.985/2016, Arts.10 (2.2) and መመሪያ ቁጥር 007, Art.12 (1). By-laws, per Art.2 (13) of the proclamation,
means a law governing a cooperative society (including SACCOs) based on the approval of the General Assembly
with two-third vote and registered by the appropriate body. Such by-laws of SACCOs are prepared based on the
model by-laws which have been made for them by the authority. 101
Proc.No.985/2016, Art.12; Regulation No.106/2004, Art.14; and መመሪያ ቁጥር 007, Art.12 (2) and 47 102
Proc.No.985/2016,Arts.31-39
30
SACCOs.103
Since the members of these committees are elected from the whole members of the
society and there is no any quality or profession related requirements for them except they are
required only not to be insane and legal interdicted person. Even though these two criterions are
related to capacity or fitness of the members, they are not enough to regulate SACCOs‟
management quality. Therefore, there should be requirements specially designed to be fulfilled
by members to become part of the management or control committee. Without adequate
experience and qualifications related to the business, how the members of these committees
discharge their duties and responsibility and how they control and evaluate the activities of the
manager and other employees of the SACCO.
Coming to the issue of manager, the law authorizes SACCOs to employ a manger, for
administering and leading the day to day activities of the society, who is accountable to the
management committee.104
The particulars as to the recruitment and administration of workers
(including manager) is left to be address by the council of ministers regulation and through
directive issued by the appropriate authority as per Art.39 (1) & (5) of the Proc.No.985/2016.
Although there is no any regulation for the matter, the regulator has prepared a directive for
human resource organization and administration of cooperatives (hereinafter Directive
No.005.105
According to this directive, SACCOs are required to hire chief executive manager, a
person who fulfilled the qualification requirements attached with this directive based on their
operation size and capital base.106
The person who want to be managers of SACCO are required
to have educational background starting from technical and vocational diploma to university
first degree in Business related fields; and 4-8 years of work experience of such fields.107
This
requirement is justified by its benefit of enabling SACCOs to hire qualified and competent
managers.
103
Id, Arts.34 & 36; and መመሪያ ቁጥር 007, Arts.30 (3) & 31 (3) The term of office of members of both the
management and control committees is limited to the maximum of six years (two consecutive terms) with a chance
that up to one-third of the leaving members can be kept in service for an extra one term after one fiscal year. 104
Proc.No,985/2016, Art.39 (1) 105
የ ህብረት ስራ ኤጀንሲ የ ህብረት ስራ ማህበራት የ ሰው ሃ ይል አደረጃጀትና አስተዳደር መመሪያ ቁጥር 005 [hereinafter መመሪያ
ቁጥር 005] 106
Id, Art.6.2; SACCOs, based on their operation size and capital base, are divided in to three, and they should
employ only those managers who fulfilled the requirements provided in respect to their level. 107
See attachment 1 (1.1) of the same directive
31
G. Registration Rules
Under the current legal framework, the power to grant or refuse registration is given to the
appropriate authority established at federal and regional states level. When the applicant SACCO
have satisfied all the above mentioned preconditions, the appropriate authority shall registered
such SACCO unconditionally and issue a certificate of registration within five consecutive
working days in accordance to Art.10 (3) of Proc.No.985/2016. The certificate of registration
issued here serve as evidence to prove that such SACCO is registered pursuant to the
proclamation.108
Any SACCO may be registered conditionally when such SACCO fulfilled only
some parts of the requirements, a-h, provided under Art.10 (2). At this time, the authority shall
grant temporary certificate which may serve not more than a year and the SACCO is required to
meet the remaining requirements within that year.109
The SACCO, per Art.19 (10) of Directive
No.007, may be registered unconditionally after satisfaction of the rest of the requirements
within the specified time. However, the directive failed to state explicitly the consequences if
such SACCO is unable to meet the conditions in that time. The acontarario reading of the
provision mentioned hereinabove may give the answer, such SACCO may not be permanently
registered and even its temporary certificate will be revoked after the lapse of that one year
period. So, the researcher believed that, the legal effect for failure to meet the remaining
requirements within the specified time might not be similar to rejection of the application for
registration by the authority rather it seems like that of SACCO which registered but failed to
start business. This is because such SACCO is already start giving service to its members even if
its registration is temporary.
On the other hand, the above mentioned proclamation authorizes the appropriate authority to
refuse registration simply by its discretion. Art.10 (4) of the said proclamation states that when
the authority rejects the application for registration of a SACCO, it shall give a written
explanation to the representatives of such SACCO within five consecutive working days starting
from the date of application. Regulation No.106/2004 provides the conditions for the prohibition
108
Proc.No.985/2016, Art.10 (6) 109
Id, Art.10 (8) and መመሪያ ቁጥር 007, Art.19 (9) The remaining requirements that force the SACCO not to be
registered unconditionally includes description of the place of operation and other particulars to be specified in
regulations and directives issued hereunder. However, currently such types of law are not enacted yet and we should
refer the secondary legislations enacted before the proclamation to ascertain the existence of additional
requirements. So, credit administration guideline with three copies and balance sheet for re-structuring SACCO are
the extra requirements that needs to be fulfilled within the specified time, as per Art.19 (5) of the same directive.
32
of registration, the proclamation failed to mention though. The ground of refusing registration
includes having similar name and emblem with the society registered before, absence of project
proposal, failure to observe registration requirements of law, and having objectives which are
contrary to laws regulating cooperatives.110
Therefore, the authority may reject any SACCO‟s
application for registration as long as one of the four conditions for the prohibition of registration
is satisfied. However, the decision of the authority that rejects SACCO‟s application for
registration is subject to judicial review as per Art.10 (5) of Proc.No.985/2016. After fully
registered by the authority, the law permits any SACCO to engage in businesses in accordance to
its objectives and activities endorsed in its bylaws without the need to secure additional business
license.111
And, SACCOs are needed to renew their certificate of registration every three years
starting from their establishment and registration.112
Generally, in Ethiopia, the SACCO
registration process is fast and the law also recognizes registration as a legal right and provides a
means of review for the authority‟s decision that affects such right. However, the proclamation
should state explicitly the grounds of refusal for registration even if the issue is covered by
another law came before it.
2.3.1.1.4 Ongoing Requirements
Ongoing requirements, as the center of prudential regulation, are a set of rules that regulates the
day-to-day operation of financial institutions including SACCOs. Such rules are applied on the
institutions after the commencement of their business or after they entered the market by
securing the green light from the appropriate authority. Thus, the current legal framework of
Ethiopia provides different ongoing requirements that govern the market operation of SACCOs
and the next section presents the discussion on them.
A. Capital Adequacy and Reserving Requirements
Regulations provided capital adequacy requirement in order to ensure that SACCOs maintain a
level of capital which is adequate to protect or cushion member deposits and creditors against
losses resulting from business risks that SACCOs, as a financial institutions faces. Thus as a
measure of a financial institution‟s safety and soundness, adequate capital promotes public
confidence in the institution. In Ethiopia, SACCOs‟ capital is the amount of assets accumulated
110
Regulation No.106/2004, Art.19 111
Proc.No.985/2016, Art.10 (7) 112
Id, Art.20 (1)
33
after deducting its liability, and it includes members‟ shares, reserve fund, donations, inheritance,
and funds prescribed by bylaws and investments.113
Accordingly, the appropriate authority, to
increase their capital and balance the liability to capital ratio, required SACCOs to collect, with
the savings, 28.5% (a ratio of 3.5 saving to 1capital) of their members‟ total regular
(compulsory) deposit in the form of capital.114
According to this, since members paid up shares
are their basic capital, SACCOs are required to keep at all times a core capital of 28.5% of their
total deposit liabilities. This requirement determine SACCOs‟ leverage ratio (saving to share
ratio) and it is important to measure how the SACCO‟s total capital balances with its liability,
members‟ savings. It seems that the regulator is preferred to use leverage ratio than risk based
capital rules to calculate the capital adequacy ratio of SACCO. This is due to the difficulty of
understanding, calculating and applying capital to risk weighted asset by the SACCOs and the
regulators. And also, it is because of the small asset and liability position of most SACCOs and
to enable them to accumulate adequate capital progressively. This is why the law empowered
SACCOs to sale additional shares when they are in need of additional capital and members who
have received net profit are also allowed to buy extra share, pursuant to Arts.27 (3) and 45 (3) of
the above mentioned proclamation.
SACCOs also required by law to preserve and deposit a legal reserve fund created and increased
from the total net profit. Any SACCO shall deduct 30% of the annual net profit in the form of
reserve fund and this amount shall continue to be deducted until it reaches 30% of its capital.115
The allocation of net profits before the deduction of the legal reserve is prohibited, but they can
do so based on their bylaws after the reserve is maintained. The proclamation requires the
deposition of such reserve in saving account opened in the name of the SACCO and said nothing
about its utilization. This implies that the law totally prohibits the investment of the accumulated
funds which are not subject to distribution for members. The law must give SACCOs a power to
invest the idle funds, which are deposited in financial institutions, in order to retain additional
incomes. On the other hand, As per Art.24 (2) of Regulation No.106/2004, the regulator is
authorized to issue directive for the utilization of such reserve fund. However, it does not enact
113
Id, Art.2 (19); however, members‟ shares may not be considered as institutional capital because it is a liability for
the institution and if it is withdrawable. 114
መመሪያ ቁጥር 007, Art.25 (2.5) 115
Proc.No.985/2016, Art.45 (1); Regulation No.106/2004, Art.24 (1); and መመሪያ ቁጥር 007, Art.36 (1), the legal
reserve fund required to be deposited in a saving account opened in the name of the SACCO
34
such directive yet. Despite the regulator is failed to issue a directive for the application of the
reserve fund, it allows the utilization in practice.116
In addition to the legal reserve, in order to
sustain undefined risks that would occur in its operation, SACCOs are expected to hold 25% of
its total collected capital.117
This capital reserve must be deposited at financial institutions in
permanently closed account. The holding of 25% of total capital reserve may serve as a general
provision or non-specific allowance provided to set aside unidentified risks.
B. Liquidity Requirement
The main purpose of liquidity requirement is to ensure that SACCOs maintain an adequate level
of liquidity (cash and liquid assets) to meet all known and unexpected obligations. For instance,
to meet the demands of loan disbursements and saving withdrawal, SACCOs should have
adequate level of liquidity. Absence of liquidity may make SACCOs unable to meet such kind of
liquidity demands of their member-customers. As we know, SACCOs have weak financial basis
because of their customers are, most of the time, the poor peoples with low deposit capacity. In
addition to the above weak financial basis, when there is high rate of uncollectable loans, results
from long term loans or delinquency, and procurement of fixed assets results liquidity problem
(liquidity deficiency) on SACCOs. Therefore, liquidity requirement should be there in order to
avoid such liquidity deficiency of SACCOs.
With regarding to this, in Ethiopia, the amount of liquidity level that SACCOs are expected to
maintain is unknown. The law is silent on this regard and what makes a given asset as liquid
asset is also undefined. On the other hand, per Art.50 of the above mentioned proclamation, the
law subjects SACCOs to annual audit and one area of this auditing is related to the cash balance
of SACCOs. This provision connotes that the legislature intentionally abstained from fixing the
minimum liquidity requirement for SACCOs, but order auditing of their liquidity level simply
for the purpose of formality. The legal framework is also failed to indicate what measures will be
followed if the result of such liquidity auditing show high or low liquidity amount. As credit
institutions, the minimum amount of cash or easily withdrawable asset must be specified under
the law that regulates SACCOs.
116
Infra note, Section 3.2.6, Para.5 117መመሪያ ቁጥር 007, Art.34 (4.4)
35
C. Loan Classification and Loan Loss Provision
As a financial institution, one of the services supplied by SACCOs is loan. SACCOs may create
different kinds of credit schemes in order to satisfy their members financial needs. However, as
their name indicates, SACCO‟s credit service is preconditioned on saving, or the member who
want loan is expected to save first. And also, their total loan portfolio is determined by their total
capital. Usually the laws governing SACCOs provide restriction on the total amount of lending
for the purpose of limiting the risk concentration. In Ethiopia, Proc.No.985/2016 allows
SACCOs to extend loans to members, individual or groups, and a cooperative society established
by this proclamation.118
The cumulative reading of Arts.48 (3) and 49 of the same proclamation
implies that the particulars as to the condition and amount of loan as well as the types and
alternative guarantee to be used for the loan are determined by the by-laws of the SACCOs.119
Other things related to loan, such as classifications of loan, duration, single borrower limit, etc.,
are covered by Directive No.007. Accordingly, even though SACCOs‟ have the power to
determine their own duration of loan based on their growth and management strength, they could
provide loans based on the following loan duration thresholds; 1) short time loan up to one year,
2) medium loan up to five year, and 3) long time loan up to ten years.120
This implies that
SACCOs could limit their loan repayment period to maximum of ten years or longer. The
directive also restricted the single borrower limit not to be more than 10% of the total assets of
the given SACCO.121
However, SACCOs may follow other single borrower limit, by considering
their strength and financial capacity as well as their procedure of loan disbursement and
collection, different from the directive but it should not be greater than the 10% threshold.
Considering the silence of the law regarding to the limit on lending to officials and staffs of the
SACCO, it seems this specified threshold applies to all borrowers regardless of their position.
The law also requires SACCOs, before granting any loan, to prepare financial report that indicate
its total amount of saving, loan, collected loan, uncollected loan, overdue loan that could be
collected, and of uncollectable loan (bad loan).122
This detail financial report is required for the
118
Id, Art.48 (1) 119
In addition to the by-laws, based on Art.13 of SACCOs organization directive, any SACCCO, from primary up to
federation level, shall have its own credit administration rule that regulates all the details related to its loan disbursement and collection. The FCA has prepared a model credit administration rule, i.e. የ ህብረት ስራ ኮሚሽን
የ ገ ን ዘ ብ ቁጠባና ብድር ህብረት ስራ የ ብድር አስተዳደር መመሪያ ቁጥር 008/1996, [hereinafter መመሪያ ቁጥር 008] 120
መመሪያ ቁጥር 007, Art.34 (2.3) 121
Id, Art.34 (2.4) 122
Id, Art.34 (4.2)
36
purpose of ascertaining the financial status of the SACCO whether it is sound and capable to
grant the loan or not. However, the law failed to stipulate the parameters that uses for labeling a
financial status of any SACCO‟s healthy or not and who decides that. Because, knowing the total
amount of savings or loans, either collected or uncollected, of a given SACCO may enable the
regulatory authority simply to know the actual financial status of such institution; but unable to
say such financial status is healthy or not without the necessary requirements. Hence, after
ascertainment of the exact financial status of SACCOs, there should be parameters which helps
to determine the soundness or not of such financial status. SACCOs are allowed to provide loans
secured by collaterals or secured by individual members guarantee. Any member of SACCO
may get credit by using his/her saving and share capital as a collateral as per Art.34 (2) of
Directive No.007. According to Art.32 (2.5) of the same directive, when the amount of loan
required by the member is greater than his/her saving or share capital in the SACCO, the
member is required to establish additional security in the form of, either a personal guarantee
(member or non-member who is capable to provide reliable evidence) or property that could
serve as a collateral. The existence of such provisions may make SACCOs easy to meet the
credit need of their poor and unbanked clienteles.
On the other hand, in order to foster their financial capacity, the law also allows SACCOs to
receive loan from their members or other organizations (like cooperative societies or lender
institutions).123
However, the extent and conditions of this borrowing may be determined by the
general assembly, based on the by-laws of the receiver SACCO. In fact, the possibility of
receiving loan could be pivotal for SACCOs to increase their financial basis and to enhance their
service outreach. In the contrary, however, this situation may escalate their dependency on
external financial sources and eventually affects their financial performance or results their
financial status to be unhealthy and unsound. The other issue in SACCOs‟ regulation is the area
of loan loss provisioning. Provisions for loan losses are also defense mechanisms to protect
members‟ savings from identified risk. The current Ethiopian SACCO substantive regulatory
framework requires SACCOs to identify, in extent and type, non-performing loans and to be
decided by their general assembly.124
Though, non-performing loan is not defined and its type
(category) is also missing from the laws governing SACCOs. There is no write-off and
123
Proc.No.985/2016, Art.47 and መመሪያ ቁጥር 007, Art.37 124
መመሪያ ቁጥር 007, Art.34 (4.6)
37
provisions for the delinquent loans, unless the 30% capital reserve deducted from the total
SACCOs‟ capital is considered as provisioning even though it is reserved for unidentified risks.
D. Accounting Procedures and Reporting Requirements
SACCOs are require by law to keep the necessary books of accounts based on the Book Keeping
and Auditing Directive No.006 (hereinafter Directive No.006).125
As per Art.5 (1) of Directive
No.006, every SACCO is expected to follow “Double Entry Accounting System” in their book
keeping. The double entry system of accounting or book keeping means that every business
transaction will involve two accounts. For example, when a SACCO borrows money from bank,
the SACCO‟s cash account will increase and its liability account loans payable will also
increase. Hence, in this method, the amounts entered into the general ledger accounts as debits
must be equal to the amounts entered as credits. Accordingly, they are required to keep financial
documents like ledger (general and/or subsidiary), collection sheet, bank reconciliation, loan
contracts, Journal voucher (for the purpose of inserting in-kind transactions in to the ledge and
correcting wrong accounts), account statements (income statement, cash balance, and balance
sheet), and other documents necessary for asset valuation.126
They are also required to have a
book for registering permanent properties that shows the property‟s type, date of acquisition,
acquiring cost, and its cost of depreciation.127
As per Art.11 and 5 (4) of Directive No.006,
Ethiopian SACCOs should keep patronage accounts that indicates members shares capital, their
participation summary, and non-member users participation.128
The usage of such documents by
SACCOs may be different considering their institutional status and hence small SACCOs are
required only to keep some of these financial documents such as income statement, patronage
account, and permanent properties registering book. On the other hand, SACCOs, whether it‟s
primary or union or federation, are also required to submit quarterly and annually reports that
show their all activities to FCA in a form prescribed by the latter.129
Similarly, they are also
ordered to provide a report of their annual plan to the same authority within one month after its
approval by the general assembly, based on Art.46 of Directive No.007. In addition, the law
125
መመሪያ ቁጥር 007, Art.39 (1); የ ህብረት ስራ ኮሚሽን የ ህብረት ስራ ማህበራት የ ሂሳብ አያ ያ ዝና ምርመራ መመሪያ ቁጥር 006,
[hereinafter መመሪያ ቁጥር 006] 126
መመሪያ ቁጥር 006, Arts.5 (3,4), 6 (5), 8, and 12 127
Id, Arts.4 (3) and 6 (2) 128
In addition, see also Arts.28 and 26 of Proc.No.985/2016 and SACCOs‟ Organization Directive, respectively. 129
መመሪያ ቁጥር 007, Art.45
38
authorizes FCA to audit (at least once in a year) the accounts and to inspect the organizational
status, operation, documents and financial conditions, of SACCOs periodically.130
Furthermore, SACCOs are expected to conduct annual audit of their books and accounts by the
regulator or other person delegated by the authority.131
This annual auditing shall cover the
examination and verification of overdue debt, if any, cash balances, securities, assets and
liabilities of the SACCOs. For this purpose, the regulator FCA has prepared Audit Delegation
Directive No.13 (hereinafter Directive No.13) and provides different requirements to govern the
appointment of such external auditor.132
According to such directive, any auditor seeking to be
appointed as an external auditor for SACCOs should be qualified as per the Federal Auditor
General and capable to submit qualification assurance certificate, have currently renewed
auditing license, specially trained by FCA or other organ to audit cooperatives and have a
certificate for that effect, having an experience of auditing SACCOs, and be able to provide other
required evidences.133
In addition, such auditor is required not to have any conflict of interest
that could affect its independency and impartiality.134
The audit may have no effect or the
auditor‟s professional autonomy may cast doubt when the auditor pursues its interest, which
includes accepting any direct or indirect benefits from SACCOs intends to be audit, accepting
from or providing to any credit or guarantee services, creating business relation with such
SACCO, and other similar acts; existence of self-auditing, such as being the official or
employee of the SACCO, providing services, other than auditing, that have effect on the
proposed auditing, and participating in other activities which result conflict of interest; and being
related person or family member or having close relation with the management, officials or
employee of the SACCOs.135
The auditor shall not audit the same SACCO more than twice and
required, during auditing, to focus on the management, finance, material management and other
conditions of SACCOs as well as their compliance, in the account recording and statement
preparation, with the generally accepted accounting principles.136
On the other hand, FCA is
130
Proc.No.985/2016, Arts.50 (1) and 52 (1) 131
Id, Art.50 132
የ ህብረት ስራ ኤጀንሲ የ ህብረት ስራ ማህበራትን ሂሳብ በውክልና ለማስመርምር የ ወጣ መመሪያ ቁጥር 13, [hereinafter መመሪያ
ቁጥር 13] 133
መመሪያ ቁጥር 13, Art.4 134
Id, Art.5 (1) 135
Id, Arts.5 (2), 6-8 136
Id, Arts.11 (5) and 14
39
required to maintain the list of qualified auditors, identify and inform the list of SACCOs which
can be audited by external auditor, to accept and immediately decide on the audit request of
SACCOs, examine the competency of auditors suggested by SACCOs, monitor the audit process
and assure it is conducted in accordance to international auditing standards and with
professionally autonomous way, evaluate the audit report and submit the same to the general
meeting for approval, and follow up the implementation of audit recommendations.137
The
auditor is also required to prepare the audit report, by attaching all the financial statement, and
submit the same to the SACCOs and the regulator within one month after completion of the
audit.138
The audit report should be prepared based on acceptable international auditing standards
and it must reflect the actual condition of the audited SACCOs. Totally, the auditor is expected
to conduct the job in due care and diligence and; providing inaccurate, false audit reports,
concealing or failing to inform the regulator any violations made by the audited SACCO either
negligently or intentionally makes the auditor liable to administrative, civil and criminal
sanctions.139
In generally, the aforementioned requirements are important in order to ascertain SACCOs‟
compliance to the regulations and to create a tradition of transparency in their operation. It is also
vital to protect SACCOs‟ assets and capital from waste by encouraging them to have modern and
sound book keeping and accounting system. And, having modern book keeping and accounting
system may be necessary to increase the credibility of SACCOs and also enables the regulator to
rate their performance. But, the frequency of reporting is not that much stringent and this could
be justify by considering the difficulty of making frequent reporting due to inadequate
management information system of Ethiopian SACCOs and their huge number of distribution in
rural areas.
E. Governance and Internal Control
Having good governance and controlling mechanisms is vital for any SACCO to prosper and
achieve its objectives prudently. Weaknesses in SACCO corporate governance may create
inefficiency and lack of effectiveness in providing services to members like service being
accessible by few, misunderstandings within SACCO and even low members‟ participation like
137
Id, Arts.9-11, and 19; in practice, FCA figured it out the identification process based on the capital base of
SACCOs. 138
Id, Arts.15-18; and Proc.No.985/2016, Art.50 (3) 139
Id, Art.23; and Id, Art.51
40
in meetings, saving and even borrowing. The absence of strong internal control system in many
SACCOS has made it easier for the unfaithful leaders and staffs to misuse the SACCO funds.
SACCOs should have strong internal control systems in order to improve their financial
performance or profitability and to prevent losses. It can help to ensure that their leaders and
staffs comply with laws and regulations, avoiding damage to its reputation and other
consequences. A clear division of roles between management bodies is fundamental as well as an
independent supervisory committee that can question the actions of the board.
The current SACCO legal framework of Ethiopia provides only about the composition, tenure,
and power and duties of the general assembly, management committee, control committee, of
SACCOs. There is no any other qualification requirement or „fit and proper‟ tests for the
members of these committees except the manager (but only education and work experience)
under the law. However, the law imposes an obligation on the management committee members
to cause inspection of their activities, performed during their membership to the committee,
when they leave the post for whatever reasons.140
As per the laws and organizational structure of
SACCOs, the main internal controlling body is the control committee. Any SACCO is required
to have a control committee accountable to the general assembly and its number of members will
be determined by the size of the institution, but should not be less than three.141
The powers and
duties of this committee includes follow ups that the management committee is discharging its
responsibility properly, control that the funds and properties of the institution are properly
utilized, execute decisions of the general assembly and perform other duties given by the
latter.142
Generally, the responsibility of the control committee involves in ensuring that the
overall activities of the SACCO are conducted as per the law, by-laws and internal regulations of
such institution and report any violations and abnormal activities of the management bodies and
workers to the general assembly. So, this committee is serving as internal supervisor of
SACCOs.
Besides, for better and continues controlling and based on its operation size and capacity, any
SACCO may also employ internal auditor. Accordingly, SACCOs are required to hire a person
who has a college diploma and two years‟ work experience as an internal auditor who is
140
Id, Art.34 (5) 141
Id, Art.36 (1) and መመሪያ ቁጥር 007, Art.36 142
Proc.No.985/2016, Art.37
41
responsible to the manager and tasked with monitoring the financial conditions of the
SACCOs.143
Furthermore, according to Art.50 of Proc.No.985/2016, the book of accounts of any
SACCO should be audited annually by FCA or a person assigned by FCA. The law still allows
SACCOs to appoint an external auditor, under the approval of FCA, if they want to undertake the
audit or inspection of the accounts by themselves other than the annual audit stated under Art.50
of the proclamation.144
Based on this provision, FCA has prepared audit delegation rule and
SACCOs are required to appoint external auditor from the list of auditors approved by the
regulator.145
The appointed external auditor also has an obligation to meet the requirements
provided by FCA and as much as possible such auditor is required not to have any interest-based
relations with the SACCO that result conflict of interest. Practically, appointment of external
auditor is determined by the capital of the audit requesting SACCO; means it is allowed only for
those SACCOs having thick financial bases and not for all SACCOs that wishes for it (even in
principle, it is permitted only for cooperatives operating import/export business).146
According to
one auditor at FCA, SACCOs are allowed to appoint auditors, based on their initiation and cost,
as external auditors only those certified by the Ethiopian Book Keeping and Audit Board.147
Totally, the control committee and internal auditor establish a system of internal control and
oversight to address problems of SACCOs before external supervision is sought.
F. Voting and Meeting Procedures
One of the guiding principles of cooperatives is that they are entities democratically controlled
by their members. And this democratic control is define by equal participation and voting right
of members. Equal voting right of members is better ascertained when one member have only
one vote. Based on this, in Ethiopia, any SACCO member, regardless of the number of shares
he/she has, have only one vote at the meeting of such SACCO.148
There are two types of voting
procedures in Ethiopia, voting in person and by proxy. In principle, any member of a primary
SACCO is expected to cast his/her vote personally by making his/herself available at the
143
See attachment 1 (1.2) under human resource organization and administration directive 144
መመሪያ ቁጥር 007, Art.39 (5) and መመሪያ ቁጥር 006, Art.13 (3) 145
መመሪያ ቁጥር 13, Art.11 146
Interview with Mr. Channie Adane, Cooperative Auditor at Federal Cooperatives Agency, Cooperatives Account
Auditing Service Directorate, on the appointment of external auditor and audit service, 18th
June, 2018 147
Ibid, however, the source told me that the FCA has no a single experience of appointing external auditor yet. 148
Proc.No.985/2016, Art.29 (2)
42
meeting.149
However, exceptionally voting in the primary SACCO may be conducted by
representatives of the member if the number of members of such SACCO is more than 500.150
The law allowed voting by representation here as a relief considering the difficulty of performing
voting in each SACCOs‟ meeting by participating all that much number of people directly. On
the other hand, SACCOs, organized beyond primary level, are required to conduct their voting
via representation.151
As per Art.29 (4) and (6) of Proc.No.985/2016, the law authorizes the
appropriate authority to issue directive as to the procedures of representation in SACCOs. The
regulator has issued a directive that regulates, among other things; the procedure of
representation in SACCOs organized in union and federation level and forgets the case of
primary SACCOs‟ member representation. Directive No.007 required that the procedure of
representation in SACCO unions and federations to be in the following manner:
Representation based on number of members:
10 representatives for SACCO with 50 members or Union with 2 member SACCOs,
Not more than 12 representatives for SACCO with 51-250 members or Union with 3-
7 member SACCOs,
Not more than 14 representatives for SACCO with 251-500 members or Union with
8-12 member SACCOs, and
Not more than 16 representatives for SACCO with more than 500 members or Union
with more than 12 member SACCOs.
For representation at society level, all SACCOs should have not less than 5 representatives
each.152
In related, the number of members which have representation in the general assembly of the
union or the federation should also not be more than 100 in accordance to Art.27 (5) of the said
directive.
With regards to SACCOs‟ meeting, SACCOs may have regular meeting, at least twice in a year,
or emergency meeting, when the management committee decides by majority vote or one-third
149
Id, Art.29 (3) and መመሪያ ቁጥር 007, Art.27 (2) 150
Ibid 151
Id, Art.29 (6) 152
መመሪያ ቁጥር 007, Art.27 (4)
43
of the members of the general assembly requires, of general assembly.153
A quorum of more than
half and two-third of the members or representatives of the SACCO is required to conduct
regular and emergency meeting of the generally assembly, respectively.154
In regular meeting,
where there is no quorum of the general assembly called, there should be second calling within
15 days and absence of quorum at this time empowered the available members to convened the
meeting and the decisions made in this meeting shall be deemed to have been passed by the full
quorum.155
Call for the emergency meeting of the general assembly should be carried out by
notifying the members, through News Paper or other means convenient for this purpose, and the
regulator, via written form, before 15 days of this meeting convened.156
The law also authorizes,
per Art.33 (3) of Proc.No.985/2016, the regulator to call emergency meeting, where the
management committee failed to call the emergency meeting as per the request of one-third of
the members of the general assembly. In both meetings, except those issues need special
resolution and two-third of members vote, SACCOs‟ decisions required to be made by the
majority vote (50+1).157
Generally, the current SACCO legal framework recognizes the equal participation and equal
voting right of members in the decisions made by the SACCO. The law also authorizes the
management committee, members and the regulator to call emergency meeting of the general
assembly. However, the law did not mention the reasons/grounds that empowered one-third of
the members to require emergency meeting. The issues that could be the agenda of either regular
or emergency meeting of the general assembly are also absent or the question related to what
type of issues are present for the decision of the general assembly in its regular or emergency
meeting is not briefly and exhaustively answered by the law. The category of issues that needs to
be decided by the regular or emergency meeting should be stipulated clearly. In addition, the fate
of an emergency meeting (called either by the management committee or one-third members of
the SACCO) that lacks the quorum is also missing from the law.
153
Proc.No.985/2016, Art.33 (1 & 2) and Regulation No.106/2004, Arts.22 154
Id, Art.33 (4) and Id, Arts.20 (2) and 21 (2) 155
Regulation No.106/2004, Art.20 (3 & 4) 156
Id, Art.22 and መመሪያ ቁጥር007, Art.29 (6) 157
Proc.No.985/2016, Art.29 (1) and Regulation No.106/2004, Art.23, based on the latter provision, the chairperson
of the general assembly have a casting vote when the voting is in tie. The issues which need the special resolution of
the general assembly includes, amendment of by-laws, amalgamation and division, decision on the sale of shares
which are not sold within the four founding years, determination of loan interest rate, and decision to dissolve the
SACCO.
44
G. Information Acquisition and Exchange Rules
As a credit institution, before granting any credit, SACCOs need to have full information about
the financial status of their customers‟ indebtedness. Because knowing the indebtedness of any
borrower enables SACCOs to determine whether the borrower deserves the requested credit. So,
the purpose of providing information acquisition and exchange rules here is similarly to control
the over-indebtedness of borrowers and to minimize SACCOs‟ default loan risks. The current
SACCO legal framework of Ethiopia requires SACCOs to prepare their own credit
administration guideline that regulate their loan disbursement and collection procedure.158
The
law requires SACCOs, before granting credit, to prudently assess and evaluate the ethics, the
business plan provided for the loan and its accomplishment, the property, equivalency of the
delivered collateral with the required loan and it‟s convertibility to cash, prior credit experience,
etc., of the loan demanding member.159
In addition to that, the credit committee or credit official
of any SACCO is authorized to conduct an interview with the potential borrower for the purpose
of better clarification of the latter‟s loan application.160
Besides, when SACCOs are about to lend
to other SACCOs, they should review the loan application, detailed financial reports, proposed
business plan and the decision of the general assembly of such SACCOs in accordance to Art.34
(2) of Directive No.007.
Generally, though these requirements are important for SACCOs to know their customers but not
enough. They are based only on the documents and interview responses provided by the
borrower and the scope of SACCOs‟ evaluation of their customer is limited to such single
SACCO. There is no way SACCOs could go beyond the customer to gather information about
the latter‟s indebtedness. The law does not encourage SACCOs to acquire from and to exchange
credit information with other SACCOs and financial institutions in order to know their clients
financial circumstances.
H. Interest Rate
Obviously, SACCOS are formed with the expectation of providing good financial services at low
cost compared to the option of going to other financial institutions. Deposit rates must be
competitive in order to enable SACCOs to attract savings and grow, while loan rates need to be
158
መመሪያ ቁጥር 007, Arts.13 and 34 (2.2) 159
Id, Art.34 (4.3) and Directive No.008/2003, Art.11 (1); these conditions are also called the “5C”s loan lending
standards (character, capacity, capital, collateral and conditions of the borrower). 160
መመሪያ ቁጥር 008, Art.6 (10)
45
set appropriate enough so that the SACCO can earn profits and build an adequate capital cushion
that ensures its strength. In Ethiopia, SACCO‟s interest rate for deposit and loan is left to the
determination of the general assembly under its by-laws.161
Pursuant to Art.34 (3.2 & 3.3) of
Directive No.007, any SACCO is permitted to have different deposit and loan interest rates for
different types of the savings and credit services it rendered. The free determination of loan
interest rate by SACCOs is justified by considering the fact that the difference in the sources of
credit, internal and/or external, may influence SACCOs to have different loan interest rates. So,
leaving the determination for SACCOs could be appropriate as it enables them to fix the interest
rate based on the amount of their credit sources. Based on this, Awach SACCO in Addis Abeba,
for instance, has applied in practice an interest rate of 7% for savings and 13.5 % interest rate for
loans, as per the response of its legal officer.162
However, in the determination of their loan interest rate, SACCOs are required to consider the
following points. These are: Cost of the credit-fund, Operational cost, Loan loss reserve,
Inflation, and Expected profit.163
The importance of these points is undeniable as they used to
evaluate whether the determined interest rates are adequate to cover the operational costs,
provisioning and capital reserve requirements. Adjustment of loan interest rate, based on the
members‟ credit demand and SACCOs‟ credit capacity, is also possible, but SACCOs have an
obligation to notify borrowers about this interest rate change.164
In related, it is obvious that any
SACCO may receive loans from its members or other organizations in accordance to its bylaws,
and the interest rate on loans received from such persons is required not to exceed the current
interest rate of a bank.165
From this provision, it is possible to deduce that the law wants to
protect the interests of SACCOs and their members in the first place. Because, from the
beginning, such borrowings are required to satisfy the credit demands of members and when a
SACCO borrows money with high interest rate, it will transfer the interest burden directly to
members through lending them with high interest rate (resulted from high cost of fund). This
condition may result two fold problems that the government dare to like. First, if members accept
161
Proc.No.985/2016, Art.48 (2) and መመሪያ ቁጥር .007, Art.28 (2.2) 162
Interview with Mrs. Bethlehem Zerihun, Legal Officer at Awach SACCO, on the practice of interest rate and
loan related issue, 21st June, 2018
163 መመሪያ ቁጥር 007, Art.34 (3.4) and መመሪያ ቁጥር 008, Art.8 (6)
164 Id, Art.34 (3.5) and መመሪያ ቁጥር 008, Art.8 (7 & 9)
165 Regulation No.106/2004, Art.34 (2)
46
such credit with this high interest rate, its repayment possibility will be close to zero and hence
affects SACCO growth. The economic life of members also may not be changed as expected
because of their huge indebtedness. Secondly, the existence of high interest rate may force
members to retreat from borrowing and this again affects SACCOs as well as members by
restricting their loan access. In both ways, SACCOs and members could not achieve the desired
objective and this is opposite to the government‟s interest in fostering social and economic
development by using SACCOs. So, by restricting the interest rate on SACCO borrowings, the
government avoids such kinds of problems and it eventually achieved the desired goal by
encouraging the financial growth of SACCOs and ensuring access to finance. In general, the law
preferred the liberalization of interest rates and needs to be determined by SACCOs themselves.
This approach seems appropriate by considering the current economic condition of the country.
In an inflationary economy, market conditions may require timely increase in yields on loans and
hence SACCOs can pay rate that will assure the income needed to cover the risks of providing
credits.
I. Fund Guarantee Requirements
Obviously, various factors may affect the instability of SACCOs and force it to fail. At this time,
the safety of members‟ deposit and the public image or credibility of SACCOs, as sound
financial intermediaries, becomes in question mark. Therefore, there should be some kinds of
guarantees or insurances to keep safe members‟ deposits and to ensure the stability of SACCOs.
Currently, Ethiopian SACCOs are not required to provide deposit insurance and other fund
guarantee requirements. However, the law simply requires them to have an insurance coverage
for their assets for the purpose of protecting such assets from different risks.166
On the other
hand, any SACCO may give micro insurance services or enter insurance agreement for its
members. Accordingly, SACCOs may provide micro credit life insurance services or enter
insurance agreement for its members‟ loan or saving or future saving, based on contractual
agreement, for the amount of premium paid money by SACCO.167
The loan life insurance is the
most common available micro-insurance service and serves for the purpose of write-off the loan
after the death of the borrower. Typically, it is a mandatory service for which SACCOs absorb
the risk of default due to death of their clients. Loan life insurance is required by SACCOs in
166
መመሪያ ቁጥር 007, Art.34 (4.8), SACCOs may also enter insurance agreement for their members‟ assets. 167
Proc.No.985/2016, Art.21 (9)
47
order to secure the reimbursement of their loans; if the insured borrower dies before the full
payment of loan, the benefit goes to the lender or SACCO to cover the repayment of the
outstanding balance of the loan. Besides, SACCOs offer micro life insurances based on savings
accounts with a multiple of the savings balance as of the death benefit. In this saving based micro
life insurance, the compensation is paid on the death of the insured person. The insurance
provider pays the pre-defined benefit (the amount is specified in the insurance contract and
linked to the savings of the deceased) to the designated beneficiary of the deceased policyholder.
Currently in Ethiopia both of the micro life insurance services are offered by SACCOs. This
micro insurance service is generally important to minimize the risk vulnerability of the SACCO
itself (as ex ante measure of securing loan portfolio of SACCOs) and its members. However, still
there is no Council of Ministers regulation issued for the detail implementation of this service as
per the plea of law to be issued in accordance to Art.21 (10) of Proc.No.985/2016.
J. Notification and Information Disclosure Requirements
Notification and information disclosure requirements are aim in creating transparency in the
institutional decision making and in order to avoid information asymmetry problems of
SACCOs. Lack of effective means of communication and transparency make it difficult for the
SACCO members, primarily, and other concerned body to be well informed adequately and
timely for issues concerning the institution. So, information disclosure, for the regulators,
members and the public, is important to make informed decisions and detect any abnormalities in
the operation of SACCOs.
As we have seen from the previous discussions, Ethiopian legal framework requires SACCOs to
disclose different information before registration and the commencement of their operation. And,
we have also discussed about the financial reports SACCOs are expected to submit for the
appropriate authority. Now, this section will discusses only other information that needs to be
disclosed by SACCO in their operation stage. Based on this, SACCOs are obliged to disclose
information about their operation to members, regulators and to the general public. Members of
SACCO as supreme managing organ of SACCOs, have a right to get information regarding to
the general activities of the SACCO.168
Other information the law required SACCOs to disclose
to its members include call of meeting (to be notified about the place, time and agendas of the
168
Id, Arts.31 and 32
48
meeting individually or generally via newspaper), monthly report that shows the SACCO‟s
financial capacity, audit report, and misconducts or losses of property and fund of the SACCO
committed by any management bodies or workers.169
Pursuant to Art.48 of Directive No.007,
SACCOs also have an obligation to provide necessary information to the appropriate authority
whenever required by the latter. The law requires any SACCO to notify the regulator about the
decision on the amendment of its by-laws within 15 consecutive working days from the date of
decision; calling of emergency meeting of the general assembly within 15 days, any misconduct
performed by any management bodies or workers; its decision on dissolution of the SACCO
within seven days from the date of decision; dismissal of the members of the management
committee with the reasons of their dismissal and name of their replacing members within five
days; and if the SACCO has conducted election of new management bodies, it should notify the
authority list of the names of elected management bodies with their position within five days.170
In addition, any SACCO is required to inform the regulator any change of its registered address
within 30 days.171
Furthermore, the law requires SACCOs to disclose some of their information to the general
public, as well. Any SACCO shall keep its audit and inspection results and deposits the laws and
the bylaws in its address in order to make easily accessible by the public.172
In addition to
SACCOs, the liquidator (since liquidation is one part of dissolution process and SACCOs are
deemed operating until cancellation) is obliged to notify the general public, before distribution of
the property of the dissolved SACCO, about the dissolution of the SACCO through newspaper
having wider circulation for the purpose of ascertaining any claims and to call on creditors.173
Generally, these all notification and information disclosure requirements are put in place to
ensure transparency and to enhance prudential decision making of SACCOs.
2.3.1.1.5 Exit Requirements
Since regulation provide the way how institutions entered and operates in the market, it also
stipulates the means of leaving such market. Market exit, as one of the areas of regulation,
169
Id, Arts.50 (3) & 54 (1.4); Regulation No.106/2004, Art.22; and መመሪያ ቁጥር 007, Arts.29 (2) & 34 (4.4) 170
Proc.No.985/2016, Arts.12 (3),& 54 (1d); and መመሪያ ቁጥር 007, Arts.29 (6), 40 (2) and 50 171
Proc.No.985/2016, Art.69 (2) 172
Id, Arts.53 & 72; መመሪያ ቁጥር 007, Art.49; and መመሪያ ቁጥር 006, Art.12 (5) 173
Proc.No.985/2016, Arts.57 (2) and 58 (3)
49
prudential regulations regulate the exit of institutions by providing different exit requirements.
The exit requirements that regulate SACCOs include rules on revocation and lapse of
registration, amalgamation/merger and division, and dissolution and winding up rules.
Discussion on these rules is presented in following manner.
A. Rules on Revocation or Lapse of Registration
As we know, after satisfaction of the conditions of registration, SACCOs shall be granted a
certificate of registration that will serve for undefined time. It does not lapse by force of law
unless the registration is conditional; certificate of registration granted for any SACCO in
temporal basis will lapse after the expiry of the specified time if such SACCO failed to meet the
remaining requirements of registration within the specified one year period. The law, per Art.20
(1) of Proc.No.985/2016, required SACCOs to renew their certificate of registration every three
years starting from their date of establishment and registration by the regulator. Based on similar
provision, the regulator is authorized to issue directive for the renewal of SACCOs certificate of
registration, but failed to do that and, practically, the renewal process is govern by the
proclamation and directives enacted for organization and registration of cooperatives, including
SACCOs. Similarly, sub article 2 of the above mentioned article also empowered the authority to
take measures in accordance to the same directive on SACCOs that fails to renew certificate of
registration. But, thanks to the failure of such authority to enact the required directive, we are
unable to know the sanctions for not renewing certificate of registration.
The ground recognized by law as reason for the revocation of certificate of registration is
SACCOs‟ engagement in businesses beyond its establishment objectives and principles. The
appropriate authority is empowered to suspend any SACCO from carrying out the activities
permitted by law where such SACCO is found operating out of the objectives and principles for
which it is established.174
However, the suspended SACCO has entitled to double petition rights,
as per Art.10 (10& 11) of the aforementioned proclamation. First, such SACCO, by providing
sufficient reasons, may ask the authority to lift up the suspension within 30 consecutive days,
and the authority would lift up the suspension if it found the request appropriate. Considering the
technicality of the dispute and its expeditious nature, the internal complaint process of hearing
the applicant‟s petition is appropriate and preferable. But, the regulator has a discretional power
174
Id, Art.10 (9)
50
to accept or reject the application of suspended SACCO and there is no clue with regarding to
the reasons that force the authority to lift up or not of the suspension. Secondly, if the authority
found the request inappropriate and does not lift up the suspension, the applicant SACCO have a
right to lodge a petition against the regulator‟s decision, to the appropriate regular court which
have jurisdiction for judicial review of the regulators decision. On the other hand, failure to
apply within 30 days to lift up the suspension and to commence operation within a total of nine
months after registration, the first six months plus the three month notice period, may results
registration revocation and dissolution.175
B. Rules on Amalgamation and Division
Sometimes, various factors such as changes in SACCO membership, management issues,
financial problems, etc., may forces SACCOs to restructure themselves. The rules on
amalgamation and division here are set of procedures that govern the amalgamation/merger and
division of SACCOs related issues like who decides the change, what the process is to be
followed, who should approve the change and other similar issues. Accordingly, under the
current substantive regulatory regime, any Ethiopian SACCO, through its general assembly
special resolution and by considering the fact surrounds it and as long as this change enable its
members to get better economic benefit, may divides into two or more SACCOs or
merge/amalgamate with one or more SACCOs and form a new SACCO.176
The regulator has
provided different reasons that could factors for division or amalgamation of SACCOs. The
reduction or inadequacy of members, consideration of merger as appropriate means to provide
better economic benefit for members, enabling the creation and collection of adequate capital,
the existence of SACCOs in related operational area, etc., are considered as the reasons that
could trigger amalgamation of SACCOs.177
On the other hand, division of SACCOs could be
caused by motives such as difficulty of providing sufficient services resulted from over-
membership, absence of common interest among members, and the members being better
beneficiary of SACCO‟s capital as a result of its division.178
The amalgamation or division of
any SACCO shall be effective after the appropriate authority registered and verify; the full
agreement of members and creditors on the proposed amalgamation or division, the members
175
Id, Art.10 (10) and 20 (2) 176
Id, Art.13 (1) and መመሪያ ቁጥር 007, Art.20 177
መመሪያ ቁጥር 007, Art.20 (1.1) 178
Id, Art.20 (1.2)
51
and creditors that did not agree have been paid off or their payment is guaranteed, the
registration of the newly amalgamated or divided SACCOs by cancelling the former SACCOs or
SACCO registration, the economic benefit resulted from amalgamation or division being greater
than the current economy situation of SACCOs, and the identification of each SACCO‟s
liability, capital and assets by conducting separate account examination before their
amalgamation or division.179
Besides, the law required that the rights and duties of SACCOs
which have lost their identities by amalgamation and of a SACCO which has lost its identity by
division shall be transferred to the newly formed SACCO and SACCOs, respectively.180
However, when we see the practice with regard to this issue, there is no any amalgamation or
division of SACCOs in the country yet.181
But, as per the same source, there are intentions and
plans to do that in the near future by SACCOs operating in the Oromia regional state, where
amalgamation and division of other types of cooperatives is common.
To sum up, these restructuring mechanisms are equally important to create strong SACCOs
having wide membership and huge capital bases through amalgamation, in one hand, and to
increase the accessibility and outreach (making their outreach penetration very broad) of
SACCOs via division, on the other.
C. Dissolution, Liquidation and Cancellation Rules
Now, everything comes to an end and the regulation has something left to govern the finishing or
the final stage of SACCOs‟ market exit. At this time the regulation controls the ways any
SACCO dissolves, the procedure of winding up, payment of SACCO‟s claims, distribution of the
remaining assets to members and cancellation or closure process. Dissolution is the decision not
to continue the operation of SACCO and not automatic termination of SACCO‟s existence. The
SACCO may be continuing as an entity for the purpose of liquidation and cancellation of the
SACCO will follow after the completion of liquidation. In Ethiopia, dissolution of SACCOs
could be voluntary and involuntary (by law and by court order). SACCOs may be dissolved
voluntarily where the general assembly decides through special resolution and the general
assembly approved the audit report that showed the bankruptcy of the SACCO which affects its
179
Proc.No.985/2016, Art.13 (2) and መመሪያ ቁጥር 007, Art.20 (1.4) 180
Id, Art.13 (3 & 4); Id, Art.20 (1.7); and Regulation No.106/2004, Art.12 (4 & 5) 181
Interview with Mr. Birhanu Duffera, Financial Cooperatives Development Directorate Director at Federal
Cooperatives Agency, on the practice of amalgamation or division of SACCOs, 1st August, 2018
52
viability as per the verification of the regulator.182
On the other hand, the causes that force
SACCO to be involuntarily dissolved includes the reduction of the legally required number of
members, failure to apply within 30 days to lift up SACCO‟s suspension resulted from its
operation out of its objective, failure to commence operation within the specified period under
the law (9 months), and the order of court (when the court uphold the decision of the regulator on
the suspension of a SACCO).183
Dissolution due to the suspended SACCO‟s failure to apply
within 30 days to lift up SACCO‟s suspension resulted from its operation out of its objective is
seems like sever penalty for SACCOs and this does not promote their growth. Providing other
legal measure, like fine, and serious warning to close the SACCO if the violation is continue
could be a better solution rather than liquidating and dissolving the wrongdoer SACCO. Because
this gives another chance for the SACCO to stop its mistakes and the measure may be
appropriate for the intended purpose of punishment, to stop the SACCO from its actions and
ensuring that the sector is operated in compliance to the government regulation. So, the law
should provide other sanctions appropriate to such kinds of violations rather than forced
dissolution. The law requires the general assembly to notify the regulator its decision to dissolve
the SACCO within seven days immediately after the decisions are made, per Art.55 (2) of the
proclamation. After the dissolution of a SACCO is certain, the liquidation process will be
follows. The liquidation process is required for the purpose ascertainment of the assets of the
SACCO and to make distribution thereof. Regulation No.106/2004, per Art.26, obliged the
appropriate authority to issue a directive on the manners of SACCOs‟ liquidation and asset
distribution. Accordingly, the regulator has enacted a directive, Cooperative Societies
Liquidation Directive No.17/2009 (hereinafter Directive No.17)184
182
Proc.No.985/2016, Art.55 (1a, e) 183
Id, Arts.55 (1b-d), 10 (10) and 19 (2); in addition to this grounds, the general assembly decision to reorganize the
SACCO through amalgamation or division and the lapse of one year grace period, for SACCO which failed to be
fulfill the remaining requirements, are other grounds of dissolution. 184
የ ህብረት ስራ ኤጀንሲ የ ህብረት ስራ ማህበራት ህልውናቸውን የ ሚያጡበት የ አፈፃ ፀ ም መመሪያ ቁጥር 17, [hereinafter መመሪያ
ቁጥር 17]; According to Art.2.2 of such directive, liquidation is a process of collecting the assets of the SACCO
proposed to dissolve, converting its assets in to cash, discharging its liability, finishing all the activities and
termination of such SACCO. And, liquidation of SACCOs could be caused by the amalgamation or division and
dissolution of SACCOs (Id, Art.4 & 10 (2)).
53
The regulator is authorized, after the dissolution decision is made, to assign a liquidator and
determine his/her remuneration be covered by the liquidated SACCO.185
The law empowers the
liquidators the necessary powers (equivalent to management committee) to complete the winding
up proceedings and expected to carry out various activities like, among others, investigating all
claims against the SACCO and decide on priority of payments among them, collecting the assets
of such SACCO, distribute the collected assets, represent the SACCO in legal proceedings and
carry on the activities of the SACCO and call the meeting of members, if any.186
After the
completion of winding up, the liquidator is expected to announce the dissolution of the SACCO
by issuing newspaper having wider circulation, call creditors to file their claims through
registered postal letter and/or by newspaper having wider circulation published twice
consecutively in a month, and prepare and submit a report, the records and documents of the
SACCO the appropriate authority for the purpose of proper deposition of such documents.187
In
order to protect the creditors, it is prohibited to distribute any part of assets among the members
of the dissolved SACCO pursuant to Art.59 and Art.19 of Proc.No.985/2016 and Directive
No.17, respectively. Based on the same provisions, the law allowed the liquidator to distribute
the assets of such SACCO among members based on the amount due to them after the payments
of claims have been completed or sufficient sums for payment has been deposited by decision of
court. The verification of the regulator with regards to the deposition of sums proportionate to
meet unsettled claims is required to discharge distribution. Claims against a liquidated SACCOs
shall be satisfied (proportionally) in the following order; claims of the government, salaries of
hired workers, external creditors based on their order and maturity of debt, loans received from
members, members share payment, and finally payment of dividends take place.188
Besides,
when SACCO is dissolved and the liquidated assets are ready for distribution, however, the law
prohibits the distribution of some types of assets. The reserve fund and other assets obtained
through inheritance or donation (includes land or house donated by the government as a
185
Proc.No.985/2016, Art.56 and መመሪያ ቁጥር 17, Art.5, based on the latter provision, the number of liquidators is
three and composed of auditor, legal professional and one official from the regulator. The Agency has also a power
to remove liquidators when they failed to act in compliance with liquidating directive, per Art.6 of such directive. 186
Proc.No.985/2016, Art.57 (1); the reason that the liquidator is allowed to carry out the activities of the dissolved
SACCO is because of the law grant the SACCO being liquidated full legal personality for the things necessary for
proper liquidation (See Art.12 of liquidation directive). 187
Id, Art.57 & 58, and መመሪያ ቁጥር 007, Art.41 (2) 188
መመሪያ ቁጥር 17, Art.21
54
promotion) are considered indivisible common assets of the SACCO and it shall not be divided
for members or other third party during liquidation.189
And finally, after the completion of liquidation and distribution, the appropriate authority should
cancel the registration of the SACCO by accepting its certificate of registration and hence the
existence of such SACCO ceased.190
The regulator is required to notify the public and concerned
bodies that the SACCO is dissolved and cancelled through newspaper having wider circulation
or other convenient ways.191
The indivisible and common assets of the SACCO, the reserve fund,
inheritance or donations, shall be transferred to Cooperative Societies Fund, as per Art.22 (2.5)
of Directive No.17.
2.3.2 Institutional Regulatory Regime
Until now, we have discussed the substantive regulatory framework that consists the
administrative, prudential, accounting and audit and operational regulations. In the following
section, we will briefly discuss on the remaining component of regulation, enforcement
regulation. Most of the time, enforcement regulation describes the enforcing organ that
empowered to regulate and supervise SACCOs, the powers and responsibilities of such organ,
and also stipulates the legal measures and administrative actions that may be taken against
SACCOs those do not comply with regulations. So, the forthcoming sections cover these issues.
2.3.2.1 The Regulatory Authority
SACCOs‟ financial intermediation service involves management of substantial funds belonging
to others, members or non-members, and this operation requires an oversight from external body.
Consequently, countries establish entities for this purpose and accord them with different powers
and responsibilities related to regulation and supervision of SACCOs. In Ethiopia, regulation and
supervision of SACCOs is entrusted to the appropriate authority which is established at the
federal or regional level. Both the federal and regional governments are required to form an
organ responsible for the execution of cooperative society‟s proclamation, leading and regulating
the sector.192
Since the focus of this study is at federal level, the discussions are restricted on the
authority of the federal government. At federal level, establishment of a federal organ
189
Proc.No.985/2016, Art.44; Regulation No.106/2004, Art.25; መመሪያ ቁጥር 007, Art.35; and መመሪያ ቁጥር 17, Art.25 190
Proc.No.985/2016, Art.60 191
መመሪያ ቁጥር 007, Art.42 (2) and መመሪያ ቁጥር 17, Art.22 (2.6-7) 192
Proc.No.985/2016, Art.2 (20); Proc.No.147/1998, Art.2 (7); and Regulation No.106/2004, Art.2 (4)
55
responsible for organizing and registering apex organizations and for providing different
supports to cooperative societies is considered necessary under Proc.No.147/1998.193
Accordingly, the Cooperatives‟ Commission (currently the Federal Cooperatives‟ Agency) is
established by Proc.No.274/2002 as an autonomous federal government organ, having legal
personality and capable to own property, enters into contract, sue and be sued in its own name.194
So, its enabling law assured the structural independency of the authority. FCA is directly
accountable to the Ministry of Rural Development (now Ministry of Agriculture and Natural
Resource) and has a Head Office situated in the capital of the federal government, Addis
Abeba.195
As per Art.9 of its establishment proclamation, the income of the authority is required
to be sourced from the budget allocated by the federal government, aid received from donors
(domestic or foreign) and other sources (e.g. registration and certificate substitution fees). On
the other hand, FCA is required to have a Commissioner and Deputy Commissioner to be
appointed by the government and other necessary staff.196
The government participation in the
appointment of the Commissioners may affect the operational autonomy of the Agency.
Currently, the Agency is administered by one General Director and one Deputy General Director
and its organizational structure comprises a lot of core processing units with a total 190 staffs.197
2.3.2.2 The Powers and Responsibilities of the Regulator
Regulatory powers of the regulators should be explicitly defined in order to enable SACCOs to
understand clearly the way that their operations are subject to regulation. The powers frequently
entrusted to regulatory organs includes, supervising or monitoring, investigating, rule-making,
sanctioning, adjudicating or dispute resolving and educating powers. When we come to Ethiopia,
the Agency is generally responsible for registering cooperatives established at federal level and
conducting researches, rendering training and other supports to all cooperatives organized
national wide. Particularly, the law entrusts FCA the following main powers and duties;
Formulate policies and prepare draft laws suitable for the activities and development of
cooperatives and submit the same to the government and follow up their implementation,
193
Proc.No.147/1998, Art.55 194
Proc.No.274/2002, Arts.2 (1) and 5 (17) 195
Id, Arts.2 (2) and 3 196
Id, Art.6 197
Interview with Mr. Getachew Ketema, Human Resource Management Officer at Federal Cooperatives Agency,
Human Resource Development and Management Directorate, on the FCA‟s organizational structure and human
resources, 18th
June, 2018
56
Organize, register, issue license of legal personality, strength, and cancel SACCOs organized
at federal level and other SACCOs unable to be organized at regional level due to their
peculiar feature, such as union or federation of primary SACCOs and unions, respectively,
found in different regions,
Provide uniform accounting system of SACCOs and strengthening the same,
Conduct study and research on SACCOs,
Assign liquidators, inspect, audit, and give legal service to SACCO,
Assess and certify competence status of SACCOs and accredit their level,
Build the capacity of SACCOs and their professionals,
Provide professional product marketing assistance to SACCO,
Formulate and distribute model bylaws,
Develop working systems that guides SACCOs,
Carry out other duties helpful for the implementation of its duties.198
The regulator is authorized to issue directives necessary for the proper implementation of
proclamations and regulations.199
It also empowered to audit or causes to be audit by a person
assigned by it, the accounts of any SACCO at least once in a year; and inspect any SACCO‟s
organizational status, operations, documents and financial conditions, periodically, as per its
initiation and when the examination is request by majority of the management committee or one-
third of their total members/representatives.200
The Cooperatives Regulatory Directorate (it has
four legal officers and six inspection officers) and Cooperatives Audit Service Directorates
(composed of eight auditors) of FCA are the sections tasked to perform the supervision and audit
of SACCOs.201
Generally, the FCA exercises its supervision or monitoring power in two ways
(techniques), on-site examination (the periodic contact performed by the officials of the FCA)
and off-site surveillance. During on-site examination, the Agency‟s staffs are required to visit the
SACCO physically and check the accuracy of the reports prepared by such SACCOs; follow up
the operation, decisions and actions of its management bodies; their compliance to regulations,
198
Proc.No.274/2002, Art.5 and Proc.No.985/2016, Art.70 199
Proc.No.985/2016, Art.76 (3); Proc.No.147/1998, Art.59; and Regulation No.106/2004, Art.28 200
Proc.No.985/2016, Arts.50 (1) and 52 (1& 2) 201
Interview with Mr. Getachew Ketema, Human Resource Management Officer at Federal Cooperatives Agency,
Human Resource Development and Management Directorate, on the FCA‟s organizational structure and human
resources, 18th
June, 2018
57
and also assess the overall performance of the institution. In short, the regulator expected to
conduct administrative and account controlling works in the on-site inspection. The auditing,
inspection and the performance rating evaluation activities are the types of on-site examination.
This on-site examination is important to know the compliance of prudential regulations and
actual performance of SACCOs. However, practically, the Agency has not been able to inspect
and audit all the SACCOs at least once on annual basis due to the large number of SACCOs
compared to the number of FCA‟s staffs. On the other hand, the off-site surveillance of SACCOs
is performed through the continuous analysis of the periodical reports submitted to the Agency
by SACCOs themselves. The reports that SACCOs are required to submit for the purpose of off-
site supervision includes a report of their plan, budget and all activities (such as books, account
statements and other documents). The main purpose of off-site surveillance is to provide frequent
depiction of the financial health and risk of each SACCOs.
Generally, the current SACCO regulatory framework of Ethiopia vests the FCA with legislative,
supervision, sanctioning (dealt under the next section), rating and educating powers. However,
the Agency is not allowed to adjudicate disputes arises from SACCOs internal relations. The law
simply authorizes the Agency to elect or appoint the chairperson of conciliation or the presiding
arbitrator, respectively, when the parties fail to reach agreement.202
2.3.2.3 Administrative Action and Sanctions
The current regulatory framework provides different administrative actions and sanctions that the
regulator may take or enforce against a problematic SACCO. Accordingly, the FCA is
authorized to reject any SACCO‟s application for registration, by providing a written
explanation, when such SACCO has got similar name and emblem with another registered
SACCO, lacks its own project proposal, failed to observe registration requirements of the law,
and has unlawful objectives.203
The law also authorizes the Agency to take administrative
measure on any SACCO that failed to renew its certificate of registration even if what type of
measure the regulator is expected to take is unknown.204
Where a person, member of any
committees or the manager or worker of any SACCO, who is or was entrusted with the
management of such SACCO, has been found to have committed any wrong action resulting the
202
Id, Arts.61 (3) and 63 (3) 203
Id, 10 (4) and Regulation No.106/2004, Art.19 204
Proc.No.985/2016, Art.20 (2)
58
losses of property or fund of the SACCO, the regulator is empowered to force such wrongdoer to
return or pay the damage and, if the person fail to do so, take appropriate civil action by
representing SACCOs.205
In related, based on the Cooperatives Inspection Directive No.16
(hereinafter Directive No.16), the Agency is authorized to remove and ask the replacement of
SACCO officials, by written warning, when they are not elected by the general assembly, remain
in office more than the legal tenure, and are not discharging their responsibilities properly.206
The law also confers the regulator the power to revoke or suspend certificate of registration of
SACCOs.207
The authority may order revocation or suspension of certificate of registration when
any SACCO is found operating out of its establishing objectives, operating with temporary
certificate more than one year and is not started its operation within the required time.
Furthermore, FCA‟s sanctioning power is extends to apply cancellation measure when its
periodical inspection revealed the violations SACCOs are made. The Agency may implement
suspension and cancellation measures, by providing written warning, when SACCOs are found
wrong and failed to act within the time specified in the warning.208
The inspection violations that
entail administrative measures, from suspension up to cancellation, provided under Art.23 of
Directive No.16 includes, among others, failure to conduct feasibility study, operating without
bylaws or with bylaws that is not prepared based on law or not approved by the authority,
operating beyond bylaws, failure to accept new members or failure to satisfy the common
interest of its members, failure to take action against its irresponsible member and to collect the
payment of the subscribed shares from members within the specified time, operating without
legal certificate of registration (results from either lapse of the grace period or failure to replace
the lost certificate) and seal, lacking office and address or failing to notify, absence of
management bodies meeting and making decisions without quorum, absence of control
committee, absence of loan, marketing, human resource, and account and asset administration
rules, failure to submit the audit report to the general assembly and maintain the approval of the
same, etc.
205
Id, Art.54 206
የ ህበረት ስራ ኤጀንሲ የ ህብረት ስራ ኢን ስፔክሽን መመሪያ ቁጥር 16, Art.24 (19, 20 & 22), [hereinafter መመሪያ ቁጥር 16] 207
Proc.No.985/2016, Art.10 (8 & 9) and 19 (2) 208
መመሪያ ቁጥር 16, Arts.22 and 24
59
Generally, the Agency has conferred with extensive sanctioning power, ranging from rejecting of
application for registration up to cancellation of SACCO which is found committing the above
mentioned and other types of violations. And also, the regulator is authorized to institute court
action against the person found responsible for the losses of assets and funds of the SACCO that
the former entrusted to manage. In practice, however, the regulator is weak in enforcing the
measures; when SACCOs found committing inspection faults, the Agency mostly preferred to
use warning instead of other severe measures.209
This may be considered as a result of conflict of
interest from the regulator‟s promoting and regulating powers.
On the other hand, for the rule of law and transparency purpose, SACCOs aggrieved by the
decisions of FCA are granted a right to appeal before the relevant court. As a means of legal
protection for the SACCOs, the current framework subjects the decisions of the regulator to
judicial review. Any SACCO that disagrees with the decisions of FCA in related to registration,
suspension, and liquidation are allowed to apply to regulator courts against these decisions.210
209
Interview with Mrs. Yenebithon Simegn, Inspection Officer at Federal Cooperatives Agency, Cooperatives
Regulatory Directorate, on the inspection of SACCOs, 18th
June, 2018 210
Proc.No.985/2016, Art.10 (5& 11); and መመሪያ ቁጥር 17, Art.24
60
CHAPTER THREE
3. The Limitations of the Current Regulatory Regime of SACCOs
3.1 Introduction
As we know, SACCOs are one type of cooperative societies specialized in the financial
intermediation services. As a financial institution, there should be prudential financial standards
and supervisory oversight for them. Therefore, the existence of prudential and proportional
legislation and a strong supervisory framework is a must for the proper regulation and
development of SACCOs as well as the stability of the country‟s financial institutions in general.
Thus, the Ethiopian government provided different primary and secondary legislations and also
established regulatory institution as regulatory framework for the SACCOs operated in the
country. In the previous chapter, the existing regulation of SACCOs in Ethiopia, the legal
regimes governing SACCOs, the contents of the regulation or the prudential standards and
requirements that SACCOs are expected to satisfy and who is the appropriate organ responsible
for the proper regulation and supervision of such entities with its enforcement powers and other
related issues are briefly analyzed. However, the mere analysis of the existing SACCO
regulatory situation may not enough to decide on its adequacy in the effective regulation of
SACCO and hence, it is imperative to explore its limitations in order to reach the required
conclusion. Accordingly, this chapter is devoted to discuss about the problems or gaps in the
current SACCO regulatory framework of Ethiopia. To do this, following this introduction part,
the next coming two sections will present the bold problems/limitations related to the substantive
and the institutional regulatory framework of SACCOs, respectively. Finally, the last section is
reserved for answering the question on whether Ethiopia required reforming its existing SACCO
regulatory regime.
3.2 Problems Related to Legal Framework of SACCOs
Despite the implementation of general cooperatives law and piecemeal directives, the existing
Ethiopian legal framework may not amply appreciates the unique nature of SACCOs and not
regulate them effectively. There may be areas in which the legal framework has constraints and
limitations and there are also issue not covered by the law. From the outset, Proc.No.985/2016 is
61
prepared to cooperatives and it generically encompasses agriculture, consumer, marketing and
production cooperatives. It covered only the cooperative aspects of SACCOs and the financial
intermediary characteristics of such entities are not touched. On the other hand, when we see the
„so called‟ legal documents of FCA, it is difficult to know which one is the rule, directive or
guideline since there is no difference between such documents as all of them are prepared as
directives. If we take Directive No.008 as an example, though the title indicate its directive
status, further assessment of such directives content implied that it has been prepared as a model
SACCO credit administration rule. Hence, understanding the application of such directives, as
governing rules/regulation or simple recommendation, is difficult. In addition, some of the
directives are also contain provisions which are vague and organized without article number.
In general, considering the benefits resulted from the proper regulation of SACCO sector,
attentions should be given to the legal framework governing SACCOs and the problems attached
thereto needs to be identified and addressed. In this regard, the researcher identified and
discussed the main problems related with legal framework of SACCOs by categorizing them as
formation, operation, management and governance, accounts and reporting, exist, and other
problems.
3.2.1 Formation Related Problems
The first legal problem related to formation of SACCOs is the absence of on-site supervision
requirement before registration and commencement of operation under the law. In order to
register a SACCO, the regulator is required only to check the satisfaction of the registration
requirements from the application paper submitted before it and nothing else. Then, the applicant
SACCO accepts the certificate of registration and empowered to start is operation. There is no
any means provided under the law to check the accuracy of the disclosure of applicant SACCOs
before registration and beginning of operation. Pre-registration on-site examination could help
the regulator to evaluate the correctness of the application, the institutional set up (like
management information system, organizational structure, etc.), and to ascertain the operational
area of SACCO. The existence of prior examination may also reduce the chance of temporary
registration of new SACCO (since temporary certificate of registration is granted for SACCOs
that fulfilled all registration requirements except description of place of operation) and
consequently also avoids lapse of registration and its final outcome, dissolution. In addition, it is
62
also important to properly register existing SACCOs (SACCO registered by former laws are
required to be reregistered within two years from the effective date of the proclamation)211
by
ascertaining their compliance to the requirements through inspection of their already installed
operational set up before allowing them to operate. This pre-registration and commencement of
operation on-site examination may serve as „ex ante‟ measure to minimize any SACCO future
operational failure. Such kind of pre examination is applicable on other financial institutions,
microfinance institutions for instance, are subject to such examination.212
Therefore, the
regulations of SACCO should include such requirements under its conditions of registration.
The other issue to be raised relating to formation is that the law, without mentioning the grounds,
conferred the authority a power to reject SACCO‟s application of registration by giving a written
explanation. Proc.No.985/2016 does not exhaustively define the ground of rejecting application
for registration; one finds the grounds of prohibition of registration from the secondary
legislation, Regulation No.106/2004. However, this may create confusion in practical application
since such regulation was enacted for the implementation of Proc.No.147/1998, which is
repealed by the new proclamation. In addition, as the second paragraph of its preamble shows,
the new proclamation is promulgated for the purpose of regulating cooperatives in a uniform
cooperatives law and hence concurrent application of former laws may contradict to this
objective of uniformity. And, since the proclamation comes after the regulation and considering
the importance of the issue, it is expected to cover all matters raised in its predecessors in
addition to the updates. On the other hand, absence of clearly specified grounds in the law, may
give a complete discretional power for the regulator on the acceptance and rejection of SACCOs‟
application for registration. This could eventually open a room for arbitrary decisions in the
registration of SACCOs. Subjecting the regulator‟s rejecting decision to judicial review, may
deserve appreciation as it provides a means of legal protection for applicants. However, this
process also create extra burden on courts and results additional cost on the parties. Therefore,
the best way to solve such kinds of problems is stipulating precisely the ground or reasons of
rejecting application for registration under the proclamation.
211
Proc.No.985/2016, Art.75 212
Solomon Abay, Financial Market Development, P.39
63
Furthermore, there may also be problems related to the initial capital requirement that SACCOs
are expected to collect before formation. As we know, currently Ethiopian SACCOs are required
to hold an initial capital of unspecified amount that is equivalent to their one year operation cost
based on their plan and feasibility study. This situation make required minimum capital floating
and its amount depends on or fluctuates with the financial capacity and size of SACCOs. This
floating capital requirement may be justified by its affordability and hence encourages any
SACCOs, regardless to their size, to participate in the market. However, this may have a setback
since its affordability could lead to the proliferation of weak and fragile institutions which cannot
sustain the risks of SACCO business. Besides, the proliferation of tremendous number of
SACCOs in the country also results a supervisory burden on the regulator. Considering the
current supervisory capacity of the appropriate authority, expecting the proper supervision of all
SACCOs found in any corner of the country may not be pragmatic. This means, the existence of
huge number of SACCOs, beyond the capacity of the regulator, makes their supervision difficult.
As a result, the possibility of some SACCO‟s operation without the proper supervision is high
and this entails a threat on the sector. Therefore, in the regulation of minimum initial capital
requirement, there should be optimum balance between the actual supervision capacity of the
regulator on one hand, and the growth of the number of SACCOs on the other.
3.2.2 Operation related Problems
After completion of registration, obliviously the next task is starting the business. In this
operational stage, legislations provide various requirements that the SACCOs needs to be in
compliance. Such as capital adequacy, liquidity, loan classification and provisioning,
investments and other related prudential requirements. As we seen in the previous chapter, the
current regulatory framework of SACCOs tries to regulate such kinds of issues as much as
possible. However, there some areas in which the framework has loopholes or some issues not
covered by it. The first problem is related to the liquidity ratio that SACCOs are required to
maintain. The issues related to liquidity management, liquidity ratio, calculation and methods of
keeping liquidity are missing from the legal framework. Liquidity management requirement is
vital for ensuring that the SACCO maintains sufficient cash and liquid assets to satisfy client
64
demand for loans and savings withdrawals and to pay the institution‟s expenses.213
Having a
specific target amount of its assets in the form of cash or in an asset readily convertible to cash is
important to SACCOs‟ day-to-day operation. Because of this other countries‟ regulations are
required them to maintain specific amount of liquidity from their aggregate savings deposit. This
is because liquidity is considered as one of the serious concern and challenges of SACCOs.
Sometimes, a SACCO having good asset quality, strong earning and sufficient capital may fail if
it is not maintaining adequate liquidity.214
Absence of liquidity (liquidity risk) makes the
SACCOs unable to meet the short term demands of their customers in timely manner. When a
SACCO failed to meet its member‟s short term demands and other obligations, it indicates that
the continuity of such SACCO is in question mark. Because, liquidity deficiency is a sign of poor
performance and hence members may turn their faces to another institutions which may satisfy
their financial needs. For SACCOs to survive in the competitive market, performance is
paramount so as to attract members who are core financer. It is by having efficient financial
management that SACCOs will meet their obligations translating satisfied stakeholders
(members) consequently good performance.215
So, since liquidity have a direct relationship to
performance, maintenance of adequate level of liquidity will boost their performance and
increased members attraction.
Though legislations are silent about liquidity ratio, practically SACCOs have maintained certain
percent of their savings as a liquidity reserve. For instance, Awach SACCO, has at all times
maintain 10% of its savings deposits in liquid form, in cash or deposit in financial institutions, as
per the response of its legal officer.216
In addition, one of the directors at FCA also told the
researcher similar ratio.217
However, the SACCOs operated at federal level maintained such
amount of liquidity ratio by their initiation as best practice of market, not required by any law. In
general, considering the number and financial demands of members, the law must stipulate
213
John M. Githaka, et al, „Effect of Liquidity Management on Liquidity of Savings and Credit Cooperative
Societies in Kirinyaga, County, Kenya‟, International Academic Journal of Economics and Finance, Vol.2, Issue 3,
2017, PP. 57-73, at P.59, [hereinafter John, Effect of Liquidity Management] 214
Id, P.58 215
Harrison K. Song‟e, The Effect of Liquidity Management on the Financial Performance of Deposit Taking
SACCOs in Nairobi County, MBA Thesis, School of Business, University of Nairobi, Kenya, 2015, P.5,
[Unpublished, available online], [hereinafter Harrison, Effect of Liquidity Management] 216
Interview with Mrs. Bethlehem Zerihun, Legal Officer at Awach SACCO, on the liquidity management of
Awach SACCO, 1st August, 2018
217 Interview with Mr. Birhanu Duffera, Financial Cooperatives Development Directorate Director at Federal
Cooperative Agency, on the practical liquidity management of SACCOs, 1st August, 2018
65
certain amount of mandatory liquidity management ratio. Because, since the first choice liquidity
sources of SACCOs are member shares and deposits, in the absence of obligatory liquidity
management ratio they may not preserve adequate amount of deposits as liquidity. Then,
SACCOs may turn to use external borrowings to satisfy their liquidity needs. This may also not
satisfactory choice for Ethiopian SACCOs having weak financial linkage with other financial
institutions and the borrowing may not granted at the time of need as well as using external loans
as a long term liquidity source may have unlikely consequences on SACCOs. Therefore,
SACCOs are recommended to focus on attracting members‟ deposits for liquidity source and to
do so, a force of law should be there to bind them.
The other operational issue is related to loan classification and loan loss provisioning.
Regulations may be established for classifying loans according to their actual and potential risk
and for providing a basis for realistic bad debt provision. Loans comprise majority of SACCOs‟
assets, and if most of the loans are bad or non-performing the SACCO may fail.218
In order to
avoid such a failure, therefore, SACCOs are required to have adequate allowances for non-
performing loans and follow proper loan appraisal mechanisms. However, the current Ethiopian
SACCOs‟ substantive regulatory framework lacks provision in relation delinquent loan
definition, classification of assets and loans, loan loss provisions and write-off, the procedure
related to repayment of written-off loans, group borrowing and external borrowing limit, the
issue of family member or related parties. The other important regulation of SACCOs, as
financial intermediary, is to limit the amount of loan that may be granted to insiders or persons
like officials, committee members or employee. The justification for such prohibition is that this
credit may not be given in the same loan procedure (e.g. related to collateral) like that of other
borrowers.219
So, this needs restrictions or limit in order to protect the interest of other members
and to avoid any abuse of power by such insiders. Unfortunately, insider lending limit is missing
from the legislations that govern SACCOs. During the interview conducted with at FCA, one
official told the researcher that the absence of sufficient legal provisions governing loan related
issues is the result of the regulator‟s presumption that governing every detail of SACCOs‟
218
David Mathuva, Drivers of Financial and Social Disclosure, P.88 219
Rodrigo and Claudio, Principles of Regulation and Prudential Supervision, P.31
66
activities as interfering in their business.220
However, considering the effect of deregulation and
loan being the main business of SACCOs, this argument does not hold water. Consequently,
SACCOs are faced with delinquent loans, lack of write-off policy and hence have bad loans that
were not written off, low level of loan loss provisions and weak loan appraisal problems.221
Furthermore, the current legal framework failed to provide a means for the establishment of a
credit information sharing system for SACCOs or not mandated to do that with other financial
institutions. They simply grant loans by their owning determination and analysis of the
applicant‟s documents and other information. There is no other way for them to evaluate the
over-indebtedness of their borrowers as a result of absence of credit recording and information
exchange centers for SACCOs and lessen linkage and cooperation with other institutions.
Therefore, all the above mentioned issues need to be correct and properly govern by SACCOs‟
laws.
3.2.3 Management and Governance Related Problems
The existence of proper governance is in any institution because it is viewed as a necessary
component towards achieving a long-term sustainability.222
For SACCOs, too, governance plays
a vital role in their financial and operational performance. Different qualification and fitness
requirements and internal controls provided in regulations buttress the importance of good
governance. With regard to this, Ethiopian SACCOs‟ legal framework provides qualification and
competence requirements only for the employed workers (including the manager or chief
executive officer and internal auditor) and other management officers or committee members are
appointed without requirement. These qualification requirements are even focused only on
educational level and experience of the employee and there are no any other established „fit and
proper‟ tests. Even if the hired manager is the one who undertake the day to day activities of the
society, the management and control committees also have a responsibility to follow up the
operation of such SACCO. Logically, the organ that is empowered to monitor other organ, the
former organ is expected to have better capacity than the monitored organ. Otherwise, such
organ may not properly monitor the other organ. Similarly, the committee members are elected
220
Interview with Mr. Birhanu Duffera, Financial Cooperatives Development Directorate Director at Federal
Cooperative Agency, on the loan related issues of SACCOs, 1st August, 2018
221የ ፌዴራል ህብረት ስራ ኤጀንሲ የ ፋይና ን ስ ህብረት ስራ ማሀበራት የ ፋይና ን ስ ግብይት የ ስልጠና ና የ ትግበራ ማኑዋል, 2009, P.53,
[hereinafter ማኑዋል]; and Kifle, Management of SACCOs, P.18 222
David Mathuva, Drivers of Financial and Social Disclosure, P.88
67
from the members of the SACCO and have no any qualification better than the hired manager. In
this situation, how much they are capable to control the activities of the manager without better
qualification. As a result, there may be managerial manipulations and information asymmetry
problems. On the other hand, the issue capacity of monitoring managers is raised only when
SACCOs are capable to hire staffs. Those SACCOs lacking hired manager could be run by their
management committee without adequate propriety and competency tests. These qualification
deficiencies resulted practical problems around the country. The problems such as low skill or
being unprofessional, weak governance and organizational arrangement, poor financial
management, lessen internal control, fraud and mismanagement are the evident consequences of
the absence of qualification in the appointment of management committee members.223
In
addition, the absence of qualified and competent management committee in related to financial
services, account recording and financial reports may also entail internal control risk. Internal
control risk is the variation in net income and in the value of equity capital that results from the
misappropriation, theft, or processing errors against the SACCOs‟ asset by a customer or an
employee.224
Therefore, the best way to avert such kinds of problems is evaluating or examining
the competency of management committee members before their appointment through setting
qualification requirements under the law. There should be proper and fit tests for the persons
seeking to be official or employee of SACCOs, in addition to the educational certificates which
is vulnerable to frauds. Furthermore, the absence of any incentive for acting management of
SACCOs also posed managerial and governance problems.225
Therefore, in addition to
qualification requirements, the issue of remuneration of management members needs regulatory
attention.
3.2.4 Accounts and Reporting Related Problems
The problem related to accounts and reporting is related to the confusion created by the regulator
on the accounting principle SACCOs are required to follow in the preparation of financial reports
and record/book keeping. On one hand, the book keeping and auditing directive, Directive
No.006, requires SACCOs to use “double entry accounting system” in their account records and,
223
Martine, Access to Finance in Ethiopia, P.31; Kifle, Management of SACCOs, P.17; Kifle2, P.143; and
Moa/ATA 2012, P.13 224
Rodrigo and Claudio, Principles of Regulation and Prudential Supervision, P.41 225
Martin, Access to Finance in Ethiopia, P.31; MoA/ATA 2012, P.13; absence of incentives forces to illegally
misappropriate the society‟s assets for personal gain
68
on the other, the regulator provided that SACCOs applied to be audited should record their
accounts and prepare financial statements based on generally accepted accounting principles and
financial statements reporting standards along with the book keeping rules provided by the
regulator.226
Based on this, Ethiopian SACCOs are expected to use two kinds of accounting
systems, double entry and the generally accepted accounting principle (which requires searching)
as well as generally accepted reporting standards. This situation may create confusions on
SACCOs regarding to finding the appropriate accounting principle and reporting standards that
the regulator talks about. In addition, such a general reference may also result application of
different accounting principles and reporting standards by SACCOs. The existence of such
confusion in addition to their deep rooted financial management issues, increases SACCOs‟
regulatory burden and eventually born complex financial problems. Moreover, their financial
statements might also be blurred and mixed. The findings of different studies conducted on the
Ethiopian SACCOs echoed the existent of such outcomes. The reality showed that SACCOs
have account recording (mixing saving with share capital), reporting and other information
management system related problems.227
In addition, the existence of different accounting
system is in contrary to the provision of the proclamation that requires the regulator to provide
uniform accounting system for all cooperatives.228
Therefore, the confusion and general
reference of the directive with regarding to accounting principles needs to be specific (uniform)
and clearly stipulated under the law.
3.2.5 Market Exit Problems
Obviously, SACCOs‟ existence as a corporate entity may come to an end for different reasons;
via members‟ initiation or by the regulatory authority or by court order. When the members
decided to liquidate the society, there may not be a problem for them since they bear the effects
of liquidation. But, when the liquidation is initiated by other organs for whatever reason, it is
involuntary and could affect the interests of members. They may face financial losses as a result
of the unwanted liquidation of their SACCO. as we discussed earlier, in existing SACCOs‟ legal
framework, different causes may trigger involuntary liquidation, like SACCOs failure to take
measure against their irresponsible members, failure to replace committee members sitting in
226
መመሪያ ቁጥር 006, Art.5 (1); and መመሪያ ቁጥር 13, Arts.12(7) and 15 (3) 227
ማኑዋል, P.53; and Martin, Access to Finance in Ethiopia, P.31; 228
Proc.No.985/2016, Art.70 (2)
69
office more than the maximum office term stipulated by law, having inadequate capital ratio, etc.
For instance, if we take a SACCO which failed to replace its committee members those sitting in
office more than the maximum, the regulator will write a warning that require such SACCO to
replace them in the coming fiscal year and if not act as per the warning, it will suspend its
operation and cancel the SACCO by ensuring the absence of any request to lift up the suspension
within one month.229
The regulator action may not be appropriate for different reasons. First
stipulation of fixed office term under the law may be restricting the freedom of members (the
right) to elect officials of their own choosing230
, and second the official that still sit on the
position beyond the normal office term may discharge his/her duties properly (may not do
nothing that affect the interests of the SACCO or its members) and the silence of other members
may indicates that. On the other hand, the availability of other measure and their cost should
also be considered before liquidating the SACCOs after the expiry of specified time. In addition,
attention must also be given to the fact that most of Ethiopian SACCOs are managed by their
members voluntarily without sufficient incentives, so that there may not be other willing member
to take that position when the incumbent member quits. The regulator rather than sitting and
waiting the expiry of the warning time, may remove such kind of officials or take legal control
over the SACCO. Such measures may sustain the existence of the society and removes the
problem. And also, the existence of such kind of measure may create threats that force
management of other poor function SACCOs to make changes and correct their wrongs.
Furthermore, when the number of members is found below to the minimum required may also be
one ground to liquidate such SACCO. This situation may also be corrected by different measure
other than liquidation. The regulator may force such kind of SACCO to merge with another
voluntary SACCO in order to curb the problem and protect the interests of members. However,
the effect of this proposed merger on the continuing SACCO should be evaluated carefully.
Ordering involuntary liquidation for all violations may affect the development of SACCOs and
conflicts with the regulator‟s promotion objective.
The regulator should find the optimum balance between the effect of the violation and the final
outcome of the measures taken against such wrongs. Therefore, the legal framework should
accommodate various remedial measures, like involuntary merger or receivership, as
229
ማኑዋል16, Art.24.20 230
Model Law, P.27
70
stabilization for distress SACCOs and to get the best out of SACCOs by extending their market
life.
3.2.6 Other Problems
The problems discussed in this category are more of general issues and may not fall on the above
categories.
Absence of valuation rules: - The first problem of the current framework is related to valuation.
In SACCOs‟ business, the issue of valuation may be basically raised twice, i.e., during in-kind
share payments and in securing credits with collateral. During capital formation, members may
be prescribed to buy certain amount of shares and the payment also discharged through in-kind
contribution. The law allows such kind of payment mechanism and leaves the valuation of this
„in-kind‟ payment for the discretion of SACCOs or authorizes them to decide it in their bylaws.
This may create problems on their operation. Valuation requires experts and SACCOs may not
afford that to make proper value of the payments, so that the valuation may not be real and
fraudulent. Improper valuations of in-kind payments may affect both the interest of the payee
and the payer. And also, the issue related to the type of considerations that are deemed as “in-
kind” payments also needs to be answer. Regards needs to be given also for the valuator, it
should be independent and impartial to guarantee the effective valuation of in kind payments that
protect both parties interest at a time. Therefore, these issues need to be strictly regulated under
the law.
On the other hand, appropriate valuation of collateral is necessary in order to assure the loan is
adequately guaranteed or not. Any SACCO should ensure that the security offered is of sufficient
value and will retain sufficient value to repay the loan. However, again proper and adequate
appreciation rules and procedures are required to determine the actual market value of
collaterals. SACCOs may be exposed to co-variant risk as a result of improper valuation of
collaterals. The law should prescribe valuation standards for collateral that determine how much
percent of the property/collateral to be credit the borrower. The amount of loan allowed to the
borrower could be an equivalent to the full or partial value of the property. This is for the reason
that when the collateral value is equivalent to the net loan, such collateral can be used only to
write-off the delinquent loan and SACCOs may lose income in the form uncollected interest on
71
the outstanding loan.231
Practically, absence of collateral valuation rules forces SACCOs to find
their way of appreciation. For instance, one SACCO registered at federal level used local Garage
professionals to valuate cars attached to loan as security.232
However, the autonomy of such
professionals is uncertain and, as a result, the SACCO may use such gap and under-valuate the
collateral arbitrarily to shift the credit risk to the borrower. In addition, the absence of valuation
rules may result reporting problems and some times, “over-valuating of net value of collaterals
for the purpose of reducing provisioning requirements.”233
Therefore, the law must specify the
rules and procedures of valuation and qualifications for valuators in order to protect both the
SACCOs and customers.
Absence of clear rules for micro insurance services: -SACCOs are allowed to provide and
enter into agreement with members for provision of micro credit and saving life insurances. But,
there is no any rule or guideline prepared for regulating the provision of the insurance services,
the premium, the liability of insurer and insured parties, assessment of the act that result
insurance, and coverage and compensation of the life insurance. So, the council of ministers
must discharge its responsibility required under the proclamation and enact regulation for the
effective implementation of SACCOs‟ micro insurance services.
Branching issue: - another point missed from the current regulatory regime of SACCOs is the
issue of opening branches. Under the law, they are only required to notify the regulator about any
change on their registered place of business or address within 30 days. However, there is no any
provision that deals with the issue of branching, even though SACCOs opened branches in
practice (e.g., Awach SACCO has five branches in the capital city of Ethiopia). It is obvious that
the law promote opening of new branches for the purpose of financial deepening. However, there
are issues related with branches such as diversification, information disclosure, financial and
operational (managerial) capacity of SACCOs and other similar issues. On the hand, the
regulator, as per Art.10 (1.4) of Directive No.007, prohibited the operation of two similar
SACCOs (related to homogeneous services) in one or same operational area. Accordingly, the
opening of new branches must be in line with this prohibition and requires the attention of
231
FAO, Safeguarding Deposit, P.73 232
Interview with Mrs. Bethlehem Zerihun, Legal Officer at Awach SACCO, on the valuation of collaterals, 1st
August, 2018 233
Solomon Abay, Financial Market Development, P.56
72
regulations. Therefore, considering the expansion of SACCOs and their capacity of opening
branches, the country needs to enact provision for the proper regulation of branches of SACCOs
and associated issues.
Service provision for non-members and investments: - currently SACCOs are allowed only to
provide financial services, accepting deposits and granting loan, only for their members. In some
extent, they may accept deposits from third parties (like government) and they may grant loans to
other societies established under the same law. However, SACCOs should be allowed to furnish
non-members fee based financial services that do not directly affect their balance sheet or assets
and liabilities. In other word, they may provide non-members services, other than savings and
loan, such as transactional services which includes money transfer, agent banking, etc. this may
help them to increase their income and attract members (the probability of satisfied non-
members to be new members) as well as it makes access to finance real. It may also reduce their
practical product variety problem.234
On the other hand, the current Ethiopian regulatory
framework also prohibited SACCOs from making investments. As we know, SACCOs may have
some funds that are not used for loan, like reserve funds. In Ethiopia, the law requires SACCOs
to maintain 30% of their annual net profits as a reserve fund and it must be deposited in saving
account opened in name of such SACCOs. However, sometimes the deposition of such amount
of fund may not help SACCOs better than the financial institution in which the fund is deposited.
So, to increase their benefit, the fund needs to be invested in non-risky and sound investment
areas. The investment may also be important for SACCOs to retain additional income so that
their external capital dependency will be reduced. In addition, it will play a vital role in the
liquidity management of SACCOs and enables them to pay competitive return on saving by
maintaining adequate income flow. The practice also indicated that SACCOs are allowed to use
their reserve fund as source of members‟ loan by securing insurance for 70% of such reserve
fund.235
This shows that how much the law and practice is in contradicting. Therefore, it is better
to allow such investments by considering the existing reality and the benefits of such
investments.
234
See Zerfeshiwa, Determinants of SACCOs, P.82; and Kifle, Management of SACCOs, P.18,; and ማኑዋል, P.140 235
See ማኑዋል, P.37 {translation is mine}; and during my interview at Awach SACCO, the interviewee told me that
they used their reserve as internal source of loan, a collateral for bank loan, and invested in share instruments issued
by other financial institutions, such as Addis International Bank.
73
Consumer protection and anti-money laundering issues: - consumer protection, in generally,
refers to “the laws and regulations that ensure fair interaction between service providers and
consumers.”236
SACCOs, as the main instrument of financial inclusion strategies, there should be
adequate consumer protection framework in their regulatory regimes that includes requirements
of product suitability, transparency and information disclosure related to their services (lending
or deposit), marketing and advertisements rules, good customer services and effective complaint
resolution schemes.237
In addition to the absence of consumer protection provisions in SACCOs‟
legislations, the general consumer protection framework of Ethiopia also does not adequately
cover sectors that are not regulated by NBE such as SACCOs and the FCA mandate is not clear
in this area as well.238
With regards to anti-money laundering, the current legislation failed to
contain a single provision about such issues and even they do not make any cross-references to
other laws related to the issue. There is no any means of detecting illicit activities and reporting
of suspicious financial activities. So, the issue of anti-money laundering deserves better
recognition under the law. This is for the reason that SACCOs, as a financial institution, may be
a victim of any financial crimes regards less of the extent. In addition, making them subject to
different legal requirements designed to protect any suspicious financial activities, may relieved
them from being safe haven for financial crimes and criminals.
Absence of profit allocation rules: - in order to increase a sense of ownership and participation
of members, there should be profit allocation and dividend distributions. However, for proper
allocation of profit there should be clear and adequate procedures or rules. Otherwise, SACCOs
could perform distributions and allocate profits arbitrarily and whenever they want. In time of
loss also they may not properly cover such loss. Therefore, the country needs to prepare adequate
profit allocation rules and procedures that enable SACCOs to make equitable and periodical
allocations.
Transformation or graduation issues: - SACCOs may become large and strong in terms of
finance, membership, services and geographical outreach that could compare with banks. At this
time, there should some way to accommodate and properly to use such largeness and strength.
236
Oya Pinar Ardic et al, „Consumer Protection Laws and Regulations in Deposit and Loan Services: A Cross
Country Analysis with a New Data Set‟, Policy Research Working Paper 5536, The World Bank Financial and
Private Development, CGAP, 2011, P.2 {hereinafter Oya Pinar Ardic, Consumer Protection laws} 237
Id, P.3; and NFIS, P.21 238
NFIS, P.22
74
Accordingly, the legal framework that governs SACCOs should provide a means to transforming
such big SACCOs into another and better form of financial cooperatives. The best way to do that
is allowing them to changing into a new cooperative organizational model adopted by the
regulatory framework. However, this new cooperative organizational model should enable
SACCOs to transform without losing their basic cooperative nature and democratic-based
governance structure. The researcher believed that cooperative bank form could be the
appropriate model for this purpose as it meets the expectations. Cooperative bank model is the
extension of SACCOs with some features of corporations, but organized by members, also their
clients, based on democratic principles of cooperatives.239
They are featured with members‟
ownership and governance, non-for profit, but accept profits as a necessary condition for their
continuity, and focused on retail banking service.240
In addition to their cooperative nature, they
are also preferable in the modern banking because of their sustainability and large capital base as
well as balanced governance structure.241
Considering the size and capital base of some SACCOs
in Ethiopia, transforming or graduating them to cooperative bank organizational model is
necessary for sustainable development of SACCOs. As we know, the absence of legal
framework for such transformation mechanisms forces SACCOs to operate and organized in
commercial bank forms.242
The existence of fully member-owned cooperatives banks in Ethiopia
could eliminates the current financial problems of SACCOs. SACCOs have low financial linkage
with commercial banks and other financial institutions because of such institution‟s high interest
rates and the collateral requirement is beyond the capacity of SACCOs.243
Therefore, to curb
such kinds of problems and creating alternative cooperative model for SACCOs, Ethiopian
regulatory framework needs to adopt this model and allow the transformation.
Absence of any protective regulatory measure/deposit insurance scheme: - the stability of
financial institutions is important for both the government, since any failure may lead a
contagious loss of public confidence on the institutions, and the depositor, as instability threatens
239
Reinhard H. Schmidt, et al, „Saving Banks and Cooperative Banks in Europe, White papers Series No.5, 2013,
Center for Financial Studies and Goethe University, Frankfurt, Germany, P.3-4 240
Rabobank Group, Cooperative Banks in the New Financial System, 2009, P.19, available at<
https://www.rabobank.com>, last accessed on 3rd
June, 2018. 241
Id, P.6 242
Martin, Access to Finance in Ethiopia, P.44; the case of Oromia Cooperatives Bank is a good example for this
assertion. 243
MoA/ATA 2012, P.13; and ማኑዋል, P.44-66
75
the safety of its financial asset that would be provided by a stable financial institution.244
So, as a
preventive mechanism, the government established prudential regulations and adequate
supervision for financial institutions to protect them from failure and instability. However, when
the unwanted failure occurred or such institutions become insolvent, in order to safeguard
depositors‟ savings and the credibility of such institutions, there should be other protective
regulatory measures. Among these measures, “deposit insurance scheme is the one appropriate
for SACCOs for the reason that the government may not see the need to intervene and
compensate savers because the failure may not be considered a threat to general financial
stability.”245
Deposit insurance scheme is a guarantee established specifically for protecting
deposits of savers through funds comes in the form of premiums from the institutions whose
deposits are insured.246
Such schemes normally guarantee the nominal value and liquidity of
deposits up to a certain amount. In general deposit insurance system ensures the depositors are
protected in the event of their institution failure and promotes savings in the form of deposits.
Accordingly, Ethiopian SACCOs may face a possibility of failure and establishing any protective
regulatory measure (especially deposit insurance) is a must to reduce uninvited results of such
failure. However, currently there is no regulation that requires the regulator to establish a deposit
insurance system to protect the deposits of SACCO members. Besides, SACCOs are simply
required to protect their assets from losses through acquiring insurance coverage. Therefore, the
government must think about the establishment of deposit insurance system for safeguarding the
deposits of members at the time of SACCOs‟ distress because the failure of any SACCO, as a
financial institution, is not unlikely.
3.3 Problems Related to the Institutional Regulatory Regime
Obviously, the regulatory framework should provide the regulatory/supervisory agency with
enough authority for the enforcement of the regulation. This agency is responsible to monitor
and direct the regulated institutions in order to ensure their obedience to regulatory requirements
and do not behave imprudently. It is clear that there would be little advantage in having good
substantive regulatory framework in the absence of efficient enforcement institution.247
Accordingly, the current Ethiopian SACCOs regulatory framework established its enforcement
244
FAO, Safeguarding Deposit, P.12 245
Id, P.91 246
Id, P.90 247
Rodrigo and Claudio, Principles of Regulation and Prudential Supervision, P.35
76
organ, FCA, which is a government funded federal organ and accountable to Ministry of
Agriculture and Natural Resources. FCA is formed autonomously with distinct legal personality
and continues to enjoy structural and budgetary autonomy with the exception of operational
dependency. On the other hand, its operational autonomy is in shadow for the reason that the
government (usually the executive wing of the government) interferes in the appointment of the
Agency‟s general executive director and its deputy. And this may enables the executive
government organ to control FCA and since there is no any clear provision under the law about
the procedure of appointment and removal of the directors, the former control over the latter will
increase definitely. Although its functional autonomy is assured under the law, but the silence of
the enabling law regarding to the appointment, tenure and removal of the management may
compromise its full autonomy. Besides, accountability of the Ministry of Agriculture and Natural
Resources and since the Ministry is not that much familiar with finance, there is no way to
evaluate the effectiveness of the regulator‟s performance with regards to SACCOs. So, the issue
of operational autonomy and accountability could be the first problem with regarding to the
regulatory institution.
The second problem is that the existence of conflict of interest in the Agency because of its
function of promotion and regulation are not separated yet. Both Proc.No.985.2016 and
Proc.No.274/2002 do not make any structural or functional distinction between the promotion
and supervision functions of the agency.248
The two functions have their own different objectives
and require different implementing actions which could be contradict each other. For instance,
the objective of promotion may need a given SACCO, which is failed to comply with the
regulation, to continue operation regard less of its non-compliance for the purpose of promotion.
But, in the contrary, the objective of supervision may not tolerate such kinds of SACCO and may
liquidate involuntarily considering the effects of non-compliance in the market. On the other
hand, the same person may not be able to decide fairly or impartially on two contradicting issues.
Practically, both regulation and promotion directorates are operated under the same leadership of
FCA‟s Deputy General Director. However, “the question here is that whether the director can be
impartial to take regulatory decision on the same issue or activity such person providing
leadership.”249
It is generally a problem to have the same agency responsible for both promotion
248
Proc.N0.985.2016, Art.70; and Proc.No.274/2002, Art.5 249
Martin, Access to Finance in Ethiopia, P.45
77
and supervision of SACCOs since it is unable to effectively enforce both responsibilities
simultaneously. Therefore, the regulator should clear separation between its promoting and
regulating powers in order to discharge both responsibilities with great emphasis.
The third problem of FCA is related to its capacity in terms of human resource and expertise. As
we know, FCA is not a financial authority and may not be capable to adequate handle the issues
of SACCOs which involves mainly in financial intermediation. The supervision of financial
institutions by non-financial authority will make the supervision imprudent. On the other hand,
the agency has a limited work force that may not be able to discharge the supervisory
responsibilities that the current SACCOs sector requires. “In fact, the supervisory responsibilities
surpass the capability of the offices.”250
Currently, the agency has eight auditors under audit
directorate and four legal and six inspection officers under the regulatory directorate.251
Considering the actual growth of SACCOs, this number of staffs is unable to regulate the sector
effectively. As a result, there is weak and insufficient inspection and auditing services in the
country.252
And without audit, it is difficult to assess whether SACCOs are operating efficiently
or not and hence FCA may not respond timely for situations that requires its attention. Even
appointment of external auditor is allowed for only those SACCOs the regulator approved to be
audited by its delegated external auditor. Sometimes, in the regional states, the regulatory
officials have relatively low capacity to implement and enforce regulations and they may
outsource the issue to other government organs.253
In addition to that there is no clear financial
performance indicator or standard applied in practice.254
In general, lack of adequate and trained
manpower in the finance area to regulate and supervise SACCOs according to standard financial
principles is another problem.
Another limitation of the regulator is related to its supervision approach and its relevancy to the
reality. The current inspection of FCA is concerned on the SACCOs‟ compliance with the laws,
250
Ibid 251
Interview with Mr. Getachew Ketema, Human Resource Management Officer at Federal Cooperatives Agency,
Human Resource Development and Management Directorate, on the FCA‟s organizational structure and human
resources, 18th
June, 2018 252
Martin, Access to Finance in Ethiopia, P.39 & 45;ማኑዋልl, P.53; and MoA/ATA 2012, P.13, 56-59 253
Moa/ATA 2012, P.13; and Interview with Mr. Yisak Betel, Legal Officer at Federal Cooperatives Agency,
Cooperatives Regulatory Directorate, on the current inspection of the agency, 18th
June, 2018; according to the
interviewee, in Afar regional state the regulatory officials have outsource SACCOs issue to the justice bureau‟s
attorneys for sanction as a result of absence of legal officers under the regulatory to do that. 254
Ibid
78
directives, and their own bylaws, the actions taken by SACCOs based on the previous inspection
feedbacks of the regulator and not about their future risks.255
This means, the agency follows
traditional or compliance based approach of supervision which requires extensive work force
which the regulator is unable to afford. This why its supervision is not effective as expected
since this approach results supervisory overburden on the agency and hence all SACCOs may
not be properly supervised. And also, considering its capacity and the actual supervisory need,
the traditional approach of supervision is not appropriate to the current condition of Ethiopia.
Instead, FCA must use risk based supervision approach since it is suitable for resource
constrained regulator, like FCA, and assures supervision outreach. It enables the regulator to use
the scarce resources appropriately through providing a baseline to divide the resources in to
different level of risks assessed based on the context of its given objective as well as by
identifying and allocating its resources on the areas of greater risk.256
However, it also requires
the capacity to determine the risks of SACCOs that need supervisory attention. Under risk based
approach, the regulator is required to develop a framework for assessing the impact of SACCOs,
identify areas of risk focus (since all SACCOs may not pose equal level of risk and the type of
activities within SACCOs pose different risk), and assess the risk exposures (the types of
inherent risk being run and their level of severity).257
Unfortunately, this process also may
require being expert in the financial service operations and the agency may not have this
financial expertise.
The issue of enforcement is another area that the regulator required to consider. The agency has a
problem of enforcing its sanctions and measures properly. The agency may use its sanctioning
powers after providing recommendation for the wrongdoer SACCO to correct the wrongs and
negotiation taken place between the regulator and such SACCO.258
Most of the time, the
regulator preferred to use soft measures instead of severe sanction and administrative actions.
The researcher believed that this may be the result of its promotion function over weights the
supervision function. Although it is better to use the soft way to correct problems of SACCOs,
but sometimes it is necessary to apply stringent measures on problematic SACCOs for the
255
Ibid 256
Toronto center, Risk Based Supervision, P.5 257
Id, P.9-14 258
Interview with Mrs. Yenebithon Simegn, Inspection Officer at Federal Cooperatives Agency, cooperatives
Regulatory Directorate, on the inspection and enforcement of the Agency, 18th
June, 2018
79
purpose of averting the distortion and to show the seriousness of the regulator against non-
compliance and hence teaches lesson to others. So, the agency needs to use its sanctioning power
appropriately and when it is necessary in order to enforce the regulation effectively.
Finally, the regulator lacks necessary organizational structure for adjudicating the appeals of
SACCOs. As we know, SACCOs have a right to appeal against the decisions of FCA on
rejection of application for registration, suspension or revocation of license, and other decisions.
However, there is no independent appeal committee or tribunal established under the regulator or
minister level and it used only the civil service compliant mechanism.259
Besides, the decision
making process of FCA is not also participatory since SACCOs are simply submitting their
application and wait the decisions of the former. This makes its decision making process non-
transparent and lack any hearing procedure or not followed the administrative law principles.
Totally, the financial compliant mechanism of the current regulatory framework is broken and
needs to be corrected.
3.4 Should Ethiopia reform its Savings and Credit Cooperatives Regulatory
Regime?
In countries such as Ethiopia, where the poor is the dominant one, the existence of strong and
capable SACCOs is essential for the overall socio-economic development. A sound, strong and
sustainable SACCO sector, of course, requires an enabling substitutive and institutional
regulatory framework. Thus, the regulatory regime governing SACCOs should be continuously
revised to keep up with the actual condition or current demands of SACCOs. Accordingly, the
findings of the study revealed that currently SACCOs are not regulated properly and effectively
for different factors related to both the substantive and institutional regulatory framework of
Ethiopia. As we have seen in the chapter two, the country tries its best to regulate SACCOs, not
as financial institutions, but as one type of cooperatives. As a result of this ignorant, the
regulatory framework has faced with different limitations that we were discussed in this chapter.
The existence of such a vast missing points from the current regulatory framework showed that
the country does not recognize SACCOs appropriately and it governed only some parts of them,
obviously, the cooperative aspect of them. With the existence of the above mentioned problems
259
Interview with Mr. Birhanu Duffera, Financial Cooperatives Development Directorate Director at Federal
Cooperatives Agency, on the dispute resolution of SACCOs, 1st August, 2018
80
or still different questions are raised on the regulatory framework, how we can say it is effective
and adequate in the regulation of SACCOs. On the other hand, the absence of substantial risk in
the SACCOs sector, without forgetting the existing problems, which could affect other financial
sectors, may not guarantee the unlikely occurrence of risks in the future considering the volatile
nature of financial market. In addition, the reasons for enactment of law should not be the current
conditions only; rather it should also expect to be futuristic by forecasting the unforeseeable
situations. In general, the researcher is of the opinion that the existing Ethiopian regulatory
regime is not adequate enough to effectively regulate all the issues related to SACCOs.
Therefore, rethinking of the current SACCOs‟ regulatory framework and proper reform is a must
for the following reasons:
First, absence of SACCOs‟ specific law: - it is obvious that SACCOs are governed under the
proclamation designed for all types of cooperatives (especially for agricultural cooperatives
because most of its provisions are related to agriculture and even the regulator is accountable to
Ministry of Agriculture) and this may be inadequate for SACCOs for the reasons that unlike
other cooperative, SACCOs mobilize deposits from members, maintains capital, and specialized
in financial services that require compliance of prudential regulations and ample supervision.260
In spite of the fact that Ethiopia has various piecemeal and unorganized directives on SACCOs,
it does not yet have special, comprehensive primary legislation specifically enacted to regulate
the issues of SACCOs. The special regime may facilitates SACCOs financial operation by
providing minimum operational and prudential financial standards and also reduce the problems
in enforcing normal cooperatives regulation. In addition, as per one director of FCA, the
government planned to make SACCOs automated and start different electronic related services,
like Automated Teller Machine and Mobile Banking, in the near future (next year).261
Accordingly, such kinds of new activities could not be governed effectively by the existing
regulatory regime and hence needs another enabling regulatory framework. On the other hand, as
the reality shows, lacking enabling regulations affect the safety and soundness of SACCOs.
Generally, a special legislation that specifically focuses on SACCOs based on recognition that
they are financial institutions and hence threats and nurture them as such is required.
260
WOCCU, Technical Guide, P.14 261
Interview with Mr. Birhanu Duffera, Financial Cooperatives Development Directorate Director at Federal
Cooperatives Agency, on the future plan of the Agency, 1st august, 2018; in similar fashion, Awach SACCO also
proposed to use core banking service in the next year.
81
Second, the growth of SACCOs‟ sector vis-à-vis-the adequacy of the existing regulatory
framework: - the growth (in number, capital, service) of SACCOs requires proper and careful
regulation because of that fracture in this sector may entail systemic risk on the other financial
sectors since their probability of integration will also increase simultaneously. So, adequate
regulation may allow these institutions to attract deposits from public which may lead them to
grow in a sustainable way and greater linkages with other financial sectors, with an improved
operating network and higher standards of control and reporting.
Third, the inappropriateness and incapacity of the existing regulator authority and ineffective
trend of supervision: - unregulated financial institutions lack good governance that maintains the
financial discipline and prudent management and thus, as a solution, we need effective prudential
supervision since it could provide incentives for good governance. In addition to the internal
problems of SACCOs, the weak regulatory capacity of the external regulation may worse the
problems of SACCOs and hence their regulation will be ineffective. On the other hand, the
existence of efficient regulator and proper supervision also enables to achieve the desired effect
of regulation.
So, based on this, if Ethiopia required reforming the existing SACCOs‟ regulatory framework,
the next question will be what should the reform be? This question will be answered briefly
under the next coming chapter.
82
CHAPTER FOUR
4. International Experiences in Regulating SACCOs and Lessons to
Ethiopia
4.1 Introduction
Consideration of SACCOs as an instrument of attaining social and economic development and
accumulation of huge savings increased the attention given to regulation of SACCOs. Especially,
the introduction of access to finance and financial inclusion concepts force governments to make
changes in their regulatory framework governing cooperatives in general and SACCOs in
particular. To make their regulation of SACCO effective, countries take measures and reforms
ranging from strengthening the general cooperative regulatory framework up to establishing a
special regulatory regime designed specifically for SACCOs.262
Ethiopia too, have considered
the importance of such entities and prepared regulatory regime that governs cooperatives and
includes SACCOs as one of the subject matter of such regime. However, taking in to account the
current regulatory situation, the findings of this study revealed that SACCOs‟ regulatory
framework is not adequate and demands reformation. Accordingly, since making reformation by
its nature needs a comparative assessment of others‟ experience for similar problem, the
researcher felt that drawing lessons from the regulatory approaches of different jurisdictions is
the appropriate means to make the required reform and solve the problems. Based on this, this
part of the paper gave a great emphasis in analyzing the operation and regulation of SACCOs in
selected jurisdictions in order to learn from their experience for the benefit of Ethiopia. To do so,
the researcher has selected two countries, Kenya and Malawi, and one international organization,
WOCCU.
The justification for selection of these two countries is based on the reason that these countries‟
have been passed through similar problems that Ethiopia currently faced and they have an
economic development relatively similar with Ethiopia, as well as the criterion related to
accessibility of necessary materials favored their selection. In addition to that, the purpose of the
researcher‟s comparative assessment also guides the selection of jurisdictions for comparison;
262
FAO, Safeguarding Deposit, P.42-60
83
means “when the purpose is to know the comparative advantages and disadvantages of
different systems and bring reforms in home- law in their light, the choice of comparative
jurisdictions shall reflect relevant diversities.”263
So, these countries are chosen because they
accommodate diversity of features even though they deal with similar issue. Therefore,
reviewing these countries‟ regulatory experience will have a huge value for Ethiopia. On the
other hand, WOCCU is selected for comparison because it is the global trade association and
development agency for SACCOs and works with national governments to improve legislation,
regulation and supervision of SACCOs.264
As an umbrella institution, WOCCU has prepared
model laws and regulations for SACCOs and the researcher believed that comparative
assessment of such documents and the lessons drawn from the “minimum regulation standards”
intended to regulate SACCOs would benefit Ethiopia in the adjustment of its regulatory regime.
Generally, the selected regimes will be analyzed comparatively from the legislative perspective
that intended to detect solutions to redress main concerns associated with the regulation of
SACCOs. And, the analysis or discussion will be made thematically, based on the components of
regulation, so that the respective treatments of SACCOs in each jurisdiction are presented side
by side.
4.2 Regulation of SACCOs in Different Jurisdictions
Before embarking on the comparative analysis of the jurisdictions‟ regulatory regime, it is
worthy to see the context of these jurisdictions with regarding to SACCO regulation in a precise
manner. To start with Kenya, it is the African model (represent the success history) in the
development of SACCO sector.265
The SACCO subsector is the fastest growing among the
cooperative movements in Kenya.266
The key objective and purpose of their incorporation is
usually to deal with the mobilization of savings and advancement of credits on the collateral of
such savings.267
Among their financial services rendered by SACCOs, one is deposit taking
financial business, similar to the one undertaken by commercial banking institutions except for
263
P. Ishawara Bahi, Comparative Method of Legal Research, p.161 264
WOCCU, Technical Guide, P.2 265
David Mathuva, Drivers of Financial and Social Disclosure, p.85 266
Samuel M. Ngugi and Francis O. Afande, „Challenges Facing Deposit Taking Savings and Credit Cooperatives‟
Compliance with the SACCOs‟ Act Number 14, 2008 in Nyeri County, Kenya,‟ Journal of Culture, Society and
Development, Vol.6, 2015, P.2, [hereinafter Samuel, Challenges Facing Deposit Taking SACCOs] 267
The SACCOs Societies‟ Regulatory Authority (SARSA), The SACCO Supervision Annual Report, 2016,
Nairobi Kenya, P.20, [hereinafter SARSA, Annual Report]
84
the fact that, such deposits are taken from members.268
This deposit taking business led to the
division of Kenyan SACCOs in to two, as Deposit Taking SACCOs (hereinafter DT-SACCOs)
which undertakes (withdrawable) deposit taking business, e.g. operating saving accounts, ATMs,
money transfer, etc.; and Non-Deposit Taking SACCOs, which gives deposit taking activities
limited to non-withdrawable deposits, used as collateral for credits to members.269
SACCOs have
been governed by the Cooperative Societies Act, CAP 490, which is a general legislation for all
types of cooperatives, since 1966 with several amendments and it was revised in 2012
(hereinafter CSA490).270
The CSA490 principally deals with the registration, incorporation and
general supervision of all cooperative societies, including DT-SACCOs, and is administered by
the office of the Commissioner for Cooperative Development.271
Recognizing the difficulty of
supervising the financial operations of SACCOs under this act (because of its different
limitations) and other factors (including the Kenya Vision 2030- financial sector reforms)
amplifies the need to prudential regulation for SACCOs and hence the government enacted the
SACCO Societies Act, No.14, 2008 (hereinafter SSA) with its implementing legislation, SACCO
Societies Regulations of 2010 (hereinafter SSR).272
The SSA is provides the legal mechanisms
for the prudential regulations of Kenyan DT-SACCOs and assign and mandates the SACCO
Societies Regulatory Authority (hereinafter SARSA) for its administration and to license
SACCOs intending to carry out deposit taking business.273
Therefore, DT-SACCOs are regulated
by both CSA490, as a cooperative, and SSA, which applies to the prudential aspects of
supervision and regulation of such institutions. For the comparison purpose, the researcher
selected Kenyan DT-SACCOs because of their similarity with the Ethiopian SACCOs as the
latter ventures financial services including taking of deposit which is possible to be withdraw as
long as such deposit is not compulsory and attached for loan as collateral. Hence, Kenya will be
268
Ibid 269
Id, p.22 270
Samuel, Challenges Facing Deposit Taking SACCOs, P.2; Cooperatives Societies Act, Chapter 490, Revised
Edition, 2012, Published by the National Council for Law Reporting with the Authority of the Attorney-General,
Nairobi, Kenya, [hereinafter CSA490] 271
SARSA, Annual report, p.20 272
Roselyne Ragma, Why it is Necessary to Reform Regulations of Cooperatives Financial Institutions, ACCOSCA
Regulatory Workshop in Nairobi, 14th
June, 2012, P.3-12; The SACCO Societies Act , Kenya Gazette Supplement
No.98, Act No.14, Special Issue, Nairobi, 30th
December, 2008, [hereinafter SSA]; The SACCO Societies (Deposit
Taking SACCO Business) Regulation, Legislative Supplement No.27, Legal Notice No.95, Nairobi, 18th
June,
2010,[hereinafter SSR] 273
Samuel, Challenges Facing Deposit Taking SACCOs in Kenya, p.3
85
represented by her DT-SACCOs and their respective regulatory framework in the forthcoming
discussion.
When we come to Malawi, the philosophy of SACCOs was introduced in the country by
Canadian Catholic priests in the 1960s and in 1973 the first SACCO was registered.274
In 1980,
around 26 SACCOs came together and formed the Malawian Union of Savings and Credit
Cooperatives (hereinafter MUSCCO), the national association (an apex body) for financial
cooperatives in Malawi.275
Prior to 2010, SACCOs were like all other cooperatives were
governed by Cooperative Societies Act of 1998 (herein after CSA) and registered under the
Registrar of Cooperatives in the Ministry of Industry and Trade.276
Because of absence of
capacity to supervise affairs of SACCOs, the Registrar of Cooperatives has delegated its function
of auditing and inspection of all SACCOs to MUSCCO and hence, the latter monitors SACCOs‟
compliance with best practices and conducts annual audits.277
However, this situation results
various bad consequences like conflict of interest in MUSCCO delegated powers, avoidance of
regulation by some SACCOs especially those not affiliated with MUSCCO, governance
problems in SACCOs, etc., and makes the existing regulation inadequate.278
An umbrella
financial sector law, the Financial Services Act (hereinafter FSA) was passed, in 2010, and it
gives mandate to the Registrar of financial institutions (the Reserve Bank of Malawi) to regulate
and supervise all financial institutions, including SACCOs.279
Then, in 2011, a SACCO specific
legislation, the Financial Cooperatives Act (hereinafter FCA) was passed.280
The Reserve Bank
of Malawi (hereinafter RBM) also delegate supervision (non-prudential) of small SACCOs to
MUSCCO, in addition to this, the latter operates a central finance facility which assists SACCOs
in liquidity management, in house financial protection plan, an insurance scheme for SACCO
274
Noel Mkulichi, Regulating and Supervising Financial Cooperatives in Malawi, Presented at Financial
Cooperative Regulators Roundtable, Pretoria, South Africa, Nov 24-25, 2008, P.3, [hereinafter Noel Mkulichi,
Regulating and Supervising Financial Cooperative] 275
Genesis Analytics, Understanding Financial Cooperatives: South Africa, Malawi and Swaziland, 2013, P.18,
[hereinafter Genesis Analytics, Understanding Financial Cooperatives] 276
Mtchaisi Chintengo, Regulation of Financial Cooperatives, P.2; The Cooperative Societies Act, Chapter 47:02,
No.36 of 1998, G.N.10/2000, Lilongwe, Malawi, [hereinafter CSA] 277
Genesis Analytics, Understanding Financial Cooperatives, P.19 278
Eldin Melemba, Regulation and Supervision of SACCOs, Presented at 3rd
Annual SACCO Regulators‟
Roundtable, Lilongwe, Malawi, 1st Dec, 2010, P.7-8
279 Id, p.8; and The Financial Service Act, No.26 of 2010, Lilongwe, Malawi, 30
th July, 2010, Section 2(1f),
[hereinafter FSA] 280
Mtchaisi Chintengo, Regulation of Financial Cooperatives, p.2; and The Financial Cooperatives Act, No.8 of
2011, Lilongwe, Malawi, 8th
April, 2011, [hereinafter FCA]
86
members targeting life savings and loan protection; and provides technical support on accounting
procedures and systems, management information systems, and data base development, etc.281
Generally, in Malawi, registration of SACCOs is done by the Registrar of Cooperatives under
CSA while licensing is conducted by the Registrar of financial institutions as per FSA and the
FCA is the legal framework that governs the operation of SACCOs in the country.
Finally, WOCCU, founded on 1971, is a not for profit international organ purposed to bet the
world‟s leading advocate, platform, development agency and good governance model for credit
unions and currently it has a membership of 68,000 SACCOs from 109 countries.282
On behalf
of its member organizations, WOCCU advocate internationally to achieve a better legislative and
regulatory outcome for credit unions and their members; provide education and global
networking for the exchange of information and ideas; champion the credit union and
cooperative financial institution model worldwide; and grow and strengthen the credit union
system with technical assistance, training and tools for management, outreach and networking.283
Accordingly, WOCCU has prepared different tools to reform and promote effective legislative
framework and regulatory systems for credit unions or financial cooperatives and such tools
includes Model Law for Credit Unions and Model Regulations for Credit Unions.284
These two
pieces provides a sample regulatory text for crafting or amending regulations for SACCOs based
on the international best experiences. Therefore, the researcher selected WOCCU‟s Model Law
for Credit Unions 2015 Edition (hereinafter Model Law)285
, the latest edition, with its supporting
Model Regulation of 2008 (hereinafter Model Regulation)286
for comparison analysis.
Now, we can go to the main discussion of SACCOs regulation in these jurisdictions based on the
components of regulation, i.e., administrative, prudential and operational, accounting and audit,
governance, consumer protection, and enforcement regulations. Again, the naming of SACCO or
credit union has the same meaning and used interchangeably for the purpose of uniformity of
word usage by the respective legislations.
281
Noel Mkulichi, Regulating and Supervising Financial Cooperative, P.6; MUSCCO was set up to develop,
promote and safeguard a safe and sound network SACCOs in Malawi. 282
https://www.woccu.org/about/organization, last accessed on August 2, 2018 283
Ibid 284
WOCCU Technical Guide, p.6 285
See supra note 27 286
World Council of Credit Unions, Model Regulations for Credit Unions, WOCCU, February, 2008, available at<
www.woccu.org>, last accessed on 15th
April, 2018, [hereinafter Model Regulation]
87
4.2.1 Administrative Regulations
Administrative regulations are the rules and requirements related to the formation and dissolution
of SACCOs and includes procedures for registration, licensing, restructuring or changes of form,
and liquidations. The selected jurisdictions have different requirements with regarding to
registration, licensing and liquidation. As we know Kenyan DT-SACCOs have dual regulatory
framework of CSA490 and SSA. Mainly, they are regulated by SSA and CSA490 applies only
for registration and on other matters that are not covered by the former law. In this regard, SSA
clearly stated that the provisions of CSA490 shall apply to a DT-SACCO with respect to any
matter, to the extent that the matter in question is no dealt under this act and in time of conflict
between the provisions of these two laws, the provisions of SSA shall prevailed.287
By taking this
in mind, when we see the Kenyan licensing process, it takes a tiered approach involving
application, inspection, provisions of letter of intent, and final license after fulfilling the
minimum requirements.288
Any SACCO intends to carry out deposit taking business is required
to be registered under CSA490 and should have a valid license issued pursuant to SSA.289
As
per CSA490, any society may be registered as SACCO society by providing a written and signed
application of registration, accompanied by four copies of its proposed bylaws, before the
Commissioner of Cooperative Development/other officer assigned by the Commissioner.290
If
the Registrar is satisfied in that the applicant and its bylaws are in compliance with the law, it
may be registered with or without limited liability and granted a certificate of registration.291
When the registrar is not satisfied and is of opinion that the applicant may fulfill the remaining
requirements, the SACCO could be registered provisionally, for one year, and unless the
applicant meets the rest of the conditions, the registrar may cancel the registration after the
expiry of the specified time.292
SACCOs may appeal against the Commissioner‟s refusal to
register the society or its bylaws to the Minister, the Minister for the time being responsible for
cooperative development, or to High Court subsequently and within thirty days from the date of
287
SSA, Section 67 (1 &2) 288
Carilus Ademba, Challenges Facing SACCO Regulations in Africa , 11th
SACCA Congress, Swaziland, P.21,
[hereinafter, Ademba] 289
SSA, Section 23 (1) 290
CSA490, Sections 4 &5; members of at least ten persons for primary SACCO or two registered primary SACCOs
for SACCO union is required. 291
Id, Sections 6 & 11; SACCO unions or apex organizations are registered only with limited liability. 292
Id, Section 7
88
refusal or the Minister‟s decision.293
After securing the registration and before commencing the
deposit taking business, such SACCO should apply, in writing, to SARSA (regulatory authority
of DT-SACCOs) for a license and, with its application, required to submit a copy of certificate of
registration and bylaws, “fit-and-proper test” results, detailed three years business plan and
feasibility study, minutes of the general meetings resolution authorizing the application, evidence
that show it has meet a required minimum capital requirement (for new SACCO, evidence of 10
Million Kenyan Shillings/around USD 100,000294
by a bank statement, and for SACCOs
carrying out deposit taking business before enactment of SSR or 2010 shall at the point of
applying for license be required to have a core capital of not less than 4% of total assets, core
capital of not less than 5% of its total deposit liabilities, and an institutional capital of not less
than 2% of its total assets and all these capitals shall graduate to 10% %, 8%, and 8%,
respectively, by the fourth year and such SACCO will be required to complete the capital
adequacy form as part of their license application as evidence), the name of the proposed chief
executive officer, information related to its place of operation, report about its business
objectives, membership and share capital, economic and financial environment, organizational
structure and management, and financial and risk analysis.295
Then, if the authority satisfied that
the applicant fulfilled all the requirements, it shall issue a letter of intent that required the
applicant to set in place an institutional infrastructures , like adequate working space, banking
hall, strong room and safe, information management systems and data base for reporting
purpose, and risk management policies and internal control systems, and after the authority
ascertain the compliance of the SACCO through on-site inspection, it will issue a compliance
letter allowing such SACCO to pay the required license fee within thirty days.296
After the
payment of the required fee, the SACCO may get a license that needs annual renewal before its
expiration and if the Authority refuse to grant the license, appeal is possible before the Minister
293
Id, Section 9 294
Currency calculation by the researcher in accordance to USD exchange rates against currencies in Africa as of
8/3/2018, 5:59 PM (1 USD =100.33551 Kenyan Shillings), at< http://www.exchange-
rates.org/currentrRates/F/USD>, [last accessed at 3rd
August, 2018] 295
SSA, Section 24 (1& 2) and SSR, Regulations, 2, 4 (2) & 84 (1); Core capital means the fully paid up members‟
shares, capital issued, disclosed reserves, retained earnings, grants and donations which are not meant to be
expended unless on liquidation of such SACCO. The institutional capital refers to the portion of a core capital or
core capital without members‟ share capital. 296
SSR, Regulations 4 (3-6); the license fee is different for head office (50, 000 Shillings) and branch (20,000
Shillings).
89
within 14 from the date of notification of the refusal.297
In Malawi, on the other hand, any
SACCO required to be registered under CSA and be a member of MUSCCO to get a license
from the RBM.298
Unless the Registrar provides otherwise, must have a minimum number of 300
members for Primary SACCOs and 15 licensed Primary SACCOs in case of secondary SACCOs
is required to be registered.299
A society applies to get a SACCO business license required to
submit information related to the result of the fit and proper questionnaires for the chief
executive officer, the finance manager, chief operating officer and board of directors; a certified
copy of certificate of registration under CSA and its bylaws; a three years strategic and business
plans; written documents about its risk management plan; evidence for its membership in the
MUSCCO; a report about its financial conditions and prospects; evidence that show it has an
institutional capital of not less than two million Kwacha (in Malawi currency and equals to USD
2753)300
for primary and thirty million Kwacha for secondary SACCO as startup capital; and
other information required by the Registrar.301
The registrar, within sixty working days from the
receipt of the application, shall grant the license, with or without condition, and issue publication
or refuse to grant a license.302
Any SACCO aggrieved by the Registrar‟s refusal may appeal to
the Financial Services Appeal Committee within 21 working days from the decision and the
latter may reverse the decision of the Registrar based on procedural irregularities.303
However, in
Malawi, securing license only may not enable any SACCO to start its business. The Registrar is
required to conduct on-site inspection of the premises of such SACCO for compliance with
minimum standards to be set by the regulator and then it shall issue a premises certificate
allowing the SACCO to commence operation.304
When we see WOCCU, it recommends that the
297
Id, Regulation 4 (6-8) and SSA, Section 24 (3 &4) and 25 298
FCA, Section 4(1a); Financial Services (Licensing of Savings and Credit Cooperative Society) Directive,
Government Notice 54, 6th
December, 2013, Paragraph 4 [hereinafter Directive N0.54] 299
FCA, Section 6 (2) 300
Currency calculation by the researcher in accordance to USD exchange rates against currencies in Africa as of
8/3/2018, 5:59 PM (1 USD =726.43899 Malawi Kwacha), at< http://www.exchange-
rates.org/currentrRates/F/USD>, [last accessed at 3rd
August, 2018] 301
FCA, Section 6 (1& 2) and Directive No.54, Paragraph 2 & 6; For SACCOs, institutional capital is the sum of
fully paid up permanent and non-withdrawable members share capital, statutory reserves, retained earnings, capital
grants and donations, and current year net profits (50%) and net losses (100%). 302
Id, Section 7 (1) & 17; and Id, Paragraph 9 (1& 2) 303
Id, Section 7 (2-4); and Id, Paragraph 9 (3) 304
SSA, Section 14; Financial Cooperatives (Premise Inspection) Directive, Government Notice No.48, The Malawi
Gazette Supplement, Lilongwe, 6th
December, 2013, Paragraph 3 [hereinafter Directive No.48]; This inspection is
aimed to ensure SACCOs operate in premises with adequate security arrangement and operational infrastructures,
and to evaluate whether the premise are maintained up to date and are of the standard that expected by the public
and its members.
90
founding member of credit union shall not be less than 300 individuals, in order to make the
institution more financially viable.305
This threshold may help to create a viable credit union
having broad ownership base. However, the difficulty of persuading that much number of
members to join the institution that is still not commenced operation needs consideration. The
Model Regulation provides similar information required to submit by the applicant during
licensing and requires the supervisory authority, before issuing a license, to determine whether
the credit union will operate responsibly by persons considered appropriate and capable of
managing financial institution, whether public interest will be served by licensing the credit
union, the nature and sufficiency of the financial resources, the soundness and financial
sustainability of the submitted plans, and the past business record and experience of the
applicants, as well as to conduct an independent on-site investigation of each applicant
institutions, if it is necessary to assure that the proposed credit union will be viable.306
With
regards to the minimum start-up capital requirement, it does not recommend a minimum amount
of absolute capital required to start a new credit union rather prefers to see a strong business plan
showing viability.307
This is for the reason that it is impractical to expect a large number of
potential credit union members to invest in ownership shares of credit union that is not yet in
operation, rather the focus of newly licensed institutions should be on accumulation of capital
through earnings retention and argues that the appropriate way is to allow a grace period to reach
capital adequacy and minimum start-up funding.308
Within 60 working days after receipt of the
information and documents, the authority is required to grant a license that should be valid for
unlimited license or deny the application of credit unions based on the grounds of non-
submission of required documents, founding documents and other necessary information that fail
to comply with the requirements, inadequacy of minimum ownership share capital or minimum
number of founding members, economic non-viability of the feasibility plan, and incapacity of
the persons designated as officials or managing executives.309
In most countries, merger or amalgamation of SACCOs is permitted voluntarily or involuntarily.
Voluntary merger or amalgamation of SACCOs, based on the general or special meeting
305
Model Regulation, Section XII.1.2 306
Id, Section XII.3.2 and XII.3.3 307
Model Law, Section 2.10 308
Id, and WOCCU technical guide, p.6 309
Model Regulation, Section XII.3.1, XII.4.1 &XII.7.1
91
resolution and prior approval of the regulator, is allowed in Kenya, Malawi, and WOCCU.310
Mostly, SACCOs are required to apply for approval of merger to the respective regulator and
shall provide information including the amalgamation/merger plan, the resolution or minutes of
the meeting of the institutions approving the change, the amalgamation agreement, pre-merger
financial statements, a consolidated balance sheet, income statement and delinquency list for
the SACCOS as of consolidation, designation of continuing SACCO, provisions for notification
and payment of creditors, assignment or transfer of to the continuing SACCO all of the merged
entities‟ assets, liabilities, properties, rights and equity, etc.311
after securing the approval for
amalgamation or merger, SACCOs are required, not later than 30 days, to notify the creditor
about the proposed change through newspaper having wider circulations or any other convenient
means.312
WOCCU provides the reasons that could be ground for denial of the proposed merger
application by the regulator and these causes include when the proposed merger is not in the best
interest of the members; violation of law, bylaws or regulations; absence of the assignment of
assets, liabilities, and equity of the merged credit union to the continuing credit union, and failure
to comply the requirements of the regulation.313
After the completion of amalgamation or
merger, the continuing or the new SACCO is required to apply for a new license.314
On the other
hand, SACCOs may be forced to discontinue their operations for different reasons. The members
of any SACCO, by majority vote, may want to liquidate the SACCO voluntarily; it is applied
only when such institution is solvent. Or, liquidation of SACCO may be sought by another party
beyond the motives of such SACCO‟s members. The causes of the second type of liquidation are
related to the non-compliance and insolvency of SACCOs. In all the three jurisdictions (except
WOCCU) selected for comparison, the approval of the regulatory authority is required for both
types of liquidations to take effect.315
In voluntary liquidation, at least two third or 75% of the
310
SSR, Regulation 83 (1); FSA, Section 67 (1); Model Regulation, Section XIII.1.1 &1.2; and Model Law, Section
13.10 311
Id, Regulation 83 (2), and Model Regulation, Section XIII.2.3 & 2.4; in addition, WOCCU recommends the
supervisory authority to conduct on-site inspection, if necessary, to review or assess the financial viability and
overall condition of the continuing SACCO (Section XIII.3.3.1 of the Model Regulation). 312
SSR, Regulation 83 (4) and Model Regulation, Section XIII.3.3 313
Model Regulation, Section XIII.3.4 314
Directive No.54, Paragraph 7 315
FSA, Section 72 (1 &2); and CSA490, Section 61 (5); Under WOCCU, the approval of supervisory authority is
required only for voluntary liquidation.
92
members of any SACCO should vote in favor of liquidation for approval by the regulator.316
In
addition to members‟ resolution, the grounds for involuntary liquidation are having less than the
prescribed number of members; intentional contravention of provisions of any law or regulation
(e.g. failure to file the returns for long period of time), obtaining registration with fraud or
mistake, failure to commence business or to achieve establishing objectives, and court order of
bankruptcy.317
Based on these grounds, the regulator may order the liquidation of such SACCO
and any aggrieved party may lodge appeal to the relevant authority against the liquidation
decision within the specified period.318
Then, when the liquidation is voluntary, the members
may appoint a liquidator on the approval of the regulator and start the liquidation according to
the liquidation plan prepared by the members of the SACCO.319
The main difference between
voluntary and involuntary liquidation is that in the former type of liquidation, the winding-up
process is performed based on members‟ interest and with their huge involvement. While in non-
voluntary liquidation, the process of liquidation is undertaken as per the direction and liquidator
of the regulator as well as the whole power of the general meeting and management of the
SACCO will be suspended and all matters related to the SACCO are answered by only the
regulator and/or the appointed liquidator. Generally, the liquidator, appointed by whomsoever,
has powers and responsibilities related to managing or extending the affairs of the SACCO until
termination or cancellation; initiate, defend and conduct in the name of the SACCO any action or
proceeding to which it may be a party; investigate all claims against such SACCO (by issuing
newspaper having wider circulation to inform creditors about the liquidation); collecting the
books, documents and assets; arranging the distribution procedure, report to and discuss with the
regulator about the process and other related issues and perform other tasks necessary for
completion of the liquidation.320
Besides, during the liquidation process, the regulator is required
to continue its supervision and conferred with different powers including removing and directing
or limiting the power of the liquidator.321
After the completion of winding up, the liquidator is
required to submit the final report and the SACCOs liquidation balance sheet (zero balance for
all accounts or a statement that show the SACCOs has no remaining assets, liability or equity) to
316
Id, Section 72 (1); Id, Section 61 (1); Model Regulation, Section XIV.2.1; and Model Law, Section 13.15 (simple
majority of all members for voting by mail) 317
Model Regulations, Section XIV.2.1; CSA490, Section 62(1); and CSA, Section 73 (1) 318
CSA490, Section 72 (2) & 73 (3); and CSA, Section 62 (2) 319
Id, section 78; Model Regulations, Section XIV.4.4 & Xiv.4.5; FSA, Section 72 (6) 320
Id, Section 66; Id, Sections XIV.7.1, XIV.7.2& XIV.8.1; CSA, Section 80 321
Id, Section 68, CSA, Section 80; FCA, Section 49 (3); and Model Regulation, Section XIV.3
93
the regulator.322
Then, distribution of assets or satisfaction of claims follows the completion of
liquidation. Regarding to the issue of asset distribution, the order of claims may not be similar
among countries‟ regulations. However, the most common ranking of claims is, first the cost of
liquidation (including the remuneration of the liquidator), then all the liabilities of the SACCO
(creditors, employee, government, depositors), and lastly share claims of members.323
Finally,
the regulator is required to cancel the license of such dissolved SACCO and announce publicly
the cancellation and hence, the SACCO shall cease to exist as a corporate body from the date of
deletion.324
In general, to enter into the market, any SACCO required fulfilling various
regulatory requirements and in similar fashion, regulations are also extended to govern the
market exit of such institution. However, the regulatory situation may vary from one jurisdiction
to another.
4.2.2 Prudential and Operational Regulations
Prudential and operational regulations establish financial and operational standards intending to
safeguard member deposits and SACCOs‟ operational healthy. Most countries provided detailed
regulations for the sound and prudent operation of financial cooperatives. These standards
include “capital related requirements and ownership restriction, asset classification and loan loss
provisions, liquidity requirements, delinquency controls, borrowing limits, operational security
requirements, anti-money laundering and terrorist financing restriction, etc.”325
the regulatory
frameworks of all the three jurisdictions provides what constitutes a capital of SACCOs,
minimum capital requirement, the criteria for higher capital requirement and also they allow the
regulator to prescribe the minimum capital amount required by SACCOs to maintain.
Accordingly, Kenyan DT-SACCOs are required to comply with and maintain at all times a core
capital (fully paid up members‟ share capital + capital issued + retained earnings + grants and
donations not expended until liquidation) of not less than 10 million Shillings, 10% of its total
assets, 8% of its total deposits liabilities (total deposits which are repayable on demand or after a
fixed period or after notice under agreed terms and conditions), and an institutional capital (core
capital less the members‟ share capital) of not less than 8% of its total capital (sum of total core
322
Model Regulation, Section XIV.5.1 323
Id, Section XIV.8.3; Model Law, Section 11.35; CSA, Section 82; FSA, Section 72 (8); and FCA, Section 50 (1) 324
Id, Section XIV.8.7 & XIV.10.1; CSA490, Section 63; and CSA, Section 76 325
WOCCU, Technical Guide, p.11
94
and supplementary capital).326
The country follows stringent capital adequacy requirements this
could be a little bit difficult for small SACCOs to maintain. In practice, a study showed that a
number of SACCOs cannot meet the minimum capital requirements and ratios as well as
challenges like unable to separate capital from member deposits and difficulties in
comprehending constitution of core capital and subsequent calculation of the capital ratios also
seen on Kenyan SACCOs.327
In Malawi, SACCOs shall maintain an ongoing minimum
institutional capital ratio of not less than 10% of their total asset and constitution of this
institutional capital includes fully paid up permanent and non-withdrawable members‟ share
capital, statutory reserves, retained earnings, current year net profits (50%) and net losses
(100%), and capital grants and donations.328
On the other hand, for capital adequacy, WOCCU
generally recommends credit unions to maintain a capital level or leverage ratio of 10% of total
assets (non-risk weighted).329
Calculation of capital in this ratio includes retained earnings,
donation and grants, statutory reserves, and permanent and non-redeemable ownership shares as
institutional capital.330
It disregards the application of Basel‟s risk-based capital regimes on
credit unions for the reason that these regimes are prepared ab initio to large banks and they may
have limited practical usefulness for credit unions unless such institutions have complex
positions of assets and liabilities that are similar to the complex assets and liabilities of big
internationally active banks.331
In addition to WOCCU, it may requires sufficient capacity of the
regulated institutions and regulators to generate a risk weighted asset to capital calculation, and
hence application of this regime on the market having lenient regulatory situation and mediocre
SACCOs is not appropriate. Based on this, WOCCU suggests regulators to establish a generally
applicable (with alternatives, if necessary) leverage ratio for credit unions to be considered
“adequately capitalized”, as well as measures for prompt corrective actions applicable to credit
unions below the minimum ratio to be “adequately capitalized.”332
In short, according to this
requirement, regulator is expected to stipulate a target leverage ratio for SACCOs to be
326
SSA, Section 29 & 2; and SSR, Regulation 9 and 2 327
Ademba, P.23 328
FCA, Section 26 (1); Financial Services Minimum (Capital Requirements for Savings and Credit Cooperatives
Societies) Directive, Government Notice 51, Lilongwe, 6th
December, 2013, Paragraph 6 (1)and 2(1) [hereinafter
Directive No.51] 329
Model Regulation, Section I.5.1 330
Ibid; Id, Section I.3.1 and I.2.1; and WOCCU Technical Guide, p.7-8 331
Model Law, Section 9.20 332
Ibid
95
considered well capitalized and also provides corrective capitalization measures (e.g., allowing
issuance of additional shares) for SACCOs that have a capital ratio lower than the target leverage
ratio in order to enable them to accumulate the required capital level within a reasonable period
of time. With regards to higher minimum capital ratio requirement, all jurisdictions allow the
regulator to require higher ratio of minimum capital from any SACCO where such SACCO has
significant exposure to risk, a higher or particularly severe volume of poor assets, losses resulting
in capital deficiency, and if it is growing rapidly without adequate capitalization.333
These all
criteria revolve on the, after supervisory review, judgments of the regulator whether the probable
risk of SACCOs warrants additional capital in order to avert the likely failure of such SACCO.
In order to accumulate the required capital, SACCOs issued membership share at par value as
specified under their bylaws. Ownership shares are the basic capital source of SACCOs and
represent a members‟ equity ownership or stake in the SACCO. However, regulations provide
share ownership restriction for the purpose of reducing liquidity risk concentration. Accordingly,
SACCO regulations in Malawi and WOCCU provides that no member is allowed to hold more
than 10% of the total ownership shares or saving deposits of the SACCO, individually or
collectively through related parties or immediate family members including the spouse, parents,
children of the member.334
The other financial standard that governs SACCOs is related to the requirements of liquidity and
asset liability management. As we know, SACCOs‟ operation involves savings and loan services
which need high flow of cash and liquid funds, and hence SACCOs are required to maintain
adequate level of liquidity in order to properly discharge such activities. Having a specific target
amount of its assets in the form of cash or in an investment readily convertible to cash is
important to a SACCO's operation and to maintain members‟ confidence in the liquidity of such
SACCO that result from the capacity of the latter to expeditiously satisfy the financial needs, like
deposit withdrawal or disbursement of loan, of the former.335
Therefore, detailed regulations with
regarding to the minimum liquidity ratio that SACCOs should maintain, types of liquid assets,
etc., is necessary. Accordingly, countries under their regulations require SACCOs to prepare
333
SSR, Regulation 10; FCA, Section 26 (2); Directive No.51, Paragraph 6(3); and Model Regulation, Section I.5.1 334
FCA, Section 34 (1) and Model Regulation, Section IX.3.1; in Kenya, no member, other than a cooperative
Society, shall hold more than one-fifth (20%) of the issued and paid up share capital of any cooperative Society,
including SACCOs, as per Section 15 and 42 (a) of CSA490 and SSA, respectively. 335
John, Effects of Liquidity Management, P.59; and Harrison, The Effect of Liquidity Management, P.3
96
liquidity and asset liability management policy that helps to maintain adequate level of high
quality liquid assets and to effectively manage their liquidity positions in order to enable them
meet obligations and commitments.336
The board of directors of any SACCO is responsible to
formulate, review, and adjusting the liquidity or asset liability management policy of SACCOs,
in Kenya, Malawi and WOCCU; and the policy required at least to address the identity of the
responsible body for liquidity management, the appointment of a person to access the line of
credit for liquidity purpose, the methods and process of liquidity monitoring, the minimum and
maximum levels for total cash assets, cash holding limit, the frequency for analyzing the asset
and liquidity position.337
SACCOs are required to maintain a liquidity ratio of at least 15% (for
Kenya and WOCCU) and 10% (for Malawi, total deposit and redeemable share capital) of their
aggregate saving deposits and short term liabilities in liquid assets or demand deposit type
accounts to provide sufficient liquidity for share and savings withdrawals, external borrowing
repayments, loan demand and operating expenses.338
Liquid assets are assets easily converted
into cash and include cash (notes and coin), deposits at financial institutions, treasury bills and
bonds traded at secondary markets, current account, etc.339
Therefore, the requirement of
minimum liquidity ratio is justified by its benefit in shielding SACCOs from liquidity risk or the
existence of certain amount of liquidity at their disposal, enables SACCOs to meet their
obligations when they fall due. Furthermore, for the purpose of protecting liquidity management
of SACCOs, some jurisdictions allow them to access the liquidity of the central bank (like
Malawi) and others authorize the establishment of central finance facility SACCOs, such as
WOCCU.340
One of the main products of SACCOs is providing credit or loan service to members.
Regulations should be established to govern loan terms and conditions in order to ascertain
Sacco‟s credit operations are performed in compliance to the interest of such institution and
336
Model Regulation, Section IX.2.1, SSR, Regulation 13(1); Financial Services (Prudential Liquidity Requirements
for Savings and Credit Cooperative Societies) Directive, Government Notice No.52, Lilongwe, 6th
December, 2013,
Paragraph 4, [hereinafter Directive No.52] 337
Ibid; Ibid; and Ibid 338
Id, Section IX.4.1; Id, Regulation13 (2); SSA, Section 30 (1); FCA, Section 27 (1); and Directive No.52,
Paragraph 5 (1); 339
Id, Section IX.1.2; and Id, Regulation 13 (3); and Directive No.52, Paragraph 2(1) 340
FCA, Section 20 (5); and Model Law, Section 10.20; central finance facility an organization or part of second
tier-organization established by member SACCOs for the purpose of providing wholesale liquidity management,
investment vehicles, financial intermediation, lender of last resort for SACCOs, etc.
97
maximum benefit of members. However, establishing regulation for every detail of loan may not
be appropriate and any SACCO must be allowed to adjust its lending program according to the
specific needs of its members and its financial capacity.341
Considering this, jurisdictions
requires SACCOs, through board of directors, to establish a written credit policy covering the
classification of assets, granting of loan, terms and conditions of loan, procedures of evaluating
and approval, conditions of repayment, maximum loan size and concentration limit, insider
lending, interest rate, establishment of provisions for loan loss, forms of collaterals, asset review
system, risk management systems, etc.342
However, such written policies should be conform to
the law and regulations. Loans that SACCOs furnishes to their members may be either secured,
with collaterals, or unsecured, loan based on the member‟s deposit holding (without extra
collateral or character lending); and the types of loan securities they required may also be
different from one another. Countries may impose different limit on the aggregate amount of
loan granted to any members based on SACCO‟s capital. For instance, Kenyan SACCOs shall
not grant any member any loan such that the aggregate amount in respect to that member at any
time exceeded 10% of the SACCO‟s core capital.343
On the other hand, WOCCU recommends
these loan concentration limits (for individual member or group of members) to be set below of
10% of assets or 25% of regulatory capital, and aggregate of unsecured loan should also not
exceed 10% of regulatory capital of credit unions.344
The restriction of the maximum single
borrower limits is necessary in order to limit or diversify SACCOs‟ risk of loan portfolio
concentration in one or a few related loans. Besides, the concentration limit is not apply only on
SACCOs lending, but extends to govern SACCOs external borrowings too. In Kenya, any
SACCO shall not borrow in excess of 25% of its total asset unless the limit has been waived by
SARSA and shall charge its members interest rate at least 2% higher than the borrowing rate.345
In Malawi, external borrowings limited to 5%, 10%, and more than 10% of total assets for a
SACCO with institutional capital between 10%-15%, up to 15%, and more than 15% of its total
341
Model Law, Section 7.10 342
Ibid, SSA, Section 33(3); SSR, Regulation 28 (2); Financial Services (Asset Classification Requirements for
Savings and Credit Cooperative Societies) Directive, Government Notice No.50, Lilongwe, 6th
December, 2013,
Paragraph 4 [hereinafter Directive No.50] 343
SSA, Section 31 (1) and SSR, Regulation 35 (5); Kenyan SACCOs are not allowed to grant loans without full
security, see Regulation 21 (2) &31 (1) of SSR. 344
Model Regulation, Section V.2.1 345
SSR, Regulation 35 (1& 4)
98
assets, respectively.346
WOCCU also restricted external borrowings to not more than 5%, 10%
and up to 15% of total assets for credit union with net institutional capital of 8% or more, 10% or
more, and 12% or more of its total assets, respectively.347
The issue of insider lending is also
another area of risk that needs stringent regulation. All the selected jurisdictions make possible
for SACCOs to grant loans to its employees, officials, and members of board of directors with
the approval of the board and in accordance to the laws as well as without any discrimination and
like other members.348
The requirement of board approval for the loan granted to officials of
SACCOs here serve as conflict of interest avoidance mechanism.
Sometimes, the loans granted to borrowers may not be collected or repaid partially or fully on
the agreed time. At this time, SACCOs should find adequate means of recourse to absorb such
losses. Therefore, loan loss provisions and any other provision that are established on the asset
side of the balance sheet are used for such purpose; to disclose the amount credit union
management believes is uncollectable in the loan or investment portfolio or for any other
asset.349
When the full payment of loans is delayed from the proper due time, such loan become
to be considered as delinquent. Loan delinquency can quickly have a negative effect on
profitability, liquidity, capital adequacy and the long-term future of SACCOs. For this reason,
any SACCO is required to undertake a review of its credit portfolio within reasonable time and
shall ensure that the loan granting and lending conform to its credit policy, problem accounts are
adequately identified and classified, and appropriate and adequate level of provisioning for
potential loss are mad and maintained at all times.350
When classifying delinquent loans,
SACCOs shall classify the entire outstanding loan balance as delinquent, not just the amount of
the delinquent payments (e.g. interest).351
WOCCU recommends that a credit union shall
maintain a total loan delinquency to total loans ratio of not more than 5%.352
In other words, any
SACCO total loans past due more than 30 days must be less than five percent of its total loan
portfolio. Keeping the total delinquency below this threshold may help SACCOs to maintain
346
Financial Services (External Borrowing Requirements for Savings and Credit Cooperative Societies) Directive,
Government Notice No.49, Lilongwe, 6th
December, 2013, Paragraph 5& 6, [hereinafter Directive No.49] 347
Model Regulation, Section IV.2.2; Net institutional capital is institutional capital less any current deficiencies in
loan loss provisioning divided by its total assets. 348
Id, Section V.5.1& 2; SSA, Section 35; SSR, Regulation 36; and FCA, Section 30 349
WOCCU Technical Guide, p.8 350
SSR, Regulation 39; and Directive No.50, Paragraph 5 (1) 351
Id, Regulation 40 (2); Id, Paragraph 5 (2); and Model Regulation, Section III.1.3 & 2.3 352
Model Regulation, Section III.1.4 & 2.1
99
adequate level of liquidity because if the delinquency ratio is more than 5% or increasing, the
amount of available funds to meet liquidity needs will be reduced as a result of non-repayment of
loans. SACCOs also required classifying their loan portfolio, based on duration or performance,
for the purpose of reporting, on daily, weekly, or monthly basis, or for loan loss provisioning.
When we see loan classification for loan loss provisioning, Malawi and WOCCU applied similar
categories and provisioning system. They categorized loans as i) normal or performing, being
loans whose repayments are current and performing as per the contractual terms (expected also
to do the same) and have zero provision or they represent the general reserve and hence have no
special reserve; ii) overdue, being loans that are 30 to 360 days past due (full payment of the
principal and interest have not performed) and required 35% of provisioning; iii) loss, are loans
that are more than 365 days delinquent and needs a 100% reserve of the unpaid outstanding
principle.353
While in Kenya, loans are required to be classified in to five categories as: a)
performing, being loans that are well documented and performing according to contractual terms
and have 1% provision (as general risk); b) watch, are loans delinquent for one day to thirty days
or where one installment is outstanding and have 5% provisioning; c) substandard, being loans
that are 31 to 180 days past due or where two to six installments have remained outstanding and
they have 25% allowance; d) doubtful, are loans that are un-paid between 181 to 360 days or
where seven to twelve installments have remained outstanding and have 50% allowance; and e)
loss, being loans which are considered uncollectable and more than 365 days past due or where
more than twelve installments have remained outstanding and required 100% or full provision.354
Delinquent loans classified as loss shall be write-off from SACCO‟s books on quarterly basis.355
Although a loan may be written off the books, SACCOs should still seek to collect payment for
the outstanding balance and any recovered made from any account previously written-off shall
be credited back to the allowances of the loan losses account in the financial statement and shall
not be considered as income in the year it is recovered.356
In addition to loans, some types of
SACCOs‟ assets which may be subject to loss or diminution in value (like deposits with financial
institutions, investment, collaterals, etc.) may also need allowance of loss. Accordingly,
SACCOs are required to regularly review their other assets, other than loans, and should make
353
Id, Section II.2.2; and Directive No.50, Paragraph 7 (1) & 9 (1) 354
SSR, Regulation 41 (3) and 44 (1) 355
Id, Regulation 45 (1) & 46; Directive No.50, Paragraph 9 (2); and Model Regulation, Section II.5.3 356
Ibid, Regulation 45 (3); Ibid, Paragraph 9 (3)
100
necessary provisions where an actual loss of asset value occurs, or when the estimated
recoverable amount of the asset is less than its book (carrying) value.357
Obviously, the principal activity of SACCOs is savings mobilization and providing loans to
members. However, they may have assets or funds remained from loan or totally not used for
loans and simply depositing or accumulating such funds or assets may not give an extra benefit
for SACCOs and their members. Therefore, SACCOs may want to invest such accumulated fund
in order to increase their profit portfolio and liquidity. But, such investment activities of
SACCOs need to be properly regulated to achieve the expectations. Based on this, countries
SACCO regulation provides the permitted investment areas in which SACCOs may invest their
excess funds and the percentage of the portfolio that can be invested in order to protect SACCOs
from the risk that arises from investment portfolio concentration. Accordingly, board of directors
of SACCOs are required to formulate, review and adjust such SACCOs‟ investment policy that
deals with purpose and objective of the investments, types of investments that can be made, the
need for adequate investment diversification and concentration risk management across
investment type and/or entity, the responsible authority to make the investments, the limitation,
quantity and maturity of investments, etc.358
in all the selected countries, SACCOs are allowed to
invest their fund, not committed in loans to members, in the following areas: securities,
obligations or any other debt instruments issued or guaranteed by the Government or any agency
of the government, deposits in banking institutions, shares, deposits in, loans to or other
obligations of SACCOs or cooperatives, and any other investments as may be determined by the
regulator.359
They are also prohibited from making investments with their officials, employees or
related parties, and they should make investments with intentions of “holding to maturity” and
shall not use the portfolio to trade securities for profit, placing their capital at risk.360
The total
investment portfolio of SACCOs on these permissible investment activities (financial) is
required to be less than 40% of their core capital and 5% of total deposits for Kenyan
SACCOs.361
Besides, SACCOs are not allowed to invest more than 5% of their total assets in
357
Model Regulation, Section II.6.2; SSR, Regulation 37 (3& 5); and Directive No.50, Paragraph 12 358
Id, Section VI.2.1; and SSR, Regulation 47 (1) 359
Id, Section VI.4.1; Id, Regulation 48 (5), SSA, Section 38 (1); and FCA, Section 29 (1) 360
Id, Section VI.5; Id, Regulation 49 (1) & 50 (1) 361
SSA, Section 38 (2); and SSR, Regulation 48 (4); FCA, Section 29 (2)
101
non-financial investment operations.362
In Kenya, any SACCO‟s investment in non-earning asset
should not exceed 10% of the total assets in which land and buildings should not exceed 5% of
the total assets; while WOCCU recommends credit unions should limit non-earning assets
investment to the maximum of 5% of total assets.363
These all investment portfolio regulations
are endeavoring to reduce concentration risk and to ensure that all investments of SACCOs are
made in safe and sound institutions.
With regards to operation of SACCOs, most countries also required SACCOs to appropriately
keep and preserve necessary documents (including coping all critical information on device and
storing in fire proof safe, making backups for vital records and store in offsite location); have
written disaster preparedness plan (it should address critical areas such as the safety of staffs and
the maintenance of critical systems and services, alternative locations for just in case); have a
security system designed to protect their offices from various crimes (like robbery) in order to
prevent destruction of vital records and to assist in the identification of persons responsible for
the liability (including fire proof safe, locks, reinforced windows and protected doors, secured
computer systems with limited access, security guards, at least for the night); etc.364
In related,
SACCOs are also obliged to monitor and detect any possible criminal activities, related to money
laundering, tax evasion, and terrorist financing, or other types of illicit activities; have in place a
written policies and procedures sufficient to adequately determine the true identity of members,
their economic activities, the origins and destinations of transactions; report any single or
multiple cash transactions in one day and in large amount or any suspicious activities to the
regulatory authority; and to have their internal anti-money laundering compliance programs.365
4.2.3 Accounting and Audit Regulations
Financial laws can require financial institutions to provide financial statements that conform to
international standards. In addition, rules relating to the audit function are particularly important
362
FCA, Section 19 (1); and WOCCU Technical Guide, P.8 363
SSA, Section 38 (3); SSR, Regulation 48 (1); and Model Regulation, Section VII.2.1; Non-earning assets are
assets, either fixed or non-fixed, that earn no interest or yield, such as land, buildings, vehicles, furniture and cash.
The percentage mentioned above does not include donated and foreclosed assets. 364
Model Regulation, Section X.2, X.3, X.4.1, X.4.2, X.5.1, X.5.2; SSR, Regulation 49 (3), 76, 77, 78; See all the
minimum standards for premise under Directive No.48 365
Id, Section XI.1.1, XI.2.1, XI.2.1.1, XI.2.2, XI.3.1, XI.4.1; FSA, Section 100; this last provision, for example,
requires all financial institutions in Malawi to report promptly to the Financial Intelligence Unit of RBM any
suspected money laundering activity.
102
for protecting depositors. A lack of adherence to appropriate audit standards has allowed the
crisis in many financial institutions, including financial cooperatives, in developing countries to
continue and deepen without the knowledge of the owners or the supervising authorities.366
So,
most countries establish standardized accounting and audit procedures, chart of accounts and set
consistent dates for the fiscal year of SACCOs.367
Every SACCO shall maintain proper books of
accounts and records that show its true and fair state of affairs as well as accounting systems and
procedures in a manner approved by the regulator.368
In Kenya and Malawi, SACCOs are
required to prepare their accounts and other financial records in compliance with the
International Financial Reporting Standards, while WOCCU wants credit unions to use the
Generally Accepted Accounting Principles and International Accounting Standards in their
performance of accounting transactions and preparation of financial statements.369
They are also
required to produce balance sheet and income statements periodically by using the same fiscal
year as prescribed by the law or the regulatory authority.370
In all three jurisdictions, SACCOs
are required to submit financial statements like, balance sheet (statement of financial position),
income statement, capital adequacy return, and liquidity return, classification of assets and
provisioning, investment return, statement of deposit return, a copy of annual report and other
required information to the regulator in monthly, quarterly and annually basis.371
Failure to
comply these financial returns and reports submission requirements may entail penalties,
including monetary and other administrative punishments.372
SACCOs are also required to conduct annual audit of their books and accounts within a
reasonable time after the close of the financial year and shall submit to the regulator after the
approval of the general meeting.373
They should have an internal control (audit) function
366
FAO, Safeguarding Deposit, P.82 367
WOCCU, Technical Guide, p.11 368
SSA, Section 40 (1& 2); and FCA, Section 41 and 47 (1) 369
Id, Section 40 (3); Model Regulation, Section XVIII.1.4, Financial Services (Reporting Requirements for
Savings and Credit Cooperative Societies) Directive, Government Notice No.53, Lilongwe, Malawi, 6th
December,
2013, Paragraph 6 (1), [hereinafter Directive No.53] 370
Id, Sections 39 & 41; Id, Sections XVIII.1.1 &1.2; SSR, Regulation 52 (1); FCA, Section 40; Directive No.53,
Paragraph 5; Mostly the financial year of SACCOs is a financial period of twelve months ending in the 31th
December each year. 371
Id, Sections 41&42; Id, Sections XVIII.1.1& 1.6; Id, Regulations 46, 51, 52; Id, Section 42; and Id, paragraphs
5,6,7; In Malawi, as per paragraph 8 of Directive No.53, a SACCO which is under supervision of MUSCCO shall
submit a copy of all returns and reports required here to MUSCCO. 372
Directive No.53, Paragraph 9& 10; SSR, Regulation 58 373
Model Regulation, Sections XVIII.2.1& 2.2; SSA, sections 40 (3) & 41 (1c);
103
(Supervisory Committee for Malawi and the Audit Committee for the case of Kenya and
WOCCU) which shall be responsible for reviewing and reporting (to the general meeting) on the
adequacy of the internal audit system and the financial matters of SACCOs.374
The audit
committee of SACCOs, among others, is responsible for completing an annual work plan for
internal auditing, performing internal audits of all operational areas throughout the year (at least
once in three months) that evaluate the efficacy of the institution‟s operations, ensuring that
accounting records and the financial reports are promptly prepared to accurately reflect
operations and results, ensuring that internal controls are established and effectively maintained,
investigating members complaint and management actions, and selecting the external auditor,
provide assistance to the external auditors when needed, review the audit report and findings
and ensure that all audit findings and recommendations are implemented.375
In addition to
that, the internal auditing organ of SACCOs is required to appoint a qualified external auditor
approved by the general meeting and the regulator.376
SACCOs are authorized to appoint an
external auditor only when the proposed auditor fulfilled or passed the qualifications provided
under the regulations. Accordingly, any person to be considered as qualified external auditor,
such person must be qualified as auditor under the law (for instance, in Kenya and Malawi, the
Company Act) and should not be an officer or member of a SACCO, related to the officer,
director or credit unions employees, a consultant of the SACCO and not performed the external
audit for three consecutive years.377
Such qualification requirements for external auditor
appointment are necessary to ensure the auditor has no conflict of interest with the SACCO and
standardization of audit function. The external auditor has duties to SACCOs in investigating the
financial conditions and operations and a duty of reporting and informing the irregularities,
violations and insolvency of such SACCO to the regulatory organ.378
And, within three months
after the end of the financial year, SACCOs should submit for approval to the regulator the audit
report, in three copies, that contains information about the audited statement of financial position
and comprehensive income, statement of director‟s responsibility, external auditor‟s opinion,
audited statistical information, statement of cash flow and changes in equity, any material
374
Id, Section XVIII.3.5; Id, Section 43 (1); SSR, Regulation 53; and FCA, Section 43 375
Model Regulation, Section XVIII.6.1; SSR, Regulation 57 (3) 376
Id, Section XVIII.3.1; SSA, Section 44 (1); SSR, Regulation 54 (1& 2); and FCA, Section 44 (1); SACCOs are
required to rotate their external auditors in every three years and like the appointment, removal of external auditor
also needs approval of the regulator. 377
SSA, Section 45; FCA, Section 45; and Model Regulations, Section XVIII.2.4 378
Model Regulations, Section XVIII.4.1; SSR, Regulation 56
104
amount written-off, and other disclosures required by the regulator.379
SACCOs are required to
display their audit report in their place of business after the approval of the regulator and failure
to comply with the requirements of the regulations may result rejection of the report and forces
SACCOs to amend or perform new auditing and if the regulator proved the existence of
intentional non-compliance, it may subject the failed SACCOs to additional punishments.380
4.2.4 Governance Regulations
As we know, governance matters in all financial institutions and especially in SACCOs good
governance is an essential component of success. Good governance is, obviously, a mandatory
ingredient for the competitiveness and sustainability of a SACCO business. Regulations establish
defined roles, power and responsibilities, criteria for management bodies and controls for
conflict of interest.381
They address the issue of governance in two ways; by specifying the
prudential disciplines of sound management (shaping the behaviors of management organs
within boundaries that protects member savings and the financial viability of the SACCO) on
one hand, and by laying out proper rules of institutional governance (establishing internal control
and oversight system), on the other.382
Based on this, countries may have different governance
provisions in their SACCO regulations. In a SACCOs setting, the supreme authority of SACCOs
is vested in the members who shall jointly and severally protect, preserve exercises it in the
general meetings.383
In exercising the responsibility of the supreme authority, members are
required to elect board of directors in their annual meeting and delegate the responsibility of
managing the affairs of the society to the elected board of directors.384
The optimal number of
directors depends greatly on the size and complexity of a credit union's operations, however, for
effective decision making, their number must be limited. Most of the time, the board consists at
least five elective non-executive directors and headed by a chairperson, who is also non-
executive director.385
Members of the board have specified maximum term of office (six years
for the case of Malawi) with the possibility of re-elected after sitting out on full term.386
With
379
Id, Section XVIII.5.1; SSA, Section 44 (3& 4); SSR, Regulation 55 (1&); FCA, Section 44 (1); and Directive
No.53, Paragraph 6 (2& 3) 380
Id, Section XVIII.8.1; Id, Section 46; Id, Regulation 58; Id, Sections 37& 46 381
WOCCU, Technical Guide, p.10 382
Ibid 383
SSA, Section 47; and SSR, Regulation 59 (1) 384
SSR, Regulation 59 (2); and Model Law, Section 5.10 385
Id, Regulation 59 (3); Ibid; and FSA, Section 29 (3) 386
FCA, Sections 21 (1a,b)
105
regards to the terms, WOCCU recommends that directors‟ office term should not be fixed by
law, rather by the institutions‟ bylaws for the purpose of continuity of services.387
It argues that
when the term is fixed by law, the value of continuity of service will be offset by the dangers
inherited in entrenched leadership.388
Therefore, it advocates non-limits of term and if it is
necessary, it should be done by credit union‟s bylaws. The board is required to meet regularly (at
least once every quarter in Malawi and not more than twelve times in a financial year for Kenya)
and shall elect the officers and committees, like audit or credit committee, as necessary to
effectively conduct the business of the SACCO.389
In Kenya and Malawi, the regulator is
authorized to evaluate the suitability and qualification of board of directors and other officers of
any SACCO and its approval is needed for their appointment.390
SARSA, Kenyan SACCOs
regulator, is empowered to determine the suitability and propriety of every person seeking to
serve as a director or an officer of SACCO and may bar or prohibit that person the position based
on considering such person‟s financial status or solvency; the academic or other qualification or
experience in related to the post; the status or license or approval granted to such person by any
financial sector regulator; its ability to carry on the regulated activity competently, honestly and
fairly, and that person has violated any provision of law to protect financial loss; has been
convicted or being investigated in respect of an offence involving financial impropriety, fraud,
corruption or economic crime; was a director of a SACCO which was involuntary liquidated or
is under involuntary liquidation or has been placed under statutory management (receivership);
has participated in any improper market practice that would discredit his competence and method
of conducting business; has acted in such a manner as to cast doubt on the person‟s competence
and soundness of judgment and other material information that the authority considered as
necessary.391
In addition to this, SARSA is authorized to impose minimum standards (including
mandatory continuous or minimum professional development courses, training and
certifications) on significant members and officers of SACCO they must undertake or attain
before serving or seeking to serve as a director or officer of such SACCO.392
These qualification
standards are applied in supplement with the „fit and proper‟ test and this implies that how the
387
Model Law, p.27 388
Ibid 389
Id, Section 5.15, SSR, and Regulation 60 (5& 8) 390
SSA, Section 50 (8); FCA, Sections 21 (1d)& 22; and FSA, Sections 29 (2) and 30 391
The SACCO Societies (Amendment) Bill, Kenya Gazette Supplement No.2, National Assembly Bills No.1,
Nairobi, 19th
January, 2018, Section 3, [hereinafter SSAB]; and SSR, Regulation 72 392
Id, Section 4
106
regulation is serious with regarding to corporate governance or management of SACCOs. But, it
may not be surprise since good governance is the backbone of development and growth of
SACCOs. Employee of the SACCO, other than the chief executive officer who deemed as an ex-
officio board member, is not allowed to be director and a person is prohibited to hold a director
position in more than one SACCO.393
The board of directors is in general responsible to the
whole business operation of the SACCOs and specifically, it required ensuring maintenance of
proper and accurate records; confirming the effective functioning of SACCO and existence of
adequate internal control system; establish appropriate policies including human resource, credit,
investment, saving, liquidity, and risk management policies; ensuring that the SACCOs make
adequate provisioning for known and probable losses; producing the annual audited accounts and
present to members in the annual general meeting; establish the necessary committees;
appointing and removing, if necessary, the chief executive officer and reporting the same to
members, etc.394
Any compensation, fee and travel or meeting expense or remuneration paid to
the director required to be disclose to the members of the SACCO at the general meeting.395
It is
essential that SACCOs have competitive compensation packages for the members of the board
so as to attract and retain competent, qualified individuals. However, for the sake of
transparency, the payment must be disclosed for the members. SACCOs are authorized to hire
chief executive officer and other employee based on their operation size and growth.
Accordingly, the appointed chief executive officer is accountable to the board for the conduct of
the day to day operation of the SACCO; and required to emphasize the implementation and
adherence to the prescribed policies and procedures, rules, regulations, and any other laws as
well as ensuring that the board is frequently and sufficiently appraises the operation of the
SACCO by reporting all necessary activities of the SACCO.396
Moreover, in order to increase the efficacy of their governance, SACCOs are also required, at all
times, to maintain internal control system.397
For this purpose, the board is under obligation to
establish the audit committee or supervisory committee, as the case may be, from its members. In
some cases, for instance Kenya, the members of audit committee needs to be a fully qualified
393
FCA, Section 24; SSR, Regulation 59 (3), 62; and Model Law, Section 5.30 394
Id, Section 43 (1); Id, Regulations 60 (2-4, 6-9), 63; and Id, Sections 5.20 & 5.30 395
Id, Section 24; Id, Regulation 61; and Id, Section 5.40 396
SSR, Regulation 64; and Model Law, Section 5.30 397
FCA, Section 25
107
accountant or hold such professional qualification in accounting and have experience in deposit
taking business.398
This committee performs an important governance function; oversight the
SACCO‟s internal control system and control the board and management‟s adherence to
regulations and other internal rules of the SACCO. The audit committee is required to report to
the board and general meeting the findings of its review, on the financial conditions and general
compliance of SACCO‟s operation with law, and measures taken to implement recommendations
and corrections of findings reported.399
In addition, such committee shall suggest an independent
external auditor approved by the regulator to the general meeting in order to conduct annual
audit of such SACCO. Conducting the external audit enable stakeholders (the regulator,
members and also creditors) to acquire objective verification of the accuracy of financial records
and accounts of SACCO by an accountant qualified and approved by the regulator. Furthermore,
in order to avoid conflict of interest and protect the interests of the SACCO, regulations clearly
stated that officials, directors or employee of SACCO should abstain from participating with in
the society on any business matter that affects their or related parties pecuniary interest and
failure to disclose such kind of interest to board of director will result punishment.400
One more
thing, regulations requires boards of any SACCOs to buy insurance coverage, fidelity bond, for
the liability incurred by the chief executive officer, and any officers, employee or member of
committees, who are responsible for funds or assets of the SACCOs.401
In general, these all regulations are established separate role and responsibilities for each
governance body of SACCOs. They also provide qualification requirements and standards to
assure the competency and propriety of the management bodies and to avoid conflict of interest.
The final objective of such governance regulations is securing the interests of members and
encouraging good governance tradition of SACCOs and eventually makes them sustainable.
398
SSA, Section 43 (2); and SSR, Regulation 53 (2)& 57 (2); in Malawi, as per section 55 of FSA, the management
of every prudentially regulated financial institutions, including SACCOs, required to appoint an internal auditor
suitably qualified and experienced in financial services. 399
Id, Section 43 (1); Id, Regulation 57 (1& 5) 400
Id, Section 35(3); Id, Regulation 36 (2); FCA, Section 30 (5); Model Law, Section 5.35 401
Model Law, Section 5.45
108
4.2.5 Consumer Protection and Information Related Regulations
Regulations addressing consumer protection are necessary to protect consumers from
unscrupulous individuals and financial institutions.402
Consumer protection regulations are
justified on the basis of inherent information asymmetry and power imbalances in the market
(presumption related with producers or service provider having more information about the
products or services than consumers) and aimed to safeguard members‟ interests and allow them
to know their rights and make well-informed decisions by comparing the services or products.403
Besides, other information related regulations also important to control the businesses or
operations of SACCOs. Different notification and prior approval requirements have substantial
significance in making SACCOs disciplined and structured as well as in regulating their
participation in risky business activities. Therefore, many countries establish various
requirements related to consumer protection and disclosure and exchange of information, such as
saving and share disclosure, lending disclosure, fair credit practices, publishing interest rate
information, actions requiring prior approval, credit referencing, and among others.
Accordingly, SACCOs are required to make shares and saving disclosure in order to enable
members or potential members making informed decision about these accounts. Any SACCO
shall disclose to its members and potential members, the terms and conditions for operating each
account and legal obligations attendant thereto; the interest rate for deposits, its type (fixed or
variable), calculation and payments; charges; conditions of account opening, operating, closing
accounts; method of disclosure for joint accounts; dividends and the condition of dividend
payment during capital deficiency, terms and conditions for term-deposits, etc.404
Another area
of regulation related to consumer protection is the issue of advertisement, commercial
announcements of SACCOs to promote their services. An advertisement concerning shares or
savings deposits or credits shall not be misleading or inaccurate and shall not misrepresent
credit union savings and share or credit products and services.405
The advertisement shall
clearly state the following information to the extent applicable, the minimum amount required to
open it and the minimum balance to maintain it, specific credit terms actually offered, the
402
Model Regulation, P.47, 403
Oya Pinar Ardic, Consumer Protection Laws, P.1 and 8 404
Model Regulations, Sections XIX.2.1- 2.4, XIX.3.1, XIX.3.3-3.5; and SSR, Regulations 21 (1,4 &5), 23 (1,2
&3), 25 (2), 26 (1&3) 405
Id, Section XIX.5.1-5.3, XX.6.1, XX.6.2, XX.6.2.1; and Id, Regulation 26 (2)
109
minimum interest bearing balance, the interest rate, dividend and fee applicable, the actual
annual percentage of yield or rate, the penalty for early withdrawal, if any, or for late payments,
the maturity of term account, etc.406
On the other hand, there are also other regulations aimed to
protect the interests of consumers related to lending. Regulations addressing lending disclosures
typically require that “institutions provide borrowers with accurate, comparable and transparent
information about the cost of a loan.”407
In lending disclosure, SACCOs, as a lender, are
required to disclose at minimum the applicable lending terms and legal obligations between the
parties, including amount to be financed; finance charges, including interest rate, fees and any
other charges that may be imposed; interest computation method (variable, fixed, flat or
reducing) and the date the interests start to accrue; conditions for refinancing of loans; frequency
of issue of statements and its contents; and collateral required for lending.408
Fair credit practices
also establish what is considered to be fair credit and collection treatment both for borrowers and
guarantors/co-signers. Fair credit practices related regulations required SACCOs to state, in
written form and reasonable time, the reasons of rejection, if they denied a loan application; to
prohibit their officials or employees from accepting anything of value or other compensation
from a borrower in exchange for receipt of loan; and to inform the guarantor/co-signer
adequately the nature of the liability prior to signing agreement creating guarantor liability.409
Besides, they are also required to respect the interests of borrowers in their debt collection
procedures by following fair debt collection practices; including not to levy additional charges
for delinquency charged before, the person they used to collect the debt may not engaged in any
conduct that harass, oppress or abuse the debtor, may not use any false, deceptive, or misleading
representation or means for collection, and such person shall not collect interests, fees or any
charges unless they are mentioned in the loan agreement/contract.410
On the other hand, regulations of SACCOs provide various information related requirements
(disclosure, exchange/sharing, notification or prior approval, and publication rules) in order to
control market distortions and to safeguard the interests of SACCOs and third party creditors.
Accordingly, regulations may require SACCOs to secure the approval of the regulators before
406
Ibid; and Ibid 407
Model Regulations, P.49 408
Id, Sections XX.2.1-XX.2.9, XX.3.1, XX.8.1 &8.2;SSR, Regulations 28 (6& 7), 29, 33 (c), and FCA, Section 36 409
Id, Sections XX.9.1- XX.9.3, Id, Regulations 28 (4), 32 (3) and 8 (1) 410
Id, Sections XX.10.1- XX.10.4; Id, Regulation 38 (2-4); and FSA, Section 62 (2g)
110
making some actions. Such SACCO actions requiring the prior approval of the regulatory
authority includes the opening and closure (even temporal) of place of business, relocating
business, opening a new branch, amendment of bylaws (requires both financial and non-financial
cooperatives regulator‟s approval), amalgamation or similar corporate restructuring actions,
introduction of new products (e.g. agency business), offering deposit or credit services for non-
members, purchasing or acquiring immovable property other than for the purpose of conducting
or extending business, grant or permit to be outstanding any credit facility to any member,
appointment and removal of external auditor, external borrowings beyond the limit, among
others.411
This prior approval requirement is justified by the necessity of frequent oversight in
order to ascertain the healthy and sound financial condition and operation of SACCOs and the
protection of members‟ interest. In addition to the information disclosure to the regulator, the
regulations may impose requirements with respect to the disclosure of information to
members/clients or other persons (like government officials) about the financial transactions for
the purpose of transparency and other reasons, e.g., protecting financial crimes.412
Credit
(performing or non-performing loans) information sharing and exchange with other financial
institutions or credit reference bureaus are also another regulation that aimed to protect SACCOs
from over-indebted consumers.413
Furthermore, SACCOs are subject to different publication and
information sharing regulations, such as publication and display of annual audit report,
liquidation and winding up announcements, calling of creditors for distribution, etc.414
These all
publication and information sharing requirements are designed to protect the interests of third
party creditors and increase the credibility or public confidence of such entities.
4.2.6 Enforcement Regulations
Enforcement regulations deals with determining the identity of the regulator, its powers and
responsibilities, and also states about the types of enforcement measures or sanctions and
penalties that would apply on SACCOs failed to comply with regulations. The authority of
SACCO regulators to enforce regulations or impose sanctions to ensure compliance with the
411
SSA, Sections 32 (1)& 44; SSR, Regulations 16-19, 34 (1), 35 (1), 55 (4), & 83; and FCA, Sections 15 (2), 33,
38-39, and 44 412
FSA, Sections 19 (2), 38, 64; and SSA, Section 54 (5); the information and reports presented before the general
assembly are considered disclosure to the general membership, but other specific information also submitted to
members with respect to the services or to the position such member is signed in. 413
SSA, Section 54 (5& 6); SSAB, Section 5; and FCA, Section 48 (6) in Kenya and Malawi, SACCOs are allowed
to exchange credit information with the credit reference bureaus and other institutions. 414
SSA, Section 46; SSR, Regulation 55 (3); FCA, Section 48; and FSA, Section 68 (6), and 72 (5)
111
laws and regulations must be specified. The authority that is responsible for registration,
regulation and supervision of SACCOs may be different from one country to the other, there may
be one or two entities discharging such task. These organs could be specialized in financial
services or not. Accordingly, with regards to the identity of regulator, WOCCU recommends
that, since credit unions as a financial institution conducts financial business that requires
financial knowledge, they should be regulated by the minister/agency that regulates financial
institutions, or by an agency that only regulates credit unions.415
SACCOs‟ regulation by
financial institution regulator or special agency particularly designed to them is the result of
endeavoring to accommodate their unique cooperative nature and their specialization in financial
intermediation service. Similar to WOCCU, considering the issues related to supervision
capacity of the Commission for Cooperative Development, Malawi also subject it‟s SACCOs
under the regulation and supervision of the financial regulator, i.e., RBM, and leaves their
registration on the shoulder of the Registrar under the Commission.416
On the other hand, Kenya
established autonomous and independent authority (SARSA) specifically for regulation and
supervision of Kenyan SACCOs.417
SARSA is managed by a board that comprises of the
Permanent Secretary to the Treasury, the Governor of the central bank, members of the Minister
for the time being responsible to the matters of SACCOs and the Commissioner of Cooperative
Development.418
Such regulatory authorities have similar powers and responsibilities in most
countries. The common powers of SACCO regulatory authority includes licensing, supervision,
rule-making, advisory, and sanctioning.419
As we know, supervision includes the analysis of
SACCOs‟ periodical reports and other information and on-site inspection of the regulator for the
purpose of evaluate the solvency, compliance and operation of SACCOs. So, the regulator may
have unlimited access to all premises and records of the SACCO. After the analysis of the
financial returns and other information furnished by SACCOs and if the regulator is not satisfied
by the reports, it may conduct on-site examination of the premises of SACCOs and their books
and records. On-site examination may be performed periodically and in emergency situation
when the regulator reasonably believed the existence of violations and non-compliance of
415
Model Law, Section 11.10 416
FSA, Sections 2 (1) & 8; 417
SSA, Section 4 (!) 418
Id, Section 6 (1) 419
Id, Sections 5& 68; FSA, Sections 8, 9, 23, 34 and 116; and Model Law, Section 11.15
112
SACCOs.420
Then, the regulator is required to prepare inspection report after completion of its
examination in the form of plan of action that shows the inspected SACCO problems, the
corrective or remedial measures, the person responsible for the problems and the time frame for
problem resolution.421
The regulator is authorized to issue administrative directions with
regarding to the remedial measures to be complied with or impose sanctions against a SACCO or
its officers when the regulator is proved that such SACCO or its officers are engaged in or is
about to engage in any unsafe or unsound financial practice or violated a provision of any law,
regulation or written order of the regulator.422
There may be substantial enforcement powers at
the disposal of the regulator, but, in deciding which administrative actions to be taken, it is
required to consider the financial condition of the SACCO; interests of the members, the
management and officials in the continuation of the SACCO; the ability of the management and
directors to manage the SACCO effectively; and the local and macroeconomic conditions.423
The possible administrative actions to be taken against any SACCO or its officers are:
Memorandum of Understanding and Agreement: - it is a least forceful action performed
through an agreement entered between the regulator and the SACCO when the later has
conducted correctable unsound business practices and failed to correct such weakness.424
The
agreement shall specify the remedial actions or corrective measures to be taken by the
SACCO within specified time frame and it must be signed by both the regulator and board of
directors as well as the regulator is required to perform frequent supervision contacts to
determine the SACCOs compliance.425
And, failure to comply with the agreement results the
next measure.
Cease and Desist Order: - this measure is used to stop or to prevent harmful practices
occurred or from occurring in a solvent SACCO while preserving and strengthening its
managerial integrity. It is issued where the SACCO has engaged or continues engaging in
any unsafe business practice, or violated or continues to violate laws, bylaws or any other
420
FSA, Section 42 (1); and SSR, Regulation 66 (7) 421
SSR, Regulations 66 (8-11), 67 (1); and Model Regulation, Section XVI.1.3 422
Id, Regulation 67 (4); and Model Law, Section 11.20 423
Id, Regulation 68 (1); and Model Regulations, Section XVI.1.3.1 424
Id, Regulation 69 (1); Id, Section XVI.2.1; FSA, Section 39 (1); and SSA, Section 50; in Malawi, the
memorandum is called by another name, Directions, since the Registrar directs the SACCO to take the necessary
actions to correct the problems. 425
Id, Regulation 69 (2-4); Id, Section XVI.2.2-XVI.2.4; and Id, Section 39 (4)
113
agreement entered with the regulator.426
The order may, temporarily or indefinitely, require
SACCOs to; stop the improper or unacceptable practice; stop paying or suspend declaration
of dividends, bonuses, salary incentives, severance packages, fees, etc. to its employee and
officials; relieve from accepting additional deposits and any other line of credit; stop lending,
investment and credit extension services; reconstitute its board of directors and convene its
members for meeting to discuss about the measures to be taken; and impose any other actions
that the regulator may deem necessary under circumstances.427
Like the agreement, the order
also needs to be in signed and state all the corrective actions and the time frame required to
complete.
Removal of Officials and Prohibition:- the regulator is empowered to remove an officer from
the post, if such officer has directly or indirectly violate any law; engaged or participate in
unsafe practice in connection with the SACCO; has a non-performing loan or becomes a bad
debtor; and committed or engaged in any act, omission or practice that constitutes a breach of
fiduciary responsibility; and these wrongs resulting in or likely to result in a SACCO
financial loss or other damage, members‟ interest to be prejudiced, or any party receiving
unfair financial gain or any benefit.428
This removal measure is used when the official
hesitates to resign voluntarily. The regulator is required to state the facts and grounds for
removal in the notice and the removal has immediate effect (automatically removed) on the
officer, but the latter is allowed to challenge the removal or have appeal right.429
On the other
hand, the regulator may prohibit any individual seeking to be an official or employee from
participating in a SACCO activity and affairs if it is found that the individual has been
charged or convicted with a crime involving monetary loss, fraud, perjury, breach of contract
or a crime that may pose a threat to the interest of members or threaten to impair public
confidence of the SACCO.430
The prohibited person also has appeal right like the removed
officer. Still, we dealt with only the lenient administrative measures of the regulator. The
worst is yet to come.
426
SSA, Section 51; SSR, Regulation 71; Model Regulations, Sections XVI.3.2-XVI.3.6; and FSA, Section 39 (2j) 427
Ibid; Id, Regulation 68 (2); Id, Section XVI.3.2.2; and Id, Section 39 (2) 428
SSR, Regulation 72 (6); Model Regulation, Section XVI.4.1; and FSA, Section 39 (2k) 429
Id, Regulation 72 (7& 8); Id, Sections XVI.4.3-XVI.4.5; and Id, Section 39 (5); for Malawi, appeal should be
request within twenty one days of the notice. 430
Id, Regulation 72 (1& 2); and Id, Section XVI.10.1
114
Receivership/Conservatorship/Statutory Management: it is the procedure whereby a regulator
takes immediate possession and control of the SACCO and operates it until the SACCOs is
recovered from the problem and resume business on its name, or merged or liquidated by the
regulator.431
It is the severest sanction that the regulator may apply because of that
receivership is mostly ended in forced liquidation. According to WOCCU, the main factors
affecting this decision will be „the nature of the issues or problems requiring resolution and
the least costly solution that can be implemented.432
The use of liquidation is often the
costliest solution and should be avoided as much as possible, and hence, receivership will be
selected as the least costly method that enable to take remedial action without affecting
members‟ savings and deposit.433
The regulator may place a SACCO under receivership
where such SACCO is involved in unsafe or unsound business practices; willfully and
continuously fails to comply with compulsory instructions issued by the regulator; has
abandoned its core business or does not operate in the members‟ interest; is totally incapable
of coping with severe financial problems that need to be brought under control; has engaged
in unsafe financial practice resulting massive erosion of its capital; is refusing to submit itself
for inspection; is unable to meet its obligations to depositors and creditors; and among
others.434
The requirement of “when financial soundness of SACCOs and members‟ interest
considered threatened” is expressed elusively and the determination may be different from
country to country. As per Model Regulation of WOCCU, credit unions financial soundness
and members‟ interest considered threatened when its institutional capital is less than 5% and
on a declined trend, and it has experienced losses or potential losses amounting to more than
10% of its institutional capital in each of three consecutive fiscal quarters and/or more than
50% of the institutional capital regardless of the time period.435
All the expenses (including
salary to the statutory manager) associated with the receivership are required to be paid by
the SACCO and the period of receivership ranges from four months (Malawi) to twelve
431
Model Regulation, p.38; Kenya and Malawi preferred to use the word “Statutory Management”, but WOCCU
used the remaining two terms for similar concept. 432
Model Law, p.53 433
Ibid 434
Model Regulation, Section XVI.5.3; SSA, Section 52 (1); SSR, Regulation 73 (1& 2); and FSA, Section 68 (1&
2); 435
Id, Section XVI.5.3.1; in Kenya, pursuant to SSR, SACCO‟s financial soundness and members‟ interest is
considered threatened when SACCO has an institutional capital of less than 2% of its total assets.
115
months under WOCCU (even it is an initial period and may be subject to extension).436
The
duration of receivership is depends on the recoverability of the SACCO and the regulatory
aggressiveness. The latter more determines the period for the reason that if the regulatory
follows aggressive approach of regulation, it may not want the existence of such kind of
failed SACCOs in the market and hence extended time of receivership may not be tolerated.
On the other hand, if the SACCOs has problems that needs elongated recovery time, its cost
of recovery may be outweighed the benefit anticipated from receivership. As a result, the
regulator may force such SACCO to liquidate involuntarily within short period of
receivership. The regulator is expected to appoint statutory manager, an individual who is not
the member, creditor or is related to or is an immediate family member to a former officer of
such SACCO.437
The appointment of statutory manager, after the issuance of statement of
receivership, shall takes effect immediately and the statutory manager operates on behalf of
the SACCO; all the powers of general meetings of members, board of directors, and
management shall be suspended and transfer to such manager; no attachment or lien, except a
lien created by the regulator, shall attach to any property or asset of the concerned SACCO as
long as the receivership stands, any gratuitous transfer of any asset of the SACCO made
within one year before the receivership shall stand revoked and all such assets shall be
surrendered to the regulator; and any lending to any official or any related person which
has been found advanced on preferential terms or without adequate security made within
six months prior to the conservatorship shall be rescinded; and that official or person
related to the official shall immediately refund the monies advanced and pay any interest
due.438
When the receivership period expires, the statutory manager is required to prepare
and submit to the regulator a written report on the financial conditions of the SACCO and its
future prospects as well as recommendations on termination of the receivership and
restoration of powers to the general meeting and newly elected management; prolonging the
436
Id, Section XVI.5.4 & 5.5; SSA, Section 52 (2); SSR, Regulation 73 (3); and FSA, Section 70 (5)&71 (2); in
Kenya the statutory management period is less than six months with a possibility to be extended by court as per the
SARSA application. 437
Id, Section XVI.5.6 and XVI.7.2; SSR, Regulation 74 (1); FSA, Section 69 (1) 438
Id, Section XVI.6.1& XVI.7.4; Id, Regulation 74 (2); and Id, Section 68 (4); appeal against statement of
receivership is possible, per Section XVI.6.3 of WOCCU‟s Model Regulations.
116
receivership; merging the SACCO; or revoking the license and liquidation of such
SACCO.439
Involuntary Merger and Liquidation; - these measures are applied after all other remedial
actions are exhaustively undertaken and restoration of the SACCO becomes impossible.
When any SACCO is insolvent or in danger of becoming insolvent as a result of the above
mentioned reasons, the regulator may order the merger of a SACCO with another voluntary
SACCO by proving, the merging SACCO cannot reasonably be expected to operate as a
viable stand-alone organization; other alternatives are not reasonably available; interest of
members would be best served by the merger, a merger is acceptable by the receiving
institution; and the merger would not severely impact the receiving SACCO.440
And, finally,
if there is no suitable or willing partner, the regulator is required to wind up the SACCO and
appoint liquidator.441
Finally, as a result of involuntary liquidation, the SACCO must cease
all operations and for continue in existence for the completion of the winding-up process.
Monetary Penalties: - in addition to the other types of administrative actions, the regulator is
authorized to take punishment of fines against SACCOs. The regulator may impose financial
punishments on SACCOs or its official that fails to submit the required periodical reports and
information, has submitted incorrect reports and information, participates in unlawful
practices, violated the administrative measures undertaken by the regulator, fails to comply
with laws and regulations, and other similar acts, omissions or non-compliances.442
However,
the amount of the punishment money is different from natural person to juridical person and
among nations.
Imprisonments: - this measure is specifically applied only on natural persons or officials or
employee of any SACCO that found in contravening of any provisions of the regulation and
the regulator may use this action with or without monetary fines.443
For instance, a person
who failed report to the authority about the closure of business is punishable in imprisonment
and fine.
439
Model Regulation, Section XVI.7.9; and FSA, Section 69 (4) 440
FCA, Section 49 (1); and Model Law, Section 11.30 441
Id, Section 49 (2); and Id, Section 11.35 442
SSR, Regulation 75; Model Regulation, Sections XVI.9.1- XVI.9.7; FSA, Sections 63 (3), 75 (3), 102 (2), 106-
108, 113; 443
See SSA, Section 64; SSR, Regulations 6 (4), 20, 58, 65 (3); and SSA, Section 12 (4) as example.
117
Revocation or Suspension of License:- the regulator is authorized, by writing a notice, to
revoke or suspend a license of any SACCO as a reason of deregistered under Cooperative
Societies Act, cease to carry on the business or liquidation or failure to commence business,
serious violations of or failure to comply the legislations and any condition of license,
founding in unsound financial positions or failed to maintain the required capital adequacy,
causing or promoting instability in the financial system, registration by false information, and
committing financial crimes.444
After the revocation or suspension of license, the regulator is
required to publish in newspaper having wider circulations the lists of the revoked SACCOs
and should inform the cooperative registrar about the termination.445
The SACCOs aggrieved
by the regulator‟s decision on revoking or suspension of a license is empowered to appeal.446
Generally, in order to implement SACCOs‟ legislations and to assure the full compliance of
SACCOs with these legislations, it could be reasonable to confer regulators with different
enforcement powers. These powers range from simple administrative measures to serious
monetary fines and other sanctions. The regulations also provide a complaint hearing system for
the purpose of reviewing the decision of the regulator and the interests of parties affected by such
a decision of the regulator. The hearing or appeal committees are established outside the
organizational structure of the regulator or at Minister level, for instance in Kenya, the aggrieved
party may appeal directly to the Minister of Cooperative Development and Marketing. Under the
minster, there is a Cooperatives Tribunal established for reviewing the decisions of the SARSA
and empowered to reverse such decision, for example the decision is revocation of license, based
on procedural irregularities happen in the making of the decision.447
And also, the hearing
procedures of the Tribunal are almost similar to normal court (with less formality and as much
expedition) and endeavored to respect the due process rights of parties. In addition, any party
aggrieved by the order of the Tribunal may appeal against such decision to the High Court.448
On
the other hand, Malawi has also established its own Financial Services Appeals Committee to
444
SSA, Section 27 (1); FCA, Section 11 (1); FSA, Section 27 (1); and Model Regulations, Section XVI.11.1; in
Kenya, upon revocation of license, DT-SACCO is not allowed to convert in to non-deposit taking SACCO, as per
Regulation 6 (5) of SSR. 445
Id, Section 27 (3); Id, Section 11 (5); and FSA, Section 26 (2) & 27 (6) 446
Id, Section 27 (5); and Id, Section 11 (3) 447
CSA490, Section 78-89; SSA, Section 27 (6) 448
Id, Section 89
118
review decisions made by the Registrar of financial institutions.449
In the hearing procedure of
the Appeals Committee, parties have equal chance to present their case and the Committee has a
power to affirm, vary, set aside or remand the decision under review.450
A party to a proceeding
before the Appeals Committee may appeal to the regular court, on question of law, from any
decisions of the Appeals Committee in that proceeding.451
In addition, the Registrar of Malawian
financial institutions is required to promote and encourage the development and implementation,
by financial institutions, of appropriate compliant resolution schemes to assist in informally
resolving complaints by the clients of financial institutions in relation to financial services they
provided.452
Deposit Insurance System: - In addition to effective regulation and other risk preventive
regulatory measures, SACCOs‟ regulation may require the establishment of deposit insurance
system in order to protect the members‟ deposits. Deposit insurance systems are funded by the
premium paid by the SACCOs benefiting from the protection. The calculation of the amount of
the premium paid by SACCOs may be varies from country to country; it can be a percentage of
the SACCOs‟ insurable deposits or a risk weighted premium that is dependent on the assessed
risk of such SACCO.453
However, the existence of deposit insurance system may create a moral
hazard on the beneficiary SACCOs and their management, as it their knowledge of insurance for
any failure may influence or encourage them to participate in more risky business. As a solution,
to discourage high-risk behavior by directors and management, WOCCU recommends that the
amount of coverage available can be limited to an amount of deposits, directors and management
can be excluded from coverage and risk based premiums can be charged.454
The system may be
government sponsored or sometimes, privately owned, according to the interest of countries.
Accordingly, regulations related to deposit insurance attempts to regulate the level of coverage,
membership, governance and administration of the fund, the premium, extent of compensation
and other issues. The regulations of all the three jurisdictions, Kenya, Malawi and WOCCU,
have established deposit insurance or guarantee fund, in which membership is mandatory for all
449
FSA, Section 78 (1) 450
FSA, Section 87 & 88 (1) 451
Id, Section 92 452
Id, Section 93 (1) 453
Model Regulations, p.42 454
Model Law, p.55
119
the licensed SACCOs.455
Though membership to the system is mandatory for all SACCOs,
WOCCU has reservation on the scope of coverage of the fund and provides minimum eligibility
requirements for membership. Accordingly, to become member of the deposit insurance system,
all credit unions required to fulfill all the requirements provided under the Model Regulations
related to institutional capital adequacy, loan delinquency and external borrowing limits, lending
and investment policies and limits, audit and accounting verification, consumer protection, and
other similar requirements set forth in the regulation.456
The objective of providing such
eligibility requirements could be reducing the moral hazard resulted from the insurance coverage
on one hand, and ensuring the credit unions compliance with the regulations by using the deposit
insurance system as enforcement measure, on the other. In related the deposit guarantee fund
protects only deposits of members‟, but not shares, up to an amount (for instance in Kenya, the
compensation is up to 100, 000 Shillings net of any liabilities for each member) determined by
the administrator of the fund.457
SACCOs are required to inform their members about the
available deposit insurance by issuing a notice of insurance coverage.458
The deposit guarantee
fund may be administered by the Boards of Trustees which consists of members from the
regulatory authority, the central bank, the national treasury, the SACCO nominees (mostly four)
and the Registrar of Cooperatives; and members appointed to the board required to serve a term
of three years with a possibility of renewal for one term.459
This governance framework is
appropriate for government-sponsored deposit guarantee fund and the structure could be
different in the privately owned insurance system that reflects less involvement of government.
The board is responsible for the management of the fund and particularly it is required to provide
oversight function in the management of the fund; manage and apply the fund in accordance with
the respective country law; levy contribution for the fund from member SACCOs; and invest an
extent of the fund in government securities.460
When we see the sources of the deposit guarantee
fund, it consists of funds contributed by SACCOs in the form of premium, interests and
455
Model Regulation, Section XVII.2; Model Law, Section 11.40; SSA, Section 55 (1)& 60; SSR, regulation 80 (1);
and FCA, Section 51 (1)& 58 (1) 456
Id, Section XVII.3.1- XVII.3.5 457
SSA, Section 59 (1& 2); SSR, Regulation 80 (2); and FCA, Section 57 (1& 2); the amount of protected deposit
of members‟ is the aggregate credit balance of any accounts maintained by a member to a SACCO, less any liability
of the member to the SACCO. 458
Model Regulations, Section XVII.4; and SSR, Regulation 80 (2) 459
SSA, Section 55 (2)& 56 (1&2); SSR, Regulation 79; FCA, Section 51 (2), 52& 53‟ and Model Law, section
11.45 460
Id, Section 55 (3) and 56 (3); Id, Regulation 81 (4); Id, Section 51 (3)& 54 (1); and Id, Section 11.50
120
dividends accruing from investments, borrowings for the purpose of the fund, funds received as
donations or grants to the deposit guarantee fund.461
The premium or levies that SACCOs require
to contribute or pay to the fund is different among jurisdiction, they may use fixed annual
premium or fixed initial capital contribution for certain time and floating annual levy. For
instance, Kenya requires her SACCOs to pay fixed annual premium of 50,000 Shillings or 0.05%
of total savings and deposits, whichever is higher, to the fund.462
On the other hand, WOCCU
applied that over the first five year of its existence (from formation to the next five years), each
credit union shall pay an initial contribution of 1% of the its insurable deposits and on the annual
basis, they are required to pay an annual levy or operating fee in the amount of insurable deposits
to the deposit insurance system.463
But, the annual levy may be change when the amount
accumulated in the deposit insurance system exceeds 3% of total protected deposits; the Board of
Trustees may make a proportionate dividend distribution, instead of collecting levy, to the
insured credit unions.464
When the insured SACCO becomes insolvent, the Board of Trustees
required paying insured members an amount equal to their deposits (including principal,
accumulated and accrued interest) and up on such payment, the Board is entitled to ask
indemnity from the SACCO or its liquidator.465
For the purpose of mitigating the existence of
moral hazard, regulations obliged the Board of Trustees to inspect or examine the insured
SACCOs in order to ascertain the type, number and value (totally the risk) of the protected
deposits.466
The examination includes both the off-site surveillance (financial statement
disclosure) and the on-site inspection of the premises of SACCOs.
4.3 Lessons Drawn to Ethiopia
As stated before, the comparison under this chapter aims at drawing lessons from the approaches
of different jurisdictions to the same or similar problem. The good thing of comparative legal
study is its vital role in creating chances from which we can learn more. Accordingly, the
regulatory experience of the above three jurisdictions indicates that adequate regulatory
framework is important in order to effectively regulate SACCOs. Legislations that recognize the
nature of SACCOs‟ activities is the most essential aspect for regulation rather than legal status. 461
Id, Section 58; FCA, Section 56; and Model Law, Section 11.50 462
SR, Regulation 81 (1) 463
Model Regulation, Section XVII.5.1 & XVII.5.2; and Model Law, Section 11.55 464
Id, Section XVII.5.3; and Ibid 465
Id, Section XVII.6.1; SSA, Section 59 (5& 9); SSR, Regulation 82; and FCA, section 57 (5& 9) 466
Id, Section XVII.7.1- XVII.7.4; SSA, Section 59 (8); and FCA, Section 57 (8)
121
The regulatory authority with the adequate capacity and knowledge in financial services and
SACCO business is also a corner stone for efficacy of SACCO regulation. In general, the
comparative assessment assisted in better understanding of the issue at hand and enables the
researcher to draw the following lessons from the regulatory experience of Kenya, Malawi and
WOCCU.
Implementing enabling legislation is crucial to establishing sound Savings and Credit
Cooperatives. Ethiopia should learn from Kenya and Malawi experience that the absence of
laws specifically designed for SACCOs may result different problems and slows the
development and growth of SACCOs. Since a strong supervisory framework is built upon a
secure legislative foundation, without this the supervision would be very lenient and born
mismanagement, weak internal control, financial instability and other similar problems that
affect the interests of depositors. These problems are arisen because the governing law was
designed for cooperatives in general and hence it appreciated SACCOs as cooperative and
neglects their unique feature or financial institution aspects. Conversely, SACCO specific
legislation ensures an appropriate set of financial management disciplines establishes
governance controls and sets up a prudential supervisory framework for SACCOs. Therefore,
developing appropriate substantive regulatory regime is important for sound and prudential
operation of SACCOs and to increase their outreach.
Subjecting the regulation and supervision of SACCOs under the authority other than
cooperative development organ, the central bank or other separate and independent organ: -
by taking a lesson from these jurisdictions, Ethiopia needs to change its SACCOs regulatory
authority and make it NBE or other organ responsible to regulation of SACCOs. This is for
the reason that to increase supervision efficiency of the regulators, regulator of SACCOs
should be a financial regulatory organ or other organ specified only for SACCOs. For
Ethiopia, making the regulator of financial institutions, NBE, also regulator of SACCOs may
be important for having one regulator for all financial institutions that enables to pull all
financial resources, available knowledge, skills and information network for regulation of
financial institutions. However, since it‟s already overwhelmed by many responsibilities,
adding such extra burden could be beyond its actual regulatory capacity and this may not
result the expected regulatory efficiency. Therefore, for Ethiopia, the best and appropriate
way is establishing an independent authority, like Kenya‟s SARSA, particularly for SACCOs
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only, and it should be composed of different organizations of the SACCOs‟ movement and
financial authorities (members from SACCOs, FCA as representative of the general
cooperatives, NBE, and other concerned organs). The advantage of such kind of regulator is
that it may have the necessary inputs like adequate resource, skills and information for
conducting direct and proper regulation of SACCOs. In addition, such institution “could be
financed by the institutions it supervises, thus, assuring that both the regulator and the
regulated share the common objective of promoting safe and sound growth.”467
In related, Ethiopia, like Malawi, may also exempt small SACCOs out of the regulator‟s
responsibility and delegate to other entity inside the SACCOs sector (e.g. the League or
Federation). This is for the reason that it promotes financial inclusiveness through, directly
regulating only those that are large enough that their failure could put the sector (and other
sectors) at risk while ensuring that all SACCOs comply with the regulations (since the
delegated entity enforces similar objectives). For countries like Ethiopia, having a variety of
SACCOs (in size, capital and hierarchy) operating in diverse areas, this approach could be
vital to reduce cost of regulation and increase supervision outreach. So, the country needs to
take it as a good lesson.
Increasing the required minimum number of founding members for primary SACCOs could
be another lesson for Ethiopia. Considering the benefit of having large membership base in
the accumulation of capital and in creating chances for quality management, the minimum
number of primary SACCOs‟ member should be increased beyond the current threshold.
Providing fit and proper tests and other qualifications for management of SACCOs‟ is very
important for governance of SACCOs. In order to avert the existing Ethiopian SACCOs‟
quality management limitations, Ethiopia must learn from the international experience and
include different qualification and competence requirements for management of SACCOs
under the law. The regulator should also conduct background screening on any person
seeking to be official of SACCOs. It will be necessary if it is required to increase
management quality and good governance so that overall success of SACCOs.
Ethiopian should also require SACCOs to acquire insurance coverage (fidelity bond) for their
officials‟ liability resulted from their official capacity and there should be an incentives or
remuneration for them. The justification for this requirement is similar to the international
467
FAO, Safeguarding Deposits, P.87
123
one, attracting competent and qualified officials by providing job guarantee and competitive
incentive packages.
As other countries do, our country should require its regulator to conduct on-site inspection
of SACCOs‟ premises before licensing and commencement of operation. The inspection is
vital in assuring regulators the accuracy of SACCOs‟ disclosure and their institutional
viability to enter into the market.
The country should also allow investment of SACCOs‟ funds that are not for loans on sound
and non-risky investment areas by restricting the maximum investment portfolio. This would
benefit SACCOs to acquire additional income flow and hence reduce their external
borrowings. And also, the allowance may help to legalize the existing practice or to curb the
contradiction between the law and the practice. Besides, based on the international
experience, SACCOs must be permitted to provide non-members financial services other
than saving and credit, considering the benefit of income creation and extending financial
access to the unbanked.
Ethiopian SACCOs‟ regulatory framework must provide precisely classification of loans,
specific percentage of loan loss provisioning, delinquent ratio, maximum external borrowing
limits, insider lending requirements, liquidity ratio and other related prudential standards for
the purpose of evaluating SACCOs‟ compliance with these requirements and to protect their
financial soundness and viability.
In related, based on the international practice, Ethiopian must create a way for supporting the
liquidity management of her SACCOs. The country may grant SACCOs access to liquidity of
NBE, based on the conditions of the latter, or authorize them to establish their own central
finance facility. The second way seems appropriate in order to augment SACCOs‟ liquidity
management regularly and without conditions as well as the establishment of the facility
could have extra advantages beyond liquidity.
The above discussed jurisdictions required their SACCOs to share and exchange credit
information with licensed credit reference bureaus. Similarly, since there is no such kind of
bureaus in Ethiopian, SACCOs‟ should also be mandated to share and exchange credit
information with other financial institutions or there should be a linkage and cooperation
with the credit recording and information sharing center at the NBE. This could be important
to increase loan appraisal of SACCOs and hence minimizes their delinquency.
124
Like other countries, Ethiopia should also provide uniform accounting principles for all
SACCOs in order to avoid accounting divergence and confusions of SACCOs.
The country also expected to include requirements related to consumer protection and anti-
money laundering issues under its regulatory framework in order to protect the interests of
customers and to eliminate the occurrence of financial related crimes.
Obviously, jurisdictions provide their SACCOs‟ regulators with exhaustive remedial or
corrective measures to be taken against any SACCO at fault before directly liquidating such
SACCO. Such measures are important in preserving the continuity of the SACCO as an
entity while attempting to correct the faults. In the contrary, Ethiopia has no any remedial
measures other than written warning, negotiation and liquidation. Therefore, the country
needs to adopt additional remedial measures, like cease and desist order, removal of
officials, receivership or statutory takeover, and involuntary merger, for similar purpose and
to minimize the effect of liquidation on the interests of members.
The country must also learn from the international regulatory experience, in establishing
deposit guarantee fund for the purpose of securing the interests of depositors during their
SACCOs‟ failure.
The existence of SACCOs dispute resolution institutional set up is another international
experience that Ethiopia needs to draw. There should be an independent national institution
to accept the complaints of SACCOs and review the decisions of the regulator transparently
and in accordance to administrative procedural law standards. The regulatory framework
should set forth the substantive and procedural standards applicable to the regulator and its
actions as well as the judicial review of such actions.
125
CHAPTER FIVE
5. Conclusion and Recommendation
5.1 Conclusion
The essential objective of this study has been to analyze the current Ethiopian SACCOs‟
regulatory framework and thereby indicate the substantive and institutional reform or adjustment
measures the country needs to undertake to curb the existing regulatory limitations and enabling
the effective regulation of SACCOs operated in the country. This was done in order to answer
the main research question of whether or not the current SACCOs‟ regulatory regime of Ethiopia
requires reform. Other three specific questions were also designed to supplement the main
question and as initiations to assess the surrounding situation thus easing solving this question.
Therefore, answering these questions was tried in the previous three chapters through legal and
practical analysis of Ethiopian SACCOs‟ substantive and institutional regulatory regimes,
interviews and assessment of the regulatory experiences of three selected jurisdictions.
SACCOs, as depository institutions, because of the nature of deposit intermediation and nature
of deposit contract as well as the market imperfections makes them subject to regulations of
many countries. In Ethiopian too, they are subject to government regulation started from the
enactment of first cooperative decree in 1960. Currently, the substantive regulatory framework of
SACCOs encompasses different primary and secondary legislations. The primary legislation
includes Cooperative Societies Proclamation No.985/2016 and Cooperatives‟ Commission
Establishment Proclamation No.274/2002. On the other hand, even though they were not enacted
for implementation of the above mentioned proclamations, currently functioning secondary
legislations consists of Council of Ministers Regulation No.106/2004 and other various
directives issued by FCA. These laws provide different requirements and rules in order to
regulate the market entry, operation and exit of SACCOs. Before entering into the market, any
primary SACCO is required to have not less than 50 individual members, maintain fully
subscribed and partially paid up capital equivalent to its one year operational cost, and other
necessary documents (bylaws, minutes, register of members, action plan, and other written
policies) and information (about its place of business, proposed organizational structure, etc.)
126
required for registration and it will be registered in cooperative society form and granted a
certificate of registration subject to renewal every three years. And, if it is not registered, such
SACCO may appeal to the relevant court. After registration, SACCOs can start operation and in
their operation they are required to operate in compliance with the regulatory requirements such
as maintaining a leverage ratio of not less than 28.5% of total deposits in capital form; a statutory
reserve of 30% retained from the total annual net profits and regulatory reserve of 30% from the
total capital; individual lending limits (not more than 10% of SACCO‟s total asset); keeping
books and accounts (financial statement and other financial documents) as per the standard
provided by the regulator and report quarterly and annually, conducting annual audit, and other
requirements related to governance and information disclosure. Non-compliance of these
requirements could entail administrative sanctions. And finally, the substantive regulatory
framework provides the way SACCOs could be dissolved, liquidated and canceled from the
registration. On the other hand, the Proc.No.274/2002 established FCA for the purpose of
regulation and supervision of SACCOs. It is conferred with rule-making, supervising
(monitoring and inspecting), educating, advocating and sanctioning powers.
However, there are areas in which the regulatory framework has constraints and limitations and
there are also issues not covered by the regulation. These problems and issues includes absence
on-site inspection before registration and commencement of operation; lacking clearly stipulated
grounds of rejecting application for registration (in the main proclamation); low and floating
initial requirement; absence of delinquent loan definition, classification of loans and
provisioning, loan write-off and recovery procedures, insider lending and external borrowings
limits; liquidity management (ratio, calculation, and methods of keeping) requirements are
missing; absence of qualification and competency requirements for committee members;
confusing and general indication of accounting principles; absence of valuation rules, investment
contradiction,; lacking clear provisions for micro insurance services, consumer protection, anti-
money laundering and branching issues; there is no profit allocation and transformation or
graduation rules; and absence of remedial measures other than liquidation and deposit insurance
establishment provisions. These all limitations are related to the substantive regulatory regime of
SACCOs and their consequences are evident in practice. Besides, the institutional or regulator
related problems includes government interference in the operational autonomy of FCA; its
accountability for irrelevant government organ; lacking the required regulatory inputs like
127
resources and skills; weak auditing and supervision trend; supervision approach related
problems; enforcement issue and absence of institutional set up for SACCOs‟ dispute resolution.
In general, the assessment of both the regulatory situation and its problems showed us that the
extent of SACCOs‟ regulation in Ethiopia. The findings of the study showed that the current
regulatory framework does not recognize the nature of SACCOs properly and with the extent
they deserve. The laws (Proc.No.985/2016 and Regulation No.106/2004), from the beginning up
to end, seems like non-financial cooperatives regulation and hence SACCOs were structured
legally and financially more like agricultural cooperatives. The SACCOs‟ directives of FCA are
also prepared based on these general cooperatives laws and failed to accommodate financial
norms and standards for SACCOs adequately. These all things amplifies that the in adequacy of
the existing Ethiopian regulatory framework to regulate SACCOs effectively. Totally, the
absence of special legal regime specifically designed for SACCOs, the existence of weak
regulator and its lenient supervision as well as the fast growth of number of SACCOs could be
the main reasons for undertaking regulatory regime in Ethiopia. The experience of other
countries also showed that without proper adjustments in the substantive and institutional
regulatory framework, the proper and effective regulation of SACCOs is unthinkable and
impractical. In addition, nowadays, it is a must to consider SACCOs as integral part of a sound
and safe financial system for economic and social progress of the country. Key to that progress is
having safe and sound SACCOs‟ sector and a safe and sound SACCOs‟ sector cannot be ensured
without enabling legislation and proper regulation. Therefore, to get the best out of SACCOs‟
development, Ethiopia is required to make reformations and adjustments related its substantive
and institutional regulatory frameworks that govern SACCOs.
5.2 Recommendations
It is obvious that sustainable development of SACCOs could result in assisting the economic and
social development of the country and financial deepening. However, as a precondition, there
must be suitable substantive and institutional regulatory situation that ensure the sound and
prudential operation of SACCOs and hence enable them to develop sustainably. So, for the
realization of the above outcome, the country is expected to assure the existence and continuance
of the sustainable developments of SACCOs by taking whatever necessary measures. Based on
this, to reap the substantial benefits out of SACCOs, Ethiopia as a country required to properly
128
appreciate the significance of SACCOs and give well recognition they deserve, review the
current regulatory framework and make reformation, establish proper and efficient SACCOs‟
regulatory authority, and in general develop a well-structured environment enabling the effective
regulation and sustainable development of SACCOs. Also, the country need to make SACCOs
part of its formal financial sector in order to increase their participation in financial deepening
and satisfaction of the financial interests of the unbanked segment of population. In general,
considering the generality of these recommendations, Ethiopia needs to do the following specific
changes;
Take substantive reforms through adopting SACCO specific legislation, in addition to the
cooperatives law, that properly regulates the following specific issues:
Conducting licensing, after registration by the registrar of cooperatives, with defined
grounds of rejecting licensing;
On-site inspection before licensing and commencement of operation; includes both
institutional evaluations; focused on adequacy of management and information
systems, policies and procedures, internal control; and financial examination which
focused on evaluation of financial soundness and capital position of SACCOs;
The initial capital requirement should be based on the aim of creating optimum
balance between the supervisory capacity of the regulator and the rapid growth of the
number of SACCOs and the law may provide specific higher amount of initial capital
requirement, to reduce the proliferation of small SACCOs, or tier capital requirement
depending the size of institutions, for the purpose of both promoting entry and
creating big and strong SACCOs;
Liquidity management requirements should be properly regulated
Loan related issues; there should be clear definition of delinquent loan, precise
classification of loan portfolio and proper amount of provisioning based on the
WOCCU Model Regulation, procedures of writing -off loans and their recovery,
specific amount of maximum allowed external borrowing, other provisions related to
insider lending should be provided.
Fit and proper tests and other qualifications for committee members and pre-
evaluation of persons seeking to be officials by the regulator must be applied
129
There must be specified and uniform accounting principles rather than general
indication of the generally accepted accounting principles;
Clear valuation rules for in-kind share payments and collaterals must be provided
under the law; the valuator also needs to be approved and qualified by the regulator,
Mandate SACCOs to exchange and share credit information with other financial
institutions and NBE which brings credit information sharing under a single
regulatory framework, or introduce thresholds for loan amounts that will require
mandatory credit referencing;
Provide clear rules and procedures for micro insurance services and for branching
notifications and approval;
Establish precise provisions for consumer protection and anti-money laundering
issues, investments and profit allocations;
Allow the establishment of deposit insurance schemes and SACCOs‟ transformation
mechanisms by adopting “ cooperative bank” organizational model; and
Provide additional remedial and corrective measures like cease and desist order,
receivership, and involuntary merger.
Bring institutional regulatory reforms that includes;
Promotion of SACCOs should be remain in the hands of FCA and establish an
independent and separate institution (with sufficient human resource and skill)
responsible for regulation and supervision of SACCOs only, so that there will be no
more conflict of interest;
The new regulator should be composed of the members from the NBE, SACCOs and
other stakeholders;
It‟s accountability must be for the NBE or the Minister of Finance and Economic
Cooperation for the purpose of efficient evaluation of the regulators performance;
External audit service must be undertaken properly and on approval of the regulator
as well as all SACCOs must be eligible for external audit as long as they bear the cost
of auditing;
The regulator must follow risk based supervision approach since it enables it to
conduct efficient supervision by allocating its resources on the greater risks and hence
supervision outreach will be maintained;
130
There should be independent SACCOs‟ dispute resolution institutional set up that
works in accordance with the substantive and procedural administrative law
standards.
There should be coordination between the SACCOs‟ regulator and NBE, since it has a
responsibility to promote the development and regulation of SACCOs along with the formal
financial institutions of the country,
Conduct consulting with stakeholders and other SACCOs‟ movement supporters
Become a member of WOCCU and ask its support in the reformation and development of
appropriate regulatory regime as it is always open to do so.
131
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through Regular Financial Audits‟, Journal of Cooperative Organization and Management,
2014, Vol.2, PP.72-82
27. Yigalem Kassa, Regulation and Supervision of Microfinance Business in Ethiopia:
Achievements, Challenges and Prospects, Presented at International Conference on
Microfinance Regulation, Dhaka, Bangladesh, March 15-17, 2010
II. Theses and Dissertations
1. Biwott Kevin, The Effect of Regulation by SARSA on Performance of Small SACCOs in
Kenya, MA Thesis, Kabarak University, 2014, [Unpublished, available online].
133
2. Harrison K. Song‟e, The Effect of Liquidity Management on the Financial Performance of
Deposit Taking SACCOs in Nairobi County, MBA Thesis, School of Business, University of
Nairobi, Kenya, 2015, [Unpublished, available online].
3. Melkamu Engida Zemede, Operating Performance and Capital Structure of Rural Saving and
Credit Cooperatives in Ethiopia, Application of Panel Threshold Method, MA Thesis, Addis
Ababa University, School of Graduate studies, 2008, [Unpublished, available online]
4. Nigusie Dibise, Determinants of Saving and Credit Cooperatives Societies (SACCOs)
Outreach in Addis Abeba, MA Thesis, Addis Abeba University, College of Business and
Economics, 2015, [Unpublished, available online].
5. Solomon Abay Yimer, Financial Market Development, Policy and Regulation: The
International Experience and Ethiopia‟s Need for Further Reform, PhD Thesis University of
Amsterdam, Netherland, 2011, [Unpublished, available at author‟s hand].
6. Tadese Tilahun, The Role of Rural Saving and Credit Cooperatives in Enhancing Financial
Inclusion: A Case of Biftu Batu Rural Saving and Credit Cooperative, MA Thesis, Addis
Abeba University, Department of Public Administration and Development Management,
2014,[Unpublished, available online]
7. Yared Gebremichael, Development of Saving and Credit Cooperatives in Mekelle Zone:
Performance, Challenge and Proposed Intervention, MA Thesis, Mekelle University,
Department of Cooperatives, 2008, [Unpublished, available online].
8. Zerfeshewa Betru, Determinants of Saving and Credit Cooperatives (SACCOs) Operational
Performance in Gonder Town, Ethiopia, MA Thesis, Mekelle University, College of
Business and Economics, 2010, [Unpublished, available online]
III. Legal Instruments
A. WOCCU Instruments, Reports and Guides
1. World Council of credit Unions, Credit Union Regulation and Supervision Technical Guide,
WOCCU, U.S.A., 2008, P.2, available at www.woccu.org/publication., last accessed on 3rd
March, 2018
2. World Council of Credit Unions, Model Law for Credit Unions, World council of Credit
Unions, INC., Washington D.C., U.S.A., 2015, P.7, available at
www.woccu.org/publications, last accessed on 15th
April, 2018
3. World Council of Credit Unions, Model Regulations for Credit Unions, WOCCU, February,
2008, available at www.woccu.org/publications , last accessed on 15th
April, 2018
4. World Council of Credit Unions, Statistical Report, 2016, at<
www.woocu.org/impact/global/reach/statreprt>, accessed on 15th
April, 2018
B. National Instruments, Policy Documents and Reports
i) Ethiopia
1. Cooperative Societies Proclamation, Federal Negarit Gazette, Proc.No.147, 5th
Year, No.27
134
2. Cooperatives‟ Commission Establishment Proclamation, Federal Negarit Gazette,
Proc.No.274/2002, 8th
Year, No.21
3. Cooperative Societies (Amendment) Proclamation, Federal Negarit Gazette, Proc.No.402,
10th
Year, No.43.
4. Cooperative Societies Proclamation, 2016, Federal Negarit Gazette, Proc.No.985, 23rd
Year,
No. 57
5. Council of Ministers Regulation No.106/2004 to provide for the implementation of
Cooperative Societies proclamation No.147/1998, Federal Negarit Gazette, Regulation
No.106/2004, 10th
Year, No.47
6. የህብረት ስራ ኤጀንሲ የህብረት ስራ ማህበራት የሰው ሃይል አደረጃጀትና አስተዳደር መመሪያ ቁጥር 005/1996
7. የህብረት ስራ ኮሚሽን የህብረት ስራ ማህበራት የሂሳብ አያያዝና ምርመራ መመሪያ ቁጥር 006/1996
8. የህብረት ስራ ኮሚሽን የገንዘብ ቁጠባና ብድር ህብረት ስራ ማህበራት አደረጃጀት መመሪያ ቁጥር 007/1996
9. የህብረት ስራ ኮሚሽን የገንዘብ ቁጠባና ብድር ህብረት ስራ የብድር አስተዳደር መመሪያ ቁጥር 008/1996
10. የህብረት ስራ ኤጀንሲ የህብረት ስራ ማህበራትን ሂሳብ በውክልና ለማስመርምር የወጣ መመሪያ ቁጥር 13/2001
11. የህበረት ስራ ኤጀንሲ የህብረት ስራ ኢንስፔክሽን መመሪያ ቁጥር 16/2002 12. የህብረት ስራ ኤጀንሲ የህብረት ስራ ማህበራት ህልውናቸውን የሚያጡበት የአፈፃፀም
መመሪያ ቁጥር 17/2002 13. የፌዴራል ህብረት ስራ ኤጀንሲ የፋይናንስ ህብረት ስራ ማሀበራት የፋይናንስ ግብይት
የስልጠናና የትግበራ ማኑዋል, 2009 14. The Agricultural Cooperatives Sector Development Strategy 2012-2016, Ministry of
Agriculture and Agriculture Transformation Agency, 2012
15. National Bank of Ethiopia, Annual Report, 2016/17
16. National Bank of Ethiopia, Ethiopia: National Financial Inclusion Strategy, April, 2017
ii) Other Countries’ Instruments and Reports
A. Kenya
1. Cooperatives Societies Act, Chapter 490, Revised Edition, 2012, Published by the National
Council for Law Reporting with the Authority of the Attorney-General, Nairobi, Kenya
2. The SACCO Societies Act, Kenya Gazette Supplement No.98, Act No.14, Special Issue,
Nairobi, 30th
December, 2008,
3. The SACCO Societies (Deposit Taking SACCO Business) Regulation, Legislative
Supplement No.27, Legal Notice No.95, Nairobi, 18th
June, 2010
135
4. The SACCO Societies (Amendment) Bill, Kenya Gazette Supplement No.2, National
Assembly Bills No.1, Nairobi, 19th
January, 2018
5. The SACCOs Societies‟ Regulatory Authority (SARSA), The SACCO Supervision Annual
Report, 2016, Nairobi Kenya
B. Malawi
1. The Cooperative Societies Act, Chapter 47:02, No.36 of 1998, G.N.10/2000, Lilongwe,
Malawi, 1998
2. The Financial Service Act, No.26 of 2010, Lilongwe, Malawi, 30th
July, 2010
3. The Financial Cooperatives Act, No.8 of 2011, Lilongwe, Malawi, 8th
April, 2011
4. Financial Cooperatives (Premise Inspection) Directive, Government Notice No.48, The
Malawi Gazette Supplement, Lilongwe, 6th
December, 2013
5. Financial Services (External Borrowing Requirements for Savings and Credit Cooperative
Societies) Directive, Government Notice No.49, Lilongwe, 6th
December, 2013
6. Financial Services (Asset Classification Requirements for Savings and Credit Cooperative
Societies) Directive, Government Notice No.50, Lilongwe, 6th
December, 2013
7. Financial Services Minimum (Capital Requirements for Savings and Credit Cooperatives
Societies) Directive, Government Notice 51, Lilongwe, 6th
December, 2013
8. Financial Services (Prudential Liquidity Requirements for Savings and Credit Cooperative
Societies) Directive, Government Notice No.52, Lilongwe, 6th
December, 2013
9. Financial Services (Reporting Requirements for Savings and Credit Cooperative Societies)
Directive, Government Notice No.53, Lilongwe, Malawi, 6th
December, 2013
10. Financial Services (Licensing of Savings and Credit Cooperative Society) Directive,
Government Notice 54, 6th
December, 2013
IV. Others
1. Mtchaisi Chintengo, Regulation of Financial Cooperatives: the Case of Malawi, 14th
SACCA
Congress, 28th
Oct- 1st Nov, 2013 P.5, available at
http://www.treasury.gov.za/coopbank/conference.aspx , accessed on 15th
May, 2018
2. Rabobank Group, Cooperative Banks in the New Financial System, 2009, P.19, available at<
https://www.rabobank.com>, last accessed on 3rd
June, 2018
3. Toronto Center, Risk Based Supervision, TC Notes, 2018 available at
http://www.torontocenter.org/publications, last accessed on 8th
May, 2018
4. Interview with Mrs. Bethlehem Zerihun, Legal Officer at Awach SACCO, on the whole
operation of Awach SACCO, 21st June, 2018 and 1
st August, 2018.
5. Interview with Mr. Birhanu Duffera, Financial Cooperatives Development Directorate
Director at Federal Cooperatives Agency, on the practice of SACCOs, FCA and its future
plan, 1st August, 2018.
136
6. Interview with Mr. Channie Adane, Cooperative Auditor at Federal Cooperatives Agency,
Cooperatives Account Auditing Service Directorate, on the appointment of external auditor
and audit service, 18th
June, 2018
7. Interview with Mr. Getachew Ketema, Human Resource Management Officer at Federal
Cooperatives Agency, Human Resource Development and Management Directorate, on the
FCA‟s organizational structure and human resources, 18th
June, 2018.
8. Interview with Mr. Sileshi Hailu, Financial Marketing Linkage Senior Officer at Federal
Cooperatives Agency, Financial Cooperatives, Development Directorate, on the current
status of SACCOs in Ethiopia, 18th
June, 2018.
9. Interview with Mrs. Yenebithon Simegn, Inspection Officer at Federal Cooperatives Agency,
Cooperatives Regulatory Directorate, on the inspection of SACCOs and enforcement of the
Agency, 18th
June, 2018.
10. Interview with Mr. Yisak Betel, Legal Officer at Federal Cooperatives Agency, Cooperatives
Regulatory Directorate, on the current functioning SACCOs‟ laws and the current inspection
practice of the FCA, 18th
June, 2018.
