Are Kenyan Saccos Overcapitalized?

WE WRITE ESSAYS FOR STUDENTS

Tell us about your assignment and we will find the best writer for your paper.

Write My Essay For Me

Introduction

Financial entities are subjected to certain accounting rules which determine how sustainable it is in meeting their long-term obligations. Accounting standards coupled with internal control standards formulated by auditing needs of organizations work in tandem to ensure that the operations of an organization are sustainable both in the short and the long terms. Financial ratios have become an integral part in the realization of the objectives outlined by accounting and auditing standards embraced by the management of the modern organizations. It therefore follows that the organization operations are highly dependent on the success that the financial barometers contribute to managerial decision making. In the determination of how operations are balanced in terms of financial obligations as contained in the balance sheet, it is important that the manner in which the assets and liabilities are handled is carefully monitored. Issues of the effective capital possessed by the entity in terms of assets and liabilities define the state of capitalization culture in the organization. The best indicators of how an entity is fairing in terms of capitalization is the sum of fixed liabilities, retained gains and stock. In this discourse, determination of the capitalization status of Kenyan Savings and Credit Cooperatives (SACCOs) is discussed based from a number of perspectives.

Background Information

SACCOs Capitalization

Capital includes the funds needed by a business entity in order to support and sustain its operations which implies that SACCO’s daily operations are supported by funds which are technically defined as capital. Gathering the capital is referred to as capitalization, which can further be analyzed in terms of its sufficiency or insufficiency. SACCOs need operating funds to ensure that they run their basic operations which mainly include meeting members’ credit applications, management and administration as well as other investment needs. Members’ deposits may not be adequate to cater for all the needs of the SACCOs, thereby creating the need for other capital raising avenues to be sought, such as borrowing in order to enable meeting every aspect of its operations. Investments of the revenues is also an element of raising some of the capital needed in the long run among other incidental needs that the entity may find necessary or inevitable in the running of its daily operations (Buehler, Mazingo and Samandari, 2009). Operations may therefore extend thereby covering venturing into investments, owning assets which may create incidental funding needs such as loans. Market capitalization defined by the valuation of the entity through the amount of share base held by members and their total market value is an important source of capital for SACCOS. Credit and equity funding portfolios provide various ways of raising capital for an entity to the levels that can be sufficiently sustainable for the business in both the short run and the long run (Investopedia, 2011b). The actual need of capital that the SACCO has is used to determine whether capitalization is exceeded (overcapitalization) or undervalued (undercapitalization).

Capitalization of various organizations varies depending on their nature and the type balance sheet items defining their financial composition. In terms of SACCO movements in Kenya, their capitalization can be determined by their capital/asset ratios as well as from their deposit ratio. In addition, their asset mix must be assessed in terms of the applicable ratios such as Loan/ Asset Ratio, Investment/ Asset Ratio as well as their Fixed Assets/ Assets Ratio. In the same determination, it is important to establish the quality of the assets under consideration. Alternatively, effective ratios in the determination of the capitalization state of the SACCOs will include the funding ratios as defined by ratios such as Deposits/ Assets Ratio, Bank loans/ Asset Ratio and Bank loan/ Deposit Ratio. Additionally, the quantification of the entity liquidity will be useful in the sense that the operating capital element also defines the capitalization aspects. To this end, determining the Net Liquid Assets/ Deposits Ratio is an important indicator of how SACCOs score regarding their capitalization (Investopedia, 2011a). It is likewise important to establish how the SACCOs rate in terms of returns obtained on the assets owned.

SACCO’s Overcapitalization and Undercapitalization

As mentioned above, financial ratios obtained from the various balance sheet items of an entity are important indicators of capitalization needs. Capital includes the funds that a business needs to cater for its operations and is indicated on the balance sheet as the difference between assets and liabilities. In case the capital available exceeds the running needs of the business, it implies that the business is overcapitalized. More money than that which is needed for sustaining the SACCO’s operations can be interpreted as a disadvantage due to the negative implications it has on interest charges as well as in terms of dividend owed. There are a number of ways to reduce the overcapitalized aspect of the accounts, which is done by simply reducing the excess funds in important business moves such as reducing debts (Investopedia, 2011a). Undercapitalization is the condition experienced by an organization for having insufficient funds to sustain the normal operations and clear debts owed. For a SACCO, this could be occasioned by the inability to collect sufficient deposits or insufficient returns from investments.

SACCOs suffering from undercapitalization are unable to service their debts and cannot meet some of their other financial obligations, which makes it difficult to remain in operations and raises risk levels for becoming insolvent. It is disadvantageous for such operation condition since raising the funding needs to the expected levels may be expensive than it ordinarily should, which presents extra burden of operations. For instance, it may force the SACCO to seek short term alternatives of raising operating capital which is generally an expensive option for funding operations. To overcome undercapitalization, SACCOs must ensure that their cash flows are not insufficient for the actual needs on a daily basis. With respect to avoiding such uncertainty, long term debt arrangements are better in terms of planning and servicing. Ensuring that the cash flow is sufficient may entail dealing is a balanced liquidity level as guided by short run and long term needs of the entity (Investopedia, 2011b).

Kenyan SACCO Capitalization and Regulations

According to Wanyama (2009), the Kenyan SACCO movement has grown tremendously in terms of government regulation and innovation to diversify its benefits into the development agenda outlined in the government policy framework. Cooperatives are controlled from an integrated approach in Kenya whereby a ministerial docket has been set aside to ensure that the benefits thereon trickle down to the actual economic development. Cooperative movement has since been liberalized in an approach to ensure that government interference does not limit the potential that they can contribute to the free economic setting in the country. Since that move, SACCOs have thrived into business entities with self mandate to control their financial engagements. One example for the realignment of the cooperatives is the coming into force of the Cooperative Societies (Amendment) Act of 2004 which gave SACCOs and other related societies the freedom to indulge in investment and control their capitalization needs. Under the liberalization regime, a mixture of fortunes has befallen the SACCO’s in Kenya mainly due to the freedom developed after government withdrawal from direct involvement in the running of the cooperative movements. The author therefore illustrates the mandate that SACCO’s have in defining the actual financial operations of the SACCOs, provided they are allowed to operate by law.

The creation of the SACCO Societies Regulatory Authority (SASRA) in Kenya led to setting out of regulation regarding some of the financial operations. Part III of the SACCO Societies Act of 2008 specifies the amount of capital that should be possessed by registered SACCOs. The SASRA regulations require that every SACCO society must have a core capital/ asset ratio of not less than 10 per cent (Kenya Gazette, 2010, p350; Juma, 2010).  Institutional capital requirement of that must be valued at not less than eight per cent of total assets is also specified by the Authority. Alternatively, the regulations require that the capital/ deposits ratio is maintained at a value not less than eight percent in order to satisfy the debt service needs of the SACCO. These regulations are in support of the main capital requirement of a Kenya Shillings (KShs.) 10 million core capital for the SACCO society (Kenya Gazette, 2010, p350). According to Juma (2010), new developments in the sector have been set to ensure that this amount is increased to Kshs. 20 million but spread out within a period of four years for full compliance. Besides the above core capital and capital ratios regulations set out by the Authority, there is a requirement that the management of the SACCO shall always handle liquidity issues with caution. This requirement provides that the SACCO must approach liquidity with special attention by ensuring that managerial dockets are set aside to deal with liquidity issues. According to the regulations in the SACCO Societies Act of 2008, it is clear that the liquidity element needs stringent monitoring which must be maintained at 15 per cent of assets must be kept liquid with regard to deposits as well as short term liabilities (Kenya Gazette, 2010, p352).

Opinion on Whether Kenyan SACCOs’ Capitalization is Overrated

In line with the explanation given above regarding undercapitalization as well as overcapitalization, there must be standardized regulations to ensure that the integrity of SACCOs in meeting their financial obligations and sustainability needs are not compromised. The role of capital ratios in ensuring sustainability is mainly aimed at protection of the entities from financial distress. Operation standards of a certain percentage valuations of capital, deposits, assets, debts or other balance sheet item facilitate the procedures of ensuring constant sustainability (Buehler, Mazingo and Samandari, 2009). The authors reckon that the impact of the recent financial crisis was mainly occasioned by the failure of major financial institutions to follow protectionary provisions given by common capital and financial ratios in their lending patterns. The recent financial crisis is a classical case of a failed financial system that incorporates risks in the manner in which credit and debt elements of the balance sheet affect the capital of the institutions. In a similar manner, SACCOs are financial institutions that must be protected from financial risks involved in the sector. Setting regulations in terms of capital ratios as well as setting liquidity mechanisms is aimed at protecting the entities from uncontrolled liquidity patterns. According to Kuria (n.d, p3), Kenya has the biggest SACCO operation base which can be attributed to something going on right in the management of the sector, particularly in the regulations. The establishment of the SASRA by the SACCO Societies Act of 2008 assisted in elimination of the loopholes likely to have been created in the liberalization of the cooperative movements in Kenya.

It can therefore be said with high confidence levels that the capitalization regulation ratios set out work by the SACCO Societies Act of 2008 perfectly fits in the cooperative success in Kenya, which includes the SACCOs operations. In case there was a serious concern for overcapitalization for the SACCOs, it would imply that the number of SACCOs suffering from poor rating of sustainability would be high. Due to such an environment, it implies that the risks levels are considerably reduced thereby raising confidence among SACCO members. The government’s input in the regulation through legislation is imperative in ensuring that the SACCO spirit guarantees sustainable development in Kenya. By making the regulation a policy has contributed to the success levels that the cooperative movement has achieved in the whole of Africa. Besides capitalization ratios facilitated by the SASRA requirements, other regulations outlined by the Authority assist in reducing operations hardships for the SACCOs. Such other regulations that assist in the stabilization of the SACCO performance include management regulations and investment dealings that the SACCOs ought to deal in.

Conclusion

In conclusion, capitalization in Kenyan SACCOs cannot be said to be a case of overcapitalization since the negative effects of overcapitalization are not a major concern in the manner in which they operate. The seriousness with which the Kenyan government takes SACCOs with has led to sufficient legislative support in the creation of the Authority handling setting standards for the entities. Among other operation guidelines that the Authority created through legislation oversees is the guidelines on dealing with capitalizations which is generally within professional financial institutions range, which brings in professionalism and protection against financial risks (Buehler, Mazingo and Samandari, 2009). The guidelines provided for in the SASRA regulations therefore facilitate professional input in dealing with over and under capitalization in Kenyan SACCOs.

The government of Kenya through the Ministry of Cooperative Development has realized the impact that the cooperative movement can make in ensuring the needed financial and economic development among the lower income population. It is through protection of the SACCOs that the government can realize such heights, which makes capitalization a regulation worth introducing in the policy implementation of SACCOs (FSD Kenya, n.d). Setting up of financial infrastructure to ensure that SACCOs and other small and middle income earners and enterprises are enabled to access financial services has been given a multi-sectoral approach that favors accounting and auditing environment among the SACCOs in Kenya.

References

Buehler, K., Mazingo, C. & Samandari, H. (2009) “Capital Ratios and Financial Distress: Lessons from the Crisis,” Retrieved from: http://www.mckinsey.com/App_Media/Reports/Financial_Services/Capital%20ratios%20and%20financial%20distress.pdf

FSD Kenya (n.d) “SACCO Fund: Round 2 of Large SACCO Restructuring Facility Outline,” Retrieved from: http://www.fsdkenya.org/pdf_documents/application_guidance.pdf

Investopedia (2011a) “Overcapitalization,” Retrieved from: http://www.investopedia.com/terms/o/overcapitalization.asp#axzz1WJFGVi1E

Investopedia (2011b) “Undercapitalization,” Retrieved from: http://www.investopedia.com/terms/u/undercapitalization.asp#axzz1WJFGVi1E

Juma, V. (2010) “New Capital Rules Put Pressure on SACCO Dividends,” Retrieved from:  http://allafrica.com/stories/201004260873.html

Kenya Gazette (2010) “The SACCO Societies Act No. 14 of 2008,” Retrieved from: http://www.sasra.go.ke/downloads/SASRA_REGULATIONS.pdf

Kuria, N. C. (n.d) “Cooperatives in Social Development,” Retrieved from: http://www.un.org/esa/socdev/social/meetings/egm11/documents/Kuria-Cooperatives%20in%20social%20development%20%20-%20The%20experience%20of%20CIC%20in%20Kenya.pdf

Wanyama, F. O. (2009) “Surviving Liberalization: the Cooperative Movement in Kenya,” Retrieved from: http://www.ilo.org/wcmsp5/groups/public/@ed_emp/@emp_ent/@coop/documents/publication/wcms_117886.pdf

Get professional assignment help cheaply

Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?

Whichever your reason may is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.

Our essay writers are graduates with diplomas, bachelor, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college diploma. When assigning your order, we match the paper subject with the area of specialization of the writer.

Why choose our academic writing service?

• Plagiarism free papers
• Timely delivery
• Any deadline
• Skilled, Experienced Native English Writers
• Subject-relevant academic writer
• Adherence to paper instructions
• Ability to tackle bulk assignments
• Reasonable prices
• 24/7 Customer Support
• Get superb grades consistently

The post Are Kenyan Saccos Overcapitalized appeared first on Grade Valley.