Yesterday morning the Central Bank was celebrating the over-subscription to the Rwf 15 billion, three-year government Treasury bond that it issued. On a closer look however I found it worrying that eight bids out of 23 were subscribed by Umerenge SACCO at 12%. Before I proceed, let me give a recap of what Umurenge-SACCO are, their mission and the identity of their clients.
SACCO’s money comes from the deposits of the poorest of the poor, whom mainly receive subsidies in Ubudehe: a government’s poverty graduation scheme, aimed at people in Category one, two and three of poverty.
Umurenge SACCO is a MICRO finance institution, based at Umurenge – the Cell level that lends to small traders; it’s members. It was created to circumvent prudential – prohibitive requirements that commercial banks demand before issuing loans, which have systemically excluded a big number of the people, namely the poor.
These include collateral, solid employment contracts and viable business plans, none of which can be produced by people in categories one, two, and even three; the uneducated, unskilled or landless, that make the adult Rwandan population covered by SACCO. As of now, UMURENGE SACCO represent 75% of the accounts of MFIs in Rwanda.
According to the SACCO Strategy, ‘The reach of SACCOs is local, reach members and areas (i.e. rural) that are unattractive to banks. They can provide access to members of the population who would not normally save in the formal sector, nor be able to physically access a traditional financial institution, especially commercial, due to locality and deposit restrictions.’ – (Sorry, I couldn’t give the page number and the year, the document doesn’t have them.)
Squeezing the poor
By buying bonds with government subsidized money, SACCOs are squeezing the poor one more time and feeding the rich. When the old lady comes to ask for a quick loan to trade bananas, she will be told that there is insufficient liquidity, because it was all sent to Kigali, where it will sit for the next three long years.
The thinking of SACCO I presume, is that when the Bond matures SACCOs will earn 12% from government on their investment, and expand their lending equity. This makes financial sense from a macro-economic standpoint, yet I find it highly problematic for Micro-Finance. There is nothing new in buying bonds, commercial banks do that all the time, yet we decided to create SACCO not to compete with Commercial Banks but to reach to unattractive, the unbankable, the poor, those likely to be left out by the gains of progress.
SACCO’s role wasn’t to grow and make money, they are called ‘Micro-finance’ not ‘Macro-Finance’ for a reason; their role then is to reduce poverty, to remain small and closer to the people at the grassroots.
Thirdly, by buying Central Banks bonds, SACCOs are taking money that government took from Kigali city to the rural area, for rural development, job creation and poverty alleviation, bringing it back to Kigali.
Another financially sound argument is that bonds are ‘safe’ loans, unlike the money lent to the old lady, who’s husband may drink all of it and she ends up not paying… However, since when has safety been the main priority of lowest level micro-micro finance institutions? They are ‘safe’ alright, except they are lent to the wrong client. The unsafe guy is whom SACCO was created for.
Also, SACCOs are financially stable: The 2015 BNR annual report indicate that ‘the number of outstanding loans declined by 1.5% from 169.6 thousand in June 2014 to 167.0 thousand as of June 2015’. SACCO’s Solvency Ratio – A key metric used to measure their ability to remain sustainable and meet their goals and other obligations: Solvency ratio = (After Tax Net Profit + Depreciation) / Total liabilities; While they vary from sector to sector, as a general rule of thumb, a solvency ratio higher than 20% is considered to be financially sound: SACCO’s averages 31 %.
The question arising then is, are there no smarter, poor-friendly ways of stabilizing – already stable – SACCOs without creating ‘Ponzi Schemes’? I call them Ponzi, because while their board of directors may have approved to buy the TBs, I am unsure as to whether the thought of taking old lady’s money to give it to suit-and-tie wearing Kigali geniuses would sit well with the shareholder – the old lady – if she was to get wind of it.
SACCOs lend at 25% interest rates to its clients. That is extremely high, but all Micro-Finances do it, and it is the main reason poor people struggle to make any profit. Now they have given a loan to the Government at 12%. Instead of giving 12% and three year repayment loan facilities to poor citizens – their members, they give it to the rich; This too wouldn’t thrill the old lady, squeezed at 25% daily; because that’s exactly the conditions she has been waiting for to shoot out of poverty. But they remain a pipe dream for her…
In any event, since when do SACCO have a Macro policy, they were supposed to remain micro, grow at the same pace as their members, at the same level as poverty is reducing. Sadly they are, like many before them: COOJAD for youth, Duterimbere for women, Urwego opportunity – now Bank, all betraying their mission and the poor people – their members, to become more profitable, bigger: an oppressors among other oppressors…
In their defense though, by buying bonds in the Central Banks, SACCO’s boad members’ behavior is very normal for Kigalians; You see, many in Kigali take a bank loan to have a big wedding at the Serena Hotel, investing in marriage, which is a safe deal between two people, but brings little or no quick returns… well, at least for most of us 😀