State Bans SACCOs from Borrowing to Pay Dividends

Nairobi, Kenya 

The Kenyan government has issued a directive barring Savings and Credit Cooperative Societies (SACCOs) from taking on debt specifically to finance dividend or interest payments to members, as part of a broader push to stabilize the sector’s finances and guard against imprudent practices.

What the Government Says

• A directive from the Ministry of Cooperatives / Co-operatives & MSME Development instructs that dividends and interest payments must come from surpluses or retained earnings, not by borrowing. 

• SACCOs are required to clear loan arrears, pending liabilities or pressing obligations before paying out returns to members. 

• The move is part of a broader tightening of prudential rules, including bans on non-core investments by SACCOs. 

• In a related announcement, the Commissioner for Cooperatives and SASRA was directed to enforce these rules, ensuring that no SACCO pays dividends unless they meet minimum financial and regulatory thresholds. 

Why the Shift?

• Risk mitigation: Borrowing to pay dividends can erode capital and liquidity, leaving SACCOs vulnerable to shocks.

• Sector governance: Several SACCOs have struggled with mismanagement and risky investments outside their core mandate. 

• Protecting members: By insisting returns only come from real profits, the government aims to prevent unsustainable payouts that might impair the institution’s long-term viability. 

Legal & Regulatory Context

• The Sacco Societies Act, 2008 gives SACCOs first charge over deposits and share capital when disbursing dividends or interest. 

• The Deposit-Taking SACCO Regulations (Legal Notice 95 of 2010) set out minimum prudential norms, capital adequacy, and prohibitions on non-core business activities for deposit-taking SACCOs. 

• Under the new rules, non-deposit taking SACCOs are under pressure to adhere to stricter capital, liquidity, and governance requirements—leading to retention of earnings rather than paying out dividends. 

Reactions & Challenges

• SACCO members and leadership have expressed concern that dividend cuts or delays may dampen member morale and trust.

• Some SACCOs argue that such strict rules may reduce flexibility, especially for smaller ones that depend on predictable returns to attract or retain members.

• Enforcement capacity, monitoring, and clarity on thresholds (e.g., when a SACCO is “safe” enough to pay dividends) remain potential hurdles.

• There is risk of unintended consequences: for example, reduced membership inflows or cash strain in SACCOs heavily reliant on returns to attract savers.

What is Still Unclear

1. Which SACCOs are affected (deposit-taking, non-deposit taking, or both)?

2. Thresholds and criteria under which a SACCO may be allowed to pay dividends.

3. Implementation timeline and grace periods for compliance.

4. Sanctions for noncompliance.

5. How this fits into broader sector reform (other rules tightened, capital injections, liquidity support).