Kuscco’s Sh5.3 Billion Bad Loans
- A recent audit report concerning the Kenya Union of Savings and Credit Cooperatives (KUSCCO) has brought to light significant loan mismanagement.
- The PricewaterhouseCoopers (PwC) audit indicates that by December 2023, KUSCCO had accumulated a staggering Sh5.3 billion in non-performing loans (NPLs).This alarming figure represented 60 percent of the total...
- Instances of questionable loan approvals include an employee receiving a Sh2 million loan despite having only Sh17,000 in savings.Another case involved a Sh1.5 million disbursement against a mere...
KUSCCO Audit Exposes Sh5.3 Billion in Non-Performing Loans
Table of Contents
- KUSCCO Audit Exposes Sh5.3 Billion in Non-Performing Loans
- KUSCCO’s Financial Crisis: Your Questions Answered
- Understanding the KUSCCO Audit and Non-Performing Loans
- What is KUSCCO, and what is its role in Kenya?
- What triggered the KUSCCO audit?
- What are Non-Performing Loans (NPLs), and why are they a concern?
- How extensive are the Non-Performing Loans at KUSCCO?
- Which KUSCCO funds were most affected by Non-Performing Loans?
- What are the specific KUSCCO funds mentioned in the audit report?
- Irregular Loan Practices and Mismanagement
- Understanding the KUSCCO Audit and Non-Performing Loans
A recent audit report concerning the Kenya Union of Savings and Credit Cooperatives (KUSCCO) has brought to light significant loan mismanagement. The audit reveals a pattern of loans being disbursed to both Saccos and senior staff without adequate verification of their repayment capabilities.
Extent of the Non-Performing Loans
The PricewaterhouseCoopers (PwC) audit indicates that by December 2023, KUSCCO had accumulated a staggering Sh5.3 billion in non-performing loans (NPLs).This alarming figure represented 60 percent of the total Sh9 billion in outstanding loans at that time.
Instances of questionable loan approvals include an employee receiving a Sh2 million loan despite having only Sh17,000 in savings.Another case involved a Sh1.5 million disbursement against a mere Sh1,300 in savings. These revelations raise serious concerns about the due diligence processes within KUSCCO.
Unraveling the KUSCCO Fraud
reports of fraud at KUSCCO emerged last year, leading to the removal of senior managers and board members. However, the full extent of the alleged theft, estimated at Sh13 billion, is only now being uncovered. Several senior executives are already facing charges in court related to these shady financial dealings.
While some Saccos genuinely struggled with repayments due to remittance challenges, others continued to receive top-up loans even with existing non-performing advances. This practice further exacerbated the financial strain on KUSCCO.
Loan Distribution and Performance
The audit report details how KUSCCO issued loans from various funds, including the Central Finance Fund (CFF), KUSCCO Housing Fund (KHF), KUSCCO Housing Cooperative (KHC), and its front office service activity (Fosa), known as Kusasa. These loans, intended for member Saccos without banking services, resulted in NPLs reaching as high as 84 percent.
- Kusasa: Established in 2004, Kusasa stands for KUSCCO Savings Accounts.
- CFF: Initiated in 1989, the Central Finance Fund aimed to mobilize funds within cooperative savings and credit circles.
- KHF: started in 1996, the KUSCCO Housing Fund focuses on lending to individuals seeking property ownership and mortgage financing solutions.
- KHC: provides loans for house construction,plot purchases,and funding of controlled developments.
Non-Performing Loan Breakdown
At the time of the audit, the CFF held the highest NPLs, totaling Sh3.3 billion, which was 84 percent of its Sh3.9 billion loan balance. This amount was distributed among 306 Saccos.
| Fund | Loans Awarded | Loan Balance (KES) | Non-performing Loans (KES) |
|---|---|---|---|
| CFF | To 306 saccos | 3.9 Billion | 3.3 Billion (84%) |
| KHF | to 1,962 members | 3.9 Billion | 1.9 Billion |
| KHC | To 313 members | N/A | 44 Million |
| Kusasa | To 967 members | 160.1 Million | 67.4 Million |
The KHF issued loans to 1,962 members and had a loan balance of Sh3.9 billion as of December 2023, with Sh1.9 billion classified as non-performing. In contrast, the KHC, which awarded loans to 313 members, had the lowest NPLs at Sh44 million. Kusasa, with loans to 967 members, had a loan balance of Sh160.1 million, of which Sh67.4 million was non-performing.
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Irregular Loan Practices
The audit team highlighted that while these figures require further validation, several significant issues were apparent. Some loans were recorded as cleared without evidence of repayments or savings.Large facilities issued to staff and KUSCCO-related parties were particularly concerning.
For example, one Sacco with an outstanding balance of Sh377.5 million received an instant loan of Sh100 million just four months after making a single installment on a previous Sh83 million loan. The initial loan was disbursed on December 22, 2017, followed by the Sh100 million on May 25, 2018.
As of December 31, 2023, the two loans were non-performing with outstanding balances double the disbursed amounts amounting to Sh170.8 million and Sh206.6 million.
Another instance involved a sacco receiving a Sh3.5 million education loan and, after only four installments, receiving an additional Sh5 million under the CFF’s instant premium loan product. These loans, issued on December 20, 2017, and December 6, 2018, respectively, were also non-performing as of December 31, 2023.
It is to be noted that no repayments have been made towards the second loan. We understand the Sacco has not been paying due to liquidity constraints, however, we did not see any evidence of CFF making any efforts to recover the loan.
implication of Staff Members
A former branch manager was also implicated in the unpaid loans. Kusasa issued the manager two loans in 2016 and 2022, amounting to Sh1.3 million and Sh2 million, respectively. However, there was no evidence of payments on the first loan when the second was issued.
The manager had only Sh17,000 in savings, far short of the Sh400,000 required as security for the Sh2 million loan, and no property was provided as alternative security. By December 2023, these loans were non-performing, totaling Sh1.3 million and Sh2.3 million, respectively.
However, we noted that Lawrence Mawira, former Kusasa loan officer, indicated that 20 per cent of savings were raised towards the Sh1.3 million, which goes against what we have observed.
A former KUSCCO finance manager received a Sh1.5 million loan in 2023 despite having three previous non-performing facilities.Auditors found no evidence of collateral for this loan.
We did not see evidence of any collateral provided against the sh1.5 million loan disbursed on July 10, 2023.
Along with these facilities, the manager received more loans totaling over Sh10 million.
The Role of Senior Management
According to the report,members with loans in KHF should not have been awarded additional loans in KHC. However, exceptions were made.
…according to Mr Odera (Julius Odera, then KHF manager now KHC chief executive), Mr Ototo (George Ototo, former KUSCCO group managing director) exempted some employees based on the trust that they woudl pay their loans.
Ototo is also implicated in approving an Sh11.5 million loan to Malachi Mwango between july 20, 2015, and January 6, 2017, which was non-performing as of August 7, 2024. Odera stated that Ototo instructed him to approve the loan despite non-payment, with a note from Ototo dated June 3, 2016, supporting this claim.
Questionable Transactions
The audit also raised questions about payments of Sh5.4 million to the loan account of Redempter Akinyi, a KHF marketer, deposited by Billy Onyango, a cash buyer of four houses at the KUSCCO homes Project. Akinyi had two KHF loans for plot finance and construction, totaling Sh1.4 million and Sh5 million, respectively.
Auditors were puzzled by how money intended for purchasing houses at the Sh1.5 billion KUSCCO homes Project ended up in Akinyi’s loan account.
We requested for the supporting documentation that went to reducing Ms Akinyi’s loan by Sh5.4 million but none could be traced.
Ms Akinyi did not also provide us with any evidence of the money in question having been deposited with KUSCCO, which could point to the entries being fraudulent.
The report further notes that Akinyi was the relationship manager for the properties purchased by Onyango.
Ototo’s Loans and Lack of collateral
Ototo allegedly pressured financial managers to issue loans without verifying the ability to repay. He received Sh10 million on June 30,2022,and Sh2.6 million on November 24, 2023, from Kusasa.
For both loans he provided savings security that were less than 20 per cent of the loan savings required for the loans; that is, Sh100,000 and Sh400,000 rather of Sh2 million and Sh520,000.
No collateral was pledged for either loan,and the Kusasa branch manager was unaware of the approvals. As of December 31, 2023, both loans were non-performing, with balances of Sh10.9 million and Sh3.2 million, respectively.
When Ototo received the last tranches of his KHF loan of Sh31.5 million and KHC facility of Sh51 million, his savings were substantially less than required, with Sh203,000 and Sh222,000 in savings instead of the necessary Sh5.6 million and Sh10.4 million.
As of December 31, 2023, the KHC loan was performing, while the KHF loan was non-performing.
lack of Write-Off Policy
The audit revealed that KUSCCO and its subsidiaries lacked a write-off policy for non-performing loans during the period under review (2018 to 2023). Additionally, there was no provision for loan loss in their financial statements, except in 2022 when KHF made a provision of Sh28.8 million.
KUSCCO’s Financial Crisis: Your Questions Answered
A recent audit has revealed critically important financial mismanagement at the Kenya Union of Savings and Credit cooperatives (KUSCCO). This Q&A article breaks down the key findings of the audit, the implications of the non-performing loans, and what it means for KUSCCO members and the broader cooperative sector.
Understanding the KUSCCO Audit and Non-Performing Loans
What is KUSCCO, and what is its role in Kenya?
The Kenya Union of Savings and Credit Cooperatives (KUSCCO) is the umbrella body for Savings and Credit Cooperative Societies (SACCOs) in Kenya. Its primary role is to champion, represent, and serve the interests of SACCOs, providing them with financial and technical support to enhance their operations and expand their reach. KUSCCO also plays a crucial role in advocating for a favorable policy and regulatory habitat for the cooperative movement in Kenya.
What triggered the KUSCCO audit?
Reports of significant fraud,estimated at Sh13 billion,surfaced last year,prompting the removal of senior managers and board members. The audit was commissioned to uncover the full extent of the alleged theft and financial mismanagement.
What are Non-Performing Loans (NPLs), and why are they a concern?
Non-Performing Loans (NPLs) are loans where the borrower has not made scheduled payments for a specified period, making it unlikely that the principal amount will be repaid.They are a significant concern because:
Reduced Profitability: NPLs reduce a financial institution’s profitability as they generate no income but still require capital reserves.
Liquidity Issues: High levels of NPLs can strain an institution’s liquidity, making it difficult to meet its obligations.
Capital Erosion: Significant NPLs can erode a financial institution’s capital base, threatening its solvency.
Economic Impact: High NPLs can reduce the availability of credit in the economy, hindering economic growth.
How extensive are the Non-Performing Loans at KUSCCO?
As of December 2023,KUSCCO had accumulated Sh5.3 billion in non-Performing Loans (NPLs). This alarming figure represents 60% of the total Sh9 billion in outstanding loans.
Which KUSCCO funds were most affected by Non-Performing Loans?
The Central Finance Fund (CFF) was the most affected, with NPLs totaling Sh3.3 billion, which was 84% of its Sh3.9 billion loan balance.
What are the specific KUSCCO funds mentioned in the audit report?
Central Finance Fund (CFF): Initiated in 1989, the CFF aimed to mobilize funds within cooperative savings and credit circles.
KUSCCO Housing Fund (KHF): Started in 1996, the KHF focuses on lending to individuals seeking property ownership and mortgage financing solutions.
KUSCCO Housing Cooperative (KHC): Provides loans for house construction, plot purchases, and funding of controlled developments.
Kusasa: Established in 2004, Kusasa stands for KUSCCO Savings Accounts and serves as its front office service activity (FOSA).
Irregular Loan Practices and Mismanagement
What kind of irregular loan practices were uncovered in the audit?
The audit revealed several concerning practices:
Loans Approved Without collateral: Several instances of loans being approved without adequate collateral or verification of repayment ability. Former KUSCCO MD George Ototo is alleged to have approved some loans based on “trust” rather than collateral.
Loans to Staff Members with Little Savings: An employee received a Sh2 million loan despite having only Sh17,000 in savings. Another received a Sh1.5 million loan against a mere Sh1,300 in savings.
* Top-Up loans to Struggling saccos: Some SACCOs continued to receive