Tight regulations push Sacco default loans to 5-year low

Kenya’s savings and credit co-operatives (SACCOs) are tightening their grip on bad loans, pushing the sector closer to a key regulatory threshold and reinforcing its status as a central pillar of the financial system.

Fresh data for the fourth quarter of 2025 shows that non-performing loans (NPLs) in deposit-taking SACCOs dropped to 5.41 percent by December, down sharply from 7.17 per cent in September and significantly better than the 6.15 per cent recorded in December 2024.

“After months of pressure from rising living costs and subdued household incomes, the Q4 performance suggests SACCOs are regaining control over credit risk through tighter underwriting, restructuring of distressed facilities and improved member repayment discipline," the industry regulator says in the report.

The improvement brings the sector within touching distance of the below-five percent regulatory benchmark — a threshold long viewed as a test of resilience in a high-cost, slow-growth environment.

The regulator is attributing the decline to strict policies, such as risk-based supervision, a framework that directs regulatory scrutiny and support where financial risks are highest.

Under this regime, SACCOs can no longer operate with the lax underwriting and lax internal controls that characterised earlier years.

“While the approach has bolstered sector safety, it has also tightened the taps on easy credit — a key reason many members joined SACCOs in the first place. Members used to relatively quick access to loans now face more stringent credit reviews, higher documentation requirements, and slower approvals,’’ Sasra acting CEO, David Sandagi says.

Furthermore, capital adequacy enforcement has also become central to regulatory oversight. The regulator has been relentless in pushing SACCOs to bolster core capital and maintain healthy capital-to-asset ratios. This follows revelations of serious financial mismanagement, including the multi-billion-shilling losses linked to Kenya Union of Savings & Credit Co-operatives (KUSCCO).

In an effort to pre-empt financial stress, regulators have rolled out early warning monitoring systems that flag emerging risks. These tools scrutinise loan portfolios, liquidity positions, and governance metrics to trigger supervisory action before crises erupt.

Dividend payouts have been curtailed as SACCOs retain earnings to meet capital buffer requirements.

“The convergence of these regulatory pressures — risk-based supervision, tougher loan rules, capital enforcement, and early warning oversight has made the SACCO sector more resilient,’’ Sasra says.

Besides strict regulatory oversight, financial expert Wilson Mwango attributes the easing of the monetary regime in the country to easing loan defaults, not just in the SACCOs but also to the wider financial sector.

“Central Bank of Kenya has cut the base-lending rate 10 consecutive times to 8.75 per cent. This has helped to ease inflation, with savings directed to loan repayments. It has also led to easy access to credit, with borrowers taking up fresh loans at lower costs to retire old ones.”

He adds that most SACCOs have improved credit appraisal and risk management, including enhanced member vetting, stricter guarantor assessment, data -driven credit scoring and reduced unsecured lending exposure.

Some entities have integrated more banking systems, digital loan tracking, and automated arrears alerts, with eyes fixed on a lower loan default ratio of less than five per cent.

Gross loans also expanded significantly, climbing to roughly Sh948.31 billion by the end of 2025.  The rise highlights sustained demand for affordable credit among members, particularly for business financing, education, and household needs.

Unlike many commercial lenders that skew toward corporate or short-term consumer credit, SACCOs remain deeply embedded in Kenya’s productive economy.

By sector, the largest share of lending went to land and Housing, which accounted for 26 per cent (Sh35.3 billion) of total loans — reflecting members’ appetite for home ownership, land acquisition and construction.

Agriculture followed closely at 21 per cent (Sh28.5 billion), underlining the co-operative movement’s historic link to farming communities and agri-based incomes. The Education sector absorbed 19.8 per cent (Sh26.8 billion), often in the form of school fee loans and infrastructure financing for private institutions.

Tradeaccounted for 12.3 per cent (Sh16.63 billion), supporting small and medium enterprises, while Human Health took up 2.76 per cent (Sh3.7 billion) — a smaller but socially critical share tied to medical financing and health facility support.

The diversified loan book helps cushion the sector from concentrated shocks. Housing and land — though cyclical — offer collateral strength, while agriculture and trade tie SACCO performance directly to grassroots economic activity.

The improving loan quality comes against a backdrop of robust balance sheet growth.

Total assets for regulated SACCOs crossed Sh1.2 trillion by December 2025, marking nearly 12 per cent growth compared to the same period in 2024.

Member confidence remains evident in deposit mobilisation. Total deposits hit Sh831.9 billion, providing a stable and relatively low-cost funding base for lending.

Gross loans outstanding stood at Sh948.3 billion, signaling sustained credit uptake even as institutions recalibrated risk management frameworks.

On the income side, SACCOs generated Sh172.4 billion in total income for the full year, up 11.75 per cent year-on-year — a performance that highlights steady intermediation margins despite economic headwinds.

With over 14 million Kenyans saving through SACCOs, the sector’s footprint rivals — and in some respects surpasses — that of traditional banking networks in reach and inclusivity.

For salaried workers, farmers, teachers, police officers, and small traders, SACCOs are often the first point of access to formal credit and disciplined savings.

The steady decline in non-performing loans, therefore, carries broader macroeconomic meaning. It signals not just healthier books, but stronger household repayment capacity and institutional discipline.

The sector's core capital to total assets stands at 17.9 per cent - well above the minimum 10 per centrequirement while the liquidity ratio is at a healthy 74.5 per cent - far above the minimum 15 per cent.

Return on Assets improved to 4.09 per cent - the best performance in two years, while reserves grew to Sh251.8 billion - up 15 per cent from December 2024.