Commentaries | Mar 23,2019
Feb 17 , 2024
By MUNIR SHEMSU ( FORTUNE STAFF WRITER )
Non-interest-bearing financial products can now be part of the credit portfolio provided by savings and credit cooperatives (SaCCos) as the Ethiopian Cooperative Commission introduces a groundbreaking directive. Signed by Commissioner Getachew Meles (PhD) and ratified last month, it establishes a standard for financial services delivery of 23,000 cooperatives in deposit mobilisation and credit provision.
The regulatory changes are part of a broader reform initiative led by the Commission. They cover various aspects, including the issuance of microinsurance products, in-kind collection of savings, the ratio of internal assets to distributed loans, and restrictions on allocating mobilised deposits to non-income-generating activities or long-term investments.
Birhanu Dufera, head of Financial Cooperatives at the Commission, recalled the lack of clearly defined regulatory protocols for savings and credit cooperatives' financial operations since the ratified proclamation seven years ago. He said it was hindering improvements in financial access.
"Our goal is to create a national financial operation guideline," he told Fortune.
While the Commission aims to establish a national legal guideline, it does not plan to dictate how cooperatives manage their money, according to Birhanu. He stressed that their role would be restricted to setting up a workable legal guideline, as most of the cooperatives have been experimenting with financial services according to their establishment bylaws.
"Many have attempted to start interest-free services," he said.
The directive allows savings and credit cooperatives to offer Sharia-compliant, non-interest-bearing financial services. The funds are separately collected through Wadia yed Aman while services may be availed through Murabaha (sales contract), Musharaka (joint partnership) and Ijarah (leasing services and goods).
Savings and credit cooperatives, with over eight million members, issued loans exceeding 15 billion Br last year and managed total deposits of slightly over 50 billion Br. Despite their significant numbers, they lag behind microfinance institutions (MFIs) which are only 43 in number but have total assets approaching 60 billion Br.
In the Amhara Regional State, there are 2,982 primary saving cooperatives, 97 unions and one federation, with more than one million members who borrowed around three billion Birr last year.
Shitahun Yersaw, a financial cooperatives development directorate representative, points out that savings and credit cooperatives have historically been given a self-regulatory status to enable them to have autonomy and address imminent concerns within their communities.
"We have prepared template bylaws," he told Fortune.
The directive establishes an 80pc cap on loanable savings with total assets and recommends the creation of a loan committee. It outlines guidelines for loan agreements, collateral types and payback periods. While interest rates and loan amounts are not set, officials aim to maintain a healthy liquidity level, ensuring the long-term operation and expansion of financial products for savings and credit cooperatives.
One Cooperative with plans to enter into the interest-free credit provision landscape but has been restricted by a lack of funds is Ethio Saving & Credit Cooperative Society, formed with 76 members.
The Cooperative, which has a cap on loans of 800,000 Br, has managed to provide around six million Birr in credit to its members, mostly public sector employees who require financial assistance for unplanned purchases. Yoseph Ashenafi, the head secretariat of the Association, revealed that the demand for loans is far from being met even in a recently formed cooperative like Ethio, which has seen the number of beneficiaries grow to around 500 in a short while.
"We're continuously adjusting," he said.
The regulatory landscape of saving and credit cooperatives in Ethiopia has been largely conflated with the general guidelines and requirements in place for other Cooperatives, contributing to the suboptimal performance of the sector to its reach.
The evolution of cooperatives in Ethiopia reflects historical, political, and socio-economic changes. It has a historical backdrop, with traditional associations like Equb and Idir (rotating savings and credit association) being integral to the communities. However, the formal initiation occurred with Emperor Haile Selassie's Farm Workers’ Cooperatives Decree in 1960. It marked the first step in establishing cooperatives within a structured framework.
During the subsequent Socialist regime, cooperatives gained aggressive endorsement. The previous regime had limited access to land ownership, but the new approach increased the types and numbers of cooperatives, introducing mandatory membership and production quotas. With the rise of the EPRDF regime, there was a shift toward universally accepted cooperative principles. This transition led to the establishment of the Federal Cooperative Commission (FCC), which has now evolved into the Ethiopian Cooperative Commission (ECC).
Ethiopian Cooperative Commission plans to introduce digital information management systems to help integrate into the financial arena by partnering with the National Bank of Ethiopia (NBE). However, difficulties related to the semi-formal nature and limited market share persist.
A study authored by Muluneh Bayabil two years ago stressed the insufficiency of the general provision on cooperatives to address the unique nature of saving and credit cooperatives while simultaneously pointing out that they should not be placed under the supervision of banking laws.
Dawit Alem, a consultant with five years of experience working with community-based financial service providers, highlights the regulatory challenges stemming from the semi-formal nature of savings and credit cooperatives.
"They are also too small for the central bank to regulate," he told Fortune.
The limited credit market share, currently around two percent, underscores the need for a more robust regulatory structure.
Dawit recommends significant financial and human capital capacity-building programs. He believes it would empower them to undertake interest-free operations from the outset and throughout their operational lifespan, enabling them to handle losses and procurements more effectively.
"Such programs are difficult not only for saving & credit cooperatives but also for microfinance institutions," he said.
PUBLISHED ON
Feb 17,2024 [ VOL
24 , NO
1242]
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