THE KUSCCO TEST: WHAT THE SACCO AMENDMENT BILL FIXES-AND WHAT IT STILL MUST ANSWER.
The Kenya Union of Savings and Credit Co-operative (hereinafter KUSCCO) experience exposed a weakness in Kenya’s SACCO regulatory architecture: an institution could operate at the center of the SACCO financial system, mobilize funds from SACCOs and undertake lending and investment activities, while remaining within a regulatory framework that was not designed for the scale and nature of that financial intermediation.
The Sacco Societies (Amendment) Bill, 2025 attempts to close that gap. But the more important question for the sector is whether closing the regulatory perimeter is enough.
What Went Wrong with KUSCCO?
KUSCCO was registered under the Co-operative Societies Act as an apex organization for SACCOs. Through its Central Finance Facility, it received funds from SACCOs and deployed them through lending and investment activities.
The difficulty was that KUSCCO was undertaking significant financial intermediation without being subject to the prudential framework applicable to deposit-taking SACCOs—a gap the Central Bank of Kenya characterized as ‘regulatory arbitrage.’
The consequences were systemic. By December 2023, KUSCCO reported assets of KSh12.5 billion against liabilities of KSh17.7 billion. Subsequent investigations identified material asset deficiencies, overstated income, loans to dormant SACCOs and loss of member funds, with the resulting exposure extending across the SACCO sector.
But KUSCCO exposed a second, deeper problem: regulation of an institution does not necessarily mean effective control of what happens within it. The CBK identified weak governance, inaccurate reporting, ineffective supervision and weaknesses in internal audit as factors that allowed serious irregularities including asset overstatements, diversion of funds, forged signatures and irregular withdrawals to go undetected. That is the more important lesson for the next generation of secondary SACCOs.
How the Sacco Societies (Amendment) Bill, 2025 Attempts to Cure the Problem
The Sacco Societies (Amendment) Bill, 2025 introduces the concept of a secondary co-operative society. Thirty or more licensed or authorized SACCOs may establish such an institution to undertake central liquidity and shared-services functions.
Crucially, a secondary co-operative undertaking this business will require a SASRA licence and will be subject to prescribed capital and liquidity requirements. SASRA is also given supervisory powers over its operations, governance, directors and senior officers, external auditors and prudential compliance. This is a significant correction to the gap exposed by KUSCCO failures
The prudential treatment of an institution should not turn on whether it is labelled an apex body, union or co-operative society. Where an institution performs significant financial intermediation for SACCOs, regulation must follow the function.
The model also does not necessarily recreate a single KUSCCO-type center. Since a secondary co-operative may be formed by 30 or more SACCOs, multiple institutions could emerge, potentially distributing liquidity and shared-service functions rather than concentrating them in one institution.
That, however, creates a different supervisory challenge: SASRA will need to supervise not only individual secondary SACCOs, but the interconnected network they create.
The Hole: KUSCCO Was Not Only a Regulatory-Perimeter Failure
This is where the Bill needs a harder stress test.
Moving secondary co-operatives into SASRA’s prudential perimeter addresses who regulates them. It does not necessarily answer how manipulation within the institution will be detected before substantial losses occur.
A secondary SACCO will potentially hold significant liquidity belonging to member SACCOs, lend to those SACCOs and operate shared payment and settlement infrastructure. That makes internal controls as important as capital and liquidity ratios.
The Bill provides for daily reporting to SASRA and extensive supervisory powers. But reporting is not verification.
If the underlying information is manipulated, a regulator can receive a daily report and still receive a daily false picture of the institution.
The regulations therefore need to go further on matters such as:
- independence and reporting lines of internal audit;
- audit and risk committee responsibilities;
- segregation of financial and operational functions;
- related-party and connected-party transactions;
- direct escalation of material control failures to SASRA;
- mandatory reporting of suspected fraud;
- protection for whistle-blowers;
- forensic intervention where reported information materially conflicts with underlying records;
- personal accountability for directors and senior officers who knowingly permit false reporting.
The KUSCCO experience demonstrates why these are not merely corporate-governance niceties. They are financial stability safeguards.
The Second Question: What Happens When the Institution Fails?
The Bill provides for prudential supervision and introduces a deposit protection framework. But protection is not the same thing as recovery.
If a secondary SACCO fails, who traces diverted assets? Who preserves them? Who brings recovery proceedings? How are assets transferred or realized? What happens to related-party transactions? Who bears losses beyond the protected amount? How quickly can the institution’s payment and liquidity functions be transferred to another entity?
These questions matter because criminal sanctions after a collapse do not necessarily restore lost funds.
The Bill proposes penalties of up to KSh3 million, imprisonment for up to five years, or both. Whether that is sufficiently deterrent for institutions capable of holding billions of shillings deserves serious consideration.
The regulatory framework should distinguish between punishment, compensation and recovery. They are three different functions.
The Way Forward
The Bill is directionally important because it closes a regulatory gap that KUSCCO exposed. But the next stage should focus less on creating the regulatory category and more on making the category difficult to abuse.
The regulations should therefore establish clear architecture for:
- Independent verification.
SASRA should not rely exclusively on information generated by the institution it supervises. - Strong internal controls.
Internal audit, risk, compliance and financial functions must have genuine independence and clear escalation channels. - Network supervision.
The failure of one secondary SACCO should not become the next source of contagion across member SACCOs. - Early intervention and resolution.
The law should make clear what happens when capital, liquidity, governance or integrity deteriorates before the institution becomes insolvent. - Recovery.
There should be an integrated mechanism for tracing, preserving and recovering misappropriated assets alongside regulatory sanctions and deposit protection.
The central lesson from KUSCCO is therefore not simply that an apex financial institution needs a license is that the regulatory perimeter, the information flowing across that perimeter, and the mechanisms for intervention and recovery must all work together. The bill makes an important first correction. The real test will be whether the regulations ensure that the next secondary SACCO cannot appear healthy on paper while the money is disappearing underneath the numbers.
BY WANJIRU PATRICIA KAHURA
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