A decline in profits is an important warning sign for any SACCO. It can affect the institution’s ability to strengthen reserves, invest in technology, reward members and expand its services.
However, falling profits do not necessarily mean that a SACCO is in financial trouble. The decline may be caused by several factors, including rising operating costs, weaker loan growth, increasing loan defaults, lower investment income or poor pricing of financial products.
The most important step for management is to identify what is driving the decline before taking corrective action.
Start by identifying why profits are falling
Management should begin with a detailed review of the SACCO’s financial performance.
Comparing the latest financial statements with previous years can help identify where the problem started. Management should examine interest income, non-interest income, operating expenses, loan-loss provisions, investment returns and other major income and expenditure lines.
The goal should be to establish whether profits are falling because income has declined, expenses have increased or both have happened at the same time.
For example, a SACCO may report strong membership growth but declining profits because members are not borrowing enough. Another may have a growing loan book but rising defaults that are increasing provisions and reducing actual income.
Without this diagnosis, management risks implementing measures that do not address the underlying problem.
Review the loan portfolio
For most SACCOs, lending is a major source of income. Management should therefore examine the performance of the loan portfolio whenever profits begin to decline.
The review should look at loan growth, repayment rates, non-performing loans, loan concentration and the performance of different loan products.
Management should identify whether particular sectors, employers, member groups or loan products are generating higher levels of arrears.
A growing loan book is not necessarily good news if a significant portion of the loans are not being repaid.
The SACCO should strengthen credit appraisal while ensuring that members who qualify for loans can access them efficiently.
Take loan arrears seriously
Rising arrears can quickly put pressure on SACCO profits.
When members fail to repay loans on time, the SACCO may lose expected interest income while also incurring additional costs to recover the money.
Management should establish why arrears are increasing.
Some members may be facing genuine financial difficulties, while others may have taken loans beyond their repayment capacity. Poor follow-up, weak credit assessment or inadequate guarantor arrangements can also contribute to repayment problems.
The SACCO should strengthen early-warning systems so that potential defaults are identified before accounts become seriously delinquent.
Members experiencing genuine financial difficulties can also be engaged early to explore appropriate solutions within the SACCO’s policies and applicable regulations.
Review the cost of operations
A SACCO can experience falling profits even when revenue remains relatively stable if operating expenses are rising too quickly.
Management should examine salaries, branch costs, rent, utilities, technology expenses, marketing, consultancy fees, transport and other administrative costs.
This does not mean that every expense should be cut.
Reducing staff or cutting essential technology investment may create bigger problems in the long term.
Instead, management should determine which expenses contribute to member service and income generation and which can be reduced, renegotiated or eliminated.
Supplier contracts should also be reviewed regularly to determine whether the SACCO is receiving value for money.
Stop unnecessary expenditure
Management should distinguish between spending that supports growth and spending that simply increases the cost base.
For example, investing in a reliable digital platform may reduce branch costs and improve member access over time. Unnecessary administrative expenses may provide little or no corresponding benefit.
The board and management should establish clear expenditure controls and ensure that major purchases are properly justified.
A SACCO should also regularly review recurring expenses because small costs can become significant when they continue for years without scrutiny.
Examine loan pricing
A SACCO should regularly review whether the pricing of its loans remains appropriate.
Interest rates and other charges should reflect the institution’s cost of funds, operational expenses, credit risk and competitive environment while complying with applicable requirements.
If loan pricing is too low, the SACCO may struggle to generate sufficient income from lending.
However, simply increasing loan charges can also hurt members and reduce demand for credit.
Management should therefore analyse the profitability of individual loan products before making changes.
A product that appears popular may not necessarily be profitable if it has high processing costs, high default rates or other associated expenses.
Diversify income sources
Overdependence on one source of income can expose a SACCO to financial pressure.
Management can examine opportunities to develop sustainable non-interest income through services that members genuinely need.
These may include transaction services, digital financial services, insurance-related products where permitted, investment activities and other member-focused services.
Diversification should be approached carefully.
The objective should not be to introduce numerous charges simply to increase revenue. Excessive fees can frustrate members and encourage them to move their transactions elsewhere.
The focus should be on providing useful services at sustainable prices.
Make better use of technology
Technology can help a SACCO reduce costs and improve efficiency.
Digital services can reduce pressure on branches by allowing members to perform routine transactions remotely.
Automation can also reduce manual work, improve record keeping and minimise errors.
Management should examine whether existing technology is delivering measurable value.
A SACCO may already have expensive systems that members rarely use because they are difficult to navigate or poorly supported.
Before investing in another platform, management should establish whether existing systems can be improved or better integrated.
Reduce dormant accounts
Dormant members represent another area that management should examine.
A member who joined the SACCO but rarely saves, borrows or uses other services may provide limited revenue while still requiring account administration.
Management should understand why members become inactive.
Some may have changed jobs, moved to another location or simply stopped using the SACCO because they are dissatisfied with its services.
Others may not understand the products available to them.
Targeted member engagement can help reactivate inactive members. However, communication should focus on understanding their needs rather than simply encouraging them to transact.
Strengthen member retention
Acquiring new members can be more costly than retaining existing ones.
Management should therefore monitor whether members are withdrawing savings, reducing their borrowing or moving transactions to competing financial institutions.
A decline in member activity can eventually affect revenue.
The SACCO should pay attention to customer service, product competitiveness, digital access, complaint resolution and communication.
Members who trust the institution and find its services convenient are more likely to remain active.
Review investments
SACCOs should also examine the performance of their investments.
Management needs to understand how much income each investment generates relative to the risks and costs involved.
Underperforming investments should be reviewed within the SACCO’s investment policy and applicable regulatory requirements.
The objective should be to ensure that members’ funds are managed prudently while generating sustainable returns.
Investment decisions should not be driven simply by the desire to increase short-term income.
Strengthen fraud controls
Fraud and financial leakages can significantly affect SACCO profitability.
Management should regularly review internal controls, approval procedures, procurement systems, cash handling, access to financial systems and reconciliation processes.
Unusual transactions should be investigated promptly.
Internal audit functions should also operate effectively and report material weaknesses to the appropriate governance structures.
Preventing financial losses can be just as important as increasing revenue.
Improve staff productivity
Staff costs are often one of the largest operating expenses for a financial institution.
Management should therefore assess whether employees are deployed effectively.
This does not necessarily mean reducing the workforce.
Instead, management should examine workloads, duplication of roles, productivity, training needs and the use of technology.
Employees should have clear responsibilities and measurable performance expectations.
Staff should also be trained to understand the SACCO’s products so they can help members effectively and identify legitimate opportunities to grow the institution’s business.
Strengthen financial planning
A SACCO should not wait until profits have fallen sharply before reviewing its financial strategy.
Management should establish realistic budgets and regularly compare actual performance against projections.
Key indicators should be monitored throughout the year rather than only at the end of the financial period.
If revenue begins falling or expenses rise unexpectedly, corrective action can then be taken early.
The board should receive timely and accurate financial information to enable it to provide effective oversight.
Do not sacrifice member value for short-term profits
One of the biggest mistakes management can make is trying to restore profits by simply increasing charges or reducing services.
A SACCO exists to serve its members, and decisions that generate short-term revenue but damage member trust can create bigger problems later.
Management should therefore consider the long-term impact of every major financial decision.
A profitable SACCO should be financially sustainable while continuing to provide useful, affordable and reliable services to members.
Give the board a clear recovery plan
Once management understands why profits are falling, it should develop a measurable recovery plan.
The plan should identify the main problems, actions required, responsible departments, deadlines and expected financial outcomes.
For example, if loan arrears are the biggest problem, management can establish specific targets for reducing delinquency and improving collections.
If operating costs are rising, the SACCO can set targets for reducing avoidable expenditure without weakening essential services.
Progress should then be reported regularly to the board.
Falling profits require action, not panic
A decline in SACCO profits should prompt careful investigation rather than panic.
Management needs to understand whether the problem is coming from weak lending, rising defaults, increasing expenses, underperforming investments, declining member activity or a combination of several factors.
Once the causes are established, the SACCO can take targeted measures to improve revenue, control costs, strengthen loan recovery, improve efficiency and retain members.
The objective should not simply be to produce a higher profit figure in the next financial year. The stronger goal is to build a financially sustainable SACCO that can protect members’ savings, manage risks responsibly, invest in better services and continue creating value for its members over the long term.
Author: Andrew Walyaula
Andrew Walyaula is a seasoned multimedia journalist. Email: [email protected]
