The regulations covering 220 deposit taking Saccos, also known as FOSAs, with an estimated membership of five million and assets worth Sh150 billion, demands that societies converting from the non-deposit taking to the deposit-taking platform invest in new banking halls and install sophisticated security equipment, including armed security personnel from the Administration Police and private security guards.

The new rules contained in the Sacco Societies Act to be enforced by the Sacco Societies Regulatory Authority (SASRA) will take effect before the end of the month when the Attorney-General publishes them in the Kenya Gazette.

Saccos have a four-year grace period to fully comply.

To ensure Saccos stay within their core business, investments in non-interest earning assets is restricted to 10 per cent of total assets while investments in land and buildings are capped at five per cent, the same ceiling placed for loans to directors and staff.

The rules also demand that investments acquired for expansion be disposed of after two years if they have not been put to any use except with approval from SASRA, which has been granted on-site inspection mandate similar to that exercised by the Central Bank’s supervision department.

Under the new legal regime, Saccos will have to file monthly reports with the authority, indicating their adherence to prudent guidelines.

The regulations have strict corporate benchmarks that include the authority’s administrative sanctions such as prohibition of dividends, expansion, lending, investments or acquisition of property among others when inspections reveal financial mismanagement.

Every Sacco is expected to develop a code of conduct whose violation will result in a fine not exceeding Sh100,000 or imprisonment not exceeding one year or both.

An just like in the banking sector Saccos will not be allowed to charge interest on a delinquent loan exceeding the Principal owed when the loan became delinquent.

Sacco managers said the ending Sacco’s low interest rate lending will deny them the competitive edge in the marketplace, making them vulnerable to competition from commercial banks’ recent foray into the low end of the market – a move that is set to accelerate with the advent of agency banking.

The development could trigger a wave of innovation in savings and lending products as both Saccos and commercial banks attack the same market, but with Saccos seeking to maintain their traditional comparative low interest rate edge.

Low operating costs have for years enabled Saccos to offer low interest rate loans, a factor that has been partly responsible for their exponential growth.

Saccos have been growing at the rate of 25 per cent per year for the last six years, according to data from the Ministry of Cooperatives Development and Marketing.

Early this year, for instance, when banks priced interest on loans at 18 per cent, Saccos charged interest at between 10-12 per cent locking out a substantial borrowing pool from the banks.