The Essence of Risk Management in SACCOs

Risk refers to the possibility that the outcome of an action or event could bring adverse impacts on Sacco’s capital, earnings, or viability. Such outcomes could either result to direct loss of earnings and erosion of capital or may result in the imposition of operational or financial constraints on Sacco’s ability to meet its business objectives. These constraints can hinder Sacco’s capability to conduct its business or to take advantage of available opportunities to enhance its business. As such, the board and senior management of Sacco are expected to ensure that the risks Sacco is taking are appropriate in nature and level.

Proactive risk management should be at the core of every Sacco’s strategy and activities. It involves identification, measurement, monitoring and controlling risks to ensure that:

a)      The individuals who take or manage risks clearly understand it.

b)      The SACCO’s risk exposure is within the limits established by the board of directors.

c)      Risk-taking decisions are in line with the business strategy and objectives set by the board.

d)      The expected payoffs compensate for the risks taken.

e)      Risk-taking decisions are explicitly clear.

f)       Sufficient capital as a buffer is available to take a risk.

Each situation is unique, in terms of the roles and capabilities of individuals and the structure, activities, and objectives of the Sacco. Risk management practices considered suitable for one Sacco may be unsatisfactory for another. Because of the vast diversity in risk that Saccos take, there is no single prescribed risk management system that works for all. Moreover, in the context of a particular Sacco, the definition of a sound or adequate risk management system is ever changing, as new technology accommodates innovation and better information and as market efficiency grows. Each Sacco should tailor its risk management program to its needs and circumstances and regularly adapt and improve it.