An audit report into the Kenya Union of Savings and Credit Cooperatives (Kuscco) reveals how the organisation dished out loans to Saccos and senior staff without evidence of their ability to repay.

The audit by PricewaterhouseCoopers (PwC) shows by December 2023, the Sacco umbrella body had accumulated non-performing loans (NPLs) of Sh5.3 billion.

This was 60 per cent of the Sh9 billion outstanding loans at the time.

In one instance, an employee was issued with a Sh2 million facility while he had just Sh17,000 in savings, raising questions if due diligence was being undertaken before approval. There was also a case of Sh1.5 million disbursed against savings of Sh1,300.

Reports of the fraud at Kuscco surfaced last year and senior managers together with the board were subsequently sent packing, but the extent of the massive theft is only now being unravelled.

Some senior executives have already being charged in court for the loss of an estimated Sh13 billion through shady financial dealings.

While some Saccos are documented to have been unable to repay due to challenges with remittances, others were being issued with top-up loans even when their previous advances were already non-performing.

The report shows how Kuscco issued loans from its Central Finance Fund (CFF), Kuscco Housing Fund (KHF), Kuscco Housing Cooperative (KHC) and its front office service activity (Fosa) for member Saccos with no banking services, dubbed Kusasa, leading to NPLs of as high as 84 per cent.

Kusasa stands for Kuscco Savings Accounts and was established in 2004, while the CFF began in 1989 with the purpose of mobilising funds within the co-operative savings and credit circles.

KHF, which began in 1996 mobilises funds for lending to those who want to own property and also provides mortgage financing solutions.

KHC, on the other hand, gives loans for house construction, plot purchase and funding of controlled developments.

At the time of the audit, CFF had the highest NPLs of Sh3.3 billion—84 per cent of the total loan balance then of Sh3.9 billion. The money was advanced to 306 Saccos.

KHF awarded loans to 1,962 members and as of December 2023, it had a loan balance of Sh3.9 billion, with Sh1.9 billion not performing.

KHC awarded loans to 313 members and had the least NPLs of Sh44 million.

Kusasa awarded loans to 967 members and had a loan balance of Sh160.1 million, with Sh67.4 million categorised as non-performing.

While the audit team noted that these numbers still need to be validated through reconstruction of the loan book, several overarching issues were put across.

Some loans were also recorded as cleared with no evidence of repayments or savings, with large facilities issued to staff and other Kuscco-related parties being the most cited.

One Sacco, for instance, which at the time of audit had an outstanding balance of Sh377.5 million, is said to have been issued with an instant loan of Sh100 million four months after making just one installment of a previous facility of Sh83 million.

The loan was disbursed on December 22, 2017 and the Sh100 million followed in May 25, 2018.

“As of December 31, 2023, the two loans were non-performing with outstanding balances double the disbursed amounts amounting to Sh170.8 million and Sh206.6 million,” the report says.

Another Sacco received Sh3.5 million education loan and 12 months later, after making just four installments, received Sh5 million under instant premium loan product issued by CFF.

The first loan was issued on December 20,2017, and the second on December 6, 2018.

The report says as of December 31, 2023, both loans were non-performing with loan balances of Sh1.4 million and Sh9.9 million respectively.

“It is to be noted that no repayments have been made towards the second loan. We understand the Sacco has not been paying due to liquidity constraints, however, we did not see any evidence of CFF making any efforts to recover the loan,” the report says.

A former branch manager is also implicated in the string of unpaid loans. Kusasa issued the manager with two loans in 2016 and 2022 of Sh1.3 million and Sh2 million respectively.

But at the time of issuing the second loan, there was no evidence of any payments made on the first.

Interestingly, the manager had only Sh17,000 in savings instead of the Sh400,000 required as security for the Sh2 million facility. No property was submitted as alternative security.

By December 2023, the two loans were non-performing amounting to Sh1.3 million and Sh2.3 million respectively at an interest rate of 5.6 per cent applicable to both.

It was noted that the loan file for the Sh2 million loan is missing from Kusasa.

“However, we noted that Lawrence Mawira, former Kusasa loan officer, indicated that 20 per cent of savings were raised towards the Sh1.3 million, which goes against what we have observed,” the report says.

A former Kuscco finance manager was issued with a Sh1.5 million loan in 2023 while three previous facilities were non-performing.

“We did not see evidence of any collateral provided against the sh1.5 million loan disbursed on July 10, 2023,” the auditors say.

“The valuation of the collateral pledged for the Sh1.5 million for the loan disbursed on September 22, 2022 was dated February 25, 2022 which was seven months prior to the loan application award.”

On top of these facilities, the manager was awarded more loans totalling over Sh10 million.

“We understand that members with loans in KHF should not be awarded additional loans in KHC.

“However, we noted exceptions…according to Mr Odera (Julius Odera, then KHF manager now KHC chief executive), Mr Ototo (George Ototo, former Kuscco group managing director) exempted some employees based on the trust that they would pay their loans,” the report says.

Ototo is also implicated in the approval of a Sh11.5 million loan issued to Malachi Mwango between July 20, 2015 and January 6, 2017 that was non-performing as of August 7, 2024.

Odera says Ototo instructed him to approve the loan despite non-payment. A note from Ototo to this effect is dated June 3, 2016.

The audit also questions payments of Sh5.4 million to the loan account of Redempter Akinyi, a KHF marketer, which was deposited by Billy Onyango, a cash buyer of four houses at Kuscco Homes Project.

Akinyi had taken two KHF loans for plot finance and construction of Sh1.4 million and Sh5 million respectively.

However, how money meant to buy four houses, a salon and barbershop at the Sh1.5 billion Kuscco Homes Project, ended up being paid into Akinyi’s loan account puzzled the PwC auditors.

“We requested for the supporting documentation that went to reducing Ms Akinyi’s loan by Sh5.4 million but none could be traced.

“Ms Akinyi did not also provide us with any evidence of the money in question having been deposited with Kuscco, which could point to the entries being fraudulent,” the report says.

It adds: “We understand that Ms Akinyi was the relationship manager of the properties purchased by Mr Onyango.”

Ototo, who was allegedly arm-twisting financial managers to issuing loans without proof of ability to pay, received Sh10 million on June 30, 2022 and Sh2.6 million on November 24, 2023 from Kusasa.

“For both loans he provided savings security that were less than 20 per cent of the loan savings required for the loans; that is, Sh100,000 and Sh400,000 instead of Sh2 million and Sh520,000.”

The report says that for both loans, no collateral was pledged, and that the loan was approved without the knowledge of the Kusasa branch manager.

“As of December 31, 2023, both loans were non-performing with loan balances of Sh10.9 million and Sh3.2 million,” the report says.

The report says that when Ototo was receiving the last tranche of his KHF loan of Sh31.5 million and KHC facility Sh51 million, he had Sh203,000 and Sh222,000 in his savings in lieu of Sh5.6 million and Sh10.4 million respectively necessary to facilitate the two loans.

As of December 31, 2023, the KHC loan was performing while the KHF one was non-performing.

The audit found that during the period under review, 2018 to 2023, Kuscco and its subsidiaries did not have a write off policy for non-performing loans.

Additionally, there was no provision for loan loss in their financial statements except in 2022 where KHF made a provision of Sh28.8 million.