I ran into an old friend of mine the other day at a coffee shop in Addis, the rich aroma of beans filling the air as we caught up. Our conversation, as it often does with those of us in my line of work, quickly turned to matters of finance. He runs a small retail business for spare parts. To fuel his inventory purchases, he is a borrower with one of the many Savings and Credit Cooperatives, or SACCOs that have proliferated across the city. He spoke highly of the experience at first – the sense of community, the accessibility compared to the imposing marble lobbies of commercial banks, the fact that they saw potential in him where traditional lenders saw only risk.
But then he leaned in, his tone shifting from praise to puzzlement. He explained his latest loan, detailing a practice I have come to recognize as a common, yet poorly understood, feature of cooperative lending. He was required to deposit a significant chunk of the loan amount, say twentyfive percent, back into the SACCO as a mandatory savings component. This is a familiar concept, a forced discipline to build a buffer. The confusion, and indeed the crux of the issue, arose with the interest calculation. He was under the impression that the interest he paid was calculated solely on the net amount he received. But as we discussed deeper, a different picture emerged. He was being charged interest on the entire approved loan amount, effectively paying for the privilege of borrowing money he never actually laid his hands on, money that was, in fact, locked away in his own savings account right there in the same institution.
This, my friend argued with a mix of frustration and feeling of betrayal, was a hidden cost. The
“low lending rate” advertised so prominently suddenly seemed like a magician’s trick, a hand that made an effective interest rate much higher than the stated one. His story is not an isolated one. It is a narrative that plays out in countless SACCO meetings and small business back offices, and it calls for a deeper investigation into the mechanics of these vital yet sometimes opaque entities. There is no denying the profound role SACCOs play in our financial ecosystem. In a market where traditional banks often fall short, tangled in collateral requirements and risk-averse policies that can strangle small ventures at birth, SACCOs offer a lifeline. Their flexible service offerings and a more communal, less stringent approach to credit assessment make them the default choice for many individuals and SMEs who are otherwise left on the financial sidelines.
The value proposition is compelling on the surface. You have mandatory savings that bear interest, a lending rate that appears competitive, and the prospect of an annual dividend from being a shareholding member. It is a powerful message that fosters a sense of ownership and mutual benefit. This is financial inclusion in its purest form, reaching the unbanked and the underbanked, building capital from the ground up. And because of this social mission, they are often viewed more as community service organizations than as purely profit-driven business entities. We can understand, then, the government’s intention to nurture them, to consider their positive contribution to the economy. Cooperatives, if managed with integrity and transparency, can genuinely change the lives of many, and by extension, lift the fortunes of the country.
But this very perception – the idea of the SACCO as a benevolent community group – creates a dangerous blind spot. It can foster an environment where financial clarity is sacrificed at the altar of accessibility. The critical question my friend’s experience raises is a simple one: shouldn’t there be a mandatory, crystal-clear pre-lending information session to explicitly inform borrowers that they will be charged interest not only on the borrowed funds but also on their own locked savings? This isn’t defaming the practice itself; from a pure accounting and liquidity management perspective, one can construct an argument for it. The SACCO uses the entire loan amount as the base for its interest calculations because, in a way, that capital is earmarked and deployed. The forced savings act as a security, reducing the net risk for the cooperative.
The problem is not necessarily the financial model, but the communication – or the profound lack thereof. When a carpenter or a young graduate starting a boutique marketing firm sits down to calculate their cost of capital, they are working with the stated interest rate. They are not factoring in the opportunity cost of the forced savings, nor the interest paid on money they cannot use. Their own accounting, the very foundation upon which they will build their business forecasts and personal budgets, is fundamentally flawed from the start because they are not in possession of all the facts. This opacity extends to the other side of the SACCO’s balance sheet, to the very savings members diligently contribute. It is an open secret in financial circles that these same cooperatives take the pooled member savings and place them in time deposit accounts at commercial banks, where they earn significantly higher interest rates – more than double the rate that is then accrued and paid back to the individual saver members. This spread is, of course, a primary source of revenue for the SACCO, and a legitimate one, but it remains a largely invisible transaction to the member whose capital is being deployed.
This is where the proponents of financial literacy have a monumental role to play. Our efforts cannot be confined to teaching people how to budget or save. We must equip them with the tools to deconstruct financial products, to ask the probing questions that reveal the true cost of credit and the true yield on their savings. What is the effective interest rate when you account for the compulsory deposit? And on the flip side, what is the institution earning on my savings versus what it is crediting to me? These are the concepts that bridge the gap between basic numeracy and genuine financial empowerment. Leaving members in the dark, however unintentionally, creates a distorted sense of value. A borrower might rejoice at a fifteen percent lending rate while unknowingly shouldering an effective cost that edges closer to or more than twenty percent. Savers might be content with a seven percent return, unaware their capital is generating more than fifteen percent for the cooperative in a bank vault. They might later receive a dividend, yes, but that is a sharing of the SACCO’s net profits at the end of the day, a partial return of the value their own capital created. The streams of cost and benefit are often mentally conflated, blurring the lines and making a true cost-benefit analysis impossible for the average member.
The success of the cooperative movement hinges on trust and mutual benefit. That trust is eroded when members feel, rightly or wrongly, that the terms of their engagement are not fully transparent. The solution is not to discourage these crucial institutions but to elevate their practices. It calls for a new standard of disclosure, one that is mandated not just by regulation but by a collective ethical commitment. Loan officers should be trained not merely as processors of applications but as educators, tasked with ensuring that every single member understands the financial commitment they are making, down to the last birr of effective interest and the real value of their saved birr. My friend left the coffee shop that day with a clearer understanding of his loan, but also with a sense of disillusionment. He still values the SACCO, still needs its services, but the relationship has changed. He now sees it as a necessary financial partner, not a communal brotherhood. That shift in perception is a loss for the cooperative spirit. The great promise of SACCOs is to democratize finance, to put power back into the hands of the people. But for that power to be real, it must be exercised with full knowledge. The ledger books of our small businesses and households must reflect the true cost of capital and the genuine yield on savings, not a sanitized version of it. Only then can we truly say that these remarkable institutions are not just providing access to finance, but are building a foundation of genuinely informed and empowered economic citizens.
Befikadu Eba is Founder and Managing Director of Erudite Africa Investments, a former Banker with strong interests in Economics, Private Sector Development, Public Finance and Financial Inclusion. He is reachable at befikadu.eba@eruditeafrica.com.
