Sacco members who guarantee loans that end up as defaults are an angry lot, I realised two weeks ago. I met a group of enraged sacco members heading to a local credit reference bureau to report their defaulters, they told me.
Engaging them, I gathered they were unhappy repaying debts that benefited others who have chosen to ignore the principle of trust.
Sadly though, they did not have a chance of engaging the bureaus successfully because the Banking Act under which the credit bureaus operate limits them to engaging and contracting only legal entities for data sharing subject to approval from the Central Bank of Kenya.
The group members claimed their sacoo was hesitant to deal with the bureaus on the said cases while the defaulters were enjoying bank loans elsewhere. Going by the law, only their saccos can engage the credit reference bureaus for data sharing.
These limitations posed by the regulations has seen many sacco members forcing their co-operatives to engage the credit reference bureaus to arrest loan delinquency. This explains the frequent public notices in the local dailies by saccos stating intention to contract the bureaus.
But do saccos really need credit information sharing with credit bureaus considering that the lending model is anchored in guarantors?
Guarantorship appears to be hurting the growth of saccos with increased loan defaults. This implies that whenever there is any case of non-repayment, the sacco will contact the guarantors to pressure the borrowers to repay.
In case of any failure to recover the debt, the sacco will then attach the guarantors’ deposits to recover the outstanding amount. This is usually a tricky balance for saccos. Attaching member deposits to recover the debt kills the morale of sacco members, especially guarantors to continue saving.
Because of the inability to access their deposits, most guarantors will be tempted to reduce contribution to the sacco if not to terminate membership. This reduction hurts growth and lending.
Conversely, uncontrolled delinquency rate has an adverse impact on the growth of sacco loan book as many members will be unwilling to guarantee others. Lean loan books will translate to minimal revenue and consequently low or no dividend. Certainly, the low dividend will erode membership and fail to court new people.
With these limitations, saccos are rushing to engage credit bureaus to complement sacco guarantorship as a risk management tool to safeguard their growth through credit information sharing. This appears to be the opportune time for saccos.
Following the recent amendment of the Banking Act (Credit Reference Bureau Regulations, 2013) and gazettement in January this year, credit reference bureaus are now authorised to engage any credit provider in credit information sharing that involves both cheques and submitting negative information for sharing with lenders. This implies that saccos, like other credit providers, can engage the services of credit bureaus to complement guarantorship model of lending.
To do this, saccos have to review their credit policy and guidelines that would authorise the sacco to undertake the credit cheques whenever they undertake loan appraisal. The credit information from the credit bureau that currently entails positive information will inform the sacco whether a member has defaulted or is servicing a loan with a bank.
Where information about a member is found adverse, potential guarantors will then be informed and asked whether they were still willing to provide guarantee such people despite the adverse mentions. Where possible, such a member would be requested to provide collateral against their loans.
However, where the borrower is found to be servicing a credit facility with a commercial bank, the guarantors too will be informed before they can guarantee a member’s loan. These steps will compel a borrower to provide proof they can financially afford to repay the bank and sacco loans.
Reviewing debt management guidelines involves two steps. The idea can be an AGM agenda for approval or the board of the sacco can pass a resolution and issue a communiqué or do a public notice.
This is imperative because the Banking Act requires financial institutions to inform the defaulters of the intention to share information with the bureaus. Such a deal is shared with the Central Bank of Kenya (CBK) for consideration and approval for it to become legal.
However, access to credit information does not require CBK approval but a consent from the borrower to access their information from the bureau for appraisal.
Mr Opiyo is a training manager and coach. Email: [email protected]