Savings and cooperative organisations (Saccos) are buying off bank loans from members spooked by the upward revision of rates by lenders switching to risk-based pricing models.
Multiple sacco leaders told the Business Daily that they are witnessing a surge in inquiries to transfer their loans from banks to saccos in an arrangement that seeks to shield borrowers from rates of as high as 18 percent.
Commercial bank loans were priced at a maximum of 13 percent by end of November 2019 when the interest rate caps were removed but have started rising after the regulator last year started approving models that allow banks to pick rates based on risk level.
The move has spooked customers and increased the number of those approaching saccos to buy off their loans and lengthen the repayment period.
Unaitas Sacco chief executive Martin Muhoho said the move offers the sacco movement a chance to accelerate the growth of their loan book and win new members.
“Many banks are adjusting rates for individual loans towards 18 percent. We are seeing borrowers start coming to us for buy-offs. It is a good opportunity for us because we do not adjust our rates alongside the Central Bank Rate,” said Mr Muhoho.
“But some banks are not increasing loan servicing rates for government employees and civil servants, which are lucrative to buy off because of the low default risk.”
Lenders have been communicating to customers the adjustments of rates in line with the benchmark lending rates, which the Central Bank of Kenya (CBK) approved upwards thrice last year to 8.75 percent.
Kenya National Police Sacco chairman David Mategwa told the Business Daily that the rise in interest rates in the banking sector has presented a reality check to some of the members who rushed to banks during the rate cap regime.
“With the caps, banks were telling members that the rates for saccos and banks were almost aligned. The upward review is presenting an opportunity for buy-offs,” said Mr Mategwa.
Members seeking buy-offs are required to submit the current bank loan statements to their saccos.
The saccos then assess the balance and the qualification of members. Saccos then pay off the loan.
“Saccos only charge a one-off cost at the start to buy off the loan then starts charging the applicable monthly rate. Those seeking longer repayment periods are also granted,” said Mr Mategwa.
Apart from relatively low-interest rates and long repayment periods, saccos are also seen as attractive because the use of guarantors saves the borrower from aggressive loan recovery methods such as property seizures and auctions.
But the buy-off process is complicated for small business loans or borrowers who have used assets such as land as collateral.
“Banks become a bit rigid. They normally complicate the process. Saccos first have to give them an undertaking before they discharge the title,” said Mr Muhoho.
Some saccos are also cautiously buying off the loans to avoid a liquidity strain or a pile-up of non-performing loans, according to Renson Ndoro, Imarika Sacco chairperson.
“A majority of our members who have gone to the banks have big loans to the tune of about Sh4 million. So if we get about 20 such members, it is a huge cash outflow at ago,” he said.
Mr Ndoro says the establishment of a central liquidity facility for deposit-taking saccos looks set to help saccos to borrow from each other and meet loan buy-off requests.
The Sacco Societies Regulatory Authority chief executive Peter Njuguna mid last year said his agency was drafting amendments to the existing laws to provide for an inter-sacco borrowing window.