Bad sacco borrowers face blacklisting by commercial banks

Members of savings and credit co-operative societies (saccos) who default on their loans will have trouble borrowing from banks as co-operatives begin sharing information with credit reference bureaus.

The move is expected to tighten the noose on bad borrowers who try to access credit from lenders that do not have a full view of their debts.

More than 50 saccos or credit unions have started listing defaulters with the bureaus, with others issuing notices of intention to join the platform. This follows a change in law early in the year that allowed saccos to share information with credit bureaus.

“Members with loans in default are notified to clear their loans or visit the Sacco offices within 30 days with a repayment plan,” Elimu Sacco said in a notice of intention to its 12,000-plus members. “Failure to comply will lead to listing of the defaulters (with the CRB).”

Those already signed up include Afya Sacco, which has about 38,700 members, and Stima Sacco, which has 26,500 members.

As at the end of last year, co-operatives registered with the Savings Societies Regulatory Authority (Sasra) had Sh8.9 billion in loans that were not being paid off — some 4.7 per cent of the total loan book. This is an improvement from previous year’s Sh11.7 billion or 7.3 per cent.

Information sharing is likely to help reduce bad loans further as banks send defaulters seeking credit back to the sacco that had them blacklisted to settle the outstanding amount.

Loans are classified as being in default after they go for 90 days without any payments. This is unlike in the banking sector where non-performing loans are only blacklisted after 180 days (six months).

READ: Sacco loan defaulters have nowhere to hide in era of credit bureaus

In the past, saccos have relied on loan guarantors to recover bad debts, a situation that would often see defaulters abscond and leave the burden to be borne by the co-signers.

This made the process of getting loan guarantors difficult, especially for members who do not belong to cliques within community or profession-based saccos.

People with unpaid sacco loans, however, could still turn to banks for credit advances. This is the loophole the change in law and the registration of saccos with CRBs aim to close.

The sacco loan appraisal process will see a shift in emphasis to a person’s character rather than apparent ability to repay and available savings.

The Kenya Union of Savings and Credit Co-operatives (Kuscco), the umbrella body of the co-operatives, has joined the bureaus and is expected to bring its members on board.

There are 215 saccos registered with Sasra with a total asset base of Sh172 billion and total outstanding loans of Sh123.3 billion. An unknown number of informal and unregistered saccos, estimated to be holding more than Sh100 billion in assets, remain outside Sasra’s ambit.

Sasra has proposed amendments to the sacco law to allow for sharing of both positive and negative information by cooperatives among themselves and with other financial institutions. Industry insiders say saccos should also benefit from access to information in the CRB blacklist.

Sam Omukoko, chief executive of Metropol Credit Bureau, said the proposed changes in the law would allow saccos to also view information about bank borrowers.

“When the saccos come they will still not see banks data but once changes in the Saccos Act are passed this will be possible,” said Mr Omukoko.

A change in the law in June mandated commercial banks to start sharing information on both good and bad borrowers. Previously banks were only sharing details of defaulters, which limited the success of credit referencing in the country.

The system is meant to ensure loyal borrowers are rewarded through favourable borrowing terms while the banks’ credit risks are reduced by cutting out defaulters.

Currently more than 3.6 million loan accounts are listed with the bureaus with approximately four per cent — 144,000 — being in default. The number of defaulters blacklisted with the bureaus shot up last year after CBA started forwarding names of those who were not honouring short-term loans given through its mobile phone banking platform, M-Shwari.

READ: CBA blacklists 140,000 Safaricom loans defaulters

Sharing of information between banks and saccos is likely to boost positive ratings of good borrowers due to the frequency of use of co-operatives.

Saccos will, however, have to invest in robust data storage systems to ensure they are able to send out detailed reports as required by the bureaus.

The bureaus have been pushing for more credit providers to be allowed on the referencing platform to make rating reports more comprehensive.

Deposit-taking micro-finance institutions are currently allowed to share information. Others being targeted are utility providers, credit-only micro-finance institutions and county governments.

The Youth Enterprise Fund is also negotiating terms on which it can provide information on defaulters.

Records of blacklisted persons are held with the bureaus for a period of five years even after the unpaid sum is settled.

Any institution which inquires about a borrower will see their borrowing history for the last five years, allowing the lender to price the risk they are taking in advancing the loan.

Inquiring from the bureaus has become a major step in loan appraisal process of most banks, with data from the Central Bank of Kenya showing that 4,325,200 reports have been requested by banks since referencing was introduced in 2010.

Individuals, who are entitled to one free credit report each year, have made 67,610 requests.