Savings and Credit Cooperative Organizations (SACCOs) play a crucial role in providing financial services to millions of people, particularly in Kenya, where they serve as a key alternative to commercial banks. SACCOs offer affordable credit to their members, allowing them to invest in businesses, education, real estate, and other income-generating activities. However, in recent years, there has been a worrying increase in non-performing loans (NPLs) among SACCOs, which poses a significant threat to their financial health and sustainability. Below is a list of causes of rising non-performing loans in SACCOs.

Economic Slowdown and Financial Hardships

One of the primary reasons for the rise in non-performing loans in SACCOs is the overall economic slowdown. When the economy experiences downturns, many members struggle to meet their financial obligations, leading to an increase in loan defaults. Factors such as inflation, high taxation, and declining disposable incomes make it difficult for borrowers to repay their loans on time. Additionally, economic disruptions caused by global factors, such as the COVID-19 pandemic, resulted in job losses and business closures, further straining SACCO members financially.

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Weak Loan Appraisal and Risk Assessment

Many SACCOs have been criticized for their inadequate risk assessment processes when issuing loans. Some SACCOs fail to conduct thorough background checks on borrowers to determine their ability to repay. In some cases, loans are granted based on social relationships rather than financial merit, leading to high default rates. Without a proper risk assessment framework, SACCOs expose themselves to the possibility of lending to members who may lack the financial capacity to meet repayment obligations.

Over-Reliance on Guarantors

SACCOs typically require borrowers to have guarantors who are fellow members, ensuring that in case of default, the guarantor covers the outstanding loan. However, over-reliance on this system has led to challenges, as some guarantors fail to honor their commitments or lack the financial capability to repay on behalf of the defaulter. In cases where multiple guarantors are linked to defaulting loans, the financial burden spreads, increasing the overall level of non-performing loans within the SACCO.

Poor Loan Monitoring and Recovery Strategies

Effective loan monitoring and recovery mechanisms are essential in maintaining healthy loan books. However, some SACCOs lack the capacity or strategies to follow up on loan repayments efficiently. In some cases, members take advantage of weak enforcement measures, resulting in delayed repayments or complete defaults. SACCOs that fail to act promptly on loan arrears risk accumulating bad debt, which can negatively impact liquidity and operational sustainability.

High Levels of Unsecured Lending

Unlike banks, which require collateral for most loans, many SACCOs offer unsecured loans based primarily on a member’s savings and contributions. While this approach promotes financial inclusion, it also increases the risk of default. Some members take loans without having sufficient savings or financial discipline to manage their repayments effectively. The absence of tangible collateral makes it difficult for SACCOs to recover funds when a borrower defaults, contributing to rising non-performing loans.

Drought of Business Opportunities and Over-Borrowing

SACCO members often borrow to fund businesses or personal projects. However, when business opportunities decline or ventures fail, members struggle to generate the expected income to repay their loans. Over-borrowing is another significant issue, where members take multiple loans from different SACCOs or financial institutions without proper financial planning. The accumulation of multiple debts can lead to financial distress, causing members to default on their loan repayments.

Weak Corporate Governance and Fraud

Some SACCOs have been victims of poor corporate governance, mismanagement, and fraud, which contribute to rising non-performing loans. In certain cases, SACCO officials approve loans to unqualified borrowers or engage in corrupt practices that weaken internal control systems. Fraudulent activities, such as embezzlement of funds or illegal loan write-offs, further expose SACCOs to financial risks, making it difficult to recover outstanding loans.

Author: Andrew Walyaula

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com