Banking & Technology

Understanding guarantor model in SACCOs

guarantor

Why, When and How you get a guarantor orguarantee someone.

By Elizabeth Angira
Every financial year, during the Annual Delegate/General Meetings, SACCOs cry foul of members’ funds lost through loan defaulting. The trend cuts across the sector with member also falling prey as loan guarantors.
Societies have been forced to write off billions of shillings amounting to loan defaulting, with others passing on the burden to members who guaranteed the defaulters. But where does all this mix come from? Can it be stopped or rather do away with? These questions are well understood first by knowing who a guarantor is and the role of guaranteeing someone.

Who is a guarantor?
Investopedia defines a guarantor as a person who pays off a loan borrower’s debt, in the event the latter defaults on their loan obligations. When you guarantee someone to borrow a loan, you pledge your assets as collateral. There are cases why you need to guarantee a person for a loan; when a person has no credit history, low credit score or they are new to the organization issuing the loan. As a guarantor you should ask yourself these questions before guaranteeing someone a loan;

  1. Why do they need me to be their guarantor – is it because they have a bad credit history? And if so, are they likely to manage the repayments?
  2. Are they responsible?
  3. Do they need the loan? (Is it for something they need, or could they save up for it instead?)
  4. Can you afford to pay back the loan if they can’t or won’t?
  5. Would having to cover their repayments affect your relationship?

Remember, once you’ve signed a loan agreement and the loan has been paid out, you can’t get out of being a guarantor. Guarantor requirements in SACCOs started as a major requirement since most of the Sacco members did not have collateral to cover their loans. It was also thought to be ideal since the members have a strong background understanding of each other.

Rising loan defaulting
The outbreak of the COVID-19 pandemic, which, according to data from the Kenya National Bureau of Statistics, has put over 740,000 million Kenyans out of work is presumed to be the major cause of default in the Sacco sector. Coupled with increased member salary pay cuts, both the guarantor and the loan borrower have been unable to service their loans.
According to the Sacco Society Regulatory Authority (SASRA) CEO Peter Njuguna, the practice of guarantors is promoted by the “common bond” membership. “Based on the principle of the “common bond,” a key principle of the cooperative movement, it has always been easy for members to guarantee each other as colleagues as a way of providing security for the loan borrowed. Since a majority of the employees (read Sacco members) know one another, there is always a way of influencing each other to pay through moral suasion or peer pressure at the workplace,” Njuguna wrote in an article published in the local dailies. He said the paradigm shift in membership – bringing together members from a different economic background – is also impacting the rising number of defaulters.

Dealing with the issues
SACCOs have to devise ways to deal with loan defaults. The Front Office Service Activity (FOSA), is a good front to start with. Most Sacco members have their salary channelled via FOSA and immovable assets.

Policy developments in the Kenya economic environment also give lenders an open chance to use collateral like title deeds, lock books among others. Njuguna said the partnership between SACCOs and fin-techs (financial technology companies) gives societies a chance to collect, collate, and analyse mobile financial transaction data as a basis for assessing the creditworthiness of borrowers. He challenged societies to ensure members verification is done and no signature is used without member consent.

Making guarantors effective
Adequate education of members on their rights and obligations and putting in place adequate redress mechanisms is inevitable. Guarantor-ship should not be used as a substitute for thorough credit risk assessment of a borrower, but as a supplement to and after the latter. It should also be applied together with other formal collaterals, especially in SACCOs where the “common bond” has been opened. Many SACCOs limit the number of loans one can guarantee, which is a good practice.
Guarantors could be more empowered if they had access to the repayment history of the borrower, including CRB, reports, before they put pen to paper, meaning the onus is on members during their Annual General meetings to make it mandatory for members to gain access to their credit history before signing off loan application forms as their guarantors. There is a huge opportunity for SACCOs in the deployment of data and credit referencing reports to evaluate the creditworthiness of a borrower both positive and negative elements.
The future of the credit market lies in risk-based lending and SACCOs must adapt to this reality.
SACCOs must also embrace the use of Credit Reference Bureaus and credit information sharing
mechanisms as additional tools for assessment aside from their existing approved policies.

Sacco Trend
Author: Sacco Trend

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