An innocent favour that could ruin your finances

NAIROBI, KENYA: Everything about them looked similar — same training college, same work and same goals. For the seven police officers, guaranteeing each other a loan did not look risky.

But in August, six of them received a disturbing message. It was from the Police Sacco, one of the largest saving societies which turn 45 years next Monday.

“Dear member, you guaranteed (name retracted) a super loan amounting to Sh550,000 which is now defaulted. Kindly note that you will be attached the loan,” read the message from the Sacco.

Their colleague, who they had guaranteed the loan, had stopped working just two months after taking the loan. Knowing that the implication of the message was huge, four of them decided to make a follow-up.

The police officer, whose name Financial Standard has withheld on request from the distraught colleagues, was in the dock to answer charges against deserting duty.

“When we met him in the dock, we were not sure what to tell him. When we asked him why he had done this to us, he just nodded in silence,” narrates one of the police officers.

Loan beneficiaries

As they left the court room that afternoon, leaving their former law enforcer to be escorted to the cells, it dawned on them that they had turned to debtors even though they were not a beneficiary of the loan.

Each of them has been forced to service Sh104,000 towards clearing the loan. That will bind them in the books of the Sacco as debtors for about 52 months.

Two of them have personal loans and their colleague’s loan has left them in financial strain.

And legally, the Sacco is justified to deduct the amount. They had signed an agreement that in case of default, the loan may be offset against their deposits in the Sacco or by attaching their salaries.

Their predicaments are not just an isolated case. Tales about people who are nursing financial wounds inflicted upon their wallets by their friends, relatives or workmates are rising each day.

The many people Financial Standard talked to are either victims or know of people who are victims of this worrying trend that is rattling the very foundation of cooperative movements.

Surprisingly, many are keen not to share their name since the pains have been inflicted upon them by people they trusted and even work or used to work together.

“The moment I give you my name, it doesn’t matter if you will hide the name of the Sacco or the person I guaranteed. He will know that he is the one,” one of the victims told this writer.

According to a study by Financial Sector Deepening (FSD) Kenya, an independent trust keen on promoting financial inclusion, having a guarantor is the second top credit eligibility requirement after an identity card.

The study further shows that other requirements such as title deed, log book, pay slip, bank statement, credit history, assets and savings are considered less significant than a guarantor.

Giddy Akali, a Facebook user, captures the ‘guarantor mentality’ in the financial sector.

Sharing his experience through Facebook, Akali says that getting a loan from a local bank in 2015 proved hard despite having transacted there over Sh400,000 worth of dealings.

He explains that the bank, one of the largest in the market, initially turned him away because he did not have any security. In March 2016, despite being in some employment, he says that the bank declined to give him a loan of Sh200,000.

“So I bought some land somewhere and sought to use the title deed as security to secure a loan. I went to the bank recently to ask for Sh1 million loan. And they told me, “You do not have guarantors,” explained Akali.

For some guarantors, disputes around loan defaulters and the lending institution have had to be settled in court. This forces the guarantor to incur the cost of hiring a lawyer.

Regina Wacera, who resides in Murang’a has been forced to take her battle to a Chief Magistrate’s Court after Kenya Women Finance Trust (KWFT) took away her goods over an unpaid loan.

Alongside Ms Muruthi, she had guaranteed someone a loan which is now in default status, forcing KWFT to attach their properties.

According to court documents, Ms Wacera is accusing KWFT of attaching her property without even informing her that the principal debtor had defaulted.

Wacera says the microfinance took away her household items including a pick-up and fridge with intention of disposing them to offset a loan of Sh280,000. She puts the value of her goods at over Sh1 million.

“I was told to pay Sh280,000 immediately or lose all my attached goods. I asked why I was not given a notice but the branch manager told me the notices are irrelevant since money is owed by the debtor and I guaranteed the loan,” she says in court papers.

Currently, the law of contracts, in which the rights and responsibilities of guarantors are captured, is silent on who between the guarantor and the principal debtor should be approached first in the event of default.

According to Muthomi Thiankolu, a Partner at Muthomi & Karanja Advocates and also a lecturer at the University of Nairobi School of Law, the laws allow a financial institution to go for the guarantor once the principal debtor is in breach.

This has seen financial institutions pounce on the party with more liquid assets even without exhausting all mechanisms to recover money from the borrower.

Principal debtor

However, Mr Thiankolu says that financial institutions cannot be compelled by the courts to show that they have exhausted all avenues of recovering the money from the principal debtor.

“Requiring them to first exhaust all avenues of recovering the money from principal debtor when he is already in breach will defeat the very economic rationale for the law of guarantee. All they need is to show that the person is in breach,” reckons Mr Thiankolu.

For some people, the innocent act of extending a gift of friendship to those around them by appending their signatures to the loan application documents has made them rethink the model of guaranteeing loans.

“Nowadays I have to lie to my colleagues that I am not a member of our Sacco,” Erick, one of the people we reached out to and was not comfortable in disclosing his second name, said.

He has been working in the media industry for more than a decade now. But his move from one media house to his current one was not smooth. He has scary memories.

Seen as a man wired with a big heart, he admits that on many occasions, he had guaranteed people loans without giving it a serious thought. 

At one point, the company Sacco cautioned him that he had soaked in too high a risk. “It did not take long. One of the people I had guaranteed left the media house and stopped servicing the loan. I had to pay about Sh80,000,” says Erick.

This experience has reshaped his approach towards guaranteeing friends. Erick says he has now set a golden rule: Never guarantee amounts you cannot afford to lose from your pocket.

Thiankolu, who is also a legal consultant, advises people to ask themselves two key questions before deciding to be guarantors:  What is the risk that this person will default? If they default, am I able to pay the bank without getting financially ruined?

If the answer to any of those questions is not favourable, he advises that one should decline, even if the person seeking the signature is a close friend.

“You should not guarantee someone a loan because they are your friends. That is an irrelevant consideration and it should not be a basis upon which a person properly directing his mind would agree to guarantee anyone,” he says.

Ruth Alinda is now servicing a loan of Sh100,000. She tells Financial Standard that it is the price she has to pay for having trusted a friend.

In mid-September, she was approached by a friend who they worship in the same church.

Ms Alinda took a Sh50,000 salary loan from her bank and borrowed another Sh50,000 in her chama since the friend promised to pay within three days.

“I trusted him because he was my friend and also a member of our church. I took the loan hoping he will honour his word but now I have been left servicing Sh18,000 per month,” says Ms Alinda.

Sacco movement in Kenya is founded on trust. People mobilise money and take loans at attractive interest rates to achieve their dreams.

In fact, for many, being in a Sacco has helped them grow since members guarantee them.

As at end of 2016, deposit-taking Saccos (DT-Saccos) had 3.6 million members. Gross loans grew to Sh297.6 billion and now account for over 73 per cent of Saccos’ assets.

At the end of last year, non-performing loans (NPLs) hit Sh15.57 billion, up from Sh13.21 billion in the previous year.

The regulator notes that members’ appetite for loans keeps rising and even puts liquidity pressure on Saccos.

The distribution of the NPLs ratio among the 175 DT-Saccos shows that only 88 of them were able to keep their NPLs below five per cent.

“The remaining DT-Saccos had NPLs of over five per cent, with 47 registering NPLs of 10 per cent and above thereby depicting the huge number of DT-Saccos with potentially bad loans,” cautions Sasra.

Guaranteed amount

This means that for members who have guaranteed each other loans, those in about 87 of the Saccos could see over five per cent the guaranteed amount defaulted.

For a model built on honesty, insincere borrowers are exploiting unsuspecting guarantors.

For instance, Erick Wesonga, who resides in Nairobi, says that he guaranteed a friend a loan of Sh150,000 only for him to realise the friend altered the figure to Sh1.5 million.

On this, Thiankolu advises that when guaranteeing someone a loan, it is important to keep a copy of guaranteeing statement so that in case of any alteration, the guarantor has some kind of defence.

“Signing agreements in which the amount is just in figures is dangerous. If there is fraud, it will have to be proved by the guarantor. So the copy of the agreement will be crucial,” he advises.

But even so, at this point, the financial institution will be out of the picture leaving the guarantor and the guarantee to settle it out.

For financial providers, guarantors may be the best thing that ever happened, but to person shouldering the risk, it is a painful journey.

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