Isn’t this script familiar? You and your colleague belong to Sacco X, your colleague is in dire need of a loan, but the catch is he needs a few of his ‘friends’ to guarantee this loan for him. You as ‘a friend’ are approached to sign off the guarantor documents or form and you gladly do so. A few monthly repayments later, your colleague is laid off and as a result he defaults and you find yourself saddled with a new, debilitating liability, as you now must repay the residual loan on behalf of your colleague based on debt/loan recovery procedures provided for in the Sacco.
The above scenario is a common occurrence in the wake 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. The situation has been exacerbated by the many salaried workers who have had to endure pay cuts and furloughs. Worse still, very few jobs are being created in the current context to accommodate those rendered jobless by Covid-19 aftermath.
Traditionally, the deployment of guarantors has been popular among Saccos as a tool for providing security for their various loans. Good prudential practice dictates that Saccos secure every loan taken out by its members, which means the decision on a loan security is a business/operational decision more that it is legally. The law only requires Saccos to put in place mechanisms for loan loss although we are seeing an upsurge of other forms of collaterals being used as security for the loans members take from their Saccos.
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 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.
But this Sacco and member ecosystem is fast changing. For starters, the wall of exclusivity has been brought down following the opening of the “common bond” by most Saccos, thereby opening the membership beyond one employer or even ministry, in the case of most employee-based Saccos. As a direct corollary and inevitably, the concept of collegiality and knowledge of one another is gradually being eroded.
Secondly, with a few Saccos adopting banking-like, Front Office Service Activity (FOSA), model, they now have not just improved organisational capability and diversified product and service portfolios, but access to additional options for loan security, including incomes received through the FOSA and immovable assets.
Thirdly, there have been several policy developments in the credit market in Kenya, enabling lenders, including Saccos, to use additional collaterals besides guarantors. Notable is the legal framework for the sharing of credit information and the Immovable Assets Collateral Registry, all of which provide Saccos with new ways to put in place securities while underwriting loans to their members.
The fifth factor is the evolution of digital loans, which are on-demand products created because of partnerships between Saccos and fin-techs (financial technology companies). Through these partnerships, which are already happening in our market, Saccos can collect, collate, and analyse mobile financial transaction data as a basis for assessing the creditworthiness of borrowers.
The x3, x4 or x5 deposit-based lending model that is popular with Saccos almost gives the member a sense of entitlement to a loan. Unfortunately, some members save with the sole purpose of borrowing, regardless of the potential risk of the possibility of changed financial circumstances in future, and if they can raise the required number of guarantors. On the other hand, Saccos will lend, taking comfort in the debt recovery policy which among other measures has the list of guarantors an option for this recovery process and at times loan processing and disbursement is done without proper due diligence on the borrower’s repayment capacity. In other cases, members verification isn’t done and signatures are used without their consent. This makes the guarantor system subject to abuse by both the borrower-member and the Sacco.
How do we make guarantor-ship efficient so that it works better for the Sacco, the member, the guarantor, and the entire credit market? 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 prior to 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.