Are you a member of a Savings and Credit Co-operative Society (sacco)? If so, has your sacco ever rejected your loan application due to a bad credit rating by a Credit Reference Bureau (CRB)? The probable answer is no.
It happens that saccos are not so enthusiastic when it comes to exchange of credit information. It may be because of the friendly relationship they have with their members or the fear of reduced profits due to less borrowing if they do.
This has been detailed in the latest sector report by the regulator, Sacco and Cooperative Societies Authority (Sasra). The report covers the industry performance for 2021.
The report implies that saccos are blindly lending to their members as majority of these registered financial entities are not willing to share credit information of their members with CRBs or make little to no effort to request for the same.
The regulator, Sasra, in its latest supervision report says such information on creditworthiness of their members seems to only be shared with CRBs when loans have been defaulted.
In the report covering the performance of Deposit Taking-Saccos (DT-Saccos) and Non Withdrawable Deposit Taking (NWDT) -saccos in 2021, Sasra reports that there was an increase for subscription to CRBs.
This is from 159 DT-Saccos in 2020 to 168 in 2021.
"Among the NWDT-Saccos 93 had subscribed to submit credit information to at least one or more of the licensed CRBs at the close of 2021," reads the report.
Managing credit risks
Sasra concludes that whereas a majority of DT-Saccos have embraced the use of credit information in managing their credit risks, a large proportion of the NWDT-Saccos are yet to embrace the usage of credit information.
The report borrows snippets from the Bank Supervision Report 2021, which indicates that credit information from DT-Saccos formed the highest number of third-party data sources to the CRBs in 2021.
"But there is no data to show the number of credit reports requested by Saccos from the CRBs," the report reads.
"Thus, whereas credit information sharing is slowly taking root within the Sacco subsector, its importance as a credit pricing tool for loan facilities advanced by saccos is yet to be fully unpacked."
In equal measure, the report adds, the place of credit information sharing as a tool for controlling over-indebtedness in the sacco subsector will continue to remain a grey area. This is unless saccos by themselves start requesting for credit reports from CRBs during appraisal of credit worthiness of their members.
"Thus, it is speculated that saccos are usually quick to submit credit information of their members to the CRBs as a debt collection tool as opposed to requesting credit reports to appraise their borrowers," Sasra deduces in the latest report.
Sasra notes that credit information sharing entails providing of both positive and negative credit history for individuals and entities to the licensed CRBs. The information provided to the Credit Reference Bureaus is then synthesised into credit report scores to assess an individuals' or entity's credit worthiness.
CRB Regulations, 2020 provides for the manner in which credit information is shared amongst and between financial service institutions in Kenya.
"The regulations acknowledge saccos licensed under the Sacco Societies Act as subscribers to the CRBs without prior approval of the Central Bank of Kenya," the report by Sasra says.
"However, the partnerships and agreements between the regulated saccos and the CRBs are on a voluntary basis and the analysis shows that some of the regulated saccos are yet to embrace the credit information sharing practice," the report states.
This negative listing or sharing of information is confirmed by another study titled Effect of Credit Information Sharing on Performance of Savings and Credit Cooperative Societies in Kenya published February 2019 by Society for Science and Education, United Kingdom.
The study authored by Otiende Wellington and Dr Elizabeth Nambuswa both from Jomo Kenyatta University of Agriculture and Technology School of Human Resource Development suggests that saccos are more inclined to share members' information to CRBs if they are defaulters. The study notes that respondents were asked whether their saccos forwards list of credit defaulters (negative information) only to Credit Reference Bureau.
From their responses, 53 per cent strongly agreed or agreed while 37 per cent disagreed or strongly disagreed. The rest 10 per cent of the respondents were neutral. "These findings implied that our saccos forwards list of credit defaulters (negative information) only to Credit Reference Bureau," the study reads.
This study notes that saccos are the go to lending institutions when one has bad credit report in the mainstream financiers like banks and microfinances who regularly share information. This then contributes to the increase in Non-Performing Loans (NPLs). The study indicates that by 2017, saccos were holding up to Sh15 billion of NPL according to Central Bank of Kenya.
"Due to bad loans, it has been observed that most of the defaulters have been shifting to the saccos," the study reads. "Instead of blacklisting defaulters using CRB reports, sharing of positive information by saccos would be helpful in putting pressure on the lending organisations and rewarding of borrowers who repay in good time."
The recent Sasra report has that DT-Saccos recorded an NPL ratio of 8.86 per cent while the NWDT-Saccos recorded an NPL ratio of 9.78 per cent. While still high, it is fairer when compared to the NPL ratio recorded by commercial banks and Microfinance banks of 14.13 and 25.58 per cent respectively.
"However, a total of 98-DT-Saccos and 82-NWDT-Saccos had their NPLs above five per cent and thus calls for urgent action to avoid these saccos incurring further losses in the form of provisioning," reads the Sasra supervision report.
The negative listing with CRB, according to Sasra, at times has happened not because the members' defaulted their loans but their respective employers did not remit the deductions.
This has been captured in Sasra's 2019 supervision report.
"These complaints and proceedings are principally premised on the lack of information or notification to the members that even though deductions were made from their emoluments either to repay a loan or as BOSA deposits, such deductions were never remitted to the respective Sacco," Sasra says in the report.
It adds: "Some saccos were noted to have even reported these members to CRBs, without these members having prior information or knowledge of the remittance default by their employers; thereby resulting into unnecessary legal proceedings."
This problem however seems to be perennial as it is captured in the 2021 report where saccos are owed Sh3.4 billion in non-remittance.
"The fact that 63.34 per cent of the non-remitted funds owed is related to loan repayments means that the subject loans have since been classified as non-performing by the saccos and provisions made in respect thereof thereby reducing the surpluses and profitability of the saccos," says George Murathe, Sasra board chair.