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Why your credit history will dictate your Sacco loan limit

Saccos are shifting from this model to risk-based lending. [iStock]

Savings and Credit Cooperative Organisations (Saccos) have for long been known for pegging loan limits on the size of savings.

Known as the multiplier model, many Saccos lend up to three times a member’s savings, motivating people to tap loans for development.

But now Saccos are shifting from this model to risk-based lending, where they check one’s repayment history to decide how much to lend.

This has saved many Saccos from members who tap oversized loans and then end up defaulting.

For others, it has helped them to accommodate members who are good payers and would like loans above what the three times multiplier model has traditionally allowed them.

For instance, Kenya National Police Sacco, which has been in existence for 50 years, has been shifting from this model and now lends as much as five times one’s savings. The sacco even offers mortgages to members.

Its chairperson, Mr David Mategwa, says that since customers are also the owners of the business, it becomes easier to lend based on one’s ability to pay as opposed to limiting them based on their savings.

“One may qualify for less money when you use the multiplier model, yet he or she has a good repayment history. Instead of denying them the loan and losing them to other financial institutions, you have to lend based on their risk profile,” says Mr Mategwa.

“We have recapitalised the Sacco so that we even give home loans, and the houses become the security. Limiting people to multiplier model has been locking many out of opportunities,” he added.

Saccos see the shift as a way of accommodating members with a good loan repayment record given the stiff competition among financial service institutions.

In addition, such a shift is helping highly liquid saccos to give out loans that can reduce idle cash and generate returns for members.

Imarika Sacco Chairperson Renson Ndoro says theirs is shifting from the multiplier model, especially to accommodate the youth and borrowers seeking to be rewarded for a good credit score.

“We are now giving loans based on one’s ability to repay. We check the credit history. We have products that provide giving up to five times the savings,” says Mr Ndoro.

He says that the financial market is now open to everybody, and “we have to diversify our products.”

“The ground is shifting drastically. For instance, you are not going to confine the youth for three months to save before giving them a loan,” says Mr Ndoro.

But Trans Nation Sacco CEO Luncham Mugambi says saccos have to be cautious to ensure the shift does not expose them to high loan defaults and deny other members loans.

He says the sacco, whose core members are teachers, has for long used the multiplier model, but started shifting when it opened up membership.

“We had to tighten our risk profile checks, especially after opening up membership. The regulator is also quite concerned with the quality of the loan book. It is not just about giving loans,” he says.

So while the shift to lending based on one’s risk profile is affording more loans to members from large saccos, small ones are using the shift to shield themselves from people with a history of defaulting on payments.  

This is in order to protect their liquidity and distribute it evenly among members seeking loans.

Large saccos have been deepening their share of deposits, which is a key source for lending to members. This has been at the expense of small saccos.

Sacco Societies Regulatory Authority (Sasra) data shows there were only 20 saccos with deposits above Sh5 billion at the end of 2020. This is about just an eighth of the total 172 deposit-taking (DT) saccos.

These 20 DT-saccos controlled cumulative total deposits of Sh224.75 billion, being more than half (59.08 per cent) of the total deposits.

The analysis shows that more deposits are being concentrated in the few DT-saccos, with deposit size in excess of Sh5 billion, as small saccos struggle.

A total 99 DT-saccos, whose total deposits were below the Sh1 billion threshold, controlled a paltry 8.4 per cent of the total deposits within the system.

The situation puts a strain on small saccos, given the rising appetite for loans among members.

Sacco members, for instance, tapped Sh54.19 billion additional loans last year on the back of coronavirus disruptions that hurt household incomes.

The new credit saw the loan book of DT-saccos rise by 13.41 per cent to Sh473.74 billion from Sh419.55 billion, being the fastest jump in four years. Only in 2016 was the rise (15.3 per cent) higher than this.

The increased pace of lending by saccos was despite a deterioration in the non-performing loans (NPLs) ratio from 6.15 per cent in the previous year to 8.39 per cent in 2020.

Actual gross NPLs jumped from Sh25.79 billion to Sh39.86 billion, highlighting the impact of disrupted income flows for households in the pandemic period.

Sasra had in 2020 cautioned that failure to mobilise enough deposits, which is a key source of money for lending to members, would push saccos to borrow externally.

“This is an undesirable situation, as saccos are forced to fund the deficit from external sources, which more often than not turns out to be quite expensive,” says Sasra.

Saccos aspire to have over 90 per cent of their loans and advances portfolio financed principally by deposits. This is because they run on a model of mobilising deposits for on-ward lending.

Having a minimal or no portion of the loans and advances being financed through external borrowing allows saccos to offer affordable rates to members at the expense of microfinance and commercial banks.