Loan guarantees a double-edged sword for saccos

Before you become a loan guarantor, understand the financial liabilities you will incur in case of default. FOTOSEARCH 

By ISAIAH OPIYO

In Summary

• Saving societies adopting alternative ways of guarding against risks as defaults hit membership and earnings.

I had planned to cover something else other than sacco societies this week until I saw a letter from a reader, Arnet, narrating how she had lost her entire savings in repaying a loan for a colleague.

Arnet had been saving with her company sacco for the last three years hoping to qualify for a loan when a colleague requested her to stand as her guarantor for a loan of Sh300,000 from the society. Arnet, whose saving in the sacco had hit Sh320,000 obliged, but she did not consider the consequences.

Several months later, Arnet’s colleague changed employers and left without fully repaying the dues. After several attempts to follow her up failed, the sacco decided to pass on the burden to Arnet.

It’s the guarantor’s obligation to pay if the debtor defaults or dies but this penalty has demoralised and set back Arnet who has stopped her contributions to the sacco.

Such cases have become common among credit societies. Although they still insist on guarantors as a requirement for credit, the cushion is proving to be an arrow rather than a shield for the saccos’ development. Defaults have continued to impact saccos and their membership in the following ways.

Low morale among members and diminishing appetite for savings

The issue of guarantorship affects saccos and their members alike. Sometimes members pull out when they fail to secure guarantors. When this happens, the impact will be felt through reduced savings and falling sacco membership. Many saccos face collapse for lack of members.

Reduced capital base for saccos to lend out

Saccos rely on members’ contributions. Reduced or depressed deposit resulting from withdrawal would translate to low capital base.

Sometimes members applying for loans have to wait for several weeks to give the sacco sufficient time to mobilise savings or cash from loan repayments. People who have no patience to wait withdraw from the saccos to seek credit elsewhere.

Lack of capital to lend out also means the society will lose the opportunity to earn from interest on loans something which would impact on the profitability of the society and eventually dividend to members at the end of every trading year. Low dividend is the surest way to kill morale.

Loss of savings to the sacco in case of default

Since saccos insists on guarantorship as a risk management measure, defaults would force the sacco to seize the savings of the guarantors until the loan is fully recovered.

Members like Arnet can neither borrow against their deposits nor access their savings should they opt to terminate their membership until the money is fully recovered.

A guarantor is not only bound to pay the loan amount if the debtor defaults, but the transaction could impact his credit score and loan eligibility.

Whereas guarantorship in this situation would cushion the sacco from bad debts resulting from defaults, the same would impact negatively on the members who volunteered as guarantors.

Fear of guarantorship

A reduced or depressed loan book will further affect the profitability of the sacco and eventually investments. It is also important to note that besides the motivation to access affordable loan facilities, most income
earners save through the saccos to earn lucrative dividends. This explains why the issue of guarantorship has continued to subdue the growth of saccos instead of serving as an impetus.

Many saccos are already adopting alternative ways of risk measures such as asking for collateral for those unable to get guarantors.

If your best friend decides to take a sacco loan and asks you to stand surety, first consider the consequences. Ensure you have the financial muscle to shoulder the additional liability that will come in case he or she defaults.

Mr Opiyo is Training Manager & Coach with Tolerance Employee Financial Advisors Limited