How Saccos can tame the rising cases of loan defaults

BySacco Review

Jul 27, 2018 ,

The recent revelation by the Senior Deputy Commissioner, State department for Co-operatives Geoffrey Njang’ombe that loan defaulters owe Saccos over Sh8 billion does not augur well for the sector.
Ridiculously, these loans have not been serviced over several years yet the defaulters are still earning their monthly incomes apart from owning assets worth billions of shillings.
In recent times loan default has emerged as a topic of frequent discussions both in Sacco Annual Delegates Meetings (ADMs) and the media.
It should be mentioned first and foremost that there are certain structural features of the Sacco system in Kenya which make it prone to loan default.
First, asymmetry of information is pervasive in Sacco systems. This means that Saccos as lenders do not have full information that borrowers possess about financial viability of projects while submitting loan applications.
The high rate of loan default could also be associated with the choice of Board Members not based on relevant qualifications. Audit Committees do not function independently.
Risk Management Committees may be either non-existent or do not function effectively.
Board members are more concerned with approving specific loans or rescheduling/restructuring loans for favoured people.
There are also allegations of corruption against both Board Members and senior employees. Thousands and thousands of cases are stuck up in the loan recovery courts.
In Kenya, many Saccos cannot to meet capital adequacy requirements and may engage in aggressive lending to undeserving borrowers.
In order to tame this vice, the Saccos need to hire more skilled staff in assessing viability of the projects for which loans are sought, monitoring utilisation of funds and maintain dialogue with the borrowers.
Secondly, the boards also should refrain from interfering in the functions supposed to be performed by the staff.
Third, the Audit Committees and Risk Management Committees should be allowed to function autonomously.

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