New law to catch Sacco loan defaulters

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By Azael Masese

The noose is set to tighten on Savings and Credit Co-operative Societies (Saccos) loan defaulters with a proposed law that allows them share records of all members having been tabled for debate in Parliament.
Sacco will share amongst themselves the credit records of their members if a Bill before Parliament is passed into law.

The Sacco Societies (Amendment) Bill, 2018 seeks to expand the current credit information sharing mechanism not only within the societies but also with other licensed financial institutions.
Presently, Saccos register with Credit Reference Bureaus voluntarily but if amended, the Act will make it compulsory to share their information.
Consequently, blacklisted members who want to borrow will be sent back to the institution that had listed them to settle the outstanding amount before they are offered any credit.
Telepost Sacco board chairman Geoffrey Onyango applauded the move, saying it will cure some of the malpractices the sub sector experiences and that have hindered its growth.
“A problem recognised elsewhere can spread and the piece of legislation can significantly cure this,” he said.
With the common bond, some members whose credit history is not well documented can freely walk to another society and get loan which can lead to bad debts.

Delegates follow proceedings during the 3rd Annual Sacco Leaders Convention at Sarova Whitesands Beach Resort and Spa on February 24, 2018. Photo/Andrew Kasuku
Delegates follow proceedings during the 3rd Annual Sacco Leaders Convention at Sarova Whitesands Beach Resort and Spa on February 24, 2018. Photo/Andrew Kasuku

“Loaning based on collateral is not sufficient but cash flow obtained through the access of the individual’s credit history can help avoid lending to a serial defaulter,” he said.
A number of members, he warned, operate in a cartel like business where they borrow a loan from one society once they save for six months only to disappear and are likely to go to another society.
Amica Saving and Credit Ltd CEO James Mbui admitted that failure by Sacco players to disclose the members’ negative or positive information adversely hurt the industry.
Once this is changed, it will significantly enable them make informed decisions on issuing of loans.
“Some members merely pick loan forms and fill them without any prior knowledge that they have taken loans elsewhere and what their repayment their status is,” he said.
With the expected change, Ombui is optimistic that the sector can become a major player in the financial sector.
Fortune Sacco CEO, Amos Kimotho said this is the best way to manage risk portfolios and reduce the liability.
“It is better to have disciplined borrowers as those who are not able to meet part of their bargain through prompt loan repayment will have nowhere to hide once the bill becomes law,” noted Kimotho.
If passed and well managed, he said that the sub sector can register tremendous growth and catapult it to become a key financial player and economic contributor in the country.
“With the credit reporting out there, it will enable us make informed decisions in the running of the societies,” he said.
This Bill has been submitted by the Cabinet Secretary for the National Treasury in line with the proposals announced in the Budget for 2016/2017.
“Sacco societies shall, in the ordinary course of business and in such manner and to such extent as shall be prescribed under the Banking Act, exchange such information on performing and non-performing loans as may be specified by the Authority from time to time.”
It’s estimated that millions of Sacco members have taken more than Sh15 billion and are not repaying, leaving their colleagues who had guaranteed them to shoulder the burden.
This may soon change as the government seeks a way to ensure individuals who have abused the trust of their friends and colleagues, take responsibility for defaulting on loans.
“The general objective of the amendments is to expand credit information sharing mechanism to include Sacco societies together with other licensed institutions,” the gazette notice says.
The Sacco Supervision Annual Report 2016 indicated an increase on non-performing loans from Sh13.21b in 2015 to Sh15. 57b in 2016.
This contributed to the increase of the total loan portfolio at risk, measured as a ratio of the non-performing loans to gross loans 5.23 per cent in 2016 compared to 5.12 registered in 2015.
Side Bar
In the Sacco sub sector, loans are classified as being in default after they go for 90 days without any payments.
The proposed changes in the law would also allow Saccos to view information about bank borrowers.
Currently, societies are not able to see bank data but this will change if the Act is amended.
Listing with CRBs has worked with banks to minimise losses due to defaults as most lenders have made it part of the conditions they consider before giving out loans.
In the past, Saccos have relied on loan guarantors to recover bad debts, a situation that would often see defaulters abscond and leave the burden to be borne by the co-signers.
Even with unpaid Sacco loans, people, however, could still turn to banks for credit advances and this is the gaps the change in law is set to address.
Saccos will, however, have to invest in robust data storage systems to ensure they are able to send out detailed reports as required by the bureaus.
Any institution which inquires about a borrower will see their borrowing history for the last five years, allowing the lender determine the risk they are taking in advancing the loan.
Referencing was introduced in Kenya in 2010 and inquiring from the bureaus has become a major form of loan appraisal of most banks.

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