SASRA decries SACCOs slow adoption of credit scores in loan appraisals

The Sacco Societies Regulatory Authority (SASRA) has expressed concern that, despite the immense value of credit scoring, SACCOs have been slow to fully adopt credit referencing, resulting in gaps in credit decision-making.

The regulator also highlights challenges in implementing effective credit-scoring systems, which have hindered responsible lending and undermined long-term financial stability.

However, some senior executives in the SACCO industry hold differing views on the use of credit scoring as a tool for loan assessment.

“It is not that SACCOs are not using credit scoring when assessing borrowers. At Mentor SACCO, we apply credit scoring to evaluate the creditworthiness of members applying for our mobile loan product, which does not require guarantors,”

“Most SACCOs offering mobile loans are therefore shifting towards credit scoring as an assessment tool. However, we still need to pilot, test, and evaluate the implications before adopting credit scoring for other loan products. Other SACCOs are also beginning to explore this approach for non-mobile loan products. It’s about starting somewhere and building from there,” said Joyce Ndegwa, Chief Executive Officer of Mentor DT SACCO Limited.

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Ndegwa, in an interview with SACCO Review, noted that the use of credit scoring as a loan assessment tool is already being applied by SACCOs that offer mobile loans.

“Members apply for mobile loans through online platforms, either via the mobile app or USSD code. Since these loans do not require guarantors, more SACCOs are adopting credit scoring as the preferred assessment tool,” said Ndegwa.

She refuted claims that SACCOs are experiencing a rise in non-performing loans as a result of their lending practices.

“The Kenyan economy is going through tough times, and SACCOs are feeling the impact just like other businesses. For instance, we are seeing employers terminating the contracts of individuals who are also SACCO members, and some firms are exiting the market altogether, leaving thousands jobless. These developments directly affect SACCOs,”she said.

The CEO further stated that the, employer-based SACCOs are particularly hard hit due to rising deductions, taxes, levies, and charges including NSSF and the Social Health Insurance Fund. All these deductions reduce employees’ net income, yet these employees still have obligations such as SACCO loan repayments.

“As a result, the amount remitted to SACCOs by employers, after all deductions, has reduced significantly. This underpayment of loans due to shrinking incomes is affecting the performance of SACCOs’ loan books,” said Ndegwa.

In the SACCO sector, guarantors and Credit Reference Bureaus (CRBs) play a key role in helping these financial institutions manage loan defaulters.

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“In the event a member fails to service their loan, the Society forwards their name to the Credit Reference Bureau (CRB) and allows the guarantors to follow up with the defaulter once we have seized the member’s deposits. We have formal agreements with CRBs, who then blacklist the defaulter, making them ineligible for credit from other SACCOs,” she said

She added that since some members borrow against their shares, the SACCO first freezes those shares in case of default. We then recover the outstanding amount from the guarantors’ deposits, prompting them to pursue the defaulter themselves, adding that loan agreements also allow the SACCO to auction the defaulter’s property, though the Sacco rarely escalate to that level.

While credit scoring has been introduced, few SACCOs have shown a strong willingness to adopt the method when issuing loans to members.

“Unlike banks, we rely on a member’s pay slip and extend loans based on that. We are dealing with individuals who are both members and owners of the SACCO, so our approach is more considerate than that of banks. We operate as a social enterprise, not a profit-driven venture like other lenders in the market,” said the manager.

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“While we are yet to adopt credit scoring as a basis for lending to members, we still assess their creditworthiness, including checking their CRB status. We do not extend credit to individuals who have defaulted on loans from other institutions until they clear their debt,” said Solomon Atsiaya, Chief Executive Officer of Kenya National Police DT SACCO.

Credit scoring is a numerical system used by lenders to assess the risk of lending to an individual, based on their past credit behaviour and financial history. The credit score assigned to a customer or member is a number that summarizes their credit history, indicating how well they have managed credit and debt over time.

Lenders, including banks, microfinance institutions, and SACCOs, use credit scores alongside other factors to assess a potential borrower’s creditworthiness. These scores help inform decisions such as loan approval, applicable interest rates, and credit limits.

Credit scores are derived from information in a person’s credit report, including their payment history, amounts owed, and length of credit history, new credit and the mix of credit types used.

A higher credit score generally indicates that an individual is a lower-risk borrower, which can result in more favorable interest rates and credit terms.

Individuals can check their credit score through credit reference bureaus such as TransUnion and Metropol in Kenya.

By Jackson Okoth

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