Ms. Ndegwa, in an interview with SACCO Review, said that the use of credit scoring as an assessment tool when considering whether to give a loan product to a SACCO member is already happening, particularly where SACCOs are offering mobile loans.
“Members apply for mobile loans on online platforms using the mobile app and the USSD code. Here, applicants are not required to have guarantors, with more SACCOs using the credit scoring method as an assessment tool,” said Ms. Ndegwa.
She denied claims that SACCOs are experiencing an increase in the volume of non-performing loans due to their lending practices.
“The Kenyan economy is undergoing tough conditions, and SACCOs are affected just like all other businesses. For instance, we have employers terminating the employment of various individuals, who are also members of SACCOs. We also have firms exiting this market for other destinations, thus rendering thousands jobless. SACCOs are also affected by these factors. Employer-based SACCOs are worst hit by the many deductions, taxes, levies, and charges that have gone up, including NSSF and Social Health Insurance. All these deductions affect the net incomes of employees, who still have obligations including SACCO loans.
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The money that is remitted to SACCOs by employers, after all the deductions have been made, has reduced considerably. Underpayment of loans by members due to increased deductions affects the performance of the SACCO loan book,” said Ms. Ndegwa.
In the SACCO business, there are guarantors and the CRB to assist these financial outfits in dealing with loan defaulters.
“In case a member fails to service their loans, the Society forwards the name to the CRB and then leaves the guarantors to follow up on the defaulter after we have seized their deposits. We have signed agreements with CRBs, who then blacklist the defaulter, making them a liability to us and unable to access credit facilities from any other SACCO. Since a member borrows against shares held, the SACCO first freezes these shares in the event of a loan default. Then we go for deposits of the guarantors, who will follow up on the defaulter.
We also have loan agreements that allow a SACCO to auction the property of the defaulter, though we rarely reach these levels,” said a top executive at one of the leading DT Saccos.
While the credit scoring method has been introduced, not many SACCOs are keen to adopt this method when lending to members.
“Unlike banks, we rely on a member’s payslip and then extend loans against it. We are dealing with members who are also owners of the business and therefore are more considerate than banks. We are a social enterprise and not a profit-making venture like other lenders in the market,” said the manager.
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Credit scoring is a numerical system that lenders use to assess the risk of lending money to an individual, based on their past credit behaviour and financial history. A credit score given to a customer or member is a number that summarizes their credit history, reflecting how well they have managed credit and debts in the past.
Lenders, including banks, microfinance companies, and other financial institutions such as SACCOs, use credit scores along with other factors to determine a potential borrower’s creditworthiness. They make decisions about lending such as approving or denying a loan, setting interest rates, and determining credit limits.
Credit scores are based on information in a credit report, which includes one’s payment history, amounts owed, length of credit history, new credit, and credit mix.
A higher credit score generally means one is considered a lower-risk borrower, potentially leading to better interest rates and more favourable credit terms.
One can check their credit scores with several reference bureaus, including TransUnion and Metropol in Kenya.
By Jackson Okoth
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