By Francis Mungai

In their pursuit to reduce non-performing loans, SACCOs have wielded almost unfettered powers in guarantors’ assets attachment. The ruling from the Cooperative Tribunal case 57 of 2021; Samuel Odhiambo Okope & 2 others (claimants) v Mwalimu National Savings & Credit Co-operative Society Limited & another (respondents), heralds a significant step on departure from this practice.

Securing a SACCO loan

SACCO Loans in Kenya are generally secured or collateralized by the borrower’s assets and on most occasions, a borrower is required to bring in a third party (guarantor) who can stand or use his assets (guarantor) to secure the loan facility.

The Claimants were guarantors to a loan issued to Charles Gwada Sudhe by Mwalimu National SACCO. Charles defaulted on the loan amounting to Sh1,018,916.46 and the SACCO proceeded to attach the assets of the guarantors to recover the loan. The Claimants protested this action, but the SACCO was unbowed. The dispute was then brought before the tribunal.

The SACCO defended its action at the co-operative tribunal by offering the following reasons among others:

1. That in guaranteeing repayment of the loan, the claimants accepted the liability to repay the loan upon default by the borrower which forms a separate agreement between the claimant and the SACCO.
2. That the attachment of the Claimant’s assets was done in strict adherence to the law where the SACCO was exercising its right of recovery of the loan advanced to the borrower whom the Claimants guaranteed.

Matters for determination

There were two key issues for determination at the tribunal. The first issue was whether the guarantors had a duty towards the SACCO to repay the borrower’s loan on default and secondly whether the SACCO  was right in attaching the guarantors’ assets upon default of the borrower’s loan. An ancillary matter also for determination was who carries the cost of the suit. We will focus our attention on the two key issues.

An important consideration in this matter is the contractual agreement between the guarantor and the SACCO and indeed the SACCO’s defence was anchored on contract law and more specifically on case law  Fidelity  Commercial  Bank  Limited  – vs-  Kenya  Garage  Vehicle  Industries  Limited  [2017] eKLR. Where the court observed that:

Because a contract  of guarantee  is essentially  a contract,  the following  basic  principles  of contract law  will apply. A contract of guarantee binds the person giving a guarantee  to honour  its terms irrespective  of any dispute  that may  be existing  between  the parties  to the transaction  for which  the guarantee  was given. A guarantee is therefore an accessory contract  by which  the guarantor undertakes  to be answerable  to the provisions  for the debt  or default  of  another  person  whose  primary  liability  to the promise  must exist.

The issue of guarantee is then thrust into centre stage, what then is a guarantee? and are there limitations on its application? In examining this question, we must look at the guarantee from two lenses. Is the guarantee provided to the SACCO by guarantors a pure form (perfect indemnity) or a conditional form (payment subject to specific events occurring?)

Defining a guarantee

A Guarantee is defined as an undertaking to answer for the payment or performance of another person’s debt or obligation, in the event of default by the person primarily responsible for it. A guarantee is a secondary obligation because it is contingent on the obligation of the borrower to the beneficiary of the guarantee (SACCO). On the other hand, an indemnity is a contractual promise to accept liability for another’s loss. It is a primary obligation because it is independent of the obligation of a borrower to the beneficiary of the indemnity (SACCO) under which the loss arose.

This definition did come into play in deciding this case, for example, the claimants argued that the SACCO by-laws explicitly stated that in the event of a default, the SACCO would take up the matter with the borrower through a tribunal mechanism and while the SACCO averred that this was a discretionary measure available to the SACCO and did not limit its powers to attach the guarantors’ assets. The tribunal agreed with the claimants that the SACCO needed to demonstrate that they had pursued all other avenues of collecting the debt (including using a tribunal) before attaching the guarantors’ assets.

In the end, the tribunal ruled in favour of the claimants on all the prayers. The lesson to be picked here is that SACCO management boards must relook their debt enforcement measures. Guarantees can no longer be treated as blanket indemnities; there is a burden placed on SACCOs to ensure that the principal debtor is pursued at his level at length before effecting attachment measures on guarantors. Further, SACCOs will need to review their existing by-laws for any unnecessary burden that may be placed on the SACCO in pursuit of debt collection.

The author is the Audit Partner at FH Consulting, Certified Public Accountants. You can reach him on mungai@fhc-ea.com www.fhc-ea.com

By Ngumbo Njoroge

176 Deposit Taking SACCOs have extended their dominance of the SACCO subsector in all key indicators according to new data by the SACCO Societies Regulatory Authority (SASRA).

In the latest SACCO Supervision report, the regulator noted that DT-SACCOs have the highest proportion of total assets amounting to Sh691 million, representing 85 per cent of the total assets’ portfolio. 

The sector’s total assets grew by 9.93 per cent in 2021 to reach Sh807billion from Sh 734 billion in 2020.185 Non-Withdrawable Deposit Taking SACCOs’ share of assets was a paltry 14.3 per cent. 

The dominance was reflected in other key indicators. Deposit-Taking SACCOs had the largest proportion of total deposits amounting toSh474.2 billion, representing 83.9 per cent of the subsector’s total deposits.

The subsectors’ total deposits grew by 9.8 per cent in 2021 to reach Sh564.8 billion compared to Sh514.4 billion recorded in 2020. 

The 185-NWDT-SACCOs shared the remaining 16.05 per cent of the total deposits’ portfolio.

“On the credit front, the subsectors’ gross loans increased by 9.67 per cent in 2021 to reach Sh608.7 billion from Sh555 billion reported in 2020,” SASRA said in the report.

DT-SACCOs controlled the largest share of gross loans issued amounting to Sh522.2 billion, representing 85.7 per cent of the gross loans issued. 

On the other hand, the 185-NWDT-SACCOs share of the gross loans amounted to Sh86.50 billion and represented 14.21 per cent of the gross loans.

However, the regulator noted that there was a decline in growth rates of Deposit-Taking SACCOs in key performance parameters of total assets, total deposits and gross loans.

“The total assets of DT-SACCOs grew at 10.10 per cent in 2021 compared to a growth rate of 12.75 per cent recorded in 2020; while their total deposits grew by 9.92 per cent in 2021 compared to a growth rate of 13.41 per cent recorded in 2020,” the regulator said in the report.

Further, DT SACCOs loans also grew at a slower pace than in the previous year, growing at10 per cent in 2021 against 13.16 per cent in 2020.

“The slower growth rates witnessed in the performance of DT-SACCOs is evidence that the after-effects of COVID-19 pandemic are still being felt in the SACCO subsector and erratic weather patterns.”

42-large-tiered SACCOs composed of 39-DT-SACCOs and 3-NWDT-SACCOs with assets above Sh5 billion controlled 67.11 per cent of the subsector’s total assets.

This, the regulator said, leaves the remaining 319-regulated SACCOs to share 32.8 per cent of the total assets’ portfolio.

“Cognizant of the fact that assets are the revenue and income generating resource of SACCOs, such small average proportionate asset portfolios technically implies that the average income generated by these SACCOs was relatively low,” SASRA said, expressing doubt on the sustainability of small SACCOs in light of competition from large-tiered SACCOs which enjoys economies of scale. 

Similarly, 28 SACCOs, including 26DT-SACCOs and 2 NWDT-SACCOs with assets above Sh5 billion control a market share of 56.3 per cent of the subsectors’ total deposits.

333-regulated SACCOs shared 43.6 per cent of the total deposits market share.

 By Samwel Mwangi

The SACCO Societies Regulatory Authority (SASRA) has called for SACCO subsector players to commence policy dialogue on voluntary mergers and consolidation.

SASRA says mergers and acquisitions taking place in commercial and microfinance banking, and competitors of SACCOs in the mobilization of savings and credit provision business are of great concern.

“Stiff competition in the national financial sector driven by heavy capital expenditures in marketing, competitive pricing, digital financial products, and service, means that only large and well-resourced financial institutions which enjoy economies of scale shall survive in the long run,” the regulator said in a report.

Quoting statistical information in a recent report, SASRA said there are too many small SACCOs in the subsector.

“Despite being social enterprises in their nature and formation, SACCOs are principally economic businesses which will thrive and be sustainable to meet members’ obligations when they enjoy economies of scale.”

The data shows that there are 49 Agriculture based SACCOs in the country, but which controlled less than 10 per cent of the subsectors’ total assets and total deposits. “Equally there were over 107-Private sector based SACCOs but whose total assets and total deposits portfolios is less than 13 per cent of the subsectors’ total assets and total deposits.

SASRA’s analysis shows that 67.5 per cent of all SACCOs controlled a paltry 36 per cent of the subsector’s total assets and deposits, while the remaining 32.4 per cent of all SACCOs controlled a whopping 64 per cent of the subsector’s total assets and deposits. 

“Other than Government-based SACCOs, it can be concluded that on average other clusters of SACCOs are relatively small in their respective asset sizes and deposits, and cognizant of the assets being the principal revenue stream for SACCOs, it goes without saying that the respective incomes and revenues generated by these SACCOs were on average quite low thus affecting their stability and sustainability.”

The Regulator further revealed that many Private sector-based NWDT-SACCOs and Community-based NWDT-SACCOs draw their membership from the same fields of membership and common bonds.

“To enjoy economies of scale, these small SACCOs can amalgamate, merge, or consolidate with each other based on similarities of fields of membership or common bonds, to enjoy economies of scale and compete effectively, not just within the SACCO subsector space but also within the national financial sector space.”

SASRA cautions that in the absence of consolidation, smaller SACCOs shall feel the heat of competition with their larger counterparts eating into the market share.

“Since the larger SACCOs can meet the member demand at competitive prices, the smaller SACCOs will always remain in a disadvantaged position to effectively compete.”

In 2021, the regulator raised concerns about shrinking small-tiered DT SACCOs, saying this will impair their competitiveness and sustainability.

The data showed that the average growth rates of DT-SACCOs with total assets below Sh1 billion continued to shrink over three years comparative periods, resting with an average growth rate of 5.2 per cent in 2020.