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.

One Sunday afternoon in 1999, a few ladies from Mother’s Union met and decided to do table banking. The group was called Mother’s Union SACCO and it started by saving Sh200 which later grew to Sh500. Now, 23 years later, it has grown to the current over 31,000 members. Dioceses of Mt. Kenya South SACCO (DIMKES) has its headquarters at the heart of the bustling Kiambu town, which is not only agricultural but also a business hub. With a vision; ‘To be a world-class deposit-taking SACCO anchored on Christian values,’ the SACCO has branches in Ngong, Kiserian, Kangemi, Wangige, Banana, Kikuyu, Nairobi and Limuru, Kimende, Ruaka, Kiambu and Githunguri,

Dimkes SACCO was licensed by the SACCO Societies Regulatory Authority (SASRA) as a deposit-taking SACCO in 2010. Despite challenges faced during the Covid-19 pandemic including loan delinquency, closure of members’ businesses, low loan demand, tough working environment, and reduced volume of transactions by members, the SACCO emerged victorious in this year’s Ushirika Day winning three accolades; Kiambu County, 1^st place,Most Improved SACCO, Nationally, 2^nd place, Most Improved Community-based SACCO and Nationally, 3^rd, Best in savings, deposit-taking community-based SACCO. Further, the SACCO’s total loan portfolio has grown to Sh1.8 billion at the close of 2021, with 90 per cent of it allocated to SME lending.

The SACCO Star team met with the SACCO’s energetic and passionate managers who shared more insights on lending to Small and Medium Enterprises (SMEs).  

What is the name and what are the features of the SME products?

We have FOSA loans tailored for SMEs including:

Development loans to assist members construct both residential and commercial houses.

Landlord loans are issued at a maximum of Sh2 million, secured with a deed of rental assignment and loan repayment of 36 months. Landlords can also access a rental advance which is a short-term loan payable within 3 months up to a maximum of Sh500,000.

Asset Finance loans facilitate members to buy assets including motor vehicles.

What does TIFI mean and how have you applied it in the SACCO?

TIFI is an acronym meaning Technology and Innovation for Financial Inclusion which has developed an SME lending toolkit to reduce credit risk for SACCOs lending to SMEs, as well as streamline and simplify SME lending processes, thereby cutting the associated costs. We embarked on pilot testing of the SME loan underwriting tool based on the 5Cs of credit scoring for new SME loan applications.

What are the technological innovations you have put in place for a smoother and more convenient lending process for SMEs?

We are in the process of integrating the new credit scoring process into the core-banking system to reduce the turnaround time for SME credit applications.

We capture data obtained from our members through loan cards/forms which are uploaded into the system. This ensures we have all the information required to enable us to score loans using the SME loan underwriting tool.

The SACCO has a ‘Paybill’ number and ‘Lipa na M-Pesa’ option to ensure that members can transact with the SACCO more conveniently. It also has a Mobile App called ‘M-chipuka’ accessed through dialling the USSD code *645#, which members use to access loans, make deposits and withdraw money.

What risks do you face when lending to SMEs and how does the TIFI model de-risk lending to this sector?

One of the challenges we face is asymmetric information where the borrower does not disclose adequate information about his or her financial affairs. In addition, some SMEs do not keep proper books of accounts or records for their business transactions making the appraisal process a bit cumbersome. We continue to offer more capacity building to our members to see the need for bookkeeping and daily transaction recording since it enables the SACCO to undertake better credit assessments based on reliable financial statements. On the other hand, the loan officers undertake site visits to the borrowers’ premises to ascertain that the borrower has given correct information about their business. TIFI loan underwriting tool also enables the loan officer to collect adequate information that supports objective credit decision-making.

Secondly, from our experience, SMEs are net borrowers who seldom keep funds in their accounts and thus the SACCO strives to provide products and services which appeal to and offers incentives to promote a savings culture.

Lastly, lending to SMEs is riskier compared to lending through check-off. It’s a bit hard to correctly price these loans commensurate to the risk since the market rates appear to be capped. The risk-based lending approach already started by the banks will pave way for better pricing of SME loans thereby incentivizing financial institutions including SACCOs to lend more to SMEs.

How have you applied the 5Cs of lending?

The diagnostic tool already has the 5Cs of lending in-built namely, Character, Capacity, Conditions, Collateral And Capital. The tool also provides the income and expenditure information, as well as the balance sheet to enable one to make sound decisions on whether the SME has the capacity to repay the loan. It also has options to fill in information about unsecured collateral or guarantors.

So far, the SACCO has used the tool for six months disbursing 12 loans with zero PAR.

In numbers

• Approximately KES.500-600 million of the loan book is used for SME lending
• Minimum loan issued-KES.500,000
• Maximum loan issued-KES.1.5 million
• Number of loans issued-12
• Portfolio at Risk (PAR)- 0%
• Loan repayment period: 36 months
• Turn-around time- Before using the credit scoring tool- 15-30 days
• After using the scoring tool- 5-7 days