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:
- 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.
- 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  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.
How does a Cooperative arrive at an ideal board of directors’ composition?
By Mary W Kiema
As a group sets out to form an enterprise, their main concern is to meet their common needs through a business model that is suitable for most of them. Their requirements for the association will be formulated depending on the anticipated nature of the business. The form of business will inform the appropriate rules and subsequent regulations required. The interim governing body at this stage will be composed of some of the founder members who will be responsible for setting up the ground rules.
In Cooperatives, the objects and membership requirements are contained in the bylaws. These by-laws are specific to an individual Cooperative society. A financial Cooperative for example will provide bylaws that attract members who have the capacity to save, borrow and repay promptly.
A marketing Cooperative will reach out to the producers or developers of the desired products. At this point the most important assignment is to get numbers regardless of their gender or age provided that they can meet the membership conditions. As the Cooperative takes shape and begins to generate the desired results, the focus is directed to other areas of concern a simple scan through the composition of the membership of a number of Cooperative Societies, shows the dominance of the male gender. This is further evident at the board of directors level and in apex bodies. Attention has been drawn to this state of affairs and certain interventions are being explored to address this.
As a requirement, a Cooperative Society observes the principle of open and voluntary membership. This means a Cooperative can attract members from diverse walks of life. These members have a right to democratically control their enterprise. The implementation of this democratic member control principle sometimes yields results that go against the tenets of inclusion. The outcome may sometimes generate discussions that are geared towards attaining the desired status. This will only happen for an enterprise that is deliberately aiming at achieving an ideal position in governance. For most, the disparity goes without being attended to until it is pointed out from within or without.
Since the promulgation of the Constitution of Kenya 2010, the matter of gender balance has continued to elicit a lot of discussion. The constitution being supreme, all other laws including the Cooperative laws are expected to align.
Enterprises that are private and opt for democratic member control grapple with the challenge of balancing between democracy, appropriate representation and inclusivity. The desire is to not only have all stakeholders sufficiently represented in the decision-making but also to have an effective organ at the top. The growth and complexity of the Cooperative societies have also further complicated the equation. The qualification requirements for board members go beyond one being a member. To qualify for a board position, some Cooperatives require one to have a certain number of shares and amounts in deposits and to have attained a certain level of education or specific professionalism. This may be interpreted as an avenue for eliminating a particular category from leadership. With all these hurdles, how does a Cooperative arrive at an ideal board of directors’ composition?
This governance challenge is not an easy one to resolve but it may be the missing link towards addressing issues that have remained in the background for a long time. As the ground is being levelled to bring all players into the fold, some interventions will be required. The absence of youthful members in the movement may be attributed to their inability to ascend to the decision-making table. The board of directors are drawn from members, therefore, for youth and women to be on the board they must first be found in the membership. With enough numbers, the electoral zones may be created in a manner that will give all eligible members a chance to serve at the top.
Among the interventions evident include the formation of women and youth networks. Some of these networks have developed elaborate programs to equip the participants with an array of leadership skills that are geared at enhancing inclusivity in institutions. The emphasis is on youth and women because they have been seen to have been left behind although these skills are required across the board. The situation is slowly changing with more women taking up jobs at all levels and being able to participate with others in the management of the organization they belong to. The youths are also encouraged to form workers’ Cooperatives where they can contribute their skills as they grow their unique enterprises.
Apart from achieving the right composition in terms of demographics, the main concerns have lately turned to the effectiveness of the board. Some skills are wanted among the board. It is for this reason that the issue of accommodating independent directors who have specific skills keeps coming up. One step at a time with the right intentions, an ideal situation will be achieved.
The writer is a consultant on Co-operative Business Model, a member of the Kenya Society of Professional Cooperators and founder of the SACCOprenuers group on Facebook
SUCCESS STORY: Kenyan SACCOs help Women Turn Entrepreneurial Dreams into Reality
By Linda Karimi
Nancy Kariuki was a licensed pharmacist who wanted something more: she dreamed of becoming an entrepreneur. Eight years into a career in sales for drug companies, at age 40, she finally took the plunge.
Keenly aware of the challenges women-owned businesses face, Nancy had been saving money over the years, and by 2020 had amassed Sh1 million (approximately $7,300) in start-up capital.
She opened her business, Essos Pharmacy, in the central business district of Kerugoya, a town of 15,000 in central Kenya.
Nancy was successful for two years in establishing and growing the business. But, in 2022, Essos was struggling to meet increased demand caused by the COVID-19 pandemic. She needed capital and turned to Fortune SACCO. SACCOs, savings and credit cooperatives, are a popular financial services option in Kenya.
Members of SACCOs invest in them or make deposits and can use that value as collateral when borrowing from the institution. They often can borrow more from a SACCO than from a bank and at a lower interest rate.
Fortune SACCO is one of ten SACCOs participating in a USAID-funded World Council of Credit Unions project under the Cooperative Development Program (CDP) called Technology and Innovation for Financial Inclusion (TIFI). The project seeks to enhance the capacity of SACCOs to lend to micro-, small- and medium-sized enterprises through improving credit risk management, streamlining and simplifying the lending process, and increasing the number of quality financial products available to these businesses.
Fortune granted Nancy a loan sufficient to do what she most wanted – create new jobs. She hired a staff of four, after previously relying only on her husband for extra help. She also enrolled her employees in the National Housing Insurance Fund and the National Social Security Fund, which provide them with healthcare, a pension and social protection.
Nancy also used the money she borrowed to upgrade her point-of-sale and inventory system. She now has more visibility over the operations and financial position of the business. The data also enhances her ability to borrow money in the future, and at a lower cost, because she can now provide reliable financial statements to lenders.
Within a year, the business tripled its revenue and now competes with larger pharmaceutical businesses as a key player in the market. Nancy’s success not only contributes to the economic growth of the community but also provides a source of inspiration for other women entrepreneurs in the area.
The USAID/CDP-TIFI project is transformative because it unlocks the potential of SACCOs such as Fortune, improving how they lend to micro-, small- and medium-sized enterprises. SACCOS in turn helps unlock the potential of those businesses, such as Essos Pharmacy, and people like Nancy, who turned her dreams into reality and improved her community in the process. She is a shining example of what can be achieved with the right resources, determination, and support.
KUSCCO and Aqua for All launch program to provide affordable financing to WASH sector through SACCOs
By Linda Karimi
Kenya Union of Savings and Credit Cooperatives (KUSCCO) in partnership with Aqua for All has launched the ‘Maji Nyumbani’ program aimed at providing affordable finance to the water, sanitation and hygiene (WASH) sector through SACCOs. The program targets SACCOs serving low-income and vulnerable persons across the country with financing being channeled to households and community-based micro, small and medium enterprises (MSMEs).
The program will pilot financing in ten deposit-taking SACCOs from Mombasa, Eldoret, Siaya, Baringo, Embu, Kakamega, Nyeri, Meru, Kilifi, and Nakuru Counties. It will also offer technical assistance to develop WASH loan products that respond to the needs of SACCO members and communities. The pilot phase is expected to take 15 months and to disburse 2,250 loans. Expected target results include reaching 12,500 people comprising of 8,250 women and 4,250 men and sustaining 1,250 jobs.
According to George Ototo, Group Managing Director of KUSCCO, the SACCO sector has a potential of between Sh84.9 billion to Sh174 billion to lend towards the WASH sector, but the SACCOs have faced challenges towards achieving this due to lack of institutional capacity to understand WASH lending, perceived high risk of the WASH sector, lack of awareness of the market size opportunity for SACCOs and lack of member awareness of WASH loan products.
“Through the Maji Nyumbani program, we intend to unbundle or separate the WASH component from the existing loan products. This has the potential to catalyse access to water by availing more financing to SACCO members and Micro, Small and Medium Enterprises (MSMEs). We expect 25 MSMEs to be served per SACCO translating to 250 MSMEs for the ten SACCOs,” said Mr. Ototo.
Marlies Batterink, Aqua for All Regional Manager for East Africa, said that the partnership with KUSCCO will allow prioritizing and scaling WASH loans, creating a significant impact by targeting both households and MSMEs.
The partnership has the potential to reach all corners of the country through the extensive SACCO membership base. Increasing access to loans through KUSCCO aligns with their goal to accelerate access to WASH for underserved, remote communities through mobilizing funds for WASH.
Aqua for All is an international foundation operating primarily in Africa and Asia, while KUSCCO is a Union for all SACCOs in Kenya, providing advocacy, advice, and protection against adverse legislation and restrictions. The Union promotes the organization and development of viable SACCOs.
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