By Robert Kanyua

The Climate Crisis is deepening and bringing along adverse and significant impacts across all sectors. The all too familiar threats occasioned by climate change include flooding, drought, unpredictable seasons and weather patterns that have turned hitherto fertile lands into deserts. Accordingly, the loss and damage associated with climate change impacts keep on growing. Yet, even as the consensus around climate risk reporting becomes stronger, not all financial services firms have embraced the practice. How should financial services firms approach climate risk reporting, and specifically, why must Savings and Credit Cooperatives (SACCOs) embrace Climate Risk Reporting?

The Impact of the Climate Crises

The impacts of the climate crises extend beyond the environment to impact business. Even where slower-moving weather events like droughts and coastal erosion are not so apparent, their impacts contribute to economic erosion. That is why the climate change risk mitigation agenda should concern companies greatly just as it concerns nations across the world.

Climate-Related Risks & Their Connectivity to Business

The nexus of Climate Risk and Business Sustainability is becoming clearer. It is now evident that Climate change presents economic risks as it impacts the long-term growth of the organization and in certain instances business continuity.

As each year passes by climate risks are becoming greater and the potential for loss is becoming higher. Climate change impacts such as flooding along the water bodies have led to loss of businesses in Kenya amounting to millions of shillings.

In the financial services space, climate-related risks include and are not limited to, loss of markets and debt defaults. When climate risks actualize, they heap pressure on the balance sheet and profitability of a business.

Climate risk reporting will enable SACCOs to identify climate-related risks, prepare for shocks and recover quickly whenever they occur. It helps financial services firms unearth links invisible or not-so-apparent risks to the physical world.

The Importance of Climate Risk Reporting for Financial Services Firms

Financial services firms have a responsibility to safeguard the assets and value of their shareholders.

Even though climate-related risks are not limited to SACCOs, they are particularly vulnerable as a majority of their members are directly or indirectly dependent on agriculture for income or well-being. Indeed, in the recent past, SACCOs have been particularly impacted by the dwindling incomes of their members who rely on this sector.

Additionally, the role of cooperatives in SME development is set to expand as Small and Medium-sized Enterprises become significant economic players in the country. We anticipate the level of economic threat posed by climate-related risks to also rise as more SMEs onboard as SACCO members.

SACCOs must seek to understand the impacts of climate-related risks within the multiple sectors where their members operate. A potential challenge is that SMEs operate in multiple sectors that are impacted differently by climate change. Without proper climate risk reporting, SACCOs run the risk of failure if SMEs in certain sectors or regions face an uncertain future and begin to be a drag on their liquidity and members’ savings mobilization.

Given that climate-related risks can lead to a drastic reduction in members’ income and loan defaults, climate risk reporting will help SACCOs prepare to make the shift from the safe terrain of employer ‘check-off’ loan system to serving their business members.

Climate Risk Reporting, A Proactive Strategy

Most publicly owned firms produce and disseminate various reports including the regularly published annual report to shareholders. However, more often than not, these reports do not disclose climate-related risks or at best mention them in passing.

Globally, there is a push to leverage climate risk reporting to mitigate climate change risks. Regulators in the financial services sector have responded to the climate change threat by enacting guidelines to help build a better, solid and more sustainable future for financial services firms.

In Kenya, The Central Bank of Kenya introduced Guidance on Climate-related Risk Management for licensed institutions under its purview. Now climate risk reporting will feature more prominently to ultimately inform credit and investment decisions.

Whereas reporting itself does not eradicate climate-related challenges it goes a long way towards enhancing preparedness, monitoring and enabling prompt intervention where necessary.

It is my view that Climate Risk Reporting should be mainstreamed and go beyond best practices.

Priority Actions – How SACCOs Can Deal with the Widening Risk Landscape

An organization that assesses and reports on climate-related risks is less likely to be caught flat-footed by the occurrence. Below are two priority actions that SACCOs can adopt to address these risks.

First, assess your SACCOs risks and evaluate their impacts. This will enable you to have a deeper understanding of the risks to enable you to make decisions that reduce your risk profile.

The second is to report on all material risks – both current and emerging. This has the benefit of making you thoughtful and deliberate in decision-making about where and when to allocate your capital. Decision-making may entail revising your lending policies based on the disclosure results.

Assessing and reporting and monitoring climate-related risks helps you in strategic planning. As you continuously monitor current and emerging risks, you get an opportunity to devise mitigating measures and course-correct if the risk situation deviates from its target level. This minimizes the likelihood of impact and the severity of climate change shocks on the organization.

More importantly, appropriate climate risk information can help SACCOs identify new opportunities for growth and develop new products. Also, climate risk reporting will enable SACCOs to make informed investment and credit decisions.

Going forward, it is clear that climate-related risks will increase and hence the need to be proactive. Now is the time to embrace climate risk reporting even in the absence of any legislation. The payoff is in preparedness, better allocation of capital and in informing strategy. Hopefully, these benefits add impetus to the push for climate risk reporting.

The writer is a Consultant and Sustainability Expert with Pro Excellence Management Consultants.

You can reach him at robert@proexcellence-management.com / www.proexcellence-management.com     

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

1.     How far can an apex body like KUSCCO Ltd go in assisting a SACCO member get their savings back from an adamant SACCO? Jackline Kweya, Meru

ANSWER: KUSCCO Limited is an umbrella body of member primary SACCOs. Its role is to represent these SACCOs and do advocacy on their behalf. SACCO rules/guidelines apply in the event a member wants their savings back.

2.     Are SACCO members allowed by law to whistle-blow to report gross mismanagement in a SACCO? If yes, which is the right institution to whistle blow to? Onesmus Murutu, Embu

Yes. The authority responsible for oversight of Saccos is SASRA. Should the mismanagement be criminal in nature, you may also report it to the police.

3.     Who is mandated by law to forward unclaimed financial assets to the UFAA and at what point are institutions supposed to forward unclaimed assets to UFAA? Name of SACCO withheld

Any person (this includes both natural and legal persons) holding assets presumed abandoned may forward the same to the custody of the Authority as unclaimed assets. Before remitting the same to the UFAA, the person must try to notify the owner before remitting/surrendering the assets.

4.     Can a SACCO society be placed under receivership? If yes, on what grounds? Name of SACCO withheld

Yes a SACCO can be placed under receivership on grounds of liquidity problems caused by mismanagement of the officials.

5.     In the case of SACCO capital shares held by a member, when one is withdrawing, what happens if a member fails to get someone to sell to since they are non-withdrawable? Kennedy Ouma, Ngong’

MostSACCOs, will on request, agree to transfer your shares to incoming new members. Please talk to your SACCO to reach an agreement.