Stories of people clearing loans for their colleagues, friends, and family members are not new. And now with the rise of savings and credit cooperative societies (saccos), the trend is even worse. Saccos operate on the premise of trust and hence the main security they use for loans is one’s savings and guarantors. However, there are individuals who abuse this principle of trust and default on loan repayment risking their guarantor’s savings. Here’s what you need to do incase a borrower you guaranteed defaults.
It is said you can never go wrong with joining a sacco but if the stories of rising defaulters are anything to go by, then one is left wondering if that is truly the case.
Consider this scenario. Charity, not her real name, has been a member of a certain sacco for quite sometime now and according to her, she has really benefitted from it.
Trouble began last month when a former colleague defaulted a loan she had guaranteed forcing the lender to deduct her savings together with that of two other guarantors so as to recover the loan.
And this is just but one of the many cases that abound of guarantors offsetting the loan of a rogue borrower in saccos, which run on the guarantorship-lending model. In most cases, this happens when borrowers change jobs and don’t notify the sacco, leave employment, or simply default because they have nothing to lose.
But this can be a thing of the past if one follows the Cooperative Societies Act, which provides a basis for the resolution of such cases hence protecting the guarantor from carrying someone else’s burden.
The Act specifies that all disputes among sacco members, whether past or deceased, be referred to the Cooperative Tribunal. This also includes disputes among committee members, sacco officers, and between saccos. The law allows the guarantor to sue the defaulter in the tribunal, which if unable to amicably solve the dispute, refers the matter to a court of law.
If the guarantor has assets, the court can give an injunction for them to be auctioned and the money recovered. Also, through the guarantors, the loan defaulter can be remanded until he clears the loan.
Good news is; with the recent amendment and gazettement of the Banking Act, saccos can engage the services of credit bureaus to complement the guarantorship model of lending. In this case, saccos can get report on whether the member has defaulted a loan with another financial institution.
If this is the case, then the guarantors will be duly informed and asked whether they still want to guarantee the borrower. Also, if the member is servicing another loan with a credit facility, the guarantors will be informed before they append their signatures to guarantee a loan. This offers crucial information to the guarantors with regard to the borrower’s financial discipline.
According to George Magutu, managing director of Kenya Union of Saving and Credit Cooperative Limited (KUSCCO), if a sacco member defaults a loan, the sacco needs to notify the guarantors. The sacco will then explain to the member the consequences of defaulting and try to recover the loan.
Two ways in which saccos recover loans is through the borrower’s savings and guarantors’ savings. The sacco can then list the defaulter with the credit reference bureau but only if the defaulter consents. If one is listed with the credit reference bureau, they will have trouble borrowing from banks. Hence the information sharing system is likely to curb bad loans.
Magutu cautions that before committing yourself to be a guarantor always ensure you know the history of the member you guarantee. He notes that most people don’t take time to investigate whether the member they are guaranteeing has ever breached a loan or has the capacity to repay the loan.
“Take time to know their background and at least let it be a person you have known for quite sometime. To be someone’s guarantor is based on trust hence one is taking a risk,” adds Magutu.
He says a cooperative member needs to know that defaulting a loan may hurt their credit scores and credit history if they need to borrow in future. He further cautions that if a member is not in a position to pay his loan as agreed, he needs to inform the sacco about his inability to pay for the loan and then, together with the sacco, do a reschedule on the loan and agree on the mode of payment he is comfortable with or can afford.
Magutu advises that before joining a sacco, one needs to check if the sacco is legally registered to avoid incidences of unprofessionalism. “You also need to check the stability of the sacco in terms of finances and whether the products it is offering satisfy your needs,” he says.
Remember…
Consider the following before guaranteeing someone a loan:
␣ The amount being borrowed and how much you are guaranteeing the person.
␣ At what point the sacco will call you to pay the liability.
␣ Whether the sacco has access to your assets incase you fail to pay up as a guarantor.
␣ How you will know your liability as a guarantor has been set aside.
Published in July 2016
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