You do not have to pay defaulter’s loan; you can now seek redress

Many people have guaranteed colleagues and friends loans from a savings and credit cooperative society (sacco). Many of these people believe that their power to ensure that the responsibility of paying the loan does not fall back on them is limited. Most do not know what to do when the borrower defaults.

Take Robert, who offered to guarantee a former colleague a loan from a sacco which their employer, a non-governmental organisation in Nairobi, had enlisted with.

Robert never expected that he would end up paying the Sh350,000 loan after his colleague changed jobs and failed to leave a forwarding address.

The sacco chose the easy way out when the man stopped paying the loan and charged Robert and the two other guarantors to service the loan.

The guarantors were told to pay as the sacco tried to locate the defaulter and his new employer to make him clear the outstanding amount.

LEAVE EMPLOYMENT

Many sacco members can tell similar tales of woe, wishing for the day they will clear outstanding loans for former colleagues, friends, or even family members and hoping that the defaulters will surface and honour their obligations.

Most cases of default happen when the borrower leaves employment and fails to furnish their sacco with their new address or lose their job.

There are even cases where people take loans with the intention of defaulting, leaving unsuspecting guarantors with the burden of paying the outstanding amount. They take advantage of the trust of the guarantors and the legal provision that delegates the risk of default to the guarantor.

The problem of default has become so serious in the sacco sector that some members have chosen to withdraw their membership, saying the system can no longer be trusted. The defaults coupled with the dwindling membership have hampered the operations of some saccos due to liquidity distress and financial and image problems.

Recent reports indicate that the Sacco Societies Regulatory Authority (Sasra) was investigating one of the largest saccos in the country that had resorted to tampering with its accounts to cover non-repayment of loans by some members.

In the case of default, saccos are often quick to pounce on the guarantors to recover the loan instead of following up with the defaulter.

Which begs the question, what can a guarantor do in case the borrower defaults? What do you need to know before you append your signature to a loan form as a guarantor?

LOAN DEFAULT

Sasra, the regulator, offers some guidelines:

The Cooperative Societies Act provides a basis for the resolution of cases, especially those where a guarantor bears the burden of a loan default.

The Act specifies that all disputes among sacco members, whether past or deceased, be referred to the Cooperative Tribunal. These also include disputes among committee members, sacco officers, and between saccos.

“Therefore, if a member defaults on a loan, the law allows the guarantor to sue that member in a Cooperative Tribunal,” the regulator says.

DECEASED MEMBER

With regard to loan guarantee, there are two main disputes that the Cooperative Tribunal can handle. The first refers to a claim by a cooperative society for any debt or demand due to it from a member or past member, or from the nominee of a deceased member, whether the debt or demand is admitted or not.

The second dispute regards the claim by a member, past member, or the nominee or personal representative of a deceased member for any debt or demand due from a cooperative society whether the debt or demand is admitted or not.

Once a case is lodged, the Cooperative Tribunal hears it with a view to settling the dispute amicably before the matter goes to a court of law or the guarantors bear the financial burden of their guarantees.

SETTLE DISPUTES

“Its mission is to maintain and administer an effective and efficient tribunal for the settlement of cooperative disputes, cognisant that justice delayed is justice denied.

“The tribunal services include advisory services, assessment of claims, processing documents, granting ex-parte judgments, giving hearing dates, and hearing disputes,” the sacco regulator further says.

Many members may not be aware that all saccos, according to regulatory requirements, have credit committees that approve loans and handle the issue of guarantors. It is the duty of the credit committee to ensure that sacco members are duly advised before they guarantee any loans.

The committee is charged with ensuring that accounts, especially with regard to loan defaults, are adequately identified and classified, as prescribed by the regulations.

Given that the committee is the one that ensures that all loans are recovered as soon as possible, it may be in the interest of guarantors to always keep in touch with it should there be any signs that the member they guaranteed may fail to pay their outstanding loans or actually do not honour their repayments.

The sacco movement in Kenya is the largest in Africa and is ranked seventh globally, with deposits of about Sh400 billion, accounting for about 33 per cent of the country’s national savings. They have become instruments of choice for people seeking to save money and acquire loans for personal development at lower interest rates compared to commercial banks. Its popularity stems from the fact that members intending to borrow depend on other members for guarantee.

This eliminates the necessity of collateral, as is the custom with banks. The saccos have also in recent years become the vehicle of choice for loans, given that members can borrow as much as three times their deposit and the process of acquiring loans is not as cumbersome as that in commercial banks.

INTEREST RATES

Further, saccos previously charged 12 per cent interest rate per annum on reducing balance before the interest rates in the market rose when the Central Bank of Kenya raised its benchmark lending rate by 11 percentage points to 18 per cent in the second half of 2011 to stabilise the macro-economic environment.

However, the popularity of saccos has in recent years been steadily been dropping as cases of default shoot up, especially as guarantors are made to bear the burden of ensuring that such loans are repaid.

DISPUTES ADDRESSED BY THE CO-OPERATIVE TRIBUNAL:

• A claim by a co-operative society for any debt or demand due to it from a member or past member, or from the nominee of a deceased member, whether the debt or demand is admitted or not
• A claim by a member, past member or the nominee or personal representative of a deceased member for any debt or demand due from a co-operative society whether the debt or demand is admitted or not
• A claim by a Sacco society against refusal to grant or a revocation of licence or any other due from the authority.

Therefore, if a member defaults on a loan, the law allows the guarantor to sue that member in a co-operatives tribunal.

Before agreeing to be a guarantor note:

1. What amount of debt repayment are you committing yourself to?
2. Under what conditions will the sacco or bank call on you to pay the liability?
3. Does the lender have access to your assets if you fail to pay up as a guarantor?
4. Is your liability limited to a specific amount? Is it limited at all?
5. When will your liability as a guarantor be set aside and how will you know?