Why one should not default on their Sacco loan
It pays to honour your loan obligations.
Recently, I attended an annual delegates meeting of a top sacco in the horticultural sub-sector. It was refreshing to see members discuss indicators of performance for their Sacco, especially the loans portfolio.
It got me thinking. The cost of loans from commercial banks has followed lockstep with Central Bank’s monetary policy rate. Consequently, borrowers are struggling with loan repayments, resulting in a rise in loan defaults.
A loan default ensues when a borrower fails to repay the loan or otherwise meet the negotiated terms and conditions. It may include missing payment deadlines, failing to make the minimum payment or breaching specific clauses agreed upon at the time of borrowing or as amended thereafter.
When commercial banks’ loans become expensive, many turn to Sacco loans. Saccos have demonstrated the classic definition of a cooperative—“autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise”. Thus, while interest rates for commercial banks have increased, the Sacco’s have remained relatively low.
A recent CBK report shows defaults of more than Sh596 billion as rising interest rates strain the banking sector loan book. Non-performing loans surged to a 16-year high of 15 per cent in August 2023. But it was significantly lower among Saccos—at 8.4 per cent in 2022 compared to 13.8 per cent for the banks over the same period.
Outcomes of loan default
The meeting identified four likely outcomes of loan default: Decreased cash flow, increased cost of recovery, low dividend to members and damaged social ties among members. None of these are good for a cooperative.
There are benefits for settling one’s loan on time. First, it saves the borrower money. If members pay in larger junks, they save money on interest. Secondly, it gives one a chance to take a bigger loan.
Thirdly, it makes the money available for other members. Fourth, it helps to cement social relations among members. Taking out a Sacco loan requires the borrower to get guarantors from among their fellow members. Thus, honouring loan obligations builds trust among members.
Fifth, a default could lead to an economic downturn. Widespread defaults constrain availability of credit, making it harder for businesses and individuals to access loans, which can hinder economic growth. It pays to honour your loan obligations. It builds an individual’s social capital, which helps groups to work together to achieve a common objective, and which can be “cashed” in other situations.
- Prof Nyamongo, anthropologist and Fulbright Scholar, is a deputy vice-chancellor at The Cooperative University of Kenya. [email protected]. @Prof_IKNyamongo
