Why SACCOs are yet to fully embrace Credit Information Sharing

By Jackson OKOTH

A number of Kenyan SACCOs are yet to fully onboard the Credit Information Sharing(CIS) platform despite its immense value, according to the Sacco Societies Regulatory Authority(SASRA).

This is due to the fact that this requirement is still discretionary, requiring a mere nod from members during an annual general meeting(AGM), and not anchored in law.

Even for those who have signed up with credit reference bureaus, their implementation is still selective with few undertaking aspects such as credit scoring when doing loan appraisals.

According to information from the latest publication of the Sacco Supervision Annual Report, the number of DT-SACCOs reporting to Credit Reference Bureaus(CRBs) dropped from 152 in 2022 to 146 in 2023.

The drop included the two DTSACCOs whose licenses were revoked in 2023, Jacaranda SACCO Society Ltd and Kenya Midlands SACCO Society Ltd, as well as four other DT-SACCOs which terminated their partnerships with the licensed CRBs.

SASRA Database also shows that 108 regulated SACCOs out of 357 have not signed up with CRBs or 30.25%.

SASRA is now urging for a review of the SACCO laws to address the existing conflict in the Credit Information Sharing(CIS) framework in order to make it mandatory.

This publication sought views from leaders across the Sacco sub-sector on what they feel about the CIS framework.

“While we are yet to begin credit scoring as a basis for lending to members as laid down in the CIS framework, we still assess their credit worthiness, including looking at the CRB status.

We do not extend credit to individuals who have defaulted on loans from other institutions until they clear with CRBs, “said Solomon Atsiaya, Kenya National Police DT Sacco Chief Executive Officer.

Other SACCOs that are already on the CIS framework have also gone ahead to begin using credit scoring in their loan appraisals, despite existing challenges in implementing effective credit-scoring systems, which continue to hamper responsible lending and long-term financial stability in the sub-sector.

SASRA maintains that failure by SACCOs to embrace credit, creates gaps in credit decision-making. It blames this situation for the rise in non-performing loans in the SACCO business.

According to the Sacco Supervision Annual Report 2023, regulated SACCOs continued to share the credit information of their members through the credit reference bureau framework established pursuant to the Credit Reference Bureau (CRB) Regulations 2020, which recognises licensed Regulated SACCOs (DT-SACCOs) as direct subscribers to the licensed Credit Reference Bureau (CRBs).

The regulator, however, points to an existing conflict between the Credit Reference Bureau (CRB) Regulations 2020 and Section 54 of the Sacco Societies Act which anticipated the enactment of a parallel credit information sharing framework for Regulated SACCOs.

In addition, the restriction created in the Credit Reference Bureau (CRB) Regulations 2020 by reference to licensed SACCOs means that the NWDT-SACCOs which are not licensed under the Sacco Societies Act, but authorized pursuant to the Regulations 2020 made thereunder, are not bound to comply with them.

A section of top executives in the SACCO industry who spoke to this publication have a different opinion on CRBs and use of credit scoring as a loan assessment tool.

“It is not that SACCOs are not using the credit scoring method tool when assessing their borrowers. At Mentor SACCO, we use the credit scoring method when assessing the credit worthiness of those members who are applying for a mobile loan product, which does not require guarantors.

Most SACCOs that provide mobile loans are therefore moving to the credit scoring method as an assessment tool.

We still have to pilot, test and see the implications before we adopt credit scoring when giving out other loan products to our members. Other Saccos are also moving into this space when disbursing other loan products to members, apart from mobile loans.

It is about having a beginning and then moving forward, “said Joyce Ndegwa, Chief Executive Officer, Mentor DT SACCO Limited.

Ms Ndegwa, in an interview with Financial Fortune Media, she said that the use of credit scoring as an assessment tool when considering whether to give a loan product to a SACCO member, is already happening where these SACCO are offering mobile loans.

“Members apply for Mobile loans on online platforms, using the mobile App and the USSD Code. Here, applicants are not required therefore to have guarantors, with more SACCOs using the credit scoring method as an assessment tool, “said Ms Ndegwa.

She denies the fact that SACCOs are experiencing an increase in the volume of non-performing loans due to their lending practices.

“The Kenyan Economy is undergoing tough conditions and SACCOs are affected, just like all other businesses. For instance, we have employers terminating employment of various individuals, who are also members of SACCOs, we also have firms exiting this market for other destinations and thus rendering thousands jobless.

SACCOs are also affected by these factors. Employer-based SACCOs are worst hit by many deductions, taxes, levies and charges that have gone up including NSSF and Social Health Insurance-all these deductions affect the net incomes of employees who have obligations including SACCO loans.

The money that is remitted to SACCOs by employers, after all the deductions have been made, has reduced considerably. Underpayment of loans by members due to increased deductions affects the performance of the SACCO loan book, “said Ms Ndegwa.

In the SACCO business, there are guarantors and the CRB to assist these financial outfits in dealing with loan defaulters.

“In case a member fails to service their loans, the Society forwards the name to the CRB and then leaves the guarantors to follow up on the defaulter after we have seized their deposits. We have signed up agreements with CRBs who then blacklist the defaulter who is now a liability to us and cannot access credit facilities from any other SACCO.

Since a member borrows against shares held, the SACCO first freezes these shares in the event of a loan default. Then we go for deposits of the guarantors, who will then follow up on the defaulter.

We have loan agreements that even allow a SACCO to auction the property of the defaulter, but we rarely reach these levels,” said a top executive at one of the leading DT Saccos.

While the credit scoring method has been introduced, not many Saccos are keen to adopt this method when loaning to members.

“Unlike the Banks, we rely on a member’s payslip and then extend loans against it. We are dealing with members who are also owners of the business and therefore are more considerate that what banks do. We are a social enterprise and not a profit-making venture like other lenders in the market,” said the manager.

Credit scoring is a numerical system that lenders use to assess the risk of lending money to an individual, based on their past credit behaviour and financial history. A credit score given to a customer or member is a number that summarizes his/her credit history, reflecting how well one has managed credit and debts in the past.

Lenders, including banks, microfinance companies and other financial institutions including SACCOs use credit scores, along with other factors, to determine a potential borrower’s creditworthiness and make decisions about lending, such as approving or denying a loan, setting interest rates, and determining credit limits.

Credit scores are based on information in your credit report, which includes one’s payment history, amounts owed, length of credit history, new credit, and credit mix.

A higher credit score generally means one is considered a lower risk borrower, potentially leading to better interest rates and more favourable credit terms.

One can check their credit scores with several reference bureaus including Trans-Union and Metropol in Kenya.