Saccos Purchase Loans as Bank Rates Rise

Members of savings and cooperative organizations (Saccos) are selling off their bank loans because they are alarmed by the rate increases brought on by lenders transitioning to risk-based pricing methods.

In an effort to protect borrowers from interest rates as high as 18 percent, some Sacco executives told the Business Daily that they are seeing an increase in requests from borrowers to shift their loans from banks to Saccos

When the interest rate limitations were lifted at the end of November 2019, commercial bank loans were priced at a maximum of 13 percent, but rates have since risen as a result of the regulator’s approval last year of models that let banks choose rates based on risk.

Customers are now approaching Saccos in greater numbers to buy off their debts and extend the repayment period as a result of the move, which has alarmed customers.

Martin Muhoho, chief executive officer of Unaitas Sacco, said the decision gives the Sacco movement a chance to expand their loan book more quickly and attract new members.

“Many banks are adjusting rates for individual loans towards 18 percent. We are seeing borrowers start coming to us for buy-offs. It is a good opportunity for us because we do not adjust our rates alongside the Central Bank Rate,” said Mr Muhoho.

“But some banks are not increasing loan servicing rates for government employees and civil servants, which are lucrative to buy off because of the low default risk.”

Customers have been informed by lenders of rate modifications in accordance with benchmark lending rates that the Central Bank of Kenya (CBK) approved three times last year, increasing them to 8.75 percent.

According to David Mategwa, chairman of the Kenya National Police Sacco, some of the members who flocked to banks during the rate cap regime have had their expectations dashed by the hike in interest rates in the banking industry.

“With the caps, banks were telling members that the rates for Saccos and banks were almost aligned. The upward review is presenting an opportunity for buy-offs,” said Mr Mategwa.

Members seeking buy-offs are required to submit the current bank loan statements to their Saccos.

The Saccos then assess the balance and the qualification of members. Saccos then pay off the loan.

“Saccos only charge a one-off cost at the start to buy off the loan then starts charging the applicable monthly rate. Those seeking longer repayment periods are also granted,” said Mr Mategwa.

Saccos are popular because, in addition to having low interest rates and lengthy payback terms, using guarantors shields the borrower from aggressive loan collection strategies including property seizures and auctions.

But for small business loans or borrowers who have utilized assets like land as collateral, the buy-off procedure is challenging.

“Banks become a bit rigid. They normally complicate the process. Saccos first have to give them an undertaking before they discharge the title,” said Mr Muhoho.

Some Saccos are also cautiously buying off the loans to avoid a liquidity strain or a pile-up of non-performing loans, according to Renson Ndoro, Imarika Sacco chairperson.

“A majority of our members who have gone to the banks have big loans to the tune of about Sh4 million. So if we get about 20 such members, it is a huge cash outflow at ago,” he said.

According to Mr. Ndoro, the creation of a central liquidity facility for deposit-taking saccos appears to be a step toward assisting saccos in borrowing from one another and fulfilling debt buy-off demands.

The Sacco Societies Regulatory Authority chief executive Peter Njuguna mid last year said his agency was drafting amendments to the existing laws to provide for an inter-sacco borrowing window.