Savings and Credit Cooperative Organizations (Saccos) have long been known to set lending limits on the size of savings.
Known as the multiplier model, many Saccos lend up to three times a member’s savings, motivating people to leverage loans for development.
But now the Saccos are moving from that model to risk-based lending, where they check repayment history to decide how much to lend.
This has saved many Saccos from members who borrow oversized loans and end up defaulting.
For others, it has helped them accommodate members who are good payers and who would like higher loans than the triple multiplier model has traditionally allowed them.
For example, Kenya’s Sacco National Police, which has been in existence for 50 years, has moved away from this model and now lends up to five times its savings. The sacco even offers mortgages to members.
Its chairman, Mr. David Mategwa, says that since the customers are also the owners of the business, it becomes easier to lend based on one’s ability to pay rather than limiting them based on their savings.
“A person may be entitled to less money when you use the multiplier model, but they have a good repayment history. Instead of denying them the loan and losing them to other financial institutions, you have to lend according to their risk profile,” says Mategwa.
“We have recapitalized the Sacco so that we even give mortgages, and the houses become the collateral. Limiting people to the multiplier model has blocked many opportunities,” he added.
Saccos sees this change as a way to accommodate members with a good loan repayment record given the fierce competition among financial services institutions.
In addition, such a change helps highly liquid saccos provide loans that can reduce idle cash and generate returns for members.
Imarika Sacco Chairman Renson Ndoro says theirs is moving away from the multiplier model, especially to accommodate young people and borrowers looking to be rewarded for a good credit rating.
“We now give loans based on repayment capacity. We check credit history. We have products that offer up to five times the savings,” says Ndoro.
He says the financial market is now open to everyone and “we need to diversify our products”.
“The ground is changing radically. For example, you are not going to confine young people for three months to save before giving them a loan,” explains Mr. Ndoro.
But Trans Nation Sacco CEO Luncham Mugambi said saccos need to be careful to ensure the change does not expose them to high defaults and turn down loans from other members.
He says the sacco, whose core members are teachers, has used the multiplier model for a long time, but started to change when it opened up membership.
“We had to tighten our risk profile controls, especially after membership opened. The regulator is also very concerned about the quality of the loan portfolio. It’s not just about making loans,” he says.
So while the shift to lending based on each person’s risk profile grants more loans to members of large saccos, small ones are using the change to protect themselves from people with a history of defaulting.
This is to protect their liquidity and distribute it fairly among members seeking loans.
Large saccos deepened their share of deposits, which is a key source for member loans. This was done at the expense of small saccos.
Data from the Sacco Societies Regulatory Authority (Sasra) shows that there were only 20 saccos with deposits above 5 billion shillings at the end of 2020. This is only around one eighth of the total 172 saccos in deposit. (DT).
These 20 DT-saccos controlled cumulative total deposits of 224.75 billion shillings, more than half (59.08%) of total deposits.
The analysis shows that more deposits are concentrated in the few DT-saccos, with a deposit size of over 5 billion shillings, as the smaller saccos struggle.
A total of 99 DT-saccos, whose total deposits were below the 1 billion shillings threshold, controlled a meager 8.4% of the total deposits within the system.
The situation is straining small saccos, given the growing appetite for loans among members.
Sacco members, for example, took out 54.19 billion shillings in additional loans last year due to coronavirus disruptions which hurt household incomes.
The new credit saw DT-saccos’ loan portfolio increase by 13.41% to 473.74 billion shillings from 419.55 billion shillings, the fastest jump in four years. It was only in 2016 that the increase (15.3%) was higher than that.
The acceleration in the pace of lending by the saccos came despite a deterioration in the non-performing loan (NPL) ratio from 6.15% the previous year to 8.39% in 2020.
Real gross NPLs rose from 25.79 billion shillings to 39.86 billion shillings, underscoring the impact of disrupted income flows for households during the pandemic period.
Sasra had warned in 2020 that failure to mobilize enough deposits, which is a key source of money to lend to members, would push saccos to borrow externally.
“This is an undesirable situation, because saccos are forced to finance the deficit from external sources, which most often turns out to be quite expensive,” says Sasra.
Saccos aspire to have more than 90% of their loans and advances portfolio financed primarily by deposits. This is because they operate on a deposit mobilization model for subsequent lending.
The fact that little or no part of the loans and advances is financed by external borrowing allows saccos to offer affordable rates to members at the expense of microfinance and commercial banks.