Understanding Loan Guarantors: Rights and Responsibilities in a SACCO
A guide for SACCO members in Kenya
When you agree to guarantee someone’s loan, you are doing more than offering a friend or fellow member a helping hand. You are accepting a financial responsibility that may affect your own savings and financial well-being if the borrower fails to repay.
Loan guarantorship is an important part of SACCO lending because it helps protect members’ savings and ensures that loans are responsibly secured. However, every member should understand the obligations, rights and potential risks involved before signing a loan guarantee form.
In Kenya, guarantorship in SACCOs is governed by the Sacco Societies Act, applicable SASRA regulations, and the registered by-laws and credit policies of individual SACCO societies.
1. Who is a loan guarantor?
A loan guarantor is a SACCO member who agrees to provide security for another member’s loan by undertaking responsibility for the guaranteed amount if the borrower fails to meet their repayment obligations, subject to the guarantee agreement and applicable law.
In simple terms, a guarantor gives the SACCO additional assurance that the loan will be repaid.
For example, if a member applies for a loan of KSh 200,000 and the SACCO requires guarantors, other eligible members may agree to guarantee portions of that loan.
If the borrower defaults, the SACCO may pursue recovery from the guarantors in accordance with the signed guarantee, its registered by-laws, credit policy and applicable law.
2. Rights of a loan guarantor
Being a guarantor comes with responsibilities, but it also comes with important rights. Members should understand these rights and exercise them whenever necessary.
a) Right to full information before signing
Every guarantor has the right to understand the nature and extent of the liability they are accepting before signing a guarantee agreement.
Under Regulation 71(3) of the SACCO Societies (Non-Deposit-Taking Business) Regulations, 2020, a guarantor must be adequately informed of the nature, purpose and amount of the liability before signing an agreement that creates guarantor liability.
For deposit-taking SACCOs, Regulation 32(3) of the SACCO Societies (Deposit-Taking SACCO Business) Regulations, 2010 similarly requires adequate information about the nature of the liability before a guarantee is signed.
b) Right to information about the guaranteed loan
A guarantor should be able to establish whether the borrower is servicing the loan as agreed.
For non-deposit-taking SACCOs, Regulation 71(5) of the 2020 Regulations provides that a guarantor is entitled, upon request, to full access to information on the performance of the guaranteed loan.
c) Right to notification of loan default
For non-deposit-taking SACCOs, Regulation 71(4) requires the SACCO to notify a guarantor in writing of a defaulted loan within one month after the loan has gone into default.
This notification enables the guarantor to understand the situation and take appropriate steps to protect their financial interests.
d) Right to have their guarantee properly assessed
A SACCO should not accept guarantees without considering the member’s ability to secure the guaranteed amount.
Regulation 32(1)(b) of the 2020 Non-Deposit-Taking Regulations prohibits a member from guaranteeing a loan that exceeds their capacity to secure it.
For deposit-taking SACCOs, Regulation 32(2) of the 2010 Regulations prohibits over-guaranteeing.
e) Right to fair treatment
A guarantor should be treated fairly and in accordance with the law, the SACCO’s registered by-laws and applicable credit policies.
Recovery procedures should follow lawful processes. Members should not be subjected to threats, intimidation, harassment or abusive debt collection practices.
3. Responsibilities of a loan guarantor
Before agreeing to guarantee a loan, members should appreciate that their decision carries financial consequences.
The following are important responsibilities:
a) Understand the loan before signing
Read and understand the loan guarantee form, the amount being guaranteed, repayment period and applicable terms and conditions.
Do not sign blank forms or documents whose contents you do not understand.
b) Assess your financial capacity
Only guarantee an amount you can reasonably secure.
Consider your existing guarantees, outstanding financial commitments and the SACCO’s requirements when assessing whether to accept another guarantee.
c) Monitor the borrower’s repayment performance
Do not assume that everything is fine simply because the borrower is a friend, relative or colleague.
Stay informed about the repayment progress of loans you have guaranteed. Where necessary, request information from the SACCO.
d) Respond to communication from the SACCO
If you receive communication concerning a guaranteed loan, take it seriously.
Contact the SACCO for clarification and engage with the relevant office if the borrower has fallen behind on repayments.
e) Honour your guarantee obligations
If the borrower defaults, a guarantor may become liable for the amount covered by their guarantee, in accordance with the signed agreement and applicable laws.
A guarantor should therefore be prepared for the possibility that their own financial resources may be affected.
4. What happens when a borrower defaults?
Loan default occurs when a borrower fails to meet the agreed repayment obligations.
When this happens, the SACCO may initiate recovery measures in accordance with its credit policy, registered by-laws and applicable laws.
Depending on the guarantee agreement and the circumstances of the default, these measures may include:
- Communicating with the borrower to establish the reason for non-payment.
- Issuing appropriate reminders and recovery notices.
- Engaging guarantors and informing them of the outstanding obligation.
- Recovering the guaranteed liability from guarantors in accordance with the applicable agreements and legal provisions.
- Taking further lawful recovery action where necessary.
It is important to understand that guaranteeing a loan does not automatically mean that the guarantor must immediately pay the entire outstanding loan. The extent of liability depends on the guarantee undertaken, the applicable contractual terms and the law.
5. Can a SACCO recover a defaulted loan from a guarantor’s deposits?
Yes. The Sacco Societies Act, Cap. 490B, Section 36(1), provides that a SACCO has a first charge against a member’s deposits, share capital, dividends and interest payable for debts owed to the SACCO by that member, including debts arising from acting as a guarantor or endorser of a loan.
Section 36(2) also allows a SACCO to refuse withdrawals from a member’s deposit account where that member is in arrears on a debt owed to the SACCO.
This means that members should carefully consider the financial implications before accepting loan guarantees.
6. Can you guarantee more than one loan?
Members may be permitted to guarantee more than one loan, subject to the SACCO’s applicable policies and their assessed financial capacity.
However, guaranteeing multiple loans increases your exposure to financial risk.
SASRA regulations require SACCOs to prevent over-guaranteeing and ensure that members do not guarantee amounts beyond their capacity.
Members are encouraged to review their existing guarantees before accepting additional requests.
7. Important things to consider before guaranteeing a loan
Before signing a loan guarantee form, ask yourself:
- Do I know the borrower and understand their financial circumstances?
- Do I understand the amount I am guaranteeing?
- Have I reviewed my existing guarantee commitments?
- Can I reasonably meet the obligation if the borrower defaults?
- Have I read and understood the guarantee agreement?
- Am I comfortable with the potential impact on my savings?
Remember, a guarantee is a financial commitment, not simply a favour.
8. Our commitment to responsible lending and member protection
As a SACCO, we recognise that responsible guarantorship is essential to protecting members’ savings, maintaining a healthy loan portfolio and promoting financial stability.
We are committed to ensuring that loan guarantees are handled in accordance with applicable regulatory requirements, our registered by-laws and approved credit policies.
We also encourage members to make informed decisions, understand their financial obligations and seek clarification from the SACCO whenever necessary.
Before you guarantee, understand. Before you sign, be informed. Your financial security matters.