EFFECTIVE CREDIT UTILIZATION IN SACCO SOCIETIES

Credit is a facility offered to be repaid later. Credit can be extended to the co-operative society as an entity, normally from other institutions. it can also be extended to individual co-operators by their co-operative organization.  Credit in financial form has a cost attached to it. This is in form of interest charged by the lender.

Money can't buy happiness, however it can rent it :-)

SACCO societies should as much as possible utilize the members savings for issuing loans to them. When there is effective and efficient loan administration, members funds are adequate to form a revolving fund that ensures member’s demands are fully satisfied.

Should it become absolutely necessary for a SACCO society to borrow for purposes of on lending to members, then the interest rate charged by the lender should be less than what the members are going to be charged. The loan should then be used solely for the purpose that it was intended for.   Since societies are not allowed to invest their funds in non core business, no society should borrow for such ventures.

Any credit from other institutions should be repaid as per terms of agreement. There should be no accumulated installments as these attract penalties and eventually the loan becomes a burden for the society.

Credit to Individual SACCO Society Members

Members of SACCO societies should have savings in their societies as the first priority.   Members should save as much as possible since this is their money refundable on ceasing membership.  It is the first financial investment that is normally available to a member on leaving formal employment.

As members continue saving with their SACCO societies, it becomes necessary for them to get loans for investment in worthy purposes. These purposes include investing in projects that will ensure a member a source of continuous income even after retirement.

Before applying for loan, a member should ensure that he has planned well for utilization of the funds.   It is no prudent to apply for and get loan money and then start planning for it.   in such instances, the money is normally not used for purposes which will benefit the member in the long run.  it ends up being for consumption.

It is important to identify the project or projects that funds will be invested in before making application. Even if the money is to be used for consumption, it is better to plan for that purposes. It is not easy to plan for money when it is already with a member. It normally leads to impulse buying.

As a member, do not overburden yourself with unnecessary loans.  SACCO societies offer to members various loan products. Utilize the products only when it is necessary and when you actually require the funds.  Do not involve yourself in loans just because you qualify for them.  You should be able to trace how each loan product that you took was utilized and be able to identify the results and benefits. Emergency loans should be for actual emergencies and school fees loan for actual fees.

After getting loan and effectively and efficiently utilizing it, repay the installments as per repayment agreement in the application form.  never start defaulting because any defaulted amount becomes a burden and eventually distorts your development plans.

Sometimes a member may wish to enter into a project but the funds he qualifies for as a loan do not allow.  Like minded members can come together, with each borrowing from his society, to raise enough funds and acquire the project.   The members can later decide on effective and efficient utilization of the project.

EXCERPT FROM: Savings and Credit Co-operative Societies; Start-up Kit (Swiss Contact and Department of Co-operatives).

LOAN POLICY

The purpose of Loan Policy is: 

•   to ensure that the society does not get into financial difficulties by approving loans in excess of funds available. (loan approved beyond capacity to issue is a major policy)

•   to ensure that there is fairness in loan granting by the society.

•   to minimize loan delinquency in the society.

The fastest way to lose friends, is simple just lend them money.

Lending Requirements 

•   the society must have been in existence and active for a period of not less than six months from the date of registration.

•   A member must have completed at least six months membership and contributed any amount to the SACCO society in shares/deposits.

•   A member who withdraws from the society and rejoins later will be treated as a new member for the purpose of this Loan Policy.

•    Lump sum amount (a one-time payment of money, as opposed to a series of payments made over time) of share/deposit paid to the society outside the regular monthly contributions shall remain in the society for at least six months before qualifying for a loan.

•    the society’s books of accounts have to be up-to-date in accordance with the Co-operative Societies Act.

•    All loans shall be restricted to members and shall be approved by the full management committee or the credit committee subject to final approval by the full management committee.

•   no member of the loan approving committee shall be present when his loan is being considered.

•    Employees of the society shall be eligible for membership but are not eligible to become members of the management committee or any other sub-committee in the society.

•    An employee or official who tampers with his regular share/deposit contribution and loan repayment shall be liable to prosecution under section 94 of the Co-operative Societies Act.

•    the rate of interest on all loans shall be determined by the management committee from time to time and approved by members in a general meeting.

•   All loans shall be insured by a reputable insurance company identified by the officials of the society.

•    All applications for loans shall be made on prescribed forms provided by the society and shall in each case set out the amount applied for, the purpose of the loan, terms of repayment and the type of security provided. the loan application form must be fully completed and must be guaranteed by at least three members.

•    the society shall maintain a loans’ register where all applications for loans received are
systematically recorded according to the date received, and which shall be used during loan granting.

•    it shall be an offence for an applicant, society employee or book keeping service employee to give false information regarding shares/deposits, loans and guarantees.

•    Loan applications shall be considered in the order in which they are received, provided that whenever there are more applications for loans than there are funds available, preference shall be given, in all cases, to smaller loans.

•    However, where amounts applied for are approximately the same, preference shall be given to loans for shorter periods. Within the foregoing preferences, priority shall be given in the following order:

»   Members who have never had loans

»   new members who have qualified for loans

»   Members who have cleared their first loans and have applied for fresh loans

•    the maximum amount of loan granted to a member shall not exceed three times a member’s  savings with the society but subject to a maximum of 5% of the society’s total share capital/deposits and reserves.

•    For purposes of eligibility for loans, a member’s total shares and deposits will be considered.

•    the maximum repayment period for development loans shall be as per the SACCo.

•    the society shall maintain 10% cash reserve of the total members’ savings. At least 50% of the cash reserve shall be kept in a deposit account and will not be available for granting loans.  the reserve shall be up-dated monthly.

•   in addition to development loans, the society my issue emergency loans and school fees loans.

•   Emergencies shall include sudden hospitalization, funeral expense, court fines and other unforeseen circumstances beyond the member’s control. the member will be required to provide documentary evidence of the emergency

•   the maximum repayment period for emergency loans will be 12 (twelve) months.

•   School fees loan may be granted to a member even though he has an outstanding loan on the following conditions:

•   the total outstanding loans, including school fees, must not exceed three times a members savings

•   only one school fees loan may be granted to a member in one calendar year.

•   the member will be required to provide documentary evidence of the school fees required

•   School fees loans shall be repaid within one calendar year

•   Emergency and school fees loans shall be given within a member’s entitlement

•   the society committee may introduce special savings and credit products as shall be required and approved by members from time to time.

EXCERPT FROM: Savings and Credit Co-operative Societies; Start-up Kit (Swiss Contact and Department of Co-operatives).

SECURITY FOR LOANS

Unless the loan applied for is equal or less than a member’s total savings, it must be secured by guarantors. The total shares and deposits of the borrower and those of the guarantors must be equal to or more than the loan applied for.

Why don't we take this relationship to the next level and you lend me some money? :-)

•   The society may still require a member to have his loan application secured by guarantors even though what is applied for may be less than or equal to his savings if those savings have been pledged as security for other members loans.

•   No member will be allowed to guarantee more than three loans. All guarantors must be members of the society.

•   Members of the management and supervisory committee shall not guarantee loans among themselves.

•   The obligation of the previous guarantors shall cease upon change of guarantors subject to the new guarantors being accepted by the society.   the obligation of the guarantors shall also cease when loans guaranteed have been reduced to less than the members total savings.

•   The society shall maintain a record of all guarantors in each members file.

Other Security

•   The society officials approving loans may ask for such additional security as it deems
necessary.    Pledges in the form of articles like share certificates, land title deeds, vehicle log books and insurance policy up to surrender value may be accepted as security.

•   Confirmation as regards the validity of the articles so pledged has to be obtained from the issuing authority before such documents can be accepted as security for a loan.

•   All expenses related to valuation and charging of security shall be met by the applicant.

Procedure for Recovery of Defaulted Loans

In case a loan is not repaid for a month, the society shall inform the borrower/loanee     immediately in writing with copy to each of the guarantors. if no repayment is effected
during the second month, the guarantors shall be informed of this fact and notified that
they will be called upon to honour their obligations if no repayments are effected at the end of three months.  However, the society will still maintain efforts to recover the defaulted loan from the loanee.

Withdrawal from Membership

•   Where a member wishes to withdraw from the society’s membership he may be required to give the society at least 60 (sixty) days written notice of his intention to withdraw.

•   No member shall be allowed to withdraw from the society membership unless the member’s loan is repaid in full or the loan balance can be fully offset by the member’s savings. Such member will also have to satisfy that all loans guaranteed have been paid in full or the balance does not exceed the savings of the members whose loans were guaranteed.

•   A member who voluntarily withdraws from the society membership and wishes to rejoin later will be required to pay a rejoining fee of 2,000.00 to the society.

Amendment

•   the loan policy may be amended by the management committee from time to time, provided that such amendments are communicated to all members before taking effect.

•   Any difficulties encountered in the implementation of this loan policy shall be referred to the management committee for clarification or interpretation.

EXCERPT FROM: Savings and Credit Co-operative Societies; Start-up Kit (Swiss Contact and Department of Co-operatives).

WE ARE 386 ON OUR FACEBOOK PAGE!!

Thanks for joining this page and for visiting the main site. Now we are 386. That's is incredible. We can form a co-operative society a savings and credit type (Sacco), and the law requires only ten people. Only ten!!

CAN WE REGISTER IT?

Lets assume we all want to form a co-operative. We call it Facebook Sacco. Our area of operation is Republic of Kenya. We all agree on postal and physical address of our society. Our common bond is Facebook users who have liked "Co-operative Movement in Kenya" (am sure commissioner won't buy that!!!). The entrance fee/registration fee we all agree to set it at Ksh. 500. We also agree that one share is Ksh. 20 (i.e. nominal value of one share) and the minimum number of shares is 100 and therefore the non-withdwable share is Ksh. 2000 and we set transfer of share fee at Ksh. 200. We all unanimously agree also that our minimum monthly contribution (deposits) should be Ksh. 2000.

If we all pay the entrance fees, we will have Ksh. 193,000. This is more than enough for registration and buying few stationary for our society and also remain with some cash that we can loan to our members! Saccos don't give loans until they are six months old, also members don't qualify for loans until they are six months old and have been contributing consecutively. We are all contributing Ksh. 2000 per month so every month our account will be reading Ksh. 772,000. In six months, we shall have savings of  Ksh. 4,632,000! Now after six months we can loan to few of our members. Of course by then we will have a loan policy that will control loan granting, repayment terms, etc.

Who is not feeling all nice now? Questions?

WHEN AND HOW DO YOU CEASE BEING A MEMBER OF A SACCO?

When do you cease/stop being a member of a Sacco/Co-operative? Many By-Laws state that membership in the society shall cease or deemed to have ceased in regard to any member from the date of:

DON'T STOP BELIEVING IN SACCOs!!

(i) Death

(ii) Withdrawal

(iii) Expulsion

(iv) Being certified to be of unsound mind.

(v) Transfer of shares to another member.

(vi) Failure to remit share contributions and loan repayments for a continuous period of six months without valid reasons or leave of the society.

(vii) Ceasing to hold qualification for membership as specified in these by-laws provided that members who have lost the common bond may retain their membership.

DUTIES AND POWERS OF THE MANAGEMENT COMMITTEE/BOARD OF DIRECTORS

The Committee of the society subject to any directions from the General Meeting generally direct the affairs of

BOARD OF DIRECTOS

the society. Its procedures, powers and duties are prescribed by the Co-operative Societies Act Cap 490, Co-operative Rules and the By-Laws of the society. In particular the management committees or board of directors shall:

a) Observe in all its transactions the Act, the Rules, the by-laws and prudent business practices.

b) Act upon all applications for membership.

c) Make provision for sufficient funds for loans.

d) Ensure that true and accurate records and accounts of the society’s money, properties, capital reserves, liabilities, income and expenditure are kept and maintained;

e) Prepare and develop long-term management plans and budgets for presentation at the General Meeting;

f) Propose to the General Meeting the amount and kind of surety bond, or other security, which shall be given by the member of the committee or employee having custody of or handling funds or property of the society;

g) Determine and recommend to the General Meeting the interest rates on loans, the maximum maturities and terms of payment or amortization of loans from time to time and the maximum amount that may be loaned with or without security to any member;

h) Cause the audited accounts to be displayed in a conspicuous place at its registered office and branches at least two weeks before presentation of accounts to its members at the general meeting;

i) Lay before the General Meeting audited accounts, together with proposals for the disposal of net surplus, if any;

j) Recommend to the General Meeting the dividend rate to be paid on shares, if any, and interest to be paid on deposits;

k) Fill through co–option, vacancies occurring in the committee between General Meetings;

INVESTMENT

l) Recommend investments of the society;

m) Authorize the conveyance of properties;

n) Authorize borrowing and lending operations of the society in accordance to the Act and the Rules;

o) Designate a depository or depositories for the funds of the society;

p) Employ and fix the remuneration of the employees in accordance with the terms and conditions of service as approved by the Commissioner;

q) Impose fines as provided for under these by-laws;

r) Approve transfer of shares;

s) Supervise the recovery and collection of loans from members and recommend to the General Meeting the write off of bad debts.

t) Perform or authorize any actions consistent with the Act, the Rules and these by-laws, unless specifically reserved for the General Meeting;

u) Provide adequate budget for education and training of members, the committee and staff; and

v) Perform such other duties as the General meeting may from time to time direct.

COMPLIANCE ISSUES AS PER THE ACT AND RULES-SACCOS

The latest revised Act and the new Rules of November 2004 have introduced amendments and provisions which should be complied with by all co-operative societies. The compliance issues that affect societies include:-

• 

  I LOVE BEING COMPLIANT

• every co-operative society shall hold its annual general meeting within four months after close of its financial year (by 30th April for Sacco Societies)
• every co-operative society shall present to members its audited accounts and balance sheet for each year within four months after close of financial year. The audited accounts shall be displayed in a conspicuous place for members to read at least two weeks before they are presented to members in a general meeting.
• the audited accounts and balance sheet shall be presented to the Commissioner for registration before they are presented to members in a general meeting
• borrowing powers shall be fixed by members in a general meeting subject to approval by the Commissioner.
• every co-operative society with employees shall have terms and conditions of service for staff. The terms and conditions shall be approved by the commissioner.
• the manager shall be a counter signatory to all documents and contract of the society.
• all society committee shall file an indemnity-Form V of the Co-operative Societies Act shall be signed by the management committee members agreeing to uphold the values of accountability, honesty and transparency in dealing with the affairs and resources of the society and accepting liabilities arising from lack of upholding such values. This is done within fourteen days after being elected, and if they do not, they will automatically lose their positions. The indemnity figure shall be fixed by members in a general meeting.
• all committee members shall fill wealth declaration forms within thirty days after elections, and if they do not, they automatically lose their positions.
• supervisory committee should write periodic reports (quarterly) and table their findings at management committee meetings. It shall also submit its reports to the commissioner present the report to the general meeting.
• committee members shall be elected for three years, subject to one third retiring annually but being eligible for re-election.
• every society shall have members funds separated into shares and deposits.
• every society shall maintain a reserve fund where one fifth of the net surplus in any years shall be credited. An account should be maintained for the fund.
• no co-operative society shall invest its funds in non-core business except with the approval of the Commissioner and the general meeting through a special resolution.
• estimates of income and expenditure shall be prepared and presented to members for approval in a general meeting at least three months before the end of the preceding year.
• every member of a co-operative society shall appoint a nominee or nominees, who shall inherit his/her shares or interest in the society upon his death.

EXCERPT FROM: Savings and Credit Co-operative Societies Act; Start-up Kit (Swiss contact Co-operatives Department)

START SAVING AS SOON AS YOU START MAKING MONEY!

Guys this is important. If you have started earning, this is the right time to start saving or is the right time to increase your savings. The longer you wait the difficult it will become as your life will probably become comfortable and you might have many responsibilities soon afterwards!!

Let me tell you the boiling frog story that I love to tell my fellow cooperators: If you drop a frog in a pot of boiling water, it will of course frantically try to clamber out. But if you place it gently in a pot of tepid water and turn the heat on low, it will float there quite placidly. As the water gradually heats up, the frog will sink into a tranquil stupor, exactly like one of us in a hot bath, and before long, with a smile on its face, it will unresistingly allow itself to be boiled to death. The boiling frog story is generally told in a metaphorical context, with the upshot being that people should make themselves aware of gradual change lest they suffer eventual undesirable consequences (Wikipedia).

See yourself as a frog and of course like the frog dropped in boiling water, you will automatically clamber out like we do in uncomfortable/unpleasant situations. But if you were to be dropped in tepid water and the water be gradually heated, you will rarely notice change in temperature until probably it is too late. Life happens like that!! Change sometimes will find you still trying to adjust to it despite it being constant!!! Life has a way of sneaking onto you and gives you a surprise though most probably you saw this surprise miles away and you told yourself you had all the time. Living life without considerable savings is like water that is being gradually boiled with you in!!!

When you leave collage with your degree or diploma certificate and you get a job, do not wait to start saving. It is likely that at this time you are still single and you have a few financial obligations. So immediately you get a job, you should start saving and save as much as possible. This is so because once you start a family, your expenses will automatically go up or if you delay, you will get used to the pay you get and therefore it will become hard to adjust. You will have established a comfort zone. We all know getting out of a comfort zone is the hardest of things to do.

Saccos have a minimum savings per month that is allowed. So if you are in a Sacco DO NOT start saving the minimum allowed. It is thought wise that one should at least save 10% of his/her income. If possible when you have just been employed, save more than the 10%. It is also wise to save with a Sacco as they pay better dividends and interest on deposit than most financial institutions. Ask around the interest paid by banks on savings accounts then ask what Saccos pay! Saccos pay way better .

So my friends, start saving now for a better future.

THE CREDIT SUB-COMMITTEE

The Credit Sub-Committee consists of three of the management committee members i.e.

• Chairman,
• Secretary and a
• Member

Functions of the Credit Committee

The credit committee appraises all the loans based on loan/credit policy set forth by the management committee and approved by general meeting of the society.

a) The Credit committee inquires carefully/diligently into the character and financial condition of each applicant for a loan, and his/her guarantors, if any, to ascertain his/her ability to repay fully and promptly the obligations incurred by him/her

b) To determine whether the loan is for a worthy purpose and whether it will benefit both the borrower and the Society

c) The Credit Committee makes appropriate reports to the Management committee

d) The Credit Committee may as its discretion appropriately delegate part of their responsibilities to any employees such as the Credit Officers where necessary to facilitate loans processing

e) Loan applications from the Credit Committee members or Loans Officers is considered by the Management Committee

f) The Credit Committee must ensure that the loans are repaid as per the loan agreements.

g) The credit committee shall inquire into the character of the applicant to -:

a) Ensure that he/she is trustworthy, prudent and his/her track record in servicing previous loans is good.

b) Check references with other Sacco, and other financial service providers by way of seeking opinion on his/her credit -worthiness.

c) To find out If the loan applicant is clinically certified to be of unsound mind, then, he/she should not be considered for a loan since his/her capacity to get into a binding legal contract is compromised

Frequency of the Credit Committee Meetings

a) The credit committee holds meetings as the business of the society requires, at least once a month

b) In order to make a binding decision, all the three-committee members must be present in a meeting to approve the loans.

c) In the absence of quorum in a credit committee meeting to carry-on its business, the loans shall be approved by the Management Committee

d) Minutes of Credit Committee meeting for every sitting on all loans approved shall be filed and retained in the Society’s files as permanent records.

e) The Credit committee shall maintain a comprehensive loans Register

Delegation

The Credit Committee may delegate some of their functions to the Manager or any other officer of the Sacco e.g. Loan/Credit officer to facilitate the efficient processing of loans.  The Credit Committee can delegate authority but cannot delegate responsibility.  The full committee meeting must ratify delegation by credit committee.