Policy for custody and handling collateral

Currently many Saccos are vulnerable to potential irregularities or fraud in the collection, storage and return of collateral. The assigned staff/management or any person may collect collateral but not deposit it in the designated storage area, or collect the wrong type of collateral, or neglect to collect it at all. It is important that co-operative societies should mitigate the risk associated with collateral through the following steps:

  1. The co-operative societies must have policies and procedures on when to require collateral, when to assume custody of collateral versus allowing borrower to maintain custody, where to deposit and store collateral, and how to value collateral.
  2. The co-operative societies should have clear guidelines to their staffs on how to verify the authenticity of the particular collateral e.g. land title verification, vehicles logbooks, etc.
  3. If the borrower maintains collateral, the co-operative societies should periodically inspect the collateral for impairment. The loan agreement should include a detailed description of the collateral and serial number or other identifying number of the property, and require that collateral must not be sold without prior notice to the society.
  4. Procedures must be clearly stated for returning collateral to the borrower upon full repayment of the loan. The Saccos should maintain a proper register for all members’ collateral so that whenever it is being moved or transferred to any other party, it is properly signed for.
  5. Procedures should be recommended to improve the chances that liquidation of collateral is done at the best available price, and that proceeds from liquidation are deposited intact into the bank.



What is loan processing?

Loan processing refers to the inter-related activities undertaken from time to time the prospective loanee applies for the loan up to the time the loan is approved, agreement signed and loan secured.

The following are the main steps in the process:-

i)  Loan application

ii) Loan appraisal

iii) Loan approval

iv) Loan collateralisation and documentation


  1. 1.       Loan application

The loan application starts with the formal expression by the borrower that he/she needs a loan. Some Saccos provide members with free loan application forms while others sell the forms at a small fee.

  1. 2.       Loan appraisal

Loan appraisal is one of the most technical areas in the lending process and any mistake made here could translate itself into cases of default and delinquency. All the principles of good lending should be adhered to. The process should also be as thorough as possible without resulting into unnecessary delays on loan processing.

Objectives in credit appraisal

a)      To determine the type of loan, loan purpose and whether it is confirming with the credit policy and procedures of the Sacco;

b)      To determine the credit risk of lending to the applicant;

c)       To determine the loanee’s plan to repay the loan and if she/he has other sources of income and;

d)      To determine whether the loanee meets the security or collateralization requirements.

What is a good loan?

A loan given:-

i) To a reliable borrower

ii) For an approved good purpose

iii) Against an acceptable security

iv) At a profit to the lender

Main issues which must be addressed when appraising loans

  1. A.      Conformity with policies and procedures

a)      Whether applicant followed all the requirements stipulated in the credit policies of the Sacco contained in the By-Laws or other policy documents

b)      Verification of whether the applicants’ information given is correct.

  1. B.      Addressing the issue of credit risk

This is normally looked at in form of the 5Cs of assessing credit risk

i) Character- Behaviour history of the borrower

ii) Capacity- Ability to repay the loan

iii) Capital- What financial ability does the borrower have?

iv) Conditions- Has the member fulfilled all the required conditions?

v)  Collateral (Security) – Guarantee required for the loan.

  1. C.      Where money borrowed is for starting a business

The credit committee should address the following issues. Ideally the committee should require the borrower to prepare a detailed business plan. This is the standard practice in all financial institutions that lend money to business people. The business plan should have the following details:-

a)      Financial viability

b)      Marketing feasibility

c)       Technical feasibility

d)      Management and organizational capability

The main concern for the Sacco should be whether given the above assessment, the intended business can run profitably and help repay the loan successfully.

Checklist for loan appraisal

The following information should be thoroughly addressed when appraising loan applications:-

a)      General particulars (name, address, family details) by the credit committee

b)      Loan amount and purpose for the loan requested

c)       Technical feasibility when a loan is for a business project

d)      Marketing feasibility

e)      Financial viability

f)       Management and organization of the business

g)      Loan repayment arrangements- mode of repayment

h)      Collateral arrangement for the loan

Does and donts of lending


a)      Be fair to both the sacco and the applicant

b)      Listen to the borrower carefully

c)       Try to have the member clarify all issues that may be unclear before you make a decision on the loan

d)      Decide firmly and convey the decision truthfully to the member


a)      Go by opinions. Verify all facts before making decisions

b)      Pretend to have the knowledge which you don’t have

c)       Have biases against the member

d)      Reject a loan application before studying it thoroughly

  1. 3.       Loan approval

Usually an approval is conveyed through a formal letter called loan approval advice. The advice apart from conveying the approval decision asks the borrower to communicate the he/she has accepted the loan and the terms and conditions attached to the loan.

  1. 4.       Loan collateralization

Loan collateralization refers to the loan security arrangements. In most Saccos loans are secured using members shares and savings in the Sacco. However some Saccos especially those that serve members from the informal sector ask for other assets for guarantee of loans.

To make sure that the loan security arrangement is properly done, Sacco officials should make such members have signed loan guarantee forms with guarantors stating clearly that they are prepared to repay the loan in case of default by the borrower.

After the final loan approval, the borrower should sign a formal loan agreement form, which clearly states the terms and conditions of the loan.

Problems faced by Saccos in their lending activities

a)      Lack of good credit policies

b)      High loan default mainly due to retrenchments

c)       Excess demand for loans that outstrip available resources

d)      Inadequate loans appraisal skills by credit committees

e)      Borrowing expensive money for lending to members at non-competitive interest rates.






Every credit programme must be appraised before disbursement of loan. The important objectives of appraisal are:

i) That the member meets all conditions necessary to participate in a credit programme

ii) That the lender minimizes the risk of recovering the whole loan.

Appraisal areas: whether;

a)      One is actually a member;

b)      The member loan application meets what is required by the policies and procedures;

c)       The risk can be there when approving the loan and;

d)      How the loan is going to be utilised and the returns will be positive.


Monitoring is the routine collection, analysis, and use of information about how well the project is going. It aims at provision of information on progress.

Monitoring can be continuous or periodic review by management at every level of the hierarchy of implementation of an activity to ensure that input deliveries, work schedules, targeted outputs, and other required actions are proceeding according to plan.

Mode of monitoring

i) Actual site visits (observation)

ii) Interview with loanee

iii) Reports

iv) Repayment records

v) Environmental factor analysis

Importance of monitoring

i) Helps both lender and loanee. Make decision to improve the project.

ii) Allows lender to decide what effect or impact the project is having on loanee

iii) Ensure accountability

iv) Ensure judgement to be made on personal and institutional performance.

Consideration for a good credit programme

A good loan programme should be one that not only enhances the welfare of the member but also repays itself fully (principle + interest).

To the lender the following features are important;

a)      The loanee is well trained to not only utilize but also understand the implications of being a loanee

b)      The loan amount is sufficient (never under lend, never over lend)

c)       The security provided is good

d)      It is adequate (value to cover the entire loan and still leave a good margin).

e)      It is realizable, should be easy to dispose of, to sell

f)       One that appreciates in value with time

g)      Repayment period is adhered to

h)      The shorter the repayment period the less risk the venture and the more liquid the society would remain

i)        Mark-up, prefer to lend to higher mark-up borrower



One of the fundamental objectives of a Sacco is to provide credit to its members. Indeed the continued survival of the Sacco is highly dependent on the fulfilment of this mission. That being the case it is important for each Sacco to endeavour to formulate lending policies that address members varied needs. In other words Saccos should no longer rely on the standard loaning policy.

creditA dynamic lending policy can be described as one that strives to satisfy members credit demands taking into account the society’s liquidity position and the security of the loans so granted. It should also ensure that loans are promptly processed and recovered at liberalised rates of interest. In addition a dynamic lending policy provides incentives for members to increase their savings thereby availing more loanable funds.

  1. A.      Lending requirements

i) Budgeting for loan should be a pre-requisite to granting of loans. Adequate plans should be made for periods of excessive loan demands.

ii) Books of accounts should be accurate and up to date.

iii) The society should operate for a number of months before granting of loans (six months or more).

iv)  Minimum period of membership and minimum amount of shares/deposits before granting of loans should be part of the loan policy.

v) The member should undertake to pay the loan with interest until it is cleared.

vi) All applications for loans should be on prescribed forms showing savings, amount applied for, purpose, terms of repayment and type of security provided, proof of members repayment ability is also required.

vii) Once a loan is granted it should be recorded in the relevant books of accounts and documents.

viii) Disbursement of funds should be done as soon as possible to avoid any inconvenience to the member and to ensure prompt recovery.

  1. B.      Loan repayments

Sacco loans are normally classified as normal, school fees and emergency. Normal loans should be recovered within 48 months. School fees should be recovered within a calendar year and emergency should be recovered within 12 months.

To ensure prompt repayment t of loans, the member should not suffer total deductions in excess of 2/3 of his/her basic salary. The employer should be advised to make the necessary deductions in good time on a monthly basis to avoid liquidity problems for the Sacco.

  1. C.      Loan delinquency

One of the major setbacks for the Sacco lending activity is loan defaulting. Among the major causes are:-


i)  Overburdening of loanee with credit

ii) Ignoring the loaning policy

iii) Death of a member

iv) Bad investment by a member

v) Redundancies

vi) Non-remittance of society funds by the employer

vii) Misuse of loan funds

viii)  Inadequate security

ix) Delays in reviver of loans

x) Interference with recoveries

The majority of these problems can be solved by management if proper safeguards are put in place. These includes:-

a)      Ensuring that correct lending procedures are adhered to

b)      Educating the ,members on loan policy and the need to borrow wisely

c)       Inform the guarantors on their obligation to pay in case of defaults

  1. Additional safeguards

For a Sacco to maintain liquidity it should practice the following financial disciplines:-


a)      Loan granted should not exceed 90% of members savings

b)      No member should be given a loan in excess of 5% of share capital and deposits

c)       The balance sheet should show the following ratios

Cash 2% Members deposits 80%
Liquidity 18% Share capital 10%
Loans to members 75% Reserves 10%
Fixed assets 5%
100% 100%

d)      The society should always ensure that delinquent loans do not exceed 2% of the toal outstanding loan. This is known as the delinquent measure.

e)      Provision for bad loans should be based on duration for example

100% for delinquent loans over 1 year

75% between 9-12 months

50% between 6-8 months

25% between 3-5 months

f)       Ensuring that the members loans are ensured by a comprehensive risk management programme.

As a result of liberalization and other global changes, Sacco societies are finding it increasingly difficult to satisfy their members ‘financial needs and maintain adequate liquidity levels. This kind of scenario calls for dynamic lending policies to be formulated by the Sacco leadership. The following strategic approaches are recommended:-

i) Introduction of Front Office Services to provide more loaning facilities to members especially short term advances

ii) Liberalise the interest rates

iii) Introduce micro-enterprise culture to members

iv) Reward both the saver and the borrower alike

v) Encourage corporate membership


A sound credit policy should at all times aim at a Sacco’s own funds rather than borrowing.

It must address carefully the issue of credit collection and formulate policies for the same. Finally a good credit policy must endeavour to practice fairness in granting of loans.

Guarantorship in Sacco Societies



The issue of members who qualify for loans and not being able to get guarantors within the society membership is emerging as one of the most challenging issue faced by Sacco Societies. It follows that such members are sorryfrustrated and withdraw their membership from the society as they cannot get loans when they apply for them. Membership withdrawal affects society’s cash flow and other operations and consequently profitability.

This problem is now being faced by Saccos with check-off-systems as it was/is mostly reported in Saccos that do not have check-off-system. Saccos with check-off-systems are Saccos that receive the members’ monthly contributions/loan repayments/interest/savings from the employer(s) through a single cheque paid to the Sacco Society’s account. Saccos without check-off-systems, are Saccos that do not have a common bond as a single employer or more than one employer and these Saccos are mainly formed by business people, farmers, matatu operators, church members, women groups and youth groups. They are sometimes referred to as Rural Saccos and those with check-off-systems are called Urban Saccos.

The rural Saccos and some Urban Saccos have circumvented this challenge through the formation of “cells” within the society. These cells are groups of between 10-30 members. The members in a cell guarantee one another and are all responsible for loans advanced by the society to individual members within the cells. This means that, if there are 20 members in a cell, then an individual taking a loan has to be guaranteed by 20 guarantors! It also means that if one or more members in a cell defaults on his/her obligations, then the whole cell is taken to account.

How are these cells formed, managed and grown?

If a society has each cell with minimum of 15 members, the cell is allowed to recruit new members until the cell membership reaches 30 where it is split into two. The split cells now will have 15 members each and allowed to recruit more members and the cycle continues. Cells are formed and given names like Nairobi, Nakuru, Pamoja, Tumaini, etc. Each cell has a cell coordinator and a cell secretary where all issues are discussed, recorded and some solved within the cell and those that need the attention of management committee are presented to them by the various coordinators. All members of the society must belong to a cell for them to qualify for a loan. The normal loan application process applies.

Another important aspect of these cells is that of membership recruitment. All new members of the society, must be endorsed by the cells for them to be accepted by the society. New members are introduced into the cells by a member and supported by two witnesses who attest that they know him/her. The person is interviewed by the cell and if by majority votes they agree, then that member is endorsed. The management committee then will accept the new member after ensuring that he/she meets all other qualifications for membership.

Through meetings of the cells, which can be every month or when need arises, members socialize with one another and therefore it becomes easier to accept guaranteeing new members of the society. This is unlike where cells are not available, where one is not able to attend annual delegates meeting or any other meetings organised by the society. Also societies hold one or two general meetings in a year which is not sufficient for members of the society to socialize and know one another sufficiently so as to act as guarantors.

CELLSOne of the major challenge of cells is that management committee/board of directors and supervisory committee have to belong to the cells and therefore act as guarantors and therefore contradicting the policy that states “No executive officer, management and supervisory committee member shall act as endorser, guarantors for borrowers from the society.” In cells, the management committee/board of directors and supervisory committee are not allowed to be coordinators or secretaries of the cells. They are in the cells as members of the society and not management committee/board of directors or supervisory committee members. It will be difficult for these committee members to be guaranteed within the cell given the cell rules if this policy was to be enforced. It is therefore important that these committees members be allowed to act as endorsers or guarantors only through the cells.

It is high time Saccos must become innovative and introduce cells or come up with other ways of assisting their members access their products. It will be useless for one to belong to a Sacco and not being able to get a loan more that his/her shares and deposits. I am a member of a Sacco and I went through this and I almost immediately withdrew my membership and move to another Sacco within my “area of operation” where I know I could get guarantors easily. It is a world of competition out here, you can no longer sit in your cocoons offer the same services the same way and expect to grow in membership and surplus. IT CAN’T HAPPEN.

Ask yourselves, what happens when I am transferred to another region where I am not known? What happens when I am the only member of the society in a whole sub-county/district? Can society allow me to scan my filled loan application form to members of the society that I know who can act as guarantors and who can send to Sacco the forms on my behalf or send me back for me to forward to the Sacco? These must be answered….probably 🙂

If Saccos are wondering why their membership is not growing, then look no further.


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