Sacco members have higher credit scores and pay lower rates on loans

Until this year, lending rates were largely assessed at portfolio level, using broad borrower segments and product categories, that did not differentiate between good and bad behaviour within the same bracket.

Under the new regime, this approach has been replaced with a single-obligor assessment model, where each borrower is evaluated independently based on their performance across all credit relationships.

The primary tool used in this process is the credit score, a numerical representation of one’s repayment behaviour, reliability and consistency in meeting financial obligations.

Credit scores are determined by the CRB from a holistic view of the borrower based on how they borrow and repay in banks, digital credit providers, trade and insurance and, importantly, Sacco loans.

This development places Sacco members in a highly advantageous position. For decades, Saccos have encouraged a culture of regular saving, disciplined borrowing and mutual accountability.

The very nature of the Sacco model promotes stable financial behaviour, and as Sacco loan data becomes more deeply integrated into the credit information ecosystem, members with strong Sacco histories now enjoy higher scores and, consequently, access credit at lower interest rates in the banking sector.

Today, Sacco loans have NPLs of below 8.5 percent against over 16 percent for commercial banks, and over 30 percent in microfinance and digital credit provider institutions.

As a result, borrowers with at least one Sacco loan, have 10 percent better credit scores than their counterparts without Sacco loans.

In Kenya, the word “Sacco,” just like the word “bank,” carries a specific legal and social weight. These are protected titles that cannot be used casually or carelessly. One cannot simply register a company and call it a Sacco without meeting strict regulatory thresholds.

Even investment cooperatives are designated as SICOs, while transport cooperatives are referred to as TRANS-COOPs.

Standards required to operate as a Sacco are intentionally high, reflecting the level of trust placed in this sector by both regulators and the public. Few industries in the country enjoy the depth of confidence, cultural significance and societal legitimacy that the cooperative movement in Kenya commands.

Read: Credit score: When a small debt becomes a big problem

The strength of Saccos is rooted in Kenya’s history.

The cooperative movement emerged in the 1930s during the colonial era, when African farmers and workers were deliberately excluded from formal markets. Cooperatives became a vehicle through which communities pooled limited resources, accessed markets and created their own financial systems in the face of deep structural discrimination.

The democratic nature of Saccos, with the principle of one member, one vote, plays an important role in entrenching accountability.

In credit transactions, Saccos use guarantee models to generate collective responsibility, which also acts as an internal control system that boosts borrower behavior.

This social capital is now an asset in credit pricing. The shift to risk-based pricing now formally rewards this model and the resultant discipline it builds.

Starting or joining a Sacco is not hard. The journey of a Sacco typically begins with a handful of individuals who feel excluded or underserve by the existing financial structures. They may start as a small chama.

Over time, as membership, trust and capital grow, the group formalizes into a closed Sacco, later graduating into a non-withdrawable deposit-taking (NWDT) Sacco and, eventually, a fully licensed deposit-taking (DT) Sacco. This organic progression is part of the maturity of the credit character.

Kenya’s Sacco regulatory regime is progressive. Regulators are now focusing on the next phase of the Sacco evolution, which is digital enablement. In recent engagements with officials from the Sacco Societies Regulatory Authority (Sasra), I got to understand they have a plan for the smaller Saccos.

Recognizing the high cost of digital transformation and automation, they have proposed to rollout a shared infrastructure model that will reduce the capital burden associated with modern loan origination systems (LoS), core banking platforms and digital channels.

Through a shared services framework, even smaller Saccos will be able to achieve efficiencies comparable to large institutions. This will lead to improved cost-to-income ratios, enhanced governance, better member experience and stronger competitiveness across the sector.

This digital transformation will have the added benefit of enabling the Saccos to easily transmit the information and data of their members to CRBs for use in credit scoring. So that, even members of smaller Saccos, can start to enjoy the lower interest rates members of the larger Saccos are already enjoying.

Today, in the new era of risk-based credit pricing, being a Sacco member is a big asset. More importantly, borrowing responsibly and honoring credit obligations boosts your credit score, which leads to greater access to loans and other forms of credit at a significantly lower cost.

The writer is a Chief Executive Officer,  Metropol CRB