Saccos slowly shifting from guarantor model to collateral as urban lending risks rise

Savings and Credit Cooperative Organisations (Saccos) across Kenya are rethinking their traditional lending models as the long-standing guarantor system becomes harder to sustain in urban areas.

KCS Sacco chief executive Gideon Gitonga said social and economic changes in major towns and cities have made it increasingly difficult for members to find reliable guarantors.

This is pushing saccos to shift toward collateral-based lending to protect members’ savings and reduce loan defaults.

Traditionally, saccos relied on members guaranteeing each other’s loans, but Gitonga noted that modern urban lifestyles are eroding the trust networks that once made the system work.

“In the past people knew their neighbours and relatives well enough to guarantee them,” he said in an interview after the Sacco’s annual general meeting.

“Today in cities, you may not even know who lives next door or where your colleague stays. Members are more comfortable giving collateral instead.”

At KCS Sacco, about 85 per cent of the loan book is now secured by collateral, including land, vehicle logbooks and other assets, a trend Gitonga says reflects wider changes in the sector.

The shift appears to be paying off. According to Gitonga, KCS Sacco reduced its non-performing loans (NPLs) ratio from 19.5 per cent to 9.5 per cent, aligning with sector trends reported by SASRA, which recently noted a decline in defaults across deposit-taking Saccos.

“Our systems encourage members to repay loans so they can qualify for more or top-ups. Where members face difficulties, we restructure loans rather than push them into default,” Gitonga said.

The sacco is targeting an NPL ratio of five per cent, the regulator’s recommended threshold.

Even as it tightens lending rules, KCS Sacco reported strong financial performance. The institution hit a historic asset milestone of Sh501 million, nearly doubling revenue to about Sh74 million.

Members also enjoyed improved returns, with dividends rising from seven per cent to eight per cent, while share deposit interest stood at 10 per cent, according to the sacco’s latest annual report.

Gitonga credited the performance to stronger governance, committed staff and member trust.

Technology is also shaping the transition away from guarantor lending. KCS Sacco has partnered with firms including Safaricom for AI-powered communication tools and Microsoft for its core banking system, enabling digital loan management and member services.

“With technology, members from the diaspora can access our services without coming to Nairobi,” Gitonga said. “Digital systems also help us track repayments and manage risk better.”