The Accountant-May-June 2017

Business Practice and Development
It is common knowledge that, SACCOs operate on principles
of cooperation, voluntary and open membership, democratic
member control, member economic participation, autonomy and
independence, education, training etc. it’s from these principles
that the governance of the cooperative movement is derived.
loan facility from a SACCO, he is required
to present a security or collateral. In nearly
all known SACCOs, this collateral will
constitute the employees monthly salary,
terminal dues and any other employment
benefits that might accrue to him in the
future. Of course for as long as the loan
remains outstanding. However, these
kinds of collateral are not considered
sufficient on their own. The applicant
(loan) has to get a number of guarantors in
addition to the aforementioned securities.
This act is the best way to ensure the
SACCO doesn’t lose money. Definitely
the SACCO management has it easy
but not so, the guarantors and especially
if the loan applicant defaults payment.
Some SACCOs will attach the salaries of
the guarantors and recover the defaulted
amount overtime. Of course a huge
burden to the guarantors considering that
they are paying an amount they didn’t
borrow or even consume. Another way of
recovering the same amount (defaulted) is
by reducing the deposits Account of the
guarantor by his/her share of defaulted
amount. This is equally a huge burden
on the part of the guarantors. Well as to
which method is the best the jury is still
out. However, we may try to analyze the
second method to be able to quantify the
impact.
Illustrative problem:
A, took a loan of 500,000 payable in 36
months at an interest rate of 14% per
annum on a reducing balance method.
He was guaranteed by 5 members of his
SACCO (XY SACCO LTD). B was one
of the guarantors to A’s loan. B has over
the years taken loans and repaid and has
saved a considerable amount (300,000),
at least by the time A defaulted on the
loan. When A defaulted on his loan, he
had only paid up 8 months equivalent
of monthly installments. On his part A
had a total of ksh. 200,000 in deposits.
A member is entitled to a loan amount
equivalent to 3 times his/her Deposits
Account.
What will be the burden to B
from default of A’s loan
For easy of calculation we assume the
total interest payable by A is 150,000 by
the end of the loan duration. Therefore
total loan burden = Principal Amount +
Interest; 500,000 + 150,000= Ksh650,000.
The monthly installments would amount
to 650,000/36 = 18,056 per month
When A defaulted, he had done 8
months worth of installments = 18056 *
8 = Ksh144,444
Balance = 650,000- 144,444 = 505,556
Guarantors burden = Defaulted amount
– A’s Deposits Account = 505,556 –
200,000= Ksh. 305,556
Individual Guarantors Burden =
305,556/5 =Ksh. 61,111
B will reduce his Deposit Account by
Ksh.61, 111 which means
Deposit Account after default = 300,000
MAY - JUNE 2017 9