Attachment of guarantors by the Rural SACCOs

Attachment of guarantors by the Rural SACCOs

ACCT 2002 - Managerial Accounting: Introduction to Financial Planning and Analysis

On application for loans by members of Rural SACCOs key security to these loans is the

prescribed number of guarantors. These guarantors must be members of the SACCO and must

have put in savings which when added with the loanees savings should be equal or more than the

loan requested for. The attachment of guarantors will always come as the last resort in case of a

loan default. The SACCO will resort to this after written demand notices have been send to the

loanee and copies given to the guarantors. Rural SACCOs have engaged in recruitment drives

aimed at expanding their client base. Among the Rural SACCOs, members have been

equivalent of 10% of principle loan amount as savings before they qualify for a loan. ‘For one to

borrow should first maintain at least 10% savings for the loan to be borrowed’ (SACCO-Nebbi)

The staff and field officer have sensitized the rural population on the benefits of saving money

with RFIs and discouraged cash savings in the home. ‘Discourage the culture of keeping money

at home’ (Umubuga majjambere , Kisoro)

Effects of guarantors in Rural SACCOs resource mobilization on the incomes of SSDF

A guarantor is a person or company that guarantees that a loan or other type of debt will be paid.

Usually, this person or company agrees to pay another person's debt or perform that person's

duty if he or she should fail to do so himself or herself. The term is most commonly used in

reference to financial assistance. A parent who cosigns a student loan for a child could be

considered a guarantor; if the child defaults on his or her debt, the parent would be held liable for

the remainder of the loan, Ketty, (2011). Generally, loan applicants use guarantors if they believe

that they will be unable to secure a loan on their own. This might be the case for applicants who

have poor credit or no credit history. Individuals and businesses can serve as guarantors or can

have guarantors for their loans. In the case of multiple guarantors, each one usually is liable for

the entire amount of the debt. Some lending institutions require guarantors to be bonded for a

certain amount usually a percentage of the loan so that the institution can be confident that the

The use of a guarantor on a loan application does not ensure that the loan will be approved,

borrower's credit, income and expenses to determine whether he or she is capable of paying back

the loan. The person who guarantees the loan must be prepared to repay the entire amount if

necessary and should not agree to guarantee a loan if he or she is financially unable to do so.

Most people who consider whether to guarantee loans for others obtain copy of the loan contract

and should be sure to read and fully understand it before signing it. After signing the contract,

there is no way for him or her to back out of the agreement, (SPEED 2010).

Membership and savings of SSDF in Rural SACCOs

On application for loans by members of Rural SACCOs key security to these loans is the

prescribed number of guarantors. These guarantors must be members of the SACCO and must

have put in savings which when added with the loanees savings should be equal or more than the

loan requested for. The attachment of guarantor’s savings will always come as the last resort in

case of a loan default. The SACCO will resort to this after written demand notices have been sent

to the loanees and copies given to the guarantors.

defaults on the payment of the loan, the SACCOs will demand payment under the guarantee, and

if the guarantor cannot pay the SACCOs can seek a bankruptcy order against the guarantor. The

SACCOs can ultimately force the personal guarantor to sell any of his/her assets in order to pay

the amount owed, (Bandiera, Rasul, 2006).

A personal guarantee allows a company to borrow money without additional encumbrances on

its business or assets. If the company keeps up its payments, there is no need for the SACCOs to

enforce a personal guarantee. Most SACCOs and reputable financial institutions will insist that

the director and/or shareholder giving the personal guarantee obtain independent legal advice in

respect of the implications of giving such a guarantee, Kaliba, A.R.M., H. Verkuijl and W.

Mwangi (2000). This will ensure that the signatory to a personal guarantee understands the terms

and consequences of giving the guarantee. The burden of a personal guarantee stays with the

director and/or shareholder who gives it. It does not affect the assets of the company. The

SACCOs can therefore demand payment from the person giving the guarantee, rather than from

the company. The guarantee is usually given on a full-indemnity basis, which means that to

initiate an order for payment the SACCOs will only have to prove that the money is owed and

that the loan repayments have not been made. Until the SACCOs recovers the money owed by

the company in full the person giving the personal guarantee remains liable in full, (Bandiera,

Even though the loan is made for the benefit of the person borrowing the loans, if that debt goes

Many people would not with to give a personal guarantee without understanding its terms and

fully weighing the consequences of giving. They don’t give the SACCOs written notice to

terminate the guarantee if they are not prepared to pay the SACCOs the outstanding debt. Most

guarantors don’t forget that when a SACCOs agrees to release a personal guarantee it must do so

in writing do not accept anything less than written confirmation from the SACCOs, (Kaliba,

Verkuijl, Mwangi, 2000).

that, the saving behavior of all private households is highly sensitive towards attractive

incentives to save (Fischer, 2005). He further observes that, higher interest rates can stimulate

financial savings substantially.

Chamwada, (2012) argues that endemic poverty, especially in the rural areas in Kenya is due to

failure of SACCOs to deliver. He is not surprised at the failure of the SACCOs to deliver,

financial SACCOs and other mainstream financial institutions often shun group, as they lack

collateral and, therefore, can’t secure loans. The executive secretary of the Savings and Credit

Cooperative Union League of Tanzania Abdul Mshaweji, (2012) said the problem was serious

and urged the authorities to quickly intervene and redress the situation.

According to (Bliss, 2011), the more one is able to save the more he/she can be able to pay over

a given period of time. He gives an example of an individual who get barely enough to eat over a

given period say one year, and argues that such an individual given a loan may not be able to

repay back as he or she will be straggling to satisfy basic want at the time when they will be

should be given. According to Bliss, rich individuals should access more loans to expand their

already mechanized farms, while small scale farmers are better when they remain small, (Bliss,

argues that those who have ever defaulted will be careful in investment and management of the

resources given a second opportunity.

Usually, this person or company agrees to pay another person's debt or perform that person's

duty if he or she should fail to do so himself or herself. The term is most commonly used in

reference to financial assistance, (Keti, 2010). Generally, loan applicants use guarantors if they

believe that they will be unable to secure a loan on their own. This might be the case for

applicants who have poor credit or no credit history. Individuals and businesses can serve as

guarantors or can have guarantors for their loans. In the case of multiple guarantors, each one

If the lending institution believes that the guarantor cannot make good on the debt if the primary

applicant defaults on the loan, then the lending institution will not approve the loan. Before

agreeing to serve as a guarantor, a person should assess the primary borrower's credit, income

and expenses to determine whether he or she is capable of paying back the loan. The person who

guarantees the loan must be prepared to repay the entire amount if necessary and should not

agree to guarantee a loan if he or she is financially unable to do so. Anyone who is considering

whether to become a guarantor should obtain a copy of the loan contract and should be sure to

read and fully understand it before signing it. After signing the contract, there is no way for him

or her to back out of the agreement, (Bliss, 2011)

A study by Odongo, (2010) established that the effects of unsecured SACCOs loan on Mombasa

teachers' savings and credit services is reality and the SACCO has already suffered from the

effects as evidenced by some of its members having moved to commercial banks hence affecting

the SACCOs. The major factor contributing to the effects was the SACCOs lack of strong capital

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