Sacco Members Enjoy Better Credit Scores and Lower Loan Rates

Daftar Isi

A New Era in Kenya’s Banking Sector

On December 1, Kenya’s banking sector introduced a groundbreaking shift in how interest rates are determined. Banks have communicated this change through various channels, including newspapers, emails, SMS messages, and their websites, ensuring that both customers and the general public are informed about the new system. This marks a significant milestone in Kenya's financial history, as it introduces a model where individual borrower behavior, discipline, and creditworthiness play a crucial role in determining the cost of borrowing.

Previously, lending rates were assessed at a portfolio level, using broad categories that did not account for differences in behavior within the same group. The new regime replaces this with a single-obligor assessment model, where each borrower is evaluated based on their performance across all credit relationships. This approach relies heavily on the credit score, a numerical indicator of a person’s repayment behavior, reliability, and consistency in meeting financial obligations.

Credit scores are generated by the Credit Reference Bureau (CRB) and consider a holistic view of an individual's financial activities, including interactions with banks, digital credit providers, trade entities, insurance companies, and Sacco loans. This development positions Sacco members in a unique advantage. For decades, Saccos have promoted a culture of regular saving, disciplined borrowing, and mutual accountability. Their model fosters stable financial behavior, and as Sacco loan data becomes more integrated into the credit information ecosystem, members with strong Sacco histories now enjoy higher credit scores and access to lower interest rates.

Sacco Loans and Credit Performance

Sacco loans currently have non-performing loans (NPLs) below 8.5 percent, significantly lower than the over 16 percent for commercial banks and over 30 percent for microfinance and digital credit providers. Borrowers with at least one Sacco loan have 10 percent better credit scores compared to those without Sacco loans. In Kenya, the term "Sacco" carries legal and social significance, much like the word "bank." These titles are protected and cannot be used casually. Investment cooperatives are known as SICOs, while transport cooperatives are referred to as TRANS-COOPs.

The standards required to operate as a Sacco are intentionally high, reflecting the trust placed in this sector by regulators and the public. Few industries in Kenya command such depth of confidence, cultural significance, and societal legitimacy as the cooperative movement.

The Historical Roots of Saccos

The strength of Saccos is deeply rooted in Kenya’s history. The cooperative movement began in the 1930s during the colonial era when African farmers and workers were excluded from formal markets. Cooperatives became a way for communities to pool limited resources, access markets, and create their own financial systems despite structural discrimination. The democratic nature of Saccos, with the principle of one member, one vote, reinforces accountability. In credit transactions, Saccos use guarantee models to promote collective responsibility, acting as an internal control system that enhances borrower behavior.

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

Starting or Joining a Sacco

Starting or joining a Sacco is not difficult. The journey typically begins with a small group of individuals who feel excluded or underserved by traditional financial structures. They may start as a small chama, and as membership, trust, and capital grow, the group formalizes into a closed Sacco, eventually becoming a non-withdrawable deposit-taking (NWDT) Sacco and later a fully licensed deposit-taking (DT) Sacco. This organic progression reflects the maturity of the credit character of its members.

Kenya’s Sacco regulatory framework is progressive, with regulators focusing on the next phase of evolution: digital enablement. Through engagements with officials from the Sacco Societies Regulatory Authority (Sasra), it has become clear that they have plans to support smaller Saccos. Recognizing the high costs of digital transformation, they propose a shared infrastructure model to reduce the capital burden associated with modern loan origination systems, core banking platforms, and digital channels.

Digital Transformation and Future Prospects

Through a shared services framework, even smaller Saccos can achieve efficiencies comparable to large institutions. This will lead to improved cost-to-income ratios, enhanced governance, better member experiences, and stronger competitiveness. Additionally, digital transformation will enable Saccos to easily transmit member data to CRBs for use in credit scoring, allowing even members of smaller Saccos to benefit from lower interest rates.

In the new era of risk-based credit pricing, being a Sacco member is a significant asset. Borrowing responsibly and fulfilling credit obligations improves credit scores, leading to greater access to loans and other forms of credit at significantly lower costs.