While SACCOs offer several benefits to their members, they are vulnerable to several risks and the common two being Internal and External Risks. While Internal risks are those risks that are within the control of the SACCO Society, external risks are beyond SACCO’s control.
Such threats can affect a SACCO’s ability to meet its financial obligations and other objectives of the organization. Risks such as Operational, Regulatory, Liquidity, Interest rates, Legal, Technological, Cybersecurity and Credit risks are a major threat to any SACCOs operation.
This article provides some insights into how SACCOs can mitigate Credit Risks and some of the Strategies to help manage these risks more effectively. Therefore, one would ask themselves;
What is Credit Risk?
This is the probability of loss due to a borrower’s failure to make payments on any type of debt.
What is Credit Risk management?
It is the practice of mitigating/preventing losses by understanding SACCO’s capital adequacy and loan loss reserves at any given period.
Developing a Credit risk management department to improve credit scoring.
Credit risk management requires SACCO’s to have a stringent operating credit policy whose main role is to ensure adherence to loan scoring and credit limits which are the major areas viewed to increase credit risks in many SACCO’s in Kenya.
The department solely focuses on who they are giving the loan to, how much are they giving, why are they giving the loan, who is their guarantor, When is the repayment period and what are the chances that the member can default and the action to be taken.
The above questions can be answered in the SACCOs policy document which ensures that SACCOs are giving quality loans which will not result in bad debts and later affecting their liquidity levels and thereafter the SACCO’s going concern.
Focus on Data to understand SACCOs members and any associated Credit risks.
It is advisable for any SACCOs to critically evaluate the quality of its membership portfolio to be able to point out any risk areas emanating from loan repayment rates, loan default rates and any other related member demographics. This data is used to assess risk factors and develop well-targeted risk management strategies.
It is recommended to have daily credit reports, daily membership reports and daily finance reports. The ability of the SACCOs to forecast member credit risk levels using the available member data is some of the key areas to look at when mitigating credit risk levels.
Even as SACCOs fight to mitigate credit risk levels it’s not easy to bridge between safety in granting a quality loan, the competitive environment and the quality of service offered hence the reason for SACCOs to onboard an Auditor, who is well-versed with SACCO’s changing operating environment due to changing regulations and technology.
Use Technology to track member activities.
Think of Compliance, Systems, and profitability. Most SACCOs in Kenya have digitalized their operations which have helped them track loan repayments and monitor member demographics easily for any risks they may pose. Investing in a Robust IT Infrastructure system to support their day-to-day operations. These systems include and are not limited to regulating SACCOs transactions and reporting requirements.
For instance, having an IT system with a marker checker feature will show a step-by-step record of events and users involved in a particular exercise, processing, and approval of loan requests, repayment consistency and loan defaults if any. This goes beyond monitoring and reporting since with proper audit trails implemented, a SACCO can easily trace fraudsters, stop their activities and even prevent future incidences.