The National Assembly plans to reintroduce a Bill that seeks to compel creditors to seize borrowers’ assets before touching a guarantor’s.
Aden Duale, former leader of the majority in parliament, said he would reintroduce the Laws of Contract (Amendment) Bill, 2019, a new law that President Uhuru Kenyatta rejected.
If MPs veto the President’s rejection of the Bill, then the new law could have adverse implications on Saccos that rely heavily on guarantors’ use when giving loan products to members.
It is faster to obtain a SACCO loan than credit from a commercial bank. This is because guarantors, who are also members of the Society, provide more secure collateral, shielding the SACCO from potential defaults.
At least three guarantors must secure all SACCO loans. All guarantors are required to be members of the SACCO, with a good track record of repaying their loans and fulfiling other financial obligations. Those guaranteeing loans must have total deposits equal to or more than the amount being sought by the borrower.
A guarantors’ obligation shall cease when the loan granted has been repaid to equal or less than the loanees total deposits.
The Laws of Contract (Amendment) Bill, 2019 seeks to shift this responsibility to the borrower, opening a loophole for guarantors to walk away scot-free.
Other than a member’s deposits, some specific SACCO loan categories or loan amounts are usually secured from pledges backed by land title deeds, share certificates or insurance policy.
Borrowers, who do not contribute their deposits through a check-off system, can seek guarantors from the check-off system members.
However, where the loanee fails to get guarantors and the loan applied for is below his or her deposits, the loan shall be granted.
A member’s deposits pledged as security for another member’s loan shall not be surrendered to offset his/her outstanding loan unless the former provides alternative guarantors.
The proposed guarantors’ law seeks to have financial institutions first seize the principal borrower’s assets before taking the guarantor’s assets.
This Bill was sponsored by Juja MP Francis Waititu, who passed on recently after suffering from cancer.
In his memorandum to parliament, dated 3rd January 2020, President Uhuru Kenyatta said provisions in the Bill were initially contained in the Statute Law (Miscellaneous Amendments) Bill 2019.
They were severed from that Bill to allow for more comprehensive consultations with all stakeholders to ensure that they equitably met all parties’ needs.
Their re-introduction in parliament in the current form was therefore premature as the consultation was ongoing, especially with key policy and regulatory stakeholders such as the National Treasury and Capital Markets Authority.
Duale said he would reintroduce the Laws of Contract (Amendment) Bill, 2019. The President rejected it because it would prejudice the financial sector if enacted into law in its current form.
He argued that some sections are likely to affect creditors by making debt recovery longer and more expensive and allowing guarantors to conceal or dispose of assets to avoid security realisation when debts are unpaid.
In particular, Kenyatta rejected clause 2(1) of the Bill that stipulates that before a suit is brought against a defendant, the plaintiff shall first realise the principal’s assets.
He said the current system is prompt, predictable, and enjoys all stakeholders’ confidence.
Kenyatta said proposed provisions are likely to have adverse effects on credit provision to micro, small and medium-sized enterprises with lenders reluctant to rely on third-party collateral, allowing guarantors to conceal or dispose of off assets while creditors are still pursuing defaulters assets through the courts.
He told parliament that the proposed law would hamper the ease of doing business and firms’ ability to raise capital.
Many co-operators have raised concerns that many Saccos have been going slow on defaulters while quick to seize their money.
The question of whose property should be first realised whenever a principal borrower default is a grey area.
Co-operators have been requesting Saccos first to realize the principal borrower’s security and not that of the guarantor, even if the guarantor’s security is commercially viable.
