To guarantee or not is now a catch-22 situation for many Savings and Credit Co-operative Societies (Saccos) members. Many have been forced to part with their hard-earned cash when the principal borrower guaranteed defaults.
During the Annual General Meeting held across the country, many members expressed their dissatisfaction with the law, which they argued, is inadequate in protecting guarantors.
The Sacco lending model requires at least a certain number of guarantors must secure all loans making it faster to obtain a Sacco loan than from a commercial bank. The guarantors, who are also members of the Society, provide more secure collateral, shielding the institution from potential defaults.
While this enables many borrowers to access credit facilities, some are too dishonest and disappear, leaving behind large sums of unpaid loans that lenders. But while some are well known and easier to follow up on, many guarantors always wonder why it is easier for lenders to shift the risk to them. A lot of injustice has been meted on guarantors.
 A law that intended to protect guarantors in February 2019 did not see the light of the day. The Bill, which was introduced into Parliament, sought to amend the Law of Contract Act Cap 23, proposing a safeguard for guarantors by requiring creditors to exhaust the debtor’s security first before going after a guarantor. The President rejected the law arguing that it could adversely affect financial institutions and credit to the micro, small and medium enterprises as lenders will be reluctant to rely on third-party collateral.
The National Assembly’s effort to introduce Bill is yet to materialize even though the Justice and Legal Affairs Committee approved a bill seeking to amend the Law of Contract Act in order to provide legal protection to guarantors whenever commercial banks, Saccos, and other lenders are pursuing a principal borrower.
The law, if passed, would have protected guarantors’ properties or securities in agreements upon default by the principal borrower. The guarantor assumes responsibility for the debt of the principal borrower in a number of transactions such as mortgages, leases, credit facilities, and business loans.
The amendment would have cleared the grey areas, particularly on the question as to whose property should be first realized whenever a principal borrower defaults.
A High Court once gave commercial banks and Saccos a stamp of approval to blacklist guarantors with the Credit Reference Bureaus (CRBs) if principal borrowers defaulted on loans, worsening the matter for a surety. Â
While the guarantor’s rights are assured, the implication is that they end up suffering more when they have not benefited from the loan if the borrower defaults.
How can guarantors become adept at avoiding sticky situations? First, one needs to understand what a guarantee is. A guarantee contract is an accessory contract by which the guarantor undertakes to ensure that the principal performs the principal obligations. It indemnifies the creditor against the principal’s default to complete the principal obligation. Therefore, the guarantor is under a secondary obligation that is dependent upon the default of the principal.
Creditors are shrewd when drafting guarantees in order to bind both the principal and guarantor as indistinguishable parties. Experts recommend guarantors to look out for such/ similar wording as “the Guarantor shall be deemed under the foregoing agreement principal debtors and not merely guarantors…”, which designates a person as both posing greater risks on an unsuspecting guarantor as it gives the creditor lee-way to pursue you as though you were the beneficiary of the loan.
“A guarantor should therefore look out for expressions in the Guarantee that try to place the guarantor and the principal on equal standing in circumstances where the guarantor is not a beneficiary of the loan,” notes an expert at Lawyer Wangu.
Meanwhile, Saccos are changing the way they loan members moving away from pegging loan limits on the size of savings to embrace the multiplier mode, risk-based lending, where they check one’s repayment history to decide how much to lend.
