Loan guarantors play a crucial role in the lending system and procedures of the Cooperative sector.
By spreading the risk among multiple members, guarantors help manage the Cooperatives’ lending risk.
However, being a guarantor comes with its risks and challenges.
As a guarantor, you are committing to protecting the Cooperatives’ assets, and the resources are given, essentially acting as security for the loan borrower.
If the borrower defaults, the guarantor may risk losing their shares.
Cooperatives rely on the relationship between the borrower and guarantor to recover the loan amount, assuming that borrowers value their relationship with the guarantor and will pay the loan to avoid inconveniencing their friends.
Non-performing loans can arise due to various reasons, such as job layoffs, diversion of funds, or simply unwillingness to pay, among many other reasons.
The recovery process often leads to conflict, creating a strenuous situation for both the borrower and the guarantor.
To ensure customer satisfaction and retention, Cooperatives should work towards reducing lending risks and providing fallback plans for all stakeholders.
Several ideas can be implemented to minimize lending risks for loan guarantors and Cooperatives.
- Introduce new loan products that do not necessarily require guarantors. Additionally, alternative collateral items, such as houses, log books, or income-generating assets, can be accepted to secure loans, relieving other members from the burden of financing loans they did not borrow.
- Providing financial literacy classes and training about the role of guarantors can help Cooperatives members manage their finances better, understand the importance of a good credit score, and make informed investment decisions.
- Investing in income-generating assets like rental properties can ensure a continuous flow of income for the Cooperatives, even in cases of default. By going beyond lending and focusing on social development purposes, Cooperatives can attract more members and experience significant growth.
In this uncertain business environment characterized by financial market decline, volatility, economic slumps, and increased living costs, making smart borrowing and investment decisions becomes crucial for resilience and growth.
Research indicates that many Africans borrow to finance consumption rather than invest in income-generating assets, leading the lower middle-class population to slide into poverty, especially during and after post Covid-19 pandemic.
The purpose for which a loan is obtained plays a significant role in determining its repayment and addressing lending risks.
Borrowing to secure affordable buy-to-let apartments in areas with high rental demand can be an excellent purpose to obtain funding.
Affordable rental properties, characterized by cheap and decent housing that does not burden owners with excessive costs, offer an opportunity for credit market players.
However, financiers often prioritize “speedy investments” with high yields and riskier, neglecting prolonged investments like housing that may require more time to recoup.
The affordable housing gap in Sub-Saharan Africa presents a significant opportunity for lenders and investors. With more than 50 million affordable houses needed and over 250 million people lacking access to decent housing, credit market players should find ways to reduce credit risk by using affordable property assets as collateral for loans.
Most lenders lack incentives to fund housing projects, despite their lower risk profile. In order to attract lenders, affordable assets must be made truly affordable, ensuring costs fall within borrowers’ repayment capacity and allowing shorter loan repayment periods.
This is what Naivera does in partnership with Cooperatives. Naivera works with Cooperatives to help people build passive income by investing in affordable houses as income-generating assets.
The author, Charles Nyandia, is an entrepreneur and an enthusiast of innovations that transform livelihoods and create wealth for the people.
He is a Product Designer and UX Designer with 15 years of experience in the financial sector and real estate. He is Skilled in Digital Transformation in financial institutions, Digital Lending & Risk management, JV & Real Estate Investment Advisory.
He is the CEO at Naivera Inc, a prop-tech based in Nairobi that helps cooperatives to lend sustainably and helps people to build passive income through affordable housing investments (rental properties). www.naiverah.com
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