Loans at low-interest rates are the bread and butter of every responsible Savings and Credit Cooperative Society (Sacco). It’s not just about making money; it’s about helping members succeed financially.
Saccos are member-owned institutions that aim to provide affordable financial services to their members. How they achieve this is by offering loans at low-interest rates.
Imagine Sacco members buying their first car without burning a hole through their wallets or renovating that old house. Saving for years can be extremely tedious for the members, but everything is within reach with a loan at a low-interest rate offered by a leading Sacco!
That’s how important saccos are in helping members achieve their financial goals—supporting financial inclusion. Saccos provide access to financial services for many people who may not have access to formal financial institutions. This includes people living in rural areas, low-income earners, and small business owners. By providing affordable credit, Saccos help members achieve their financial goals, such as starting a business, buying a home, or paying for education.
However, the benefits of lending at low-interest rates are almost infinite for saccos. Take the case of higher loan approval rates. Lower interest rates make it easier for borrowers to meet loan requirements and reduce default risk. This creates a win-win situation for both the Sacco and the borrower.
Saccos that lend at low-interest rates may also see an increase in borrower repayment rates. This is because borrowers are more likely to repay their loans on time when the interest rate is lower. This, in turn, reduces the risk of default.
Moreover, lower rates encourage Sacco members to take out loans, making borrowing more affordable. This can help members achieve their financial goals, such as expanding their businesses or investing in their education.
Consequently, it can reduce reliance on expensive informal sources of credit, such as shylocks, which can lead to a cycle of debt.
Several case studies have also shown that low-interest rates positively impact Saccos. For example, the Kenya Union of Savings and Credit Cooperatives (KUSCCO) reduced the interest rates charged by its affiliated Saccos. This led to a significant increase in the number of loans disbursed as well as a decrease in the loan default rate.
And Saccos are not alone in this call. Over the last several months, risk-based pricing has been a hot topic in the Kenyan banking industry. The Central Bank of Kenya increased the benchmark interest rate on September 20, 2022, allowing 22 of the 38 commercial banks in the country to boost their lending rates by 1.1%, effective as of November of the same year.
This rate cap came in just after the CBK lifted it to prevent banks from repricing their loans, which sent almost all banks lobbying to adopt a risk-based loan pricing model. According to the most recent statistics available from the industry, including data from CBK, the highest loan rate is now 15.7%, while the lowest is 7.02%.
This is how the risk-based pricing model works: a bank may offer a higher interest rate if a customer is deemed a higher-risk borrower. That may apply if the individual has been declared bankrupt, has lost their job, or is several mortgage payments behind.
However, if the bank believes the borrower poses a smaller risk, it may offer a lower interest rate. Let’s assume that the borrower has a strong credit history and is likely employed. When other costs are considered, the total cost of obtaining the same loan, say for school fees, may vary dramatically among lenders, even if the interest rates charged by the majority of them fall within a fair range. However, most banks have revised their loan interest rates to make their products more competitive.
Can Saccos also afford to lend at even lower interest rates? Yes, Saccos are the only category of lenders uniquely positioned at the top. They are at the core of the lending business, directly supporting the financial well-being of the majority of the population.
Saccos are better positioned to offer a significant amount of loans at reasonable rates by implementing efficient operational processes and maximizing the use of technology to reduce costs. And many saccos that have already implemented low-interest rate lending strategies have begun reaping the benefits of doing so.
