Juja Member of Parliament Francis Munyua has sponsored a bill seeking to amend the law to compel creditors to first exhaust options of recovering a loan from the principal borrower before going for guarantors.
This could be a huge blow to loan recovery efforts by Saccos, most of which target guarantors in case a borrower defaults.
Most often, individuals have lost their assets to credit lending institutions like Banks, Saccos and Microfinance institutions on account of acting as guarantors to borrowers who later default.
This is buoyed by the current legal dispensation that provides for creditors to recoup their loans by seizing funds, savings, and assets of guarantors.
Under the proposed Law of Contract Amendment Bill 2019, sponsored by Munyua, guarantors would be cushioned from penalties and confiscation of assets over bad debts if the legislation is enacted into law in its current form.
In part, it reads “clause 2 of the bill provides for the amendment to section 3 of the Act to provide that before a creditor pursues a guarantor in law, he or she should first realize the assets of the principal debtor.”
The proposed amendment has been termed as disruptive and may lead to a credit crunch as credit lending institutions seek to minimize risk.
Cooperative Alliance of Kenya CEO Daniel Marube says “the proposed amendments are a threat of the spirit and growth of the Cooperative movement, as it will expose SACCOs to risks as well as detrimental to safeguarding member savings.”
The proposed amendment has been welcomed by Sacco members who argue that it is against the “know your customer” rule for Saccos to absolve themselves completely in cases where a borrower defaults by passing the risk to guarantors.