Should I Keep Saving With The SACCO Yet Bank Loans Are Readily Available?

A young lady asked me this question within 15 minutes of meeting each other. We were on an excursion, and this blog came up as part of the casual conversation of the thing we each enjoyed doing. She has been part of a SACCO for about 4 years, had borrowed from the SACCO once, and the bank once, was done borrowing and now wanted to exit the SACCO and use her savings to buy some land. She has a good employer and a good job which means bank loans are easily accessible should she need a loan.

My first question to  her was the purpose for which she had borrowed in the past. It was for investments/business. My advice was that she should keep saving with the SACCO, and if she needs to buy land, she is better off getting a SACCO loan to buy it, than liquidating her savings for this purpose, in the hope that she’d build the savings up once more. I gave her this advice for several reasons:

1. Once you deplete your savings (especially if the savings are substantial), it is psychologically very hard to start from zero and build your nest egg once more. This is because in our minds, long term saving tends to be optional, something we do when we do not have exciting, risky things to do with our money at the moment. A loan on the other hand, has to be paid off, so we prioritize it. I frankly consider the 12% interest on SACCO loans a small price to pay, when I consider the risk of using up savings I’ve set aside for long-term use, in hope that I’ll refund the cash slowly over time. Remember, unless you are super wealthy, personal finance has a lot to do with psychology, and techniques that keep you motivated.
2. The real interest rate of a SACCO loan is even lower than 12%, compared to bank loans which can easily be double the rate. Why do I say this? Every year, depending on the performance of the SACCO, you are likely to get 6-10% of your savings as a dividend. This actually significantly lowers the effective interest rate at which you have borrowed, depending on the amount of the loan relative to the quantity of your shares. On the converse, you would need to own a lot of shares in a bank, for the minuscule dividend payout to significantly alter the interest you would be paying on a bank loan.
3. Repaying a SACCO loan builds your savings. This again plays into the first point about psychology. When you are repaying a SACCO loan, you have to still contribute towards your savings account in the SACCO. Some SACCOs even place a limit – the last time I checked, my SACCO required you to keep saving 2/3rds of your average savings for the  6 months after taking a loan.  This is  unlike taking a bank loan where the burden of the loan repayment leaves you too psychologically depleted to “give” the bank additional money as savings.
4. You have a say on how the SACCO is run. I am not great at this, but I love that as SACCO shareholders, you get to participate in meetings, and also elect committee members who are accountable to you. One of my new year decisions is to start participating more in my SACCO.
5. A SACCO will loan you money even if you leave employment, as long as you can demonstrate ability to repay. A bank will not, unless you have an asset to give as collateral, and even then, they can easily assess and declare that you do not have the ability to repay your loan. For those with entrepreneurial dreams, it helps to build substantial credit at the SACCO.

Should I save in my SACCO for eternity?

I don’t think you should. My strategy is to set a goal. Say, I want to one day be able to borrow Kshs 12 million from my SACCO in 5 years when I decide to develop my ka-plot (every Kenyan has a ka-plot right? 😀 ), It means I want to have saved up at least Kshs 3 million by then, because my SACCO loans us up to 4 times our savings.  Once I get to that amount, then I can ease up and continue saving just the nominal Kshs 1,000 a month, then redirect my savings to other pursuits.

Next post, we talk about guaranteeing loans within the SACCO. I do not think it is wise to do so, I have alternatives that I will share.

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