Painful price of being a loan guarantor

Ken Kimani and three of his colleagues acted as guarantors to a fellow teacher when he took a loan of Sh1.2 million from their savings and credit society. The four hardly knew the borrower and had first met him in the banking hall.

The borrower repaid the loan for a few months before secretly leaving the country.

A few months later, Kimani and his colleagues were served with warning letters that they were liable to repay the outstanding balance and the interest that had accrued.

Even after the defaulter’s savings were seized by the co-operative to offset the loan, Kimani and his friends are still repaying the outstanding balance, three years on.

As it is, the four teachers are now ineligible for any credit from their Sacco until the outstanding balance of the defaulter is paid in full.
Mr and Mrs Mbugua are civil servants. A year ago, they guaranteed a close family friend and a colleague Sh1 million bank loan to buy a matatu. The borrower serviced the loan for six months and stopped.

“He simply absconded duty and went into private business,” says Mbugua.

The couple knew something was wrong when they began receiving telephone calls from their bank.

“Every time, the caller inquired if we knew the whereabouts of the borrower and sounded less friendly than the previous call,” says  Mbugua.

The Mbuguas’ calls to the defaulter went unanswered. The borrower then changed his phone lines.“When we finally went to his home, his wife didn’t have a clue where he was for the last several weeks.”

Meanwhile, the bank loaded the loan installments and fines on the Mbuguas who had other commitments and life turned into a nightmare. After their own deductions were made, the bank took all the remainder of their salaries and would not hear their pleas whatsoever.

“From a family that could afford some decent living and an occasional holiday, we were reduced to selling off some of our property and working second jobs to meet our basic needs,” says Mbugua.

They employed a private detective who traced the borrower to western Kenya where he was operating his matatu.

“We went there and made the defaulter commit himself to be banking a specified amount of money in our account to mitigate the hardships he had put us in.”

Things went on smoothly for some time before the defaulter changed stations and went to an unknown town. They tracked him again and begged the defaulter’s in-laws to intervene on their behalf.

And when confronted by his furious father-in-law in a coastal town, the defaulter got ashamed and has since renegotiated with his bank and resumed his loan repayment.

The Mbuguas have learnt that before you guarantee anybody a loan, be sure that you can afford to pay the debt in full if the borrower defaults.

Andrew Njoka, a banker with a financial institution, agrees that loan defaulters are bad for business and their actions cut both ways on the guarantors and the banks.

Njoka says financial institutions often try all methods, including rescheduling payments and legal action and only load bad loans on guarantors as a last resort.

“We have been losing many guarantors who are often our good clients when we load bad loans on them. For they close their accounts quickly and take their money elsewhere,” says Njoka.

Indeed, a banking insider, who does not wish to be named, says that due to the agony of charging guarantors and in effect losing customers, some banks are exploring the possibility of changing tact to request borrowers to furnish them with guarantors who are not account holders with them.

Bob Musyoka, another banker, says that under the present arrangements in most financial institutions, a guarantor assumes a real liability in case the principal debtor defaults or fails to meet some terms of the loan agreement.

This is because the loan contract does not assess the guarantor’s credit worthiness other than their assurance that the lender’s money will be repaid.

“The assumption is that the guarantors read the fine print of the agreement and know what they are getting into,” says Musyoka.

He adds that in his bank bad loans are only written off if the guarantor’s security is not enforceable or if the matter is set aside by the courts.

Both Njoka and Musyoka acknowledge that the the famous Donde Bill is rarely applied to bad personal loans and many institutions simply let the interests and fines compound. The Donde law bars financial institutions from charging further interests on non-performing loans when the interest equals the principal borrowed.

Musyoka says under limited circumstances, some banks can negotiate partial payments of a bad loan with a borrower or a guarantor subject to recovery of the principal and administration charges at an agreed date. And all this points to the fact that it is ndeed tricky for a guarantor in all situations.