Guarantors in group lending: how they work and how to protect them

A guarantee is a promise by another member to cover a loan if the borrower doesn't. In savings groups, chamas and SACCOs, guarantees let members borrow more than their own savings without the fund taking unfair risk. They also put social trust to work: people only guarantee borrowers they believe in. This guide explains how to run guarantees fairly.

#How a guarantee works

1. The borrower applies for more than their own savings would allow under your loan limits.
2. One or more members agree to guarantee part of the loan.
3. The guaranteed amount of each guarantor's savings is locked: it can't be withdrawn while the loan is outstanding.
4. As the borrower repays, the locked amounts are released proportionally.
5. If the borrower defaults, the fund recovers first from the borrower's own savings, then from the guarantors' locked savings.

#A worked example

Kofi has GHS 3,000 in savings and wants to borrow GHS 9,000. The fund's rule lets members borrow up to their own savings without guarantors.

• The first GHS 3,000 is secured by Kofi's savings.
• The remaining GHS 6,000 needs guarantors: Esi guarantees GHS 4,000 and Yaw guarantees GHS 2,000.
• When the loan balance falls to GHS 6,000 (a third repaid), guarantees are released proportionally: Esi's lock falls to about GHS 2,670 and Yaw's to about GHS 1,330. Some funds instead release guarantees only when the balance is covered by the borrower's savings, which is simpler to administer.

#Rules that protect guarantors

• Informed consent. Guarantors sign or confirm in writing, and are told the amount, the term and what happens on default.
• Guarantee limits. A member's total guarantees shouldn't exceed their free (unlocked) savings, and they shouldn't guarantee more than two or three borrowers at once.
• Notification. Guarantors are told promptly when the borrower misses a payment, not months later.
• Fair sequence. The fund recovers from the borrower's savings first, then from guarantors, and only after the agreed process in handling late loan repayments.
• Recovery rights. A guarantor who pays should have the right to recover that amount from the borrower, with the fund's support where possible.
• Exit restrictions. Guarantors can't leave the fund until their guarantees are released or replaced (see member joining and exit policy).

#When guarantees are called

When a loan becomes seriously overdue (often 90 days) despite reminders and a restructuring offer:

1. The committee confirms the arrears from the records.
2. The borrower and guarantors are notified in writing, with a final date.
3. After that date, the outstanding amount is offset against the borrower's savings.
4. Any remainder is deducted from the guarantors' locked savings in proportion to what each guaranteed.
5. Everything is minuted and reported (totals only) to members.

If the fund can't recover a loan even from guarantees, see writing off bad loans and provisions.

#Common mistakes

• Guarantees as a formality. Members sign for friends without understanding the risk. Explain it every time.
• Circular guarantees. A guarantees B while B guarantees A. If both default, the fund has no real security. Don't allow it.
• Officers guaranteeing their own approvals. An officer who guarantees a loan shouldn't vote on it.
• Untracked locks. Pledged savings get withdrawn by mistake. Track locks in your records system, not in someone's memory.

#Alternatives to guarantees

Smaller funds sometimes use a group guarantee, where all members share the risk through a reserve. Others use a collateral item or simply keep loans within each member's own savings. Whatever you choose, apply it consistently through your loan application and approval process.

Frequently asked questions

Can a guarantor withdraw their savings while guaranteeing a loan?

Usually not the pledged part. The guaranteed amount stays locked until the loan balance falls enough to release it or the loan is repaid in full.

How many loans can one member guarantee?

Set a limit, for example guarantees totalling no more than the member's own free savings, and no more than two or three borrowers at once.

Should the fund recover from guarantors immediately after a missed payment?

No. Follow the late-payment process first and give the borrower a fair chance. Guarantors should be called on only after an agreed period, commonly 90 days, and after being notified in writing.

This guide is general information to help groups organise themselves. It isn't financial, tax or legal advice — rules for savings groups differ by country, so check with a qualified adviser for your situation.