Most of CML’s clients are small business owners who do not use any system for financial management. They typically don’t keep written records of sales and expenses and know little about how their business is doing. The staff at CML realized that, both from the lenders and the business owner’s perspective, there was a need for better financial information. Together with Steven Kaweesa, one of CML’s clients that teaches book keeping at his vocational school, they invented a record keeping system aimed for small scale business owners with limited knowledge about financial management.
Introducing book keeping in an environment where few people have access to computers and even fewer have the necessary knowledge for using them for a business purpose is a tough challenge.
Introducing book keeping in an environment where few people have access to computers and even fewer have the necessary knowledge for using them is a tough challenge. Some of CML’s clients have spent very few (if any) years in school and have only basic literacy. Furthermore, business owners must be convinced that time spent on book keeping is well invested and will provide them with higher incomes in a not too distant future. The record system therefore had to be very easy to use. CML together with Steven decided that a pre-formatted book was the best solution for CMLs clients and in 2013 the first version of the book was launched.
So far, the record keeping system has been implemented for more than 80 small business owners (that is 25 percent of the clients) and the ambition is that all of CMLs borrowers should use the system by end of 2019. Introducing record keeping is a unique feature for CML and once the system is implemented for all clients, CML would have a clear competitive advantage compared to similar MFIs.
How does it work?
The record keeping book has separate pages for each day where the business owner notes down sales, expenses, given credits etc. Every 30 days, there is summary page where an income statement and a balance sheet of the period is created. Initially, CML staff do the record keeping together with the borrower. The intention is however that the client does the daily record keeping him/herself and that the CML staff should be less of accountants and more of consultants or mentors. CML keeps on the regular visits in order to discuss the performance of the business and suggest improvements on the basis of what they see in the book.
For some larger clients, the records are put into a computerized format using a program called “Quick book”. The result is in addition to income statement and balance sheet some graphs to visualize the result
How the Record Keeping System benefits CML
Loans to small businesses in Uganda are typically made without much financial information. Lenders judge intuitively the borrower’s credit worthiness based on what they can see with their own eyes at the business premises and in the owner’s home. This takes time and expertise, and an analysis of past business performance is hard to do.
CML aims to let all potential clients start with the record keeping already when they first show interest in a loan. This means that at least a few months of record keeping data will be available by the time the final credit assessment is done. And since many of CMLs loans is given to returning customers, the data will on average be more comprehensive. Hence, the record keeping system will provide CML with information that reduce the credit risk and speed up the assessment process!
The chance of detecting repayment problems at an early stage is also increased for clients that are in the record keeping system. It is easy for CML’s staff to analyze problems in the business, suggest ways forward and thereby reduce the risk of default.
How the Record Keeping System benefits businesses owners
With accurate record keeping and training in financial management, a new world of opportunities opens for the business owner. During the training, they learn how to separate the business from the house hold economy and how to make comparisons, both between different periods of time and different business lines. Together with CML, the business owner can try new ideas for improving the performance of the business and immediately see results.
One third of CML’s borrowers that have had their records computerized opt to continue and also pay for the service after the loan period is finished.
Initially, many business owners are skeptical towards book keeping fearing that it will consume too much of their time. After seeing the benefits, most however change their mind. In fact, one third of CML’s borrowers that have had their records computerized opt to continue and also pay for the service after the loan period is finished. To meet the demand, CML has started a consulting company; Think Big Consult, who help their clients with book keeping, financial analysis and other business-related problems.
The business owners trained by CML can act as important sources of knowledge in their neighborhoods. Since financial knowledge is scarce, this multiplies the social impact.
A vision for the future
Even if the record keeping system currently is a unique selling point for CML, the company wish to inspire other micro lenders to implement similar systems. At the first glance, record keeping might seem difficult and time demanding, and it is easy for small scale business owner to say “nobody else do this, so why should I”. When combined with micro finance, the business owner gets an incentive to start – no record keeping means no loan.
CML together with Steven Kawesa (the founder of the record keeping book), CML has now copyright of the book and the national organization for MFIs have showed interest in start distributing it. In the long run, increased use of recordkeeping among small business owners has the potential of changing the foundations of the micro finance industry by making lending less risky and thus open for lower interests rates and greater outreach.
In addition, large scale implementation of record keeping will create a large number of administrative jobs. As youth unemployment also among university graduates is one of the major problems that Uganda currently faces, that is exactly what the country needs.