What if the borrower defaults?
CML is confident in getting back your money from the investor. To prove that, CML itself puts in the last 20 percent of each loan. CML’s share will be the last to be repaid meaning that CML wants the money back from the borrower just as much as you do.
Being in business for six years, CML has already gained enough expertise in the industry to be able to enjoy an excellent portfolio performance. Historically, portfolio at risk has been between 3-5% since the start of operations in 2012. The company has comprehensive procedures for assessing potential loan takers as well as monitoring the existing clients. Unique for CML is also their work with introducing book keeping to the clients which additionally improves the ability to monitor clients. Read more about how CML works to reduce defaults here and view the portfolio performance here.
Although CML has a strong history of clients making timely loan repayments, circumstances can arise that make it impossible for entrepreneurs to pay back loans, such as severe sicknesses, accidents or even death. To protect the portfolio from such things, CML requires all clients to buy an insurance that repays the full amount of the loan in case the key personnel are incapacitated. CML is currently using AIG Uganda Insurance Company Limited to insure all client loans.
If it still happens that your specific business owner defaults on his/her loan, your money is nevertheless safe. This is because there is a spread between the interest rate that you earn as an investor and the interest rates charged to the borrowers. In addition to be used for covering operational costs, this spread is used for provision of loans to build up a reserve of funds that can be used in case of defaults.
The provision is made on the basis of the days the loan is outstanding and calculated using the following rates:
|Days Outstanding||Reserve Rates|
|1 - 30||5%|
|31 – 60||25%|
|61 – 90||35%|
|91 – 120||50%|
|121 – 179||75%|
Hence, even though you invest in one specific business owner, the risk is pooled over the whole CML portfolio.
The only exception from the guarantee is in case CML itself gets into serious economic problems and goes into bankruptcy. However, the low leverage of the company (2016, debt-to-equity-ratio was 0.44) and an agreement of prioritizing foreign investors to others makes your money relatively safe even in the very worst-case scenarios
The loan is disbursed and repaid in Ugandan Shillings. This means that the exchange rate between the currency in your country and Ugandan shillings will affect the amount of money you will receive. In case the Ugandan shillings weakens compared to your currency, there is a risk that your repayment will be smaller than the originally invested amount. For very large investments, we can help you hedge your investment in order to mitigate the risk of losses due to currency fluctuations.