Loan process for new clients
Most of CML’s potential clients learn about the company from existing clients. Since CML has a large network and a good reputation, the number of interested clients is by far more than the company can service given the current level of capital and the company does need to engage in any marketing activities.
When a potential client gets in touch with CML for the first time, he or she informs CML staff about what size of loan that is needed and what it should be used for. CML then makes a quick screening. Some clients get turned down already at this stage. Reasons could be that the loan they require is too big, that the concept of their business does not seem profitable or that the suggested loan purpose is not in line with what CML generally provides loans for. In general, CML does not give out loans to very new businesses – normally enterprises is required to have been running for at least a year. During the first contact, CML also briefly informs the potential client about the loan process and the requirements for getting a loan. CML requires borrowers to take a group loans if they do not have enough assets that can be used as collaterals and this make some clients uninterested.
If the potential client seems interesting, CML now moves on to the loan appraisal procedures. It involves the following steps;
- Information to the potential client about the appraisal process and the requirement to get a loan. Each client has to open up an account with CML and save an amount corresponding to 10 % of the loan size.
- The potential client fills in a loan application form with some brief information about the business and the loan. The loan application form also includes directions to the client’s business location and home.
- The client provides a recommendation letter from the local authorities in his/her area.
- CML visits the client's business. It is important that the exact day and time for the visit is not known on beforehand by the client. This is because there have been cases when potential clients “borrow” businesses from friends and pretend that they own them in order to get a loan. When visiting potential clients, CML among other things look at:
- The business itself. Is it a healthy business with growth opportunities?
- Do they keep records? If yes, then CML look at these.
- The business location. Is the building a temporary or permanent house? Since the local authorities is about to remove all shacks and other temporary buildings and replace them with brick houses, the condition of the building is important in order to determine long term profitability.
- Is the business location owned or rented?
- If rented, the agreement the client has with the landlord is evaluated.
- What assets is owned by the business? Do they have any stock?
- The loan size. Is the value of the desired loan accurate in order to fulfill the loan purpose?
- To get a clearer picture of the potential client, several interviews are made with different stakeholders such as clients, staff if any, neighbors and the landlord.
- In addition to visit the business itself, CML visits the home of the potential client in other to get information about the following:
- What is the spouse doing? Does he or she do any income bringing activities?
- What assets is owned by the potential client? Is there anything that can be used as a collateral?
- How many people belongs to the household? How many of them is dependents?
- There is now time for the potential client to fill out a loan appraisal form that includes detailed information about the business. All monthly incomes and expenses is estimated and since CML staff has seen both the business and the clients home, they can easily see if the estimates are accurate. In addition, the client also fills in a spouse consent form and a guarantee consent form.
- CML visits the spouse (if he or she was absent when the home was visited) and the guarantors to inform them about what implications the loan may have on their lives.
- Verification of collateral assets is collected.
- The client get training on the loan procedure. The client’s expectations regarding the loan and CML’s services are discussed and CML staff ensure that the client understands what is expected from him/her.
- The client gets introduction to the accounting and book keeping system. All clients are required to do book keeping and for most, this is something new. CML provides them with a book where incomes and expenses should be recorded on a daily basis. Read more about the book keeping system here.
- Finally, a loan agreement is signed and the loan disbursed. For loans with the purpose of buying assets, the normal procedure is that CML buys the asset for the client instead of handling out cash.
For already existing clients, the loan appraisal is significantly shorter.
CML requires their clients to pay weekly. Since CML introduced weekly payments instead of monthly, the repayment rate has significantly improved since potential problems in the clients business can be detected at a very early stage. In addition, holding a lot of cash while waiting for the monthly repayment date might tempt the client to use the money for something else. It might also be that friends and family put pressure on the client to lend out the money to them.
Generally, the first payment should be done already a week after getting the loan disbursement. The repayments can be done either in cash or by mobile banking. Mobile banking differs from internet banking and is widely used in Uganda and other African countries. With mobile banking, it is possible to transfer money using the GSM network. The transfer reaches the receiver immediately and all that is needed is a cell phone and a sim card.
Exceptions from the weekly payment schemes are made, for example for farmers whose income is determined by season.
During the repayment period, CML visits the clients monthly in order to see how the business is performing and also to collect information from the record keeping book. The monthly visits also serve as additional training sessions where CML staff go through the book keeping from last month and analyze the business performance together with the client.
Since all data from the book keeping books is manually entered into CML’s software, this process is currently not done for all clients due to limitations of time. A field accountant is going to be employed and the vision is that in the future, there would be monthly financial reports on all CML clients.
Actions towards defaulters
Since CML uses weekly payments, potential defaulters are detected at a very early stage. In addition, the book keeping system gives the CML staff a very good view of the client’s businesses and enables them to discover potential problems before they become severe.
However, late payments do happen. Often due to sudden but necessary expenses such as school fees or unlucky circumstances such as sickness that hinders the client from running his/her business.
When late payments occur, CML acts quickly. The first action is to call the client and set up a meeting. The client has to clarify why he or she did not pay, and often a solution to the problem can be found together with the CML staff. It is important that at an early stage change the attitude of the client and teach him/her how to save money for unexpected expenses to reduce the risk of future payment problems.
If a client does not show up for the meeting or regrets to accept a new repayment schedule, CML send up to three notification letters to the client informing them of their responsibility to pay and the consequences of not paying. If nothing happens also after these notifications, the client will be taken to court.
Of course, there are also circumstances under which the client cannot repay the loan. The client might have a serious accident or get very sick and in worst case die during the repayment period. Something that totally destroys the business, such as fire outbreak, might also occur. Therefore, CML requires all of its clients to take up an insurance that repay the full amount of the loan under these types of circumstances.