|Guidelines for the Formation of Small Enterprise Loan Policies and Procedures (K-REP, 18 p.)|
You will want to think of what your loan portfolio strategy will be - what sorts of loans you will want to make to the clients you have described above. You will want to consider what will be the proportions of different size loans, proportions of short, medium and long term loans, proportions of loans to different types and sizes of enterprise, and for different uses in those enterprises. The definition of the following policy areas will be based on what you have determined (i) will respond to the needs of your clients, (ii) will prudently allow them access to loans their present condition, and (iii) will enable you to extend your loan funds to as many of them as possible. Follow the same procedure as suggested under Client Characteristics (page 3) for drawing up these policies.
A. Purpose/use - For what the loans are to be used. To consider:
· for what can your loan funds be used; to finance working capital (day-to-day operating costs), equipment, building or land purchases, and/or refinancing other debt (if so, under what conditions would you lend for this purpose).
B. Amount - How much you will lend to any group and/or individual. To consider:
· what are limits in the number of shillings that will be lent; maximum and minimum. This alternatively could be defined as a percentage of the revolving loan fund;
· should there be a graduated series of limits for first time borrowers, and second and third time borrowers. This will, to certain extent, be affected by the people being served, their - experience with credit and the objectives of the project. For example, the minimum for a loan fund which was lending to individual micro enterpreneurs would probably be lower than for one lending only to group enterprises.
· how the minimum might be determined by the economics of administering and following up individual loans (which is why some NGOs have chosen to make one loan to a group of micro-enterprises instead of dealing with them individually).
C. Term - The length of time someone (a group) can borrow money. To consider:
· how does this vary for the type of business, the use of the loan and the size of the loan;
· is it different for clients without prior credit experience or for first-time versus second or third time borrowers.
D. Repayment Schedules - The amounts that are to be paid for each period of time (weekly, monthly, quarterly, etc.), which include interest and principal payments, To consider:
· are they fixed (an equal amount for each period) variable, or lump sum (the total amount, either principal or principal plus interest, is paid at the end of the loan period);
· is it the same for all loans or variable depending on the use of the loan and the financial ability to repay (cash flow of the enterprise);
· how will repayment amounts be determined;
· what are the limits for any grace periods (period of time before the first payment is due);
· what is the payment grace period. If a payment is received within a certain number of days after it is due, for instance 5- days on
E. Rescheduling/Renegotiation - Changing when the loan must be repaid after the loan has been made or changing other terms of the loan agreement. To consider:
· under what circumstances will the project reschedule loan repayments or otherwise renegotiate the terms of a loan such as in cases of robbery, sickness, and possibly others.
F. Interest Rate - The cost to the borrower of the money is usually expressed as a percentage of the amount of money borrowed. To consider:
· will it be the same for all loans or variable depending on the clients, the use of the loan, the amount of the loan, the cost of making the loan, or possibly other reasons;
· how the interest charges are determined; (simple interest declining balance basis, discounted in advance, collected in advance, compounded interest, and possibly others)
G. Other Fees - These could be charges for the loan application, processing, penalties for late payment, and for related services (training, management assistance, etc.,). To consider:
· will they be flat, graduated or variable fees depending on size of loan, client, services provided, location, and possibly other considerations each of which will be defined;
· what fees are necessary for program stability (economic, client seriousness and other factors).
H. Security - The tangible assets, if any, that are pledged as collateral on a loan so that in case the borrower does not repay, the proceeds from the sale of these assets can be used to pay off the debt. To consider:
· what are the assets that are acceptable for collateral;
· what legal procedures/formalities are required for registering the collateral;
· what amount of collateral is required as a percentage of the loan;
· at what percentage of market value or cost are assets valued as collateral;
· what security is needed to motivate clients to repay their loans responsibility;
· is the project willing to take the pledged assets from a client who is not repaying,(if not, any security policy will be ineffective).
I. Guarantees - Someone or some people agreeing that they will pay off the loan and interest if the borrower refuses or cannot. They can be personal (individual) or by group (each member of a group guarantees the loans for all other members of the group). To consider:
· what are criteria for acceptable guarantors;
· what are conditions for calling on guarantor to pay the loan. (Kenyan law indicates the evidence that must be submitted before a guarantor is obliged to pay).
· in what instances, will a moral guarantee be used in the absence of a legal one. (e.g., an NGO "guarantees" to a bank that its borrower will repay because the NGO is providing other necessary technical or managerial support to that enterprise).
J. Conditions of Default - when a loanee is not meeting the terms of the loan agreement. To consider:
· what indicates that the terms of the loan agreement have been broken; for example, number of days after a payment is due, sale of assets, changes in management, and possibly others.
K. Client Contribution - The portion of the activity being funded by the loan that must come from other sources. To consider:
· what must client put into enterprise to show good faith. This can be defined by a loan/equity or loan/assets measure or some other measure of such a§ hours spent developing the business, doing various tasks related to starting up the business.