CREDIT POLICY AND PROCEDURES MANUAL

PREPARED BY:

HR & GOVERNANCE COMMITTEE

JANUARY 2017

FAIDISHA WANABIASHARA SACCO LTD TABLE OF CONTENT 1 Introduction ......................................................................................................... 1.1 Objectives ................................................................................................................ 4 1.2 Legislation ............................................................................................................... 4 1.3 Definitions .............................................................................................................. 5 2 General Policy And Procedures ............................................................................. 7 2.1 Administration ....................................................................................................... 7 2.2 Authority ................................................................................................................ 7 2.5 Procedures For Loan Applications ........................................................................... 9 2.6 Loan Process ........................................................................................................... 9 2.7 Assessment And Analysis ........................................................................................ 10 2.8 Appraisal ............................................................................................................... 10 2.9 Loan Approval ...................................................................................................... . 10 2.10 Purpose Of Loan ................................................................................................... 12 2.11 Loans To Office Bearers And Staff ........................................................................... 12 2.12 Interest On Loans ................................................................................................... 12 2.13 Loan Repayment And Recovery .............................................................................. 13 2.14 Maximum Loan ......................................................................................................15 2.15 Security For Loans ..................................................................................................15 2.16 Loan Disbursement ................................................................................................16 2.17 Loss Of Common Bond ............................................................................................17 2.18 Loan Delinquency ..................................................................................................17 2.19 Loan Collection ......................................................................................................18 2.20 Collection Procedure ............................................................................................18 2.21 Loan Documentation .............................................................................................19 2.22 Reports ............................................................................................................... 19 2.22.1 Delinquent Loans ......................................................................................... 19 2.22.2 Allowance For Doubtful Loans ....................................................................... 20 2.23 Loan Write Off .................................................................................................... 21 2.24 Risk Management To Loans ................................................................................ 21 2.25 Summary Loan Granting Mechanism ................................................................ 22 3 Credit Procedures For Loan Products ................................................................. 23 3.1 Loaning Appraisal ............................................................................................... 23 3.2 Other Procedures ................................................................................................ 24 3.2.1 Processing Loans ................................................................................................24 3.2.2 Loans Cleared By Cash/Cheques ...........................................................................24 3.2.3 Loans Appeal .......................................................................................................24 3.2.4 Savings Refund .................................................................................................. 24 3.2.5 Clearance .......................................................................................................... 26 3.2.6 Death Claims ..................................................................................................... 26 3.2.7 Returns To Insurance Loans Processes ............................................................... 26 3.2.8 Guarantors ........................................................................................................ 27 3.2.9 Replacement Of Guarantors ............................................................................... 27 3.2.10 Roles Of The Credit Committee .......................................................................... 27 3.2.11 Defaulters ....................................................................................................... 27

4 Functions Of The Credit Committee And Credit Office....................................... 29 4.1 Duties Of The Credit Committee ........................................................................29 4.2 Main Duties ................................................................................................... 29 4.3 Credit Function .............................................................................................. 29 4.4 Duties And Work Procedures Of The Credit Officer ......................................... 30 Board Approval Of Policy ................................................................................ .. 34 6.0 Appendices ....................................................................................... ....... 35 PURPOSE AND SCOPE OF THIS MANUAL The purpose of this Policies and Procedures Manual is to create a set of standardized policies and procedures for the lending activities. The Policies and Procedures have been designed to assist the credit administration, as well as other departments in the performance of their duties. The main objective is to ensure thorough loan appraisal and proper monitoring of all outstanding loans. This includes both supervision of outstanding loans and recovery of overdue loans.

1 INTRODUCTION Savings and Credit societies (SACCOS) meet a need not presently met by other financial institutions by allowing members to obtain loans based on Security of their Savings, their Incomes, Character and Guarantee by fellow members. To fulfill the above, Faidisha SACCO has formulated this credit policy and procedures to guide credit granting and administration taking into account the relevant legal provisions. 1.1 Objectives The objectives of the Policy are to:

a) Establish a fair and efficient loaning system based on uniform and consistent credit administration b) Ensure fairness in loan granting process. c) Provide clear basis for dealing with members’ loans. d) Ensure that society does not get into difficulties through approving loans in excess of available funds e) Ensure proper utilization of loans granted to members. f) Facilitate loan recoveries g) Minimize loan defaulting. h) Set checks and balances in credit operations. i) Define Committee and Staff roles in order to avoid duplication and overlap of duties and responsibilities

For the Credit system to function effectively there is need to have a Credit Policy and Procedures Manual to guide those who are involved in the credit granting process. The Credit Committee, the General Manager, staff and the Board must follow clear-cut set of rules, procedures and policies. These policies include preconditions for granting loans, the minimum requirement for a member to be eligible to borrow, maximum loan, types, terms and conditions and other relevant information on the Credit Management Process. 1.2 Legislation All loans must be made in accordance with the provisions in the Cooperative Societies Act, Rules, SACCO Act, SACCO Regulations and the SACCO By-Laws. 1.3 Definitions Unless otherwise stated in this Policy and Procedures Manual the following words shall mean: a) Board of Directors: Members elected by the Faidisha Savings and Credit Cooperative Society Limited at the Annual General Meeting who ultimately will be responsible for the policy making operations of the SACCO. b) Credit Committee: A Board Committee appointed by the Board of Directors comprised of members responsible for the approval of loans within the approved lending policies as stipulated in this manual. c) General Manager: An officer hired by the Board of Directors responsible for the day to day operations of the SACCO in accordance with the rules and regulations set by the Board of Directors. d) Credit Officer: staff delegated authority to consider and approve loans within specific limitations as set by the Credit Committee. e) Deposit: means a sum of money paid on terms under which it shall be repaid, with or without interest or premium, and either on demand or at a time or in circumstances agreed by or on behalf of the person making the society receive it at the risk of the society receiving it;

f) Delinquent Loan: A loan whose repayment terms and conditions have been violated or a loan granted in violation of this Loan/ Credit Policy. g) “Equity” is the difference between assets and liabilities, or the total of institutional capital and other capital accounts. h) “Foreclosed assets” means real estate and assets of material value that are transferred to the Society because of non-repayment of a loan. i) Fixed Deposits: It is Savings by a member whose withdrawal period is fixed. j) Interest Rate: The cost of using money k) Loan: Any financial transaction or commitment entered into by the SACCO with a member whereby the other party becomes or could become indebted to the SACCO. l) Loan Application: A form requiring information used to determine whether a member will be granted a loan. m) Loan Contract: A document that binds the SACCO as lender and member as borrower in acknowledgment of a loan granted to the member and all subsequent terms and conditions associated with the loan. n) Loan Collateral/Security: An asset (any item) of monetary value pledged to ensure loan payment and may be subject to seizure upon default to offset the indebtedness. The collateral value should at least be 80% of the loan applied for. o) Management: Refers to the senior staff of the Society p) Market Rate of Interest: A rate of interest determined by the financial market forces of demand and supply and is related to the real cost of funds. q) “Minors” shall mean people who are not at least 18 years of age who may not vote or hold office or borrow from the Society. r) “Provision for Loan Losses” is an expense in the income statement to reflect an increase in the probability of losses due to uncollected loans s) Provident Loan: A loan granted to a member for his or her own personal welfare or for consumption purposes. t) Productive/Business Loan: A loan granted to a member for a use in an income generating activity (business) or agriculture intended to earn a return secured by assets of the said venture and its source of repayment is intended to emanate from revenue of the said business. u) “Society” means “Faidisha Savings and Credit Co-operative Society Limited”. v) Shares: A member contribution to the Society capitalization subject to review by the Board and is not withdrawable. w) “Share Capital” shall mean members’ equity in the form of issued and fully paid up shares of common stock. x) Savings: Savings by members which can be withdrawn on demand within the normal working hours as specified by the Society Management.

2 GENERAL POLICY AND PROCEDURES 2.1 Administration A high quality of loan documentation including proper signing authorities and borrowing resolutions shall be instituted and maintained. Adequate accounting records for all loans shall be required and maintained as well as such physical and monitoring controls that are necessary to ensure that any given loan does not jeopardize or impair the SACCO’s financial position. 2.2 Authority This Policy and Procedures Manual has been approved by the Board to provide direction and guidelines to the Credit Committee and Faidisha SACCO staff in order to ensure that financial resources are adequately protected, investment in member loans is of high quality and that the return on loans is relative to the risk taken. 2.3 General Conditions for all Loan Products To qualify for a loan, a member shall: - Have completed at least Three months of membership and contributed not less than Kshs. 4,500. - Ensure contributions have been consistent for at least three months prior to the loan application. - Ensure that shares contributed in lump sum for the purpose of taking a loan have been in the Society for at least three months. - The maximum loan amount that can be granted to a member shall not exceed Kshs. 2 million or as may be determined by the Board of Directors from time to time. - A member is only eligible for one loan in each loan category at a time. - A member who withdraws from the Society and rejoins later will be treated as a new member for the purpose of this lending policy. - A member who transfers shares from another Society will only be eligible for a loan after three months. - The rate of interest on loans shall be determined by the Board of Directors from time to time. -. All loans shall be insured by a reputable insurance company against death or permanent disability. - Savings contribution shall be deposited to the SACCO account via Buy Goods Till No. 968533 or deposit to our bank Ac at Cooperative. 01120415976000. Original Banking slip/Ref No must be submitted to SACCO office for verification and recording purposes. If a member fails to service his/her Loan as per the repayment Schedule, his/her guarantors shall not qualify for any loans until such a time the accruing amount from the defaulter is fully recovered. Members are advised to form/join cluster groups. -. A member who remits their monthly repayments irregularly shall only be granted loans equivalent to their savings with the society and default in monthly loan repayments may disqualify a member from being granted loans/or their loan applications may be varied at the discretion of the management committee. ii. No member of the credit committee shall be present when his/her loan is being considered by the CMC. iii. No member shall be allowed to guarantee more than three loan in a given period. 2.4 TYPES OF LOANS 1. BIASHARA/ DEVELOPMENT/ SCHOOL FEES LOAN Processed once a month and must be submitted by 1st Monday of the month not later than 5pm Interest Rate is 10% pa A member must have accumulated at least 3 months of continuous savings of Kshs 1500/- per month. A member shall qualify up to 3 times of his/her savings Loans must be fully guaranteed. Savings must be done continuously as the member repays the loan.

Purpose of this loan is to enable members expand their businesses. Minimum Amount is Kshs. 10,000 to Max of 200,000 for first loan. Duration for repayment for first loans is 6 months but it can be varied depending on the amount and board discretion upon request Processing Fees 1% Insurance is 1%. Legal fee—150/= Grace period 14 days. Repayment must be weekly basis 2. EMERGENCY LOAN Meant to assist members to settle medical bills when hospitalized, Funerals, Accident, any other issue that the committee will consider as an emergency. Documentary evidence must accompany the loan application. Interest rate 12pa 3. FAIDISHA LOAN A member must have accumulated at least three months continuous savings, Member is entitled up to 2 times of his/her savings. Min 10,000 to Maximum of 100,000 per member Full repayment of this loan must be done before one can apply for another loan. Duration for repayment ranges between 3– 6 months Interest is 5% per month and the loan is available within 2 days of application Loan must be guaranteed fully Processing Fees & Insurance is 2%. Legal fee—150/= Loan repayment must be effected on weekly basis. INSTANT / QUICK CASH LOAN Applications for this loan shall be done between Monday to Friday and shall reach the office by 10.00am. Appraisal and disbursement will be done within 12 –24 hours via Mpesa or Cheque. Guarantors required and loan shall not exceed 1.5 times your savings. to a maximum of 50,000 repayable within 3 months. Processed instantly or within 12 hours. The applicable interest is Interest 10% pm. 5. FIXED ASSET LOAN Its purpose is to enable our members acquire assets like their Dream cars, Purchase Plots, Houses etc. Financing is up to 70% and the member will contribute the balance of 30%. The sacco will co-own the asset with the borrower till the loan is fully paid. Interest shall be 15%pa. Member must have saved for 6 months to qualify for this Processing, and evaluation fee shall be determined at the time of application same as legal charges. Logbooks/Title deeds must be surrendered to Faidisha Sacco. LOAN APPROVAL PROCEDURES 1. Loan applicants will communicate to the loans officer of their intent upon which a credit officer will visit and do the assessment, appraisal and evaluation procedures. 2. Loan forms be filled properly with all guarantors signing and availing their copies of IDs, Passbooks/statement before loan is forwarded to credit committee. 3. Credit committee will deliberate on the loans and make their recommendations to the CMC. They will consider the 5 Cs of Credit. Members shall be communicated to once the committee has concluded the approvals for their loan and issued a letter of offer to the member which will be accepted or rejected within 14 days. If the member accepts the terms of offer the signed letter will be returned to the credit team and the credit manager will have to prepare a Loan schedule for the members and also a general payment schedule for all loans approved. Each branch must be furnished with a copy of the payment schedule and the accounts department will also get a copy to help in computing /data entry procedures - Cheques written & issued by the accountant systematically.

- Loan Officers Must keep track of all loans & guarantors. - Loan recovery starts immediately after the grace period.

REVISED SUMMARY OF LOAN CATEGORIES LOAN CATEGORY

LOAN MAXIMUM

No. of Time of Members Savings

Interest Rate Duration for Processing

Max period of repayment

Biashara Loan 1000,000 3 10%pa 30 days 3 years Development 1,500,000 3 12%pa 30 days 4 years Asset Finance Vehicle/Land

2000,000 3 15% 30 days 4 years

School Fees 200,000 3 10% 15 days 12 months Biashara Plus 200,000 3 2%pm 7 -10 days 6 months Emergency 100,000 2 12%pa Same day 6 months Faidisha Plus 100,000 2 5%pm 48 hrs 6 MONTHS Quick Cash 50,000 1.5 10%pm 3 hours 3 MONTHS 2.5 PROCEDURES FOR LOAN APPLICATIONS - The loan application form shall be fully completed and supported by proof of the applicant’s income and ability to repay the loan. Applicants may be required to provide additional proof such as certified Passbooks, Bank statements, pay slips, financial statements, credit reference bureau reports or reference letters. - Loan application shall be considered on a first in, first out basis, provided that wherever there are more applications than the funds available, preference shall be given in all cases to smaller loans. However where amounts applied for are approximately the same, preference shall be given to applicants with shorter duration of repayment. Subject to the foregoing preference shall be given in the following order 1. Where the purpose of loan applied is deemed urgent 2. Members who has not applied for a loan before 3. New members who have qualified for loans 4. Members who have cleared their fist loans and have applied for a fresh one. NB: Members who defaulted in their previous loans or paid poorly may not be considered immediately for another loan and they will be subjected to new evaluation and waiting period of two (2) months. Loan Forms must reach the office by the 1st Monday of the month failure to which it will be carried forward- this applies to Normal/Biashara Loan and Development loans. Biashara Plus loan forms must reach the office every Tuesday while Quick cash, Emergency and Faidisha Loans will be brought any day during business hours. - A member whose loan has been declined shall be at liberty to appeal to the Board of directors in writing. -. It shall be an offence, liable for prosecution for a member or Society employee to give false information regarding shares, loans and guarantee. i. The society maintains a loan register where applications received are systematically recorded and which is used during loan granting. and maintain a members passbook record reflecting details of members financial activities. ii. For purpose of loan eligibility only member savings shall be considered. However if a member has shares in the society, they can be used as security for the loan iii. Loan processing fee of 1% , Insurance fee 1% of the amount and flat fee of Kshs. 150/- for legal services shall be deducted upfront from the amount approved.

2.6 LOAN PROCESS a) Loan applications shall be directed by the applicant and during working hours to the Society Offices where the Credit Officer will attend to the customer. b) The society’s date stamp will be put on the application the same day when it is received and processing done in chronological order. c) In the initial discussion, the Credit Officer shall find out if the prospective applicant meets the requirements, verify the correctness of the information provided by the borrower in the application form and attachments thereof, and number the application form serially and enter the application in the loan application register. d) If requirements are not met in full, the Credit Officer has the prerogative to advise the customer not to pursue the loan any further. e) If the applicant does not agree with the Credit Officer, the Loan applicant has the right to contact the Manager, who together with the Credit Officer will enter final verdict on whether or not the application should be processed further. f) If requirements are fully met, the Credit Officer can move to the next step, loan assessment and analysis. 2.7 Assessment and Analysis a) The Credit Officer shall make an assessment of the applicants eligibility based on the salary slip/documents provided by the member. 2.8 Appraisal a) The application will be subjected to the predetermined formula based qualification parameters, period of patriotic membership, multiplier and debt ratio. b) Based on the applicant’s loan history (if available), cash flow and ratio analysis, the Credit Officer will formulate a comprehensive credit appraisal formular containing the following: Proposed loan amount Proposed loan duration Proposed installment amount Proposed repayment frequency (monthly) 2.9 Loan Approval a) The General Manager or Credit Officer may approve loan applications based on the limits specified by the Credit Committee (such as: character of the borrower, ability to repay the loan, and past record) provided such loans are fully (100%) secured. Any loans above authority or not otherwise secured by cash shall be referred to the Credit Committee. Loans that Can be Approved by Management Staff: Quick Cash Loans – Limit of Kshs. 30,000 Faidisha Loans - Limit of Kshs. 100,000 Emergency Loans - Limit of Kshs 50,000 Staff Advance Loans - Limit of 2 months salary. NB: Normal, Development, Biashara Plus, Asset Finance, Staff & Committee members Loans shall be approved by Credit committee and Full Board. Any loan above 100,000-300,000 shall be referred to credit committee and those above 300,000 MUST Be approved by full management board. b) The Credit Committee shall approve or reject all Society loans and those above the authority of the General Manager or Credit Officer. c) The Credit Committee shall meet at least once a month or as the Board may approve. The purpose of the meeting is to approve loans and/or interview loan applicants where necessary.

d) The majority of three members of the Credit Committee shall meet to review loans approved by the General Manager or Credit Officer as per specified limits and security and consider other loan applications. e) The Credit Committee shall approve loans based on the applicant’s character, capacity, ability to pay, capital and collateral security offered. f) Loan application shall be considered in the order in which they are received, provided that: Whenever there are more applications for loans than the funds available, preference will be given, in all cases, to smaller loans. Where amounts applied for are approximately the same, preference will be given to loans for shorter periods. Within the foregoing preferences, priority will be given in the order of: members who have never had loans, then new members who have qualified for loans, and then to members who have cleared their first loan and have applied for fresh loans. g) When all conditions for approval have been satisfied a loan will be approved by a majority decision of the Credit Committee. h) Members will be informed immediately the decision has been passed on the fate of their applications and reasons for passing such decisions. i) The rejected loan applications are filed and communication sent to the member showing the following possible reasons; Inability to repay or poor repayment history Loan not in proportion to deposits Lack of proper guarantee or security Inadequate membership period Outstanding loan Ineligible purpose j) At times, any loan application may be deferred due to any of the following reasons: - Incomplete information or lack of supporting documents Time limit can occur when an applicant applies for a loan more than one month in advance of the date needed To negotiate loan terms or purposes The loan purpose may not conform to the loan policy k) In these cases, the credit committee may wish to defer the loan application, pending further negotiation instead of outright rejection. l) A loan may also be deferred due to inadequate loaning funds. Action will be taken regarding approval when funds become available. m) When a loan application is declined, the Society shall communicate to the applicant in writing the reasons for denial of the loan within 14 days. n) If a member is not satisfied with the decision passed by the Credit Committee, they will be required to submit a written appeal to the Board within fourteen days when the decision was passed by the Credit Committee. The decision of the Board shall be final. 2.10 Purpose of Loan Loans shall be granted for provident and productive purposes where repayment will emanate from member’s salary and business activities.

2.11 Loans to Office Bearers and Staff a) Loans to Board members and staff shall be approved in the normal loan process. This shall however be brought to the attention of the Board provided that such member or employee shall not be present when their loan application are being considered b) A Board member who tampers with his/her monthly deposit contribution and loan repayment shall be liable for fine under Society’s By-laws for each such offence committed besides losing his/her position as a board member; while an employee who tampers with his/her monthly deposit contribution and loan repayment shall face disciplinary action as per section 94 of the Cooperative Societies (Amendment) Act 2004. 2.12 Interest on Loans a) The Board is empowered by the Society’s By-laws to set and review loan interest rates b) The Society will adopt a loan pricing strategy, which will be based on full sustainability. It will seek to balance institutional sustainability, growth, safety and soundness and quality of services to members c) The interest rate on all loans shall be based on market rates to be decided by the Board from time to time as dictated by the changes in the base rate. The interest rates will be dynamic and competitive. d) The following factors shall be considered when determining interest rates: full cost of funds, loan risk, inflation, institutional capital building, members’ needs and market trends. Generally, the society’s mark up/margin shall be determined by the cost of the funds. e) The method of quoting interests shall be decided by the society from time to time and may vary from one loan product to another f) The method of calculating and posting interest rates in members’ loan accounts shall be outlined in the Society’s accounting procedures as reviewed from time to time. g) The stated interest rates shall exclude legal fees and any other direct cost related to loan processing like collateral valuation. 2.13 Loan Repayment and Recovery a) Loan repayment period shall depend on individual cases and can be paid in full or by installments based on loan agreement and contract; which shall take account of the borrower’s current income flow. b) Repayment terms shall clearly show amount relating to the principal loan repayment and interest. c) Deductions for loan scheduled for monthly repayments shall commence not later than the month following that in which the loan was released to the member. d) The members of the Society shall have the obligation to clear their loans borrowed from the society, by exercising credit discipline so as to maintain good member society relationship. e) To make good of the borrowed loans, members shall be required to repay their loans by installments and deductions shall be made at source from the employer. Cash payments shall be accepted by the society as another form of loan repayment f) The member loan repayment plus interest shall not exceed 2/3 of his/her total salary or income at the time of application. g) A member is free to repay the loan from any sources. The Society may consider these other sources when determining the member’s ability to repay the loan at the time of granting provided that the income from other sources is reflected in the member’s savings account in the society. h) Loan repayment can be made either through check off system, banker’s standing order, society’s pay bill number. Any cash payment done through the bank, bank-pay-in slip should be forwarded to the Society for receipt and recording immediately. It is important to indicate on the pay- in slip the name, personal number of the member and purpose of payment. i) Members are advised to ensure timely payment of loan. If for any reason nonrecovery occurs, effort should be made to pay the months installment through other means. Delayed payments will attract a further penalty on the interest. Members should indicate loan type/purpose e.g. emergency, college/school fees etc.

j) A member’s deposits pledged, as security for another member’s loan shall not be surrendered to offset his/her outstanding loan unless the former can provide an alternative security for the loan guaranteed k) The society may consider designating an employee to coordinate loan recovery. If designated, the employee shall work independently from other credit activities. l) Any refinancing of a loan balance, or any request for an extension of time in which to pay, shall be agreed to by the Credit Committee only in exceptional circumstances. Any extension so granted must be consented to by guarantors and shall be treated as though it was a new loan, and an extension agreement shall be executed and signed. m) Any loan more than three months overdue may be referred to the guarantors with a demand notice for them to clear all outstanding loan guaranteed by them provided that the society shall first give written notice of this intention to the borrower before so acting. n) The Supervisory Committee shall monitor the performance of all loans and in particular, the insider loans (for Board members and staff) and ensure that their repayments are prompt and correct. NOTE: Loans may be repaid earlier than the agreed term. 2.15 SECURITY FOR LOANS Loans shall be fully guaranteed by one or more of the following:- 1- Member’s savings 2- Guarantors if the loan applied for is more than the member’s savings -. All guarantors shall be members of the Society in good standing. - No member will be allowed to guarantee more than their savings. -. The obligation of guarantors shall cease when loans guaranteed have been reduced to or below the member’s savings. - The obligation of previous guarantor(s) shall cease upon change of guarantors subject to the new guarantor(s) being accepted by the Society. 3. Motor Vehicle Log Book – A member can use a motor vehicle as security for a loan up to 60% of the current value of the vehicle, except for matatus. The member shall provide the following documentation in order for a motor vehicle to be accepted as loan security:- -. Original logbook -. KRA Vehicle Transfer form signed to effect change of ownership in the joint names of Faidisha Wanabiashara Sacco and the member - Copy of PIN -. Copy of ID -. Valuation report from Society recommended valuer -. Proof that vehicle is comprehensively insured -. Letter from insurance company noting the Society’s interest in the vehicle -. Costs of Transfer as advised by the Society 4. Tangible Assets up to 80% of current value. A member shall provide the following:- -. Original lease or title deed for charging -. Valuation report from Society recommended valuer -. Land rent and rates receipts, as applicable. -. Copy of PIN -. Copy of ID -. Spousal Consent, where applicable 14. Once a loan is equal to or less than a member’s savings all securities and guarantees are released. Specifically, -. Guarantor shares are released Faidisha Wanabiashara Sacco Ltd

-. Motor vehicle ownership reverts back to the member and the Society’s interest in the motor vehicle is cancelled - . Discharge of charge for tangible assets is completed. 15. All costs associated with security for loans shall be borne by the member. f) All guarantors must be members of the society in good standing and acceptable to the Credit Committee. - No member of the Board or any Board committee or employee shall act as an endorser or guarantor, for borrower from the society. - A borrower or a guarantor may apply to the Credit Committee for a change of guarantors. k) Other security: Mortgage in real estate can be taken as security for a loan not exceeding two thirds of the mortgage value. n) The society will only accept valuation reports from the Automobile Association of Kenya or any other firms of repute that may be approved by the Board when dealing with motor vehicle log books. o) All security offered must be in place and in possession of the Society before funds are disbursed. 2.16 Loan Disbursement a) Loans will be disbursed when all security documents are completed, signed, acknowledged and in place at the Society Office. b) Loans will be disbursed only after a Loan Contract has been completed and acknowledged by both the member and the Society. Loans will be disbursed after approval by the relevant authority subject to availability of the funds. c) Loans will be disbursed either through Cheque or on the request of the borrower, by making direct payments to another organization/bank. d) Loans shall not be disbursed in cash. 2.18 Loan Delinquency a) The General Manager shall at the end of each month prepare a listing of all loans whose repayment date has been exceeded in the following order: 0-31 days 31-6o days 61-90 days 91-180 days 181 - 365 days 365 days and above b) The report shall include the following:- Name of borrowers Amount and purpose of loan applied for Investigative report and analysis Security taken or proposed and value Managers recommendations Other loans pending i.e. loans approved but not yet disbursed. c) Such a list shall be presented at all Credit Committee Meetings detailing action taken to minimize potential loss to the Society. d) The Society will have to levy the interest and penalties for the loan defaulted. e) ALL security pledged or guaranteed shall be realized whenever a loan is delinquent for more than three months.

2.19 Loan Collection a) The Society shall have documented loan collection procedures. All loans that are past due shall immediately be recorded on the member’s character card. b) All correspondences regarding delinquent loans should be filed and noted on the members’ file or documentation. 2.20 Collection Procedure a) A collection notice is to be sent to the Loanee within 30days of default b) A reminder notice is to be sent within 60 days to the Loanee and copied to the guarantor(s) c) A final notice is sent to the guarantor after which realization of security i.e. Deposits, shares and other security pledged might be used to offset the loan balance. d) The loan balance can be transferred to the debt collector or Society lawyer at the expense of the borrowing member (meets all the legal and collection costs). e) Where the amount realized on the sale of security is more than the outstanding loan, the balance shall be credited to the member’s Savings Account or a Cheque drawn in favour of the member. f) The Society may appoint a debt collector after exhausting the normal debt collection procedures. A debt collector may not engage in any conduct, the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt. The following conduct is considered unacceptable:

1) Use of threat, or violence or other criminal means to physically harm the person, reputation, or property of any person. 2) Use of obscene or profane language. 3) Engaging any person in conversation on the telephone or in person with the intent to annoy abuse or harass until they repay the debt. 4) A debt collector shall not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. g) Without prejudice to the generality of this provision such misrepresentation shall include:

i) The false representation of the character, amount or legal status of any debt. ii) The false representation or implication that any individual is an attorney or that any communication is from an attorney. iii) The threat to take any action that cannot be legally enforced or that is not intended to be taken. iv) Communicating or threatening to communicate to any person credit information that is known to be false. h) A debt collector shall not collect interest, fees, charges or expenses unless they are mentioned in the loan agreement or contract. No debt collector shall collect his fees directly from a debtor.

2.21 Loan Documentation a) The General Manager shall maintain up-to-date documentation of loan files and ensure that the loan file has the following complete and in place:- Loan application, Appraisal and analysis report, Loan Contract, Receipt/acknowledgement of security, Security documents and b) All application forms for loans and all reports and minutes of the Credit Committee for every sitting shall be filed and retained in the Society files as permanent records. c) There shall also be maintained a Security (Guarantors) Register.

2.22 Reports The General Manager shall provide written reports to the Credit Committee and the Board as follows:- 2.22.1 Delinquent Loans a) A detailed report shall be maintained (and made available to the Credit Committee) on all loan applications received since last sitting and all fully secured loans approved and disbursed by the Chief General manager for formal approval by the Credit Committee. b) The Society shall produce monthly delinquency report and table it to the Board. The report shall include the following:- The number of loans in arrears by category (0-3 months,3-6 months, 6-12 months, and over 12 months) The total outstanding principal (unpaid balance) of loans in arrears by category The total arrears of all categories in numbers and amounts The total ratio of delinquent loans by percentage as it relates to the total loan portfolio. Action taken on each individual loan to ensure full recovery c) The Board shall there upon take action to collect the overdue loans. d) A quarterly delinquency report shall be prepared and discussed by the Board and compared with targets to track down the society’s overall rate of delinquency. e) The Board shall caution and warn any member making indications of becoming a defaulter and the guarantors shall be informed accordingly. Immediately the loan is defaulted, the Committee shall ensure that appropriate measures are taken to recover the outstanding loan from the borrower and guarantors through all the available machinery including the Society’s lawyer/debt collector. f) The society shall also ascertain that all necessary insurance covers for the loans, in case of the member’s death, are taken. For example a Benevolent Fund is established for this purpose. g) The society shall charge off delinquent loans it considers difficult to collect. This shall be done through the accounting procedures. Charge-offs are not write offs. All efforts will be made to recover them and proceeds written back in the society’s income and expenditure account. 2.22. Allowance for Doubtful Loans At the end of each quarter, (after three months), the year- end or any such other times as the Board may require, the General Manager shall prepare a detailed report of all loans on which the Society anticipates loss of interest and/or principal. The report shall include the following:- a) Member name and address b) Repayment Terms c) Period in arrears and date of last payment d) Balance of principal and interest outstanding e) Description of security held including estimated liquidation value and source of evaluation f) Report on activity on the account since last report g) General Manager’s comments on detailed action being taken to resolve h) Total exposure i.e. loans less cash or security value 2.23 Loan Write Off a) The Society shall be required to maintain an allowance of loan losses based on the Allowance for Doubtful loans report. When all effort to collect the loan has been turned over to the collector or Society lawyer and the period has exceeded 12 months, such loans will be charged off against the allowance for loan loss. b) A record shall be kept of all charged off accounts to be reconciled whenever a payment is received. c) A charge off account may be reactivated upon payment of all interest due and reconsidered under new terms and conditions as a new loan.

d) All charged off loans shall be followed up just as any ordinary loan such that effort will only cease when the debt has been fully recovered. e) A dividend or bonus will be considered after the Society books have been audited and the doubtful loans charged off completely. 2.24 Risk Management to Loans Members are encouraged to pay their loans promptly for eligibility to benefits that would accrue to the beneficiary in the event of death. a) The cover demands up to date member’s account. b) Any underpayments within the period will be deducted from the deposits. c) The loan will be fully paid by the appropriate insurance provider in case of death of a member. d) The Benevolent Fund or appropriate insurance provider shall also pay funeral Fee, if any to the next of Kin. 2.25 Summary Loan Granting Mechanism The diagram indicates the stages of the loan cycle from granting of the loan up to when the loan has been fully repaid.

Loan Application

Registered

Loan Evaluation/Appraisal

Loan Granting/Approved

Loan Rejected Loan Recorded Loan Agreement

Loan Disbursement

Loan Repayment Schedule

Loan Repayment As Per Scheduled Over a Period of Time

Loan Deferred

Loan Approved

Overdue

Loan Arrears

Repayment Completed – Loan Clearance Letter issued/ security discharge prepared & effected

Loanee Member Loan Default

3 CREDIT PROCEDURES FOR LOAN PRODUCTS 3.1 Loaning Appraisal When a member brings an application, the Credit Officer/Assistant will engage the member in a discussion with the aim of finding out the purpose of the loan being applied and advising him /her on when the loan will be granted and any other information. The form will be received by the Credit Officer who will check if all the relevant attachments have been availed i.e. Passbook, copy of Id and any other relevant document. The form should be duly filled and signed and witnessed. If the member is in Management, the General Manager should stamp his loan form. The Credit Officer will check if the member qualifies for the loan .In particular, he should check the following:

a) The member should qualify under the 2/3 rule b) The member should have been in the society for three months for loans below 300,000 and six

months for loans exceeding 300,000 (ie asset finance etc) c) The loan applied should be equivalent to the stated times of his deposits less any loan outstanding. d) The Loan should be fully guaranteed and any other requirement specified in the loaning policy. The Loan will be keyed into the system and the member informed of his loan number and the mode of payment. The Credit Officer will inform the member on how much the member will be granted before he leaves. The Credit Officer will work on the forms and forward them to the General Manager before the end of the following day. The Credit Officer will work on the form within a day after receiving them, Where he finds a variance on the application form he should inform the General Manager and call the member to inform him of the changes. The Credit Officer will produce the schedule of the loans pending by ……… of every month to be taken to the Board. The Report and the forms should be forwarded to the Credit Committee by ……of every month. The Credit Officer will attend the Credit Committee meeting where he will state the loan approved and will make the schedule for recovery purposes

The Credit Officer will send a text message to the member that his/her loan has been approved and will be disbursed as per agreed payment mode.

3.2 Other Procedures 3.2.1 Processing Loans All loan forms and other relevant documents moving from credit section should be registered and the recipients should sign upon receiving the same indicating the date and the time. The register will be kept by the Credit Officer 3.2.2 Loans Cleared By Cheques The member will go to the Credit Officer who will advice as follows; For those boosting their deposits, they will be required to wait for not more than 3 months to qualify for another loan. Those who clear by cheques, the Credit Officer will be required to wait until the cheque is cleared. 3.2.3 Loans Appeal This should be done in writing stating the grounds of appeal and supporting documents.

There should also be a letter from the guarantors giving their consent and authority with regard to the adjustment if it will be more than what had been applied. This should then be forwarded to the Credit Officer immediately The Credit Officer will then attach the appeal documentation to the loan form accompanied with the members file and forward to the General Manager. The General Manager will put his remarks and then forward to the next credit committee Meeting. All the other procedures will then follow. 3.2.4 Savings Refund When one wants to withdraw from the society, he or she will be referred to the Credit Officer, or a respective officer mandated by the Board to see whether they can be advised on the need to maintain their membership. This should be done immediately and they need to be handled within the shortest time possible. The issues to be covered include:

o Establish the reason as to why such member wants to resign o Advice on when to expect their refunds i.e. 60 days from the date of withdrawal o Advice on the processing fee for those with loans and the prescribed share capital. o Advice on the different products, services and investment opportunities available.

If the issues are beyond the staff level and one is convinced that the issue can be addressed further, refer to the General Manager or any other official. If the member insists on resigning, such member will be advised on how to write the withdrawal letter. He /she will also be advised on the need to replace Guarantors Member will be advised on the maturity date i.e. 60 days They will be advised on the different modes of payment and that they need to specify clearly. For those who send through mailing, the Credit Officer will forward the same to the General Manager who will call the member and advise him or her. The Credit Officer will make sure that the letter being received is correctly written and signed, the guarantors’ signature and witness, a copy of ID for the new Guarantor. If everything is in order, he should stamp, register and serialize the same. The Credit Officer will then replace the Guarantors and print the Guarantor card indicating both the new and old. The Credit Officer will make remarks on the new card indicating whether the loan has been cleared or not and attach supporting documents for the same. The Credit Officer will then check if all the documents are in order. The Credit Officer will then forward the same to the General Manager. The Credit Officer will start processing the files that have matured on 23rd of every month, he will forward the files to the General Manager who will process the files and return the files to him on the same day. In case there is an issue arising from the clearance, the Credit Officer will communicate to the member within 3 days. The Credit Officer will extract the Deposit refund report and the files and forward the files to the Chief Executive Officer on 24th of every month 3.2.5 Clearance The clearance form will be received by the Credit Officer, he will check if the member has replaced the member he has guaranteed He will then advice him to replace the members he has guaranteed. If the member has not guaranteed any one he will originate the clearance summary sheet and take it to the General Manager

After it is signed it will be taken to the Credit Officer who will sign the clearance and advice the member accordingly. He will advice the member on the mode of payment if he would wish to continue with membership. 3.2.6 Death Claims The General Manager will make arrangement for the person who will go to see the bereaved family within 3 days, where the person is an employee or board member. The representative will inform the bereaved family of the society’s help and requirements in the death claim The Credit Officer will notify the insurer and the next of kin within 3 days and copied to the welfare and Benevolent Funds Committee chair If these documents are not received within one month the Credit Officer will make a follow up with the next of kin by sending a reminder When all relevant documents are received, the Credit Officer will lodge a claim the following day. If he does not receive payment within 14 days he should lodge a complaint in writing. When paid he will make a provision in the shares refund report and inform the next of kin. Where there is a dispute, all concerned parties will be called to the office to resolve the dispute. 3.2.7 Returns to Insurance Loans Processes The Credit Officer will send a list of all the loans approved for that particular month on or before 5th of every month. He should do reconciliation with the schedule sent against the control account before 10P

thP of every

month. He should make a report and make adjustments before 15th of every month. 3.2.8 Guarantors For a member to qualify as a guarantor one has to have been a member for three months, Members of staff and board are not allowed to guarantee other members of the society. 3.2.9 Replacement of Guarantors This will be done on request of the member or when a member is withdrawing from membership. The member will be given an irrevocable guarantor form to fill which he will attach a copy of the ID. If a member cannot be able to get a guarantor, an apportionment of the loan the member has guaranteed will be calculated and will be retained until the loan is cleared. 3.2.10 Roles of the Credit Committee The Credit Officer will arrange for the Credit Committee meetings, he will ensure the schedules and forms are ready. He will also liaise with them whenever there are issues to be addressed and keep them updated on the loans status regularly and advice them on cash provisions, and the loaning policy. He should take minutes in case the secretary is absent; the minute should be available within 3 days. The Credit Committee should meet at least once a month 3.2.11 Defaulters The Credit Officer will print defaulters list on the first day of the month. He will check individual accounts and produce a report detailing reasons for non-payments by 30th of every month. He will then categorize the reports as follows. a) Terminated The Credit Officer will write to the member requesting him to inform the office on how he intends to service the loan and inform him on the various modes of payment.

The Credit Officer will write these letters within 7 days. He will then write the first notice in the following month by 7th. When he sends the 3rd notice he will inform the General Manager to pass journals and make a schedule for recovery. b) Deceased The Credit Officer will contact the Insurer to get the loan paid as stipulated in death claims above. c) Unrecovered Extract list and forward to relevant Field officers/Branch managers by 5th of every month. 4 FUNCTIONS OF THE CREDIT COMMITTEE AND CREDIT OFFICE 4.1 Duties of the Credit Committee The Credit Committee consists of three members of the Board. This Committee is chosen within seven days of each annual General Meeting. The Committee shall elect its Chairman and Secretary. It shall hold such meetings as the business of the society may require but not less frequently than once a month. 4.2 Main Duties a) Ensure establishment and review of appropriate credit policy consistent with the relevant provisions of the regulations and these bylaws. b) Ensure that the problem loan accounts are adequately identified and classified as prescribed in the regulations. c) Ensure adequate provisions for the potential loss are made. d) Review periodic credit and loan portfolio reports of the Society before submission to the board. e) Endeavour diligently to assist members to solve their financial problems f) Observe the loan policy and the By-Laws when acting on Loan Applications. g) Keep minutes of their meetings and detailed reports about their deliberations for the consumption of the Board. The Credit committee has therefore a very important function to undertake within the Board. They should analyze the lending activity to evaluate the efficiency of the lending process. They are supposed to fulfill the obligations of the society faithfully and with determination. The credit committee is expected to make detailed reports about their deliberations for the consumption of other committees and the board. 4.3 Credit Function Objectives of the Credit Function 1. The main objective of the Credit Function is to give loans to members at a reasonable rate of interest as set out in the Credit Policy & procedures. 2. The second objective is to ensure that the loans are recovered as soon as possible so that funds become available for further lending. In carrying out the two main objectives, the Credit Function shall strive to give the best service to members in the shortest possible period without discrimination or favour. The Credit Officer shall hold interviews with members where need be in order to form a fair opinion of each application where need arises before loans are lent out to members. Reports on demand for loans, defaulters, credit staff matters, credit committee deliberations, loan funds requirements and any required changes to the Board through the General Manager Reporting a) Reporting is of various forms and the regularity of reporting shall depend on the type of report. b) Credit Committee minutes shall be reported every time the Credit Committee meets. c) Staff reports should be on a monthly basis to the Board and weekly to the General Manager d) Reporting on delinquencies should be on monthly basis.

4.4 Duties and Work Procedures of the Credit Officer a) Receiving Loan forms attached to member files with folio Loan application number clearly indicated on the member’s file which the Credit Officer shall initial after acting on the Loan form. b) The Credit Officer has to check the history of the member from Members’ file in order to form a fair opinion of granting the applied loan. When going through the file, the Credit Officer will try to understand:- Whether the applicant is the bonafide member who has applied by checking the details of the copy of Identity card attached to the loan application and the details of the documents in the file like the names of the member file number, corresponding ID number in the file documents Whether the member has completed the initial three months maturity period before applying for a loan If the applicant has applied for previous loans has the member been paying regularly Personal address of the member and referees incase need arise to contact the member Creditability of the member - Past payments of loans and regular contributions to the Society should be established. . Age of the member may be checked either from Identity card or from the information in the file in view of considering the repayment period in regard to retirement age. c) The Credit Officer has to go through all applications in order to satisfy oneself that the form is completed by the applicant in all the spaces provided for filling properly and with correct information. d) When checking / accessing the form the following major points should be considered: What type of loan is applied for and if it has all the supporting documents and details or information required for that particular type of loan? In case the details and information is not complete or inadequate the member-loan applicant should be contacted and interviewed or asked to produce the required information or documents. The guarantors should be checked to obtain that the loan applied is well covered by the guarantors incase of common bond members. Other securities other than our property should be well charged or be placed in the Society’s custody until the loan is repaid in full. Repayment authority should be signed in the form and witnessed by another member. e) The form ought to have been appraised to indicate the status of the member in the Society having regard to:- The actual deposit contributions The qualifying amount i.e. multiple of lending times actual deposits contributed or any other factor decided by the board depending on the financial capacity of our Society at the time in consideration. If there is any Loan owing, the balance should be given and, The difference between the qualifying point and the balance of loan indicated. The underlying idea here is that if there is no loan balance then the member should have the maximum qualifying point considered for loan should the member apply for the same and consider other factors as payments, repayment period, and credibility. If on the other hand there is a balance, the qualifying point shall be the difference between the maximum less the balance of loan. This can only be considered in case of emergency loans. a) A statement of Account indicating deposits contribution and loans taken and are being repaid or those taken and have been completely repaid. b) When it comes to calculating the actual loan amount the member can get, the following has to be considered by the Credit Officer. What amount the member has applied for. The amount of deposits the member has contributed. The deposits times the multiplying factor shall give the qualifying loan amount.

c) When assessing what the member should get as loan the following shall be considered among other facts to qualify or disqualify the applicant; Other deductions other than the Loan repayment amount shall be considered to reduce the amount available to the repayment of loan per month. The repayment period should be that which the member deems fit to repay the loan comfortably provided the member has not applied for the loan as emergency in which case the loan should be repaid within one year or within a stipulated period as will be decided by management from time to time, and provided the member is not due for retirement before the expiry of period indicated. d) After the Credit Officer is satisfied that the member applicant meets the requirements, he calculates the amount of Loan the member qualifies on the form provided for the calculation. e) The Credit Officer after calculating the loan due to loan applicant shall enter the figure and recommend it to the General in emergency cases. The amount has to be indicated at the space provided for the recommended amount and give any comments on the same if need be before signing and indicating the date. f) The Credit Officer has to pass the form or write up the Loan Schedules giving all the details required for the benefit of the Credit Committee to deliberate on each case. g) After the schedules are ready the Credit Officer may call or inform the chairman of the Credit Committee and they tentatively plan for credit committee sitting to deliberate on the application form. h) The Credit Officer can sit in the Credit Committee to answer and help the committee to arrive at a fair decision on applications for loan. i) After loans are approved, the Credit Officer prepares a schedule for payments and passes the approved forms to the General Manager for payments after funds have been allocated for the same. j) Credit Officer shall present a list of approved Loans to the Committee every month or any other time the committee sits to allocate funds. k) The Credit Officer shall write all the minutes of the Credit Committee and present them at every meeting of the committee. l) The Credit Officer may call an applicant to interview or get clarification on the loan. In case of deferred cases, the Officer shall inform the applicant the reason for deferment promptly. m) In cases of project loans the Credit Officer will inspect the progress at every phase of the project implementation. n) The Credit Officer shall asses all loans i.e. Board, members and staff loans before they are presented to the Credit Committee and the Board in case of staff loans. o) The Credit Officer shall after assessing the Loan Applications cause the applicant to sign a Loan contract which shall have the following details: Title i.e. Loan Contract Name and address of Society Name and address of borrowing member... Date of contract... Loan amount in Kshs. Period of Loan / Duration / Term Price of the Loan (Interest) Repayment structure (weekly, Monthly) and number of such installments and due date Security pledged Associated conditions like -borrower failing to repay and expected action Signature from Society Witness to the loan contract with full details Next of kin. p) The Credit Officer shall monitor loan delinquencies and write a comprehensive report to the Board giving aging analysis.

q) The General Manager shall cause the Credit Officer to maintain a regular Loans register against which loan delinquencies shall be entered and monitored. r) The Credit Officer shall maintain a list of all approved loans by purpose i.e. development and Emergencies loans. s) The Officer shall maintain a Delivery Register monitoring the movement of the loan applications from the time it is submitted by the member to the end. BOARD APPROVAL OF POLICY This document was discussed and approved for implementation as a policy and procedures of the Society in respect to this Policy with effect from………………………………………………2017. It is approved under Minute Number................... of Management Committee Meeting held on ……………….......... APPROVED BY: Chairman………………………………………. Date………………………. Vice Chairman………………………………… Date………………………. Hon. Secretary………………………………….. Date………………………. Treasurer…………………………………………… Date…………………….. General Manager ………………………………… Date……………………. 6.0 APPENDICES Attach the following; Revised Loan Application & Loan Agreement Form Guarantors substitution form