SUKARI SAVINGS & CREDIT CO-OPERATIVE SOCIETY LTD. CREDIT POLICY

SUKARI SAVINGS & CREDIT CO-OPERATIVE SOCIETY LTD. CREDIT POLICY REVISED SEPTEMBER 2013 0

TABLE OF CONTENTS FOREWORD.2 PREFACE 3 1.0 DEFINITION OF TERMS..4 2.0 SACCO VISION, MISSION, CORE VALUES, MOTTO AND PRINCIPLES 5 3.0 OBJECTIVES OF CREDIT FACILITIES IN SACCO 6 4.0 LENDING AUTHORITIES AND LEVELS OF APPROVAL 7 5.0 LOAN APPROVAL LEVELS...7 6.0 BOARD CREDIT COMMITTEE...7 7.0 CREDIT FACILITIES ADMINISTRATION...8 8.0 LOAN CATEGORIES...13 9.0 LOAN REPAYMENT GUIDELINES...15 10.0 LOANS CASH FLOW MANAGEMENT...15 11.0 CREDIT ADMINISTRATION IN FOSA...15 12.0 FOSA ADVANCES AND LOANS...16 13.0 LOAN DISBURSEMENT...18 14.0 DELIQUENCY MANAGEMENT...18 15.0 LOAN AGING...18 16.0 PROVISIONS AND LOAN WRITE-OFFS...20 17.0 INTEREST CALCULATIONS....20 1

FOREWORD Sukari Sacco was formed and registered on 16th November 1973 primarily to promote thrift among Mumias Sugar Company (MSC) employees by affording them an opportunity for accumulating their savings and thereby creating a source of funds from which loans could be made to them. In the year 2000 the common bond was opened by the amendment of the By-Laws of the society to include farmers and business community in the sugar zone. Currently, Sukari SACCO Society is operating a Front Office Savings Activity (FOSA) for MSC employees, the farming community, contractors and business community who have registered as members of the SACCO. In its endeavor to manage the SACCO affairs professionally and in a business-like manner, the Board has developed the Sukari SACCO Credit Policy to guide in administering all its credit facilities as one of the management tools to articulate the SACCO Vision, mission, values as well as policies governing other operations and management in the society. This policy is therefore released by the Board of Directors for use in the SACCO basically to direct and guide in the process of all credit facilities offered by the SACCO. The policy shall be updated regularly by the Board of Directors depending on business requirements and the needs of the business environment from time to time. ISAAC SUMBA SHEUNDA BOARD CHAIRMAN. 2

PREFACE The objective of this manual is to provide the lending staff of the Sacco with a reference for best practices for the identification and analysis of risk in lending propositions and for the monitoring and control of Credit. The manual also aims at providing guidance on lending procedures and the completion and submission of Loan applications and other advances forms. While processing credit products, many challenges have been encountered, raising concern to the stakeholders. Some of these challenges include i. Subjectivity in appraisal. ii. Infringement of the law. iii. Inaccuracies. iv. Malpractices. All the above and many others have contributed to inefficiency in service delivery. Given the competitive nature of the industry, it is our desire to offer quality services to our members. In response to the changing environment the society has embarked on reform programmes which are intended to improve service delivery and to remain competitive in the industry. These are; i) Strategic Planning ii) Customer Service Charter iii) Performance Contracting iv) ISO 9001/2000 Standards This policy guidelines cover; Loans processing, Internal controls and Roles of various committees and officers. Availability of the Policy The Policy or sections of the Policy are not available for external distribution. It is to be freely available to Management, Credit Committee and staff members of Sukari Sacco Society, but is not to be removed from the Society s premises. Confidentiality Board of directors and Staff shall take utmost care in the security and safekeeping of loan documents. All information provided by a member must be kept in strict confidence. HUDSON A. ALUBISIA CHIEF EXECUTIVE OFFICER 3

1.0 DEFINITION OF TERMS AUTHORITY: means a body corporate with perpetual succession and a common seal capable of suing and being sued, disposing and acquiring property, borrowing or lending, entering into contracts and any other duties. BOARD OF DIRECTORS (BOD): Shall mean the governing body of nine members elected by the general members at the Annual General Meeting (AGM) to manage the affairs of the SACCO who are also referred to as Board Members. BOSA: Shall mean Back Office Savings Activity CHIEF EXECUTIVE OFFICER (CEO): Shall mean the highest ranking executive whose main responsibilities include developing and implementing high-level strategies, making corporate decisions, managing the overall operations and resources of the Sacco and acting as a main point of communication between the BOD and the Management CREDIT COMMITTEE: Shall mean a committee of three to five persons nominated from the Board of Directors to administer the process of credit facilities of the SACCO according to the By-laws, clauses of this policy, guidance from the Ministry of Cooperatives and Marketing and other related Apex cooperative organizations KUSSCO, CIC, etc. CIC: Shall mean Cooperative Insurance Company Ltd. COMMISSIONER: Means the office or a representative of the Commissioner for Co- operative Development and Marketing. DIRECTOR: Shall mean a member of the Board of Directors. EMPLOYEE: Shall mean a person employed for wages or a salary and in the service of the SACCO and includes an apprentice. FINANCIAL YEAR OF THE SACCO: Shall mean the period from 1st January to 31st December of the year. FOSA: Shall mean Front Office Savings Activity HEAD OF DEPARTMENT (HOD): Shall mean a person heading a department in accordance with the approved organization structure of the SACCO. KSHS: Shall mean Kenya Shillings KUSCCO: Shall mean Kenya Union of Savings and Credit Co-operatives Ltd MANAGEMENT STAFF: Shall mean Chief Executive Officer, departmental and section heads. MEMBER: Shall mean a person who signed the application for membership form and admitted to membership in accordance with the society s By-Laws. 4

SACCO: Shall mean Sukari Savings and Credit Cooperative Society Ltd. SOCIETY: Shall mean SUKARI SAVINGS AND CREDIT COOPERATIVE SOCIETY LTD (SUKARI SACCO LTD) as established under the Co-operative Societies Act - CS/2185). SECTION HEAD: Shall mean a person heading a SACCO section in accordance with the approved organization structure of the SACCO. SUPERVISOR: Shall mean a person heading a sub-section in accordance with the approved organization structure of the SACCO. SUPERVISORY COMMITTEE: Shall mean a committee of three persons elected by general members to oversee (verify) the actions of BOD and general operations of the SACCO. 2.0 SACCO VISION, MISSION, CORE VALUES, MOTTO AND PRINCIPLES 2.1 Vision To be a leading Sacco providing world class financial products and services 2.2 Mission To effectively mobilize resources and provide financial products and services through excellent product development and service delivery 2.3 Core Values a) Customer focus; b) Integrity, transparency and accountability; c) Teamwork; d) Creativity and innovation; e) Equity; f) Professionalism; and g) Corporate social responsibility. 2.4 Motto There for you 2.5 Cooperative Principles (a) Voluntary and open membership (b) Democratic member control (c) Member economic participation (d) Autonomy and independence (e) Education, training and information (f) Co-operation among cooperatives (g) Concern for community. 5

3.0 OBJECTIVES OF CREDIT FACILITIES IN SACCO This policy establishes the guidelines to be followed in the lending process in order to maximize the achievement of the following objectives: 3.1 Granting Loans on a solid recoverable basis. The SACCO s loan portfolio will consist of a good mix of short and medium term loans. Every effort shall be made to maintain a healthy and balanced portfolio, thereby maintaining adequate liquidity and lowering the risk of the resources channeled into loans. 3.2 Investing the SACCO s funds to maximize their returns while providing for the protection and safety of the member s savings. The Sacco will endeavor to keep risk at a reasonable level. Loan quality will prevail over business opportunities. Maintaining good loan quality will depend on the granting of sound loans and following them up with a periodic evaluation of the portfolio quality and the adoption of measures for timely loan recovery. 3.3 Serving the real loan needs of the SACCO s members. The SACCO shall maintain adequate social response to members in a manner consistent with sound lending principles by providing timely, adequate and competitive responses to applications for loans, observing that they represent viable options for the use of funds available for investment or social needs. 3.4 Loan processing within a legal and Ethical Framework. The management committee, credit committee, officers in Credit Section and employees of the SACCO will process loans in full agreement with ethical guidelines to avoid possible conflicts of interest. 3.5 Delegation of the Board s authority and responsibility The lending authorities and the SACCO s approval procedures are based on the delegation of authority by means of structured levels of authorization. However, regardless of the individual loan authority delegated or the amount of loan approved, the BOD bears the final responsibility for the loan risk assumed by the SACCO. 3.6 Policy Review The SACCO s lending policies will be reviewed and approved by the BOD from time to time based on the following factors:- (a) (b) (c) (d) (e) Changes in the laws and regulations Changes in Market conditions Changes in the SACCO s financial position and its lending capability. Changes in the SACCO s strategic plans Any other applicable factors The appropriate changes, if any, will be made and promulgated by the BOD and communicated to all members as well as staff responsible for financial management and loan administration. 6

The BOD - Shall be responsible for ensuring that the credit policy is adhered to and that it achieves the goals for which it was formulated. 4.0 LENDING AUTHORITIES AND LEVELS OF APPROVAL General Considerations for Lending Authorities 4.1 Authority and Delegation The maximum authority over the lending policy is the Board of Directors. The delegated lending authorities are; i. The Credit committee ii. Management staff 4.2 Risk Implementation All loan approvals, loan disbursement, FOSA products etc., will be authorized by the Credit Committee and Management staff. 5.0 LOAN APPROVAL LEVELS 5.1 The Board of Directors (BOD) The BOD shall approve all loan applications for BOD members, Supervisory officials and employees based on recommendation from the Credit Committee. 5.2 Credit Committee The credit committee shall rule on all applications according to the authority assigned to this committee. The credit committee will be the second level of importance with regard to loan authorization and must be constituted as required in the SACCO s by laws. The committee must adhere to the highest ethical principles and possess technical knowledge of lending procedures and practices. 5.3 Management Staff Credit Committee The committee shall comprise of the following; Credit Manager Chairman FOSA Operations Officer - Secretary Accountant - Member Responsibilities of the Management Staff Credit Committee To appraise, recommend and approve the loans under their limits To ensure all loans in the Sacco are recovered To provide all the reports as per the SASRA regulations within the stipulated time period To provide any other credit related reports that may be required by the BOD 6.0 BOARD CREDIT COMMITTEE 6.1. Composition of Board Credit Committee A credit committee shall comprise of three board members elected by the BOD. 7

6.2. Responsibilities of the Credit Committee The responsibilities of the credit committee include: Displaying ethical conduct. Complying with all legal requirements and ensuring compliance therewith. Following established policies and procedures. Respecting and maintaining the confidential nature of the information. Maintaining objectivity in its analysis. Approving loans. Ensure collection of all loans. Discuss delinquency reports. Preparing the minutes of each meeting and recording them in the respective book. Producing and maintaining statistical information on loans approved by the committee. Planning and establishing the committee s calendar of meetings and reporting to the BOD. Holding regular and special meetings according to the calendar and the rules established in this policy. Preparing monthly reports for the committee and the BOD. Ensure the members loan accounts are up to date and correctly written. 6.3. Meeting and Records of its Proceedings The credit committee will meet at least once a month for credit matters. A detailed record of its proceedings must be maintained in the committee s minute book stating the following: Date, time and place of the meeting. List of those attending. Itemization of the applications approved containing the application number of the beneficiary, the loan purpose, amount approved, term, security required, form of payment, interest, commissions (if in order), date of disbursement and other data related to each application. A list of the denied or deferred applications with an explanation of the reason for denial or deferment or other additional decision or requirement. Statistical summary of loans studied at the meeting following the parameters indicated in the previous two items. Relevant comments. 6.4. Confidentiality of the Proceedings and Decisions of Credit Committee The proceedings and decisions of the credit committee are strictly confidential and may be disclosed only through the proper channels of the SACCO to the bodies or persons entitled to know them. At any decision making level, including the BOD, any loan approval or rejection will be communicated to the respective officer for proper processing, with all the details and components of the approved or rejected loan applications. 7.0 CREDIT FACILITIES ADMINISTRATION 7.1 Introduction I. A good lending process ensures that all monies lent out to members and customers are fully recovered plus the interest. 8

II. Such process will ensure that all borrowers have got the ability and willingness to repay the borrowed funds. It s against this background that this document is prepared to provide the lending guideline that shall be complied with when processing and granting loans and advances in the Sacco. III. It is important that the character of the borrower is fully understood by the SACCO before lending. His/her values, attitudes, needs and expectations must be well known in order to determine his/her willingness to repay the loan. If need be, a letter of introduction from an active member may be sought. IV. The member must be a person of high integrity, honest, trust worthy and with a clean loan repayment record. He must be known by the SACCO for a considerable period of time before lending to establish his conduct and willingness to pay. DO NOT LEND TO PEOPLE YOU DO NOT KNOW. 7.2 Eligibility for a Loan I. A member must have completed at least six months membership and contributed not less than Kshs 18,000/= in non-withdrawable deposits. II. Lump sum savings contribution (boosting of member non-withdrawable deposits) paid in cash or cheque outside the check off system shall remain in the society for at least three (3) months or qualify for a loan at a commission of 5% of the loan disbursed subject to availability of funds. III. A member applying for a loan should undertake to pledge future salary from any IV. employer towards loan repayment before such a loan is granted by the Sacco Society. All loans shall be restricted to members only and shall be processed and appraised by the credit officer and approved by the relevant credit committees. V. No member shall be present when his/her loan application is being considered. However, in case of technicalities a member may be called for consultation and clarification. VI. A member who is interdicted by his/her employer and does not have an outstanding loan is eligible for a loan but such a loan shall not exceed his/her non- withdraw-able deposits. The same applies to retirees unless pension is channeled through Sukari Sacco. 7.3 Loans to Staff/Committee Members i. All normal/refinancing loans to staff, BOD & Supervisory Committee members shall be appraised by the Credit Officer, recommended by Credit Committee to the Board of Directors for approval. ii. No applicant of the loan shall be present when his/her loan application is being considered by the BOD. iii. An employee who tampers with his/her monthly non-withdraw-able deposit contribution and loan repayment is liable to prosecution under the Co-operative Societies Act and disciplinary action for misconduct. 7.4 Membership Eligibility and Transfers (a) No member should belong to more than one Co-operative Savings and Credit Society at the same time on a single common bond. (b) Where a member leaves the common bond by virtue of transfer or retirement, he/she may continue to be a member of that society or may transfer all his/her nonwithdrawable deposits to the society which he/she intends to join under the new employer. 9

(c) All new applicants for membership must provide written proof from their previous employer and the management of the previous society that they do not have outstanding liability in the society and that they are no longer members of the same society. In case a member has any outstanding liability with the previous Society, clause (a) above will apply. (d) Where a member changes employers, he/she may transfer his/her non- withdrawable deposits to the society of the new employer, and will be deemed to have joined the society of his/her new employer from the time he/she became a member of the society of his/her former employer. In all cases, a member must clear any outstanding loan with the society of his/her old employer. The society of his/her first employer shall transfer non-withdrawable deposits direct to the society of his/her new employer. (e) A member cannot be paid his/her non-withdraw-able deposits or transfers his nonwithdraw-able deposits on leaving the Sacco unless all his liabilities have been recovered in full. Management staff is mandated to ensure full recovery of any such liabilities or the same shall be responsible for any loss to the society. 7.5 Procedures of Granting Loans (a) Loan applications shall be considered in the order in which they are received (i.e. First In First Out) provided that whenever there are more applications for loans than the available funds; preference shall be given in the following order:- I. Members who have never had loans. II. New members who have qualified for loans. III. Members who have cleared their first loans and have applied for fresh loans. b)the maximum amount of loan granted to a member shall not exceed three times a member s non-withdraw-able deposits but subject to a maximum of 5% of the society s total share capital and reserves as per the Society s By- laws. Where total deductions exceed two thirds of a member s basic salary, the loan shall be reduced accordingly. c) No member will be allowed to withdraw part of his/her non-withdraw-able deposits or offset part of the outstanding loan against non-withdraw-able deposits unless he/she ceases to be a member 7.6 Appraisal of Loans I. Appraisal of loan application shall be strictly based on member s ability to repay the loan. II. A member s net pay should be enough to cover the monthly loan installment. The appraising officer should advice members accordingly. System appraised figure shall be followed strictly. III. Only income that is consistent shall be considered during appraisal. IV. Such income excludes overtime, acting allowance and leave allowance. V. While a member is free to repay the loan from any other source besides the net salary, under no circumstances should these other sources be taken into account in determining the member s ability to repay the loan at the time of loan granting. 7.7 Guarantee I. Unless the loan applied for is equal to or less than a member s non-withdraw able deposits, it must be secured by guarantors. II. The total non-withdraw-able deposits of the borrower and those of the guarantor(s) must be equal to or more than the loan applied for. 10

III. A member s non-withdraw-able 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 latter s loan. IV. No member shall be allowed to guarantee more than his/her total non-withdraw able deposits. V. All guarantors must be members of the society. VI. Members of the BOD and the Supervisory committee shall not guarantee loans among themselves. The obligations of the previous guarantors shall cease upon change of guarantors but subject to new guarantors being accepted by the society. The obligation of the guarantors shall also cease when loans guaranteed have been fully repaid or the loan balance is fully secured. The society shall maintain a record of all guarantors to every loan in each member s personal file. 7.8 Other Securities a. Pledges on other securities as per 7.10 may be accepted. The society shall process such documents at the loanees cost and shall hold the security under safe custody; but must be handed back to the member immediately the loan balance equals the member non-withdraw-able deposits. b. Confirmation as regards the validity of the security pledged from the issuing authority must be obtained before such documents can be admitted as security for the loan. c. Being a last resort action, upon which the society can fall back to, the security must have the following features; i) Its value must adequately cover the loan (principal and interest) and leave a good margin. ii) It must be easy to dispose off (sell). iii) It should be the type whose market value appreciates with time. iv) It must not be prone to vandalism or high wear and tear. 7.9 Perfecting of Securities I. All the security offered as collateral for loans shall be dully perfected in accordance with the legal provisions. II. All the necessary valuations and inspections shall be undertaken by the society s appointed and registered valuers at the borrower s expense before funds are released to the borrower. III. The securities shall be fully insured against all risks and the premiums must be paid up to date and the society s lien incorporated in such policy. IV. All the security documents of ownership shall be submitted to the society for safekeeping and charging in accordance with existing legal provisions. V. The titles to the securities offered must be clean, all government rates, rents and licenses must be paid up to date. VI. A certificate of security compliance shall be signed by the C.E.O and a copy attached on the loan application before funds are released to the borrower. Such certificate shall indicate that the various items in the security perfection have been accomplished. 11

7.10 List of Acceptable Securities Security Land property secured by a legal charge and developed with permanent structures in: City centers Urban centers Rural centers Lendable value 60% of open market value 55% of open market value 50% of open market value Share quoted in N.S.E. 12 50% of the market value Motor Vehicles excluding Public 40% of the market value Service Vehicles & equipment ( Valuation to be conducted by a reputable Crops (MSC valuation sugarcane firm) contracts only) 70% of expected cane proceeds delivered to MSC 7.11 Exercise of Guarantee I. After one month non repayment, the defaulter shall be notified in writing about his delay to service the loan. II. If by the second month his repayment has not regularized, a demand notice shall be written to him and copied to the guarantors. III. After the third month of non- repayment, the defaulter s deposits shall be used to offset the loan without further notice. The balance, if any, shall be apportioned to the guarantors according to their guarantorship. 7.12 Withdrawal from Society a. Where a member wishes to withdraw from a society s membership, he/she may be required to give the society a written notice of up to 60 days of his/her intention to withdraw. b. No member shall be allowed to withdraw from a society membership unless the member s loan is repaid in full or the loan balance can be fully offset by the member s non-withdrawable deposits; i. Such a member will also have to satisfy the society that all loans guaranteed have been paid in full or the balance does not exceed the nonwithdraw-able deposits of the member whose loans were guaranteed. ii. The member wishing to withdraw guarantorship must provide alternative guarantee. c. A member who retires from the common bond, but retains his/her membership in a Co- operative society, shall be granted loan only up to the limit of his/her non-withdraw-able deposits. d. A member who withdraws due to retirement or resignation will be required to clear all outstanding loans and provide alternative guarantors in case of loans guaranteed before retirement or resignation. e. Where a member who is resigning is not able to clear immediately, he/she will be required to make arrangements with the society for repayments.

f. The society will be required to ensure that no loan is granted whose repayment period goes beyond the retirement age of any member g. For members who have retired and are not paying their monthly loan contribution he or she will be notified of the intention to net off the loans and interest against the customer s deposits two (2) months after the repayments stop coming and net off the account after 6 months 7.13 Loans to Members on Contract I. Where a member is employed on contract, he/she shall be granted a loan payable within his/her contractual period or the total exposure to be within his/her non-withdrawable deposits II. Loans to members in farming segment shall be granted within their nonwithdraw-able deposits or based on their 70% value of crop proceeds. Other securities in 7.10 above apply. 8.0 LOAN CATEGORIES The SACCO shall offer various loans to its segmented clients to meet their financial needs depending on the fulfillment of various requirements: 8.1 BOSA LOANS The Back Office Savings (BOSA) loans are available to eligible members who have saved at least Kshs.18,000 in form of non-withdrawable member deposits for six months. Non- withdrawable deposits are saved monthly and they cannot be withdrawn by a member. All BOSA loans to a member shall not exceed 3 times the member s non-withdrawable deposit except prestige loan. a) Normal Loan This is a loan granted to members three times ones non-withdraw-able deposits and the funds will be used for development purpose such as acquisition of land or plot, construction projects, acquisition of personal or business vehicles etc. A member who intends to borrow this loan must have fulfilled the following requirements; I. Must be a member of the society for at least six months II. Must have saved with the SACCO at least Kshs. 18,000 III. Must submit an application for the loan on an official form issued by the SACCO at a fee. IV. Other features are: i. Maximum repayment period shall be 60 months. ii. Interest rate shall be as approved by the Board Of Directors iii. Attach two latest original pay slips and a photocopy of national ID iv. A member shall provide at least three guarantors whose deposits pledged can be able to cover loan applied. NOTE. It is important that members utilize this facility well to improve their standard of living. b) Emergency Loan This loan facility is given to members who need cash for unplanned and uncertain events Features: i. Maximum repayment period shall be 12 months ii. The interest rate shall be as approved by the Board Of Directors from time to time. 13

iii. Other features as listed in part 8.1 (a) above. c) School Fees Loan This loan is strictly for education purposes. It enables members to sponsor their children and themselves for primary, secondary, college and university education both locally and internationally. School fees loans may be granted to a member even though he/she has outstanding loan on the following conditions; i. School fees shall be paid by cash or cheque sent directly to the schools on members request or on the credit committee s directive. ii. A member should provide a report card and a fee structure as evidence of school fees requirement and shall be required to complete an official form where names of their children, the names of schools and the amount required for each child will be shown. iii. Repayment shall be twelve (12) months iv. Interest rate shall be as approved by the Board of Directors d) Investment Loan This loan facility is given to members who want to build up on their investments. Features: I. The loan shall be within 3 times deposits. II. The loan is repaid in a period of 48 months III. Interest rate shall be as approved by the Board of Directors IV. A pledge over the shares shall be taken as security for loans not covered by the guarantors e) Refinancing loans I. The refinancing loan product is a loan for members of Sukari SACCO who have successfully serviced their loans up to 50% and require more money to complete the project or to meet high level of college or university fees. II. It is a loan product that targets all members of Sukari SACCO that have on-going loans and require more funding. Features: I. Maximum repayment period is 60 months II. Security is savings/deposits III. Guarantee from other members IV. Commitment letter by employer (other than MSC employees) V. 10% bridging interest will be charged on outstanding balance. However, this interest shall be reviewed from time to time by the Board of Directors. V. Pricing: Interest rate shall be as approved by the Board of Directors. f) Prestige loan The product will assist the Sacco to mobilize deposits that shall be used for on lending to members Features: I. Member must plough back the entire amount of his/her dividends or interest on deposit until the loan is fully cleared II. Members shall be entitled to a maximum of four times of their non-withdrawable deposits III. Payable in 72 months IV. Interest shall be as approved by the Board 14

All normal, prestige, investment and refinancing loans shall be approved by the credit committee School fees loans and Emergency loans below Kshs. 500,000 shall be approved by the staff management credit committee. Any amounts outside the bracket shall be approved by the credit committee. 9.0 LOAN REPAYMENT GUIDELINES a. The loan repayment period shall be determined by the BOD but in all cases shall not exceed 72 months. Repayment terms shall show clearly amounts repayable relating to the principal loan and interests. b. Deductions for loan repayments shall commence not later than one month following disbursement of the loan. Note: it is the responsibility of the member to ensure that his/her loan is repaid as agreed to avoid delay in repayment which shall attract a penalty. c. Loans will be repaid from a member s salary and no member should be allowed to suffer total deductions (including savings, loan repayment and interest) in excess of two thirds of his/her monthly basic salary. Nothing in the foregoing need prevent any member from repaying his/her loan and interest in whole, or in part, prior to its maturity. It s the responsibility of the credit officer to ensure that all loans disbursed are fully recovered. 10.0 LOANS CASH FLOW MANAGEMENT Before every disbursement of loans, a cash flow report must always be attached to determine liquidity of the activity. Cash Ratio I. The society shall endeavor to maintain a predetermined cash ratio as shall be set by the BOD and the loans shall NOT be disbursed when the ratio falls below the set limit. II. Such ratio shall be reviewed quarterly by BOD on the recommendation of credit committee. III. PEARLS shall form a basis of calculating the necessary ratios. 11.0 CREDIT ADMINISTRATION IN FOSA 11.1 Records The following shall form the basic records that shall be used to administer the loans/advances/overdrafts. i) A member s savings account. ii) A member s loan account. iii) An interest on FOSA loans account. iv) Commissions/penalties account. v) A provision for bad and doubtful loan account. vi) Loans/advance application and appraisal forms. vii) Certified copy of national ID/PASSPORT 11.2 Reports The FOSA operations officer shall maintain full records and must prepare and submit the following reports:- 15

1. A weekly report to the C.E.O highlighting the following: i) A list of all approved advances and loans in the week ii) A list of all advances and loans released in the week iii) A list of all rejected advances and loans iv) A cash ratio report 2. A monthly report not later than 5th of each month of the subsequent month should be given to BOD highlighting the following: i) Total advances and loans approved in the month ii) Total advances and loans rejected in the month iii) Cash disbursed for advances and loans iv) Schedule of outstanding advances and loans and their performance v) Schedule of delinquent advances and loans and action taken. 12.0 FOSA ADVANCES AND LOANS FOSA loan products currently in force are as below: Loan type Amount Duration Interest Other securities Premier loan Ability to repay Up to 30 months At prevailing interest Guarantors and other securities as Salary advance Ability to repay Up to 12 months rates At prevailing interest rates As per 8.1 Crop advance Bosa loan advance Cheque advance Up to 70% of crop proceeds Ability to repay 30% Up to 50% the cheque value (On crop payment) On Loan disbursement On cheque clearance At prevailing interest rates At prevailing interest rates At prevailing interest rates Crop proceeds Guarantors & Member deposits MSC Cheques only Note: A processing fee shall be charged on all FOSA advance 12.1 QUALIFICATION FOR FOSA LOANS and ADVANCES i) He/she must be a registered member of the society with withdrawable deposit of at least Kshs.1,000/=. ii) Must have completed at least three months mandatory membership period. 16

iii) Must have operated an active FOSA savings account for a period not less than three months (statement must be attached). iv) Must be channeling his/her salary or income through the FOSA savings account. v) Must sign an irrevocable order before a Commissioner of Oaths authorizing the Society to dispose of his pledged securities. vi) Any other conditions as shall be set by the management from time to time. 12.2 COMPOSITION OF FOSA LOANS COMMITTEE Management staff committee (Comprised as per section 5.3) Credit committee (Three elected members of the board) Board of Directors (All the nine members of the board or in the usual quorum) 12.3 LOAN APPROVAL LEVELS In order to enhance fast decision making in processing FOSA facilities, the following approval authority levels shall be applied. Amount Upto Kshs 500,000 From Kshs 500,001 to 1,000,000 Above Kshs 1,000,000 Authority Management Staff Committee Credit Committee Board of Directors 12.4 ADVANCES/LOAN APPLICATION AND APPROVAL PROCESS i. All advance/loan applications shall be in writing and in the prescribed form duly completed and signed by the applicant. ii. All applications shall be dated, stamped, received and registered in loan application register by the loans officer iii. A preliminary credit analysis shall be done by the FOSA operations officer on the standard loan appraisal form. iv. Site visits shall be arranged where applicable to see the customer s ongoing projects and assess the values and attach to the application. v. The loan evaluating officer shall make a written evaluation report to the FOSA supervisor detailing project viability. vi. The FOSA Operations Officer shall make his final recommendations to the loans approving committee. 12.5 LOAN RECOVERY PROCESS The FOSA operations officer shall be responsible with the recovery of all loans under the FOSA section. The process of realizing the security shall depend on its nature; however the following shall form the general procedures to be followed: i) The defaulter shall be given three demand notices through his known address. ii) The guarantors shall be given copies of the demand notices to inform them on the nonrepayment by the borrower. iii) The society shall refer the matter to the society s lawyer in writing for necessary legal action and subsequent sell of the securities. iv) The proceeds realized from the sale of security shall liquidate the outstanding loans plus interest and any incidental costs 17

v) The balance of the sale shall be given to the member less any charges levied vi) Where the sale proceeds does not cover the loan outstanding, the guarantors must be sought to honor their guarantee and pay. 13.0 LOAN DISBURSEMENT I. BOSA 1. Normal loan For applications received between 1st and 15th of the month the loans shall be granted by the 15th of the subsequent month subject to availability of funds. 2. Refinancing loans - For applications received between 1st and 15th of the month the loans shall be granted within 60 days subsequent month subject to availability of funds. 3. Investment - For applications received between 1st and 15th of the month the loans shall be granted by the 15th of the subsequent month subject to availability of funds. 4. Emergency- within 48 hours subject to availability of funds. 5. School fees Within 30 days subject to availability of funds. 6. Prestige loan - For applications received between 1st and 15th of the month the loans shall be granted by the 15th of the subsequent month subject to availability of funds. II. FOSA 1. Premier loan Within 30 days subject to availability of funds. 2. Crop advance Same day subject to availability of funds. 3. Salary advance Within 48 hours subject to availability of funds. 4. Cheque advance Same day subject to availability of funds. 5. BOSA loan advance Same day subject to availability of funds 14.0 DELIQUENCY MANAGEMENT I. It is the responsibility of the BOD, management staff, credit committee and the Credit Officer to ensure that only quality loans are granted to minimize on default. II. III. All loans granted shall be in line with the stipulated loan policy. All Sacco facilities shall at all times be managed through the ICT system as a means of controlling delinquency in the society. 15.0 LOAN AGING The CEO shall keep a loan ageing record for all loans overdue, which will then be used in the making of the provisions for bad and doubtful loans. The format of a Loan Ageing Schedule is shown in the appendix. (a) Normal risk (Graded as 1) i) Well documented ii) Up-to-date repayments iii) Fully covered by guarantors (b) Watch (Graded as 2) i) Good accounts ii) Unsecured or partly secured 18

iii) iv) Principal and interest have remained unpaid for one day to thirty days or where one installment is outstanding. Evidence of default by borrower elsewhere. When a loan slips to this grade, the following should be done; A demand letter should be sent to the member/customer. A copy of the demand letter sent to the member/customer sent to all the guarantors of the loan. (c) Sub-Standard (Graded as 3) i) Long periods of arrears (31 to 180 days) ii) Loan not fully covered by the guarantors iii) Significant increase in risk due to declining net worth of the borrower In case the loan is graded as above, the following is done; A visit is made to the customer to get the exact position as to why the loan is not being serviced at the defaulter s cost. A demand is then made to the customer and the guarantors (d) Doubtful (Graded as 4) i) Longer periods of arrears (181 to 360 days). ii) High risk due to inconsistency in future earnings to meet repayment. ii) Inadequate free shares of the guarantor to secure the loan At this point, the following has to be done; Interest is suspended from accruing on the principle loan. Consider rescheduling of the loan s repayment. The security placed for the loan is reviewed to take in to consideration to the changes. Realize the security if it is apparent that the loan may not be recovered. Make a provision for both the accrued interest income and the principle loan (e) Loan loss (Graded as 5) These are loans that are considered uncollectible or of such little value that their continued recognition as receivable assets is not warranted, not adequately protected and have remained unpaid for more than 1 year or where more than 12 installments have remained outstanding (f) Loan Restructure The decision to restructure a loan must be approved by Credit Committee, and any request to restructure must be properly evaluated. Loans may be restructured in the case of: Permanent illness. Robbery. Accidents destroying major income earning assets. Unforeseeable changes in local/government policy. 19

16.0 PROVISIONS AND LOAN WRITE-OFF The Society shall maintain an allowance for loan losses based on the allowance for doubtful loans report. When all efforts to collect and/or recover the loan fail, the recovery shall be turned over to a collector. Such loans shall then be charged against the allowance for loans loss. It is prudent to assume that the Society s outstanding loans may not be repaid, in spite of the precautions taken by the management. It is therefore vital that the management make provisions against the possibility of bad and doubtful loans. Objective classification of bad and doubtful loans and making provisions for them could be done using the following rates: Period of default Risk Grade % of provision 0 days Performing 0% 1-30 days Watch 5% 31-180 days Sub-standard 25% 181-360 days Doubtful 50% Over 360 Loss 100% The Sacco shall write off a loan or part of a loan from its portfolio when it loses control of its contractual right over the loan or when the loan or part of the loan is deemed uncollectible or where there is no realistic prospect of recovery. The circumstances specified above shall be deemed to have arisen where: a. A court has ruled against the Sacco. b. All forms of security/collateral have been called, realized but the proceeds have failed to recover the debt outstanding c. The Sacco is unable to collect and there is no security d. A borrower is adjudged bankrupt Any recovery made from a written off account shall be credited back to the allowance for loan losses account and the same shall not be recognized as income in the year it is recovered. 17.0 INTEREST CALCULATIONS. Interest on Loan Interest on loan will be dependent on the market trend and the cost of borrowing funds. The rate will have to be passed by a resolution of the Board of Directors. Interest shall be charged on a reducing balance against the outstanding amount principle. Interest Computation The monthly interest shall be computed as a percentage of the outstanding balance on a reducing balance. A full installment shall be the sum of interest and principle loan components for a particular month. A member may choose to pay monthly, weekly or fortnightly, so long as the amount paid within the month shall not be less than one installment. Any balance on an installment shall be regarded as a full installment delayed. 20

AGREED TO: On the...day of...20... This document was discussed and approved for implementation as a policy of the SACCO with effect from. It is approved under MIN.of BOARD OF DIRECTORS Meeting held on... APPROVED BY: Board Chairman Vice Chairman. Treasurer Hon. Secretary. Chief Executive Officer.. Date... Date... Date... Date... Date 21