Instant Loan parameters guide - understanding your options to maximize revenue & profit

Introduction

Instant loans are a proven way for the SACCO to quickly grow their revenues and profits. We have designed the parameters in such a way that the SACCO has a lot of flexibility to maximize those revenues and profits, without taking too much risk.

Here is a comprehensive guide on Instant Loan parameters, designed to help you navigate various options and understand their implications on loan eligibility and terms. We have added advice on how to set the parameters to maximize revenue and profitability. The document attached also explains some of the parameters and how to go about deciding on them in further detail.

Understanding the Instant Loan parameters

Loan term and interest

• Loan term: the minimum loan term is 1 month (30 days), and there is no maximum loan period.

• Interest calculation method:

  • Fixed flat interest: charge a % interest on the full principal amount. The interest is split evenly over the repayment period, and will not reduce when part of the principal amount is repaid. Note: if the member repays the loan early, the interest will still be applied for the full term of the loan

  • Interest on reducing balance: charge a % interest on the outstanding balance.  If the loan is mapped on a reducing balance, members only repay the interest owed, enabling them to save on interest costs if they repay early.

• Interest rate: Set the interest rate applied to the loan amount across the full loan period. E.g. for a loan of 3 months where you want to charge 8% per month, set the interest rate at 24%. While adhering to your credit policy, consider setting the interest rate slightly higher to mitigate risks and ensure sustainable lending practices.

Eligible & maximum loan amount

The Instant loan parameters are very flexible when it comes to the eligible loan amounts per member. We advise setting the absolute ceiling loan amount as high as possible, and rather limiting the eligibility per member based on the individual’s behaviour. This ensures that members that save a lot with their SACCO and show good repayment behavior can take very high Instant Loans, while members with riskier profiles are more limited.

Base eligiblity = multiplier on deposit accounts (% of savings) - all deposits or on a a specific account

Then we can do deduction (only if multiplier is >=1) --> active loans (all loans, or only specific loans), guarantors

Incremental is upon base minus deductions

Up to max of aboslute ceiling

• Determine the base eligibility, through the maximum % of savings: set the maximum loan amount per member as a % of savings. This way, you reward members with high savings by allowing them to take high Instant Loans, and to increase their eligible amount when their savings grow. At the same time, you do not expose the SACCO to high risks, because the loan amount is covered by the member’s savings. This can be based on all savings combined, or a specific savings account.

• Deductions from the base eligibility: once you have set the eligible amount per members, you can decide to deduct certain amounts from this, such as active loans and guarantors. We recommend only doing this if the maximum loan amount is >100% of savings, otherwise you are severely limiting a member's eligibility

  • Deductions based on active loans: you can deduct the principal of active loans. You can do this for all active loans, or just a specific active loan (e.g. an existing Instant Loan, or other short term loan). If the max % of savings is 200%, a member has KSh100k in savings, and KSh110k in active loans, then they are eligible for KSh100k * 200% - KSh110k = KSh90k

  • Deductions based on guaranteed amounts: you can deduct the guaranteed amounts from the member's base eligibility. If the max % of savings is 100%, a member has KSh100k in savings, and KSh40k in guaranteed amounts, then they are eligible for KSh100k * 100% - KSh40k = KSh60k 

• Incremental eligibility upon good repayment behaviour: This feature rewards good repayment behavior and decreases default rates by leveraging digital scoring algorithms. It allows Sacco to incentivize timely repayments and adjust the loan eligibility amount based on members' good repayment history. Determine the % by which the eligibility amount will increase after timely repayment. This increase will only occur once, and will then be used as the new eligibility amount for that member going forward, and it will revert to the base eligibility amount if they member fails to repay on time.
  If a member was eligible for KSh50k based on their savings amount, and the SACCO has set a 20% increase upon timely repayment, then the next time the member will be eligible for KSh50k + 20% = KSh60k. Note: the total eligibility amount will never increase above the absolute ceiling.

• Absolute ceiling: this is the absolute maximum amount that a member can take out as an Instant Loan, independently of the member-specific eligibility criteria. The system-dictated maximum amount is KSh500,000, but SACCOs can decide to set this lower. We recommend, however, to set it as high as possible and rather limit an individual’s eligibility amount based on the three parameters above.

• Minimum loan amount: set the minimum amount for the Instant Loan. We recommend setting this as low as possible so that members with lower eligibility can still access an instant loan from their SACCO based on their individual financial capacity.

Member eligibility constraints

SACCOs can exclude members from taking Instant Loans altogether if they deem their profiles too risky. We recommend not being too strict on these parameters, but rather limiting individuals’ maximum eligible amount as described in the section above.

• Minimum Savings Balance for Loan Qualification: Establish the minimum savings balance required for members to qualify for this loan. We recommend setting this as low as possible and rather setting the maximum loan amount as a % of the member’s savings, so that you ensure that many members can take a loan, but only within their financial capacity

• Minimum Share capital for Loan Qualification: Establish the minimum share capital required for members to qualify for this loan.

• Minimum length of Membership: Define how many months a member needs to have been part of the SACCO before they are eligible for the Instant Loan.

• Eligibility of Members with Arrears: Define the eligibility criteria for members with outstanding payments. By setting clear guidelines, you can manage the risk associated with lending to members with previous arrears, while also providing opportunities for them to improve their financial standing.

• Excluding dormant members: you can decide to restrict dormant members from taking up the Instant Loan

• Blacklisting members from Instant Loans: you can exclude specific members from taking up the Instant Loan product on a case-by-case basis.

Multiple loan products per member

• Multiple of the same Instant Loan products: a member can take up multiple Instant Loans of the same instant loan product. We recommend limiting this to 1 or 2 instances of the same product because a member will be able to take out the full eligibility amount each time they take the instant loan. Note: Members will not be able to top up an existing Instant Loan product until they have repaid the outstanding principal and interest amount.

• Loans that the member cannot take when taking this Instant Loan: the SACCO can limit the combinations of loans that members can take up. For an Instant Loan product, the SACCO can decide which other loans the member cannot take up in parallel. However, you can also leave this open so that members can take different types of loans that serve different needs at the same time

Operational settings

• Reminder SMS: The SACCO can decide when to send reminder SMS for repayment of the Instant Loan. This can be a # days before the due date, on the due date, or after the due date

• Arrears penalties: the SACCO can decide whether or not they want to charge a penalty when the loan is in arrears. This can be a flat fee or a % of the principal, and you can decide whether there is an initial grace period.

• Fees: the SACCO can decide to add fees to the loan. This can be a fixed amount or a % of the loan amount. It can be configured to be deducted upon disbursement, or part of the amount to be repaid.

Setting up your Instant Loan

To set up a new Instant Loan or change the parameters of an existing Instant Loan, please fill out the template below and send it to [email protected].

• Name of the Instant Loan Product: [Insert Name]

• Loan term and interest:

  • Maximum loan period: [Insert duration in months]
    

    Interest calculation method: [Fixed flat interest / Interest on reducing balance]

  • Interest rate: [Insert % interest for the full loan period, NOT per month]

• Eligible and maximum loan amount:

  • Maximum % of savings: [Insert the maximum % savings that a member is eligible for]

  • Deductions: [Yes/No]

    • Based on active loans: [No / Deduct all active loans / Deduct specific loan (please specify)]

    • Based on guaranteed amounts [Yes/No]

  • Incremental eligibility on good repayment behaviour: [Insert the % increase in eligible amount when repaid on time; fill in 0% if you do not wish to use this feature]

  • Absolute ceiling: [Insert KSh amount, max. KSh500,000]

  • Minimum loan amount: [Insert KSh amount]

• Member eligibility constraints:

  • Minimum savings balance: [Insert KSh amount]

  • Minimum share capital: [Insert KSh amount]

  • Minimum length of membership: [# months]

  • Eligibility of members in arrears: [Yes/No]

  • Eligibility of dormant members: [Yes/No]

• Multiple loan products per member:

  • Multiple instances of this Instant Loan: [Yes/No]

  • Loans that the member cannot take when taking this Instant Loan: [Insert names of loans or None]

• Operational settings

  • Reminder SMS:

    • Before due date: [No / #days before due date]

    • On due date: [Yes/No]

    • After due date: [No / #days after due date]

  • Penalties

    • Penalty calculation: [No penalty / Flat fee of KShX / X% of principal]

    • Grace period: [None/ X# days]