additional different explanatory variables the write off ratio WOR which is the

Additional different explanatory variables the write

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additional different explanatory variables; the write-off ratio (WOR) which is the value of loans written off during the year as uncollectible, as a percentage of average gross loan portfolio over the year. An additional measure of credit risk is the Risk Coverage Ratio (RC) which is measured as the Adjusted Impairment Loss Allowance/PAR>30 Days and finally Loan Loss Reserve Ratio (LLR). This is measured as the ratio of loan loss reserves to gross loans or simply put as Loan loss reserve/Value of loans outstanding. It is an indicator of how much of the gross loan portfolio has been provided for but not charged off. It is important to note that only WOR and LLR are measures of default, while PAR is a measure of risk of default. 2.4. Credit Management Variables Key Credit management variables include ; 2.4.1. Client Appraisal methods and Financial Performance of SACCOs Loan appraisal plays an important role to keep the loan losses to minimum levels hence if those officers appointed for loan appraisal are not competent then there would be high chances of lending money to non-deserving customers, Boldizzoni (2008). Collection procedure is a systematic way required to recover the past due amount from clients within the lawful jurisdiction. The collection aspects may vary from institution to another but they should be 17
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subject to existing laws such as third party collection agencies may be involved in a collection process. It does not just involve only collection procedure details provided by the institution but also the procedure in which the lawful collection takes place, Latifee (2006). Well administered collection is needed for better performance of the loan. If financial institutions do not follow well administered collection procedures, this would results in loan defaults, Boldizzoni (2008). The first step in limiting credit risk involves screening clients to ensure that they have the willingness and ability to repay a loan. Microfinance Institutions use the 5Cs model of credit to evaluate a customer as a potential borrower (Abedi, 2000). The 5Cs help MFIs to increase loan performance, as they get to know their customers better. These 5Cs are: character, capacity, collateral, capital and condition. Character - refers to the trustworthiness and integrity of the business owners .it’s an indication of the applicant’s willingness to repay and ability to run the enterprise. Capacity assesses whether the cash flow of the business (or household) can service loan repayments. Capital - Assets and liabilities of the business and/or household. Collateral -Access to an asset that the applicant is willing to cede in case of non-payment, or a guarantee by a respected person to repay a loan in default. Conditions-A business plan that considers the level of competition and the market for the product or service, and the legal and economic environment The 5Cs need to be included in the credit scoring model. The credit scoring model is a classification procedure in which data collected from application forms for new or extended credit line are used to assign credit applicants to „good
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