Secondly, when you go to big shops you
will find two prices displayed, the cash
price and the credit price, you find the
cash price is lower than the credit price
and the reason is that the credit sale has
factored into that price the time value
of money so there is an interest that
compensates the seller for staying out of
money for that period.
Over and above that there is also an
additional margin all sellers put on
credit sales which caters for risk taken
and a reasonable profit for waiting for
payments and enabling buyers to enjoy
present consumption. So if you are doing
business on credit you can generally get
better margins than a person doing sales
on a cash basis.
Credit helps you to create a loyal pool
of customers. If there is a kiosk near the
place you stay and every time you pass by
you buy a few products on cash the kiosk
owner will never know who you are until
the day you request goods on credit then
the kiosk owner will begin to enquire
information about who you are before
deciding to give you the products.
Credit trading is done on a relationship,
cash never creates a relationship.
Credit trading requires you to know
your customer and on the basis of that
knowledge you develop a relationship.
If that relationship is well managed this
customers become loyal to your business.
Credit has been known to be a serious
builder of customer loyalty.
Finally Credit has a strategic angle to
the busin ess, if you are in an industry
where capacity is under-utilized, but the
demand in the market is such that you
can stretch terms from 30 to 60 days you
will find that you can actually increase the
capacity of your production from 60 to
80 days because by stretching the credit
period there is increased demand for your
product.
One can therefore use credit as a strategy
of ensuring that you manage production
and demand of products. So people who
have used and managed credit properly
based on these four benefits find that they
can be able to build their businesses and
maintain growth by maintaining demand
in a robust way.
Giving Credit
If you want to give credit you must answer
three questions. If I give this person credit
will they pay me back at all? You have put
capital to produce the item, if you give
52 MAL22/18 ISSUE
Credit is the oil that
moves the economic
engine and therefore
everybody should be
able to take advan-
tage of credit facili-
ties available in the
market. We all must
be able to know the
upside of credit and
the downside of cred-
it. CRBs, as explained
are poised to play an
even bigger role in fi-
nancial discipline and
business stability.
credit and don’t get paid back, you lose
your capital; because the money that you
have invested is being lost through the
customers you are giving credit.
The second question is if I give credit, will
I be paid on time? Because you are losing
the value of your money every time you
get paid late and the later the payments
the more value you lose then eventually
your business begins to shrink because
people are not paying you on time. This
will happen even when you are running a
profitable business.
The last question to ask is what does it
costs me to give this credit in terms of
the processes. If you calculate the cost
of giving that credit you will find it is a
significant part and it eats into your profit
and it consistently reduces the amount
of profit that you can get and this simply
means that you must be able to improve
on your efficiency on how you give credit.
5 C’s of Credit
Credit itself conforms to a science it’s
not something that you can just wake up
and say I want to give credit. Have you
heard about the 5 C’s of Credit? The 5C’s
of credit are the basis upon which credit
worthiness is always assessed. These are
Character, Capacity, Capital, Collateral,
and Conditions.
Character: Sometimes called credit
history, the first C refers to a borrower’s
reputation or track record for repaying
debts. This information appears on the
borrower’s credit reports.
Capacity: Capacity measures a borrower’s
ability to repay a loan by comparing income
against recurring debts and assessing the
borrower’s debt-to-income (DTI) ratio.
Capital: Lenders also consider any capital
the borrower puts toward a potential
investment. A large capital contribution
by the borrower decreases the chance of
default.
Collateral: Collateral can help a borrower
secure loans. It gives the lender the
assurance that if the borrower defaults
on the loan, the lender can repossess the
collateral.
Conditions: The conditions of the loan,
such as its interest rate and amount of
principal, influence the lender’s desire to
finance the borrower. Conditions refer to
how a borrower intends to use the money.
With this brief background to the rationale
of credit transactions we are now ready to
delve into the history of Credit Bureaus in
Kenya and outline why they were necessary
to underpin the commercial activity and
why they are pivotal to trade development,
both domestic and international.
History of Credit Reference
Bureaus
Have you heard about Credit Reference
Bureaus or CRBs? Credit Reference
Bureaus are based on a mechanism
where lenders’ and credit providers share
information about their customers. Every
bank gives information to the Credit
Reference Bureau and every time you go
to the bank to borrow, the place where
the bank checks is the Credit Reference
Bureau. So everybody who has ever
borrowed has a Credit Reference Bureau
profile.
Today you can be able to get credit
without going to the bank or without
ever having a bank account. Before 2010
you had to go to the bank and open an
account, have your photograph taken and
you were told you have to run an account
for six months before you get credit. What
is the difference between pre 2010 and
post 2010?
Why is the bank today able to give you
money without ever wanting to see your
face? Because they know that whatever
you take you will have to pay back. Now
these are the developments that have
taken place in this country and it brings
me to discuss what our business today is.
A credit reference bureau is based on a