Joseph Wainaina

Gilchery Skip Trace Ltd Business Plan Prepared By: Joseph Karanja Geoffrey Kipkoech September 2019 // Confidential Information Statement of Confidentiality and Non-Disclosure THIS document contains proprietary and confidential information. All data that are submitted to Kuramo Capital is provided in reliance upon its consent not to use or disclose any information contained herein except in the context of its business dealings with Gilchery Skip Trace Ltd. The recipient of this document agrees to inform its present and future value employees and partners who view or have the access to the documents contents of its confidential nature. The recipient agrees to instruct each employee that they must not disclose any information concerning this document to others except to the extent that those matters are generally known to and are available to use for by the public The recipient also agrees not to duplicate or distribute or permit others to duplicate or distribute any material contained herein without Gilchery Skip Trace Ltd.’s express written consent. Gilchery Skip Trace Ltd retains all title, ownership and intellectual property rights to the material and trademarks contained herein, including all supporting documentation, files, marketing material, and multimedia. BY ACCEPTANCE OF THIS DOCUMENT, THE RECIPIENT AGREES TO BE BOUND BY THE AFOREMENTIONED STATEMENT. 1 TABLE OF CONTENTS Executive Summary Business Description Products and Services The Market The Opportunity The Solution Competition Operations Management Team Risks and Opportunities Financial Summary Capital Requirements 1. Business Description 1.1. Mission Statement 1.2. Values and Vision 1.3. Industry Overview 1.4. Company Description 1.5. History and Current Status 1.6. Goals 1.7. Critical Success Factors 1.8. Company Ownership 2. Products/Services 2.1. Product Service Description 2.2. Unique Features of Proprietary Aspects 2.3. New and Follow On Products and Services 3. The Market 3.1. Industry Analysis 3.2. Market Analysis 3.3. SWOT Analysis 3.4. Competitor analysis 4. Marketing and Sales 4.1. Market Segmentation Strategy 4.2. Targeting Strategy 4.3. Positioning Strategy 4.4. Product/Service Strategy 4.5. Pricing Strategy 4.6. Distribution Channels 4.7. Promotion and Advertising Strategy 2 5. Product Development 5.1. Development Strategy 5.2. Development Timeline 5.3. Development Expenses 6. Management 6.1. Company Organization 6.2. Management Team 6.3. Management Structure and Style 6.4. Ownership 7. Operational Strategy 7.1. Location 7.2. Personnel 7.3. Operational Expenses 7.4. Legal Environment 7.5. Suppliers 7.6. Credit Policies 8. Financials 8.1. Income Statement projections 8.2. Financial History and Analysis 9. Funding Request 9.1. Offer 9.2. Capital Requirements 9.3. Risk/Opportunity 9.4. Valuation of Business 3 Executive Summary Business Description Gilchery Skip Trace Limited (GST) is a business that is primarily focused in the provision of debt management services through offering debt collection services from loan defaulters to debt providers. Majorly GST helps its clients to manage the risk associated with their portfolio and enable them to comfortably extend credit. These include commercial banking institutions, savings and credit organizations, commercial trade firms, consumer credit organizations, mobile based lending organizations (fin-techs) amongst others. The company collects overdue and delinquent debt accounts for these organizations based on a pre-determined fee. The firm is located in the capital city of Nairobi where its headquarters are situated and has one branch located in Eldoret town. Products and services In fulfillment of the above objectives we provide several services to our clients. GST Ltd operates a call centre collection service which is a well-established call centre manned by appropriately trained staff to follow up and ensure overdue accounts are settled as soon as possible. Any account that has remained overdue for 30 days despite internal collection efforts is a prime candidate for our call centre collections team. Secondly, we provide commercial collection service which focuses on companies and organizations with unpaid debtors from other companies and organizations. Third, the firm provides consumer collection services that are designed for companies with a customer base made up of many private individuals’ majorly utility firms and public organizations. Fourth, we provide debt Surveillance whereby the firm monitors long outstanding debts that may have been written off by companies and attempts to collect them on the client's behalf. Fifth, we aid firms in tracing debtors the client has lost contact. Being the only firm in Kenya that offers skip tracing services, we carry out investigations by ascertaining the debtors’ location assets to assist companies serve legal letters and attach assets where judgment has been made. Market The transformation of the credit provision industry from the traditional distribution channels to the modern digital channels has opened up the access to credit to many people. This has resulted to higher number of providers whom rely on these platforms. According to the Central Bank of Kenya on an annual basis, the non-performing loan rates increased by 27.2% between June 2017 to June 2018. This has led to many lenders outsourcing collection services to external collectors due to in house under capacity. Currently, we have slightly more than 20 reputable debt collection agencies operating in the country. GST which is a leading collections agency leads the pack with outstanding performance rating from major lenders. We serve almost all commercial banks and we intend to capture all the few remaining mobile lending fin techs operating locally. 4 Our plans are to venture in to other markets in sub Saharan Africa including Uganda, Namibia, Tanzania and Mozambique. The opportunity The firm has a strong brand presence and this is as a result of great investments in physical infrastructure and human resources to propel the organization forward. The continued growth from inception with meager resources to a mid-sized company with over 300 permanent employees which has largely been financed organically portrays the positive returns expected to you as an investor. The solution GST is a market leader in the field and the only firm that provides legitimate skip trace services. The firm has a good performance rating for instance it ranks as the leading debt management company amongst one of the leading credit providers i.e. CBA Mshwari in collections whom disburses Kshs 5 billion annually. Leading Debt Management Companies in Kenya Name Credit wise Kenya Nimble Group Nature Of Product Service Business To Business Business To Business Stan Ford Company Business to business Reliable Investment Services Business To Consumer Business To Business Lolwe Auctioneers Kenya Read Business To Business Demojie Holdings Limited Business To Business Exceptional Debt Management Services Business To Business Swipe Recoveries Limited Business To Business Business To Consumer Calm Recoveries Limited Excel Credit Management Solutions Sky Wave Management Tebz Debt Solutions Limited Afrimax Debt Management Services Ultimate Debt And Trace Limited Ultimate Debt And Trace Limited Trackpol East Africa Limited Business To Business Business To Business Business To Consumer Business To Business Business To Consumer Business To Business Business To Business Business To Business Consumer To Consumer Product/Service Debt Collection & Investigations Debt Collection Global Debt Collection and Investigations Debt Recovery, Property and Real Estate Management. Debt Collection And Property Auctioning Services. Debt Collection, Debt Recovery, Debt Management And Consultancy Debts, Management of Liabilities, Debt Recovery and Private Investigation Debt Collection Private Investigations Asset Searches Debt Collection Debt Collection Geographic Focus Nairobi Africa International Debt Collection Debt Collection Debt Collection Kenya Nairobi Nairobi And Mombasa Debt Collection Property Consultancy And Management Debt Collection Services Nairobi Nairobi Debt Collection Nairobi Kenya East Africa Nairobi Nairobi Nairobi Nairobi Mombasa 5 6 Management The organization has grown through leaps and bounds and currently has a strong management of five senior managers whom are supported by a team of seven junior mangers. The senior management team is headed by a general manager who supervises the entire GST support heads. These include IT and infrastructure, business development, human resources, operations and finance. The junior management team is comprised of portfolio managers who are account managers for the different clients in the organization. They monitor the performance and advice on strategies to be followed to ensure recovery of delinquent accounts provided. The portfolio managers are accountable to the operations manager. Key personnel Table 1: Key Personnel Role Business development manager IT and infrastructure manager Finance manger Operations manager Name Peter Thiongo Back ground Marketing-Debt management Skills Bachelor of Commerce- Marketing and Diploma-Marketing Stanley Huho Computer science Bachelor of sciences -Applied sciences& Diploma-IT Diana Odero Faith Mbage Accounting Bachelor of commerce-Accounting & CPA-K Diploma Business Administration Administration Financial summary Income Statement summary Credit Management Services Table 2: Income Statement Summary Year ending: 31-Dec-18 31-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 164,982,894 272,221,775 449,165,929 741,123,783 1,222,854,241 2,017,709,498 Total Expenses 86,657,384 143,011,906 235,969,645 389,349,913 642,427,357 1,060,005,139 Profit Before Tax 78,325,510 129,209,869 213,196,284 351,773,869 580,426,884 957,704,359 Corporate Tax 23,497,653 38,762,961 63,958,885 105,532,161 174,128,065 287,311,308 Profit After Tax 54,827,857 90,446,909 149,237,399 246,241,708 406,298,819 670,393,051 Total operating income 7 8 Credit Reference Bureau Table 3: Income Statement Summary CRB services Year ending: Total operating income 31-Dec-21 921,600,000 31-Dec-22 1,013,760,000 31-Dec-23 1,115,136,000 30-Dec-24 1,226,649,600 Total Expenses 173,106,226 180,834,887 198,918,375 218,810,213 Profit Before Tax 748,493,774 832,925,113 916,217,625 1,007,839,387 Corporate Tax @ 30% 224,548,132 249,877,534 274,865,287 302,351,816 Profit After Tax 523,945,642 583,047,579 641,352,337 705,487,571 Capital requirements The firm needs to expand into a new business unit and also venture in to other markets within the region. The budgeted cost of expansion is Kshs 175 million. Sources of funds Table 4: Sources of Funds Sources Owner’s Contribution Term Loan New Equity Financing Total Amount 174,876,000 174,876,000 Percentage 0% 0% 100% 100% Uses of funds Table 5: Uses of Funds Category Capital Expenditures G & A Expenses Other Total Amount 110,160,000 54,960,000 9,756,000 174,876,000 Percentage 63% 31% 6% 100% 9 1. Business Description 1.1. Mission statement We exist to help people resolve their financial obligations for the benefit of all parties in a manner consistent with our core values of integrity, accountability and professionalism. 1.2. Value and Vision Statement Company Vision "To continuously strive to be the first choice for debt management services provider in Kenya, by developing beneficial and lasting relationships with our clients through a process of continuous improvement and optimizing their returns by delivering the most efficient and effective service." Core Values Integrity:  Do the right thing  Be honest and respectful to clients, consumers, suppliers and each other Accountability:  Do what we say  Focus on results  Communicate openly Professionalism:  Do things right  Value training and education  Operate within the framework of law  Be passionate and determined  To maximize the recovery of all debts whilst remaining sensitive to any existing business relationships. 1.3. Industry Overview The expected growth in the economy due to a stable macro-economic environment is expected to drive the expansion of private sector credit from the previous 4.4% in 2018 to 5.2% in 2019. Players in the financial and consumer services industry have continued to be innovative by creating products to suit their targeted clientele amid challenges experienced previously in lending to the private sector due to risk premiums using traditional models. The emergence of digital credit avenues have led to an increase in penetration by traditional players who have now shifted to offering credit through mobile based platforms and reaping good returns at lower costs. The ease of access to credit to the market strengthened by sound legal frameworks provides confidence to debt providers to offer loans to the public. 10 However, this expansion of credit as a result of inherent risks in the market brought about by information asymmetry, inflation and over concentration of portfolios by lenders in a particular sector continues to plague the financial services sector as witnessed by increasing number of non-performing loans. In the first quarter 2019, NPLs among commercial banks increased by an outstanding 10.4% from January 2019 to March 2019. These figures illustrate the hardships the economy is facing albeit reported improved economic growth. Over the past ten years there have been an increasing number of debt management firms setting up shop. Most lenders have increasingly opted to have external debt management solutions as opposed to in house credit officers. This is due to amongst other reasons, reducing effectiveness and efficiency of in-house personnel in debt collection from defaulted borrowers. The trend arises from a need to cushion lenders exposure and avoid complete write offs for a fraction of the cost especially to collapsed firms and runaway borrowers. 1.4. Company description Gilchery Skip Trace Ltd (GST) is a limited liability company which is limited by shares. The firm specializes in offering debt management solutions to help businesses that extend credit to manage the risk of their credit portfolio and recover delinquent debts cost effectively. The firm employs a more professional approach towards debt collection which involves contacting defaulted borrowers and notifying them on the status of their accounts. Their business model involves direct communication through phone conversations and text messaging as reminders. It heavily relies on negotiation which ultimately makes borrowers to make payments on overdue accounts to avoid unnecessary credit reference bureau listing and skip tracing. Based on our experience and knowledge of the industry, GST partners with companies to assist in the collection of overdue accounts owed to the company by other companies, institutions and individuals. Most suppliers of goods and services will usually extend credit to their clients for periods ranging from 30 days to 90 days. Any account that remains unpaid from day 1 beyond that credit period is considered overdue while any account that has remained overdue for 90 days or more is considered a default. Most businesses prefer to use internal resources to follow up overdue accounts and will only outsource those accounts they are unable to collect after attempting to do so for some time. Currently, the bulk of debt passed on to private debt collection agents for recovery by businesses is usually default debt that is overdue by one year (360 days) or more and the success rate in the recovery of such debt has been dismally low (in the region of 20%) which means that the balance of the debt is either recovered through court or written off. To reap the benefit of reduced write-offs and avoid the usually lengthy court process, GST encourages businesses to shorten the trigger times for outsourcing overdue debts. Chances of success in collection are much better where debts are outsourced earlier and this benefits cash flow through reduced costs. It is an acknowledged fact the longer a debt remains outstanding, the harder it becomes to collect, and the more resources required to collect such a debt. 11 1.5. History GST was established in the year 2011 as a small sized firm being run as a sole proprietorship. The firm had employed a handful of employees who assisted the business owners in administrative roles as the promoters tirelessly embarked with collection of debt for a small clientele base. The firm operated in Nairobi’s lower hill area in a residential apartment where it extended its services. The business was later incorporated in the year 2013 with its principal business of providing debt collection and skip trace services. It later moved to the Nairobi Central Business District in the year 2012 and they were located at Development house along Moi Avenue. Over the period GST due to good performance was able to acquire more business mandates numbering 30 from more financial institutions and commercial organizations. The key strategy was to focus on their expertise and grow the firm. The increased mandates from newer corporate clients forced the firm to increase their staff count and relocated from the Nairobi central business district to Mombasa Road at Alpha Business Centre. At this stage a more refined management and operational structure was developed in lieu of the increased scale of operations. The firm has since grown steadily and expanded its footprint as demanded by clients with regional branches. This saw the opening up of the Eldoret Branch in the year 2016: The branch was meant to serve the western part of Kenya market. It has a staff count of 48 employees who actively execute the firms mandate with in their geographic focus. Currently, the firm handles 62 clients from the two branches with a total staff count of over 300. 1.6. Goals 1. Extend the customer experience from our clients ensuring client satisfaction. 2. Reduction of the level of outstanding debts for our client’s portfolio. 3. Reduction of bad debt and write-offs for our clients. 4. Reduction of the cost of collections for our clients. 5. Employ ethics and integrity in recovery outstanding debt portfolios for our clients. 1.7 Critical success factors In order to reach our objectives the company needs ensure;       Timely realization of outstanding debt from allocated corporate portfolios with a reasonable timeframe of 60 days at most. Maintain adequate staff numbers incognizant to the portfolio mandates at all times. Continuously seek new mandates from new clients to ensure the staffs are working on debt collection and recoveries thus reducing idle times. Ensure the IT infrastructure more importantly the auto dialer software, delinquent account identification systems are in working condition at all times. Adequacy of personnel at all times and continuous training of staff to ensure the organization maintains a skilled workforce Efficiency in debt collection and recoveries. 12 1.8 Company Ownership Chart 1: ownership Current Shareholding Gilbert Cheruiyot Caroline Jepkoech 40% 60% 2 Products and Services 2.1 Service description Table 6: Services Service Description Features Benefits Call Centre Collection Team that collects debts that are overdue by 30 days and not delinquent collection of outstanding debt from retail customers Dedicated and trained staff members Faster cash cycle Robust IT systems Cost savings in collections Lower costs to the client Transparency and communication Legal advisory services Experienced negotiation team Short turnaround time Fees are payable based on results Prompt remittance of funds collected Debtor default listing management Bilingual capabilities Commercial Collection Collection of outstanding corporate debt Experienced commercial collectors -Infield collections -Credit reports and customer profiling Focus and flexibility Consumer Collection Collection of outstanding debt from retail customers Targeted to utility companies with many private clients In-house tracing Collections of small amounts Negotiation of payment plans Assessment of debtors’ means to pay Stage of development Operational Operational Operational Detailed monthly client reports Regular reviews of debtors’ situation Debt Surveillance Monitoring of long outstanding debt Active post legal avenues have been exhausted eg Bankruptcy & Insolvency Tracing Services Tracing of lost debtors by the client Regular check on income and asset position of debtor has changed No cost to the client during monitoring Positive feedback followed by quick action to recover debt Operational Identify the debtors location No hit, No fee Operational Identify the assets of debtors Comprehensiv e database of Addresses Real human skip trace specialists Serving of legal papers post judgment 13 2.2 Proprietary Aspects Call centre collection and consumer collection The firm has invested in training the staff on effective ways of approaching the targeted debtors to ensure that they make payments on outstanding accounts. A professional approach leads to positive results and that’s the mantra that the firm employs. Further, the firm has invested heavily in an Auto GSM Predictive Dialer which uses statistical algorithms to minimize the time that agents spend waiting between conversations, while minimizing the occurrence of someone answering when no agent is available. When dialing numbers one at a time, there are two sources of delay. First, only some fractions of dials are answered; for example, if 1 out of 3 dials are answered, a predictive dialer might dial 3 lines every time an agent becomes available. Second, even dials that are answered take some time before being picked up. Dialing one number at a time, only when an agent is available, typically keeps agents utilized for 40 minutes per hour (33% idle time). Predictive dialing can increase utilization to 57 minutes per hour (5% idle time). Skip Tracing Services The firm utilizes the data obtained from different organizations in identifying the location of untraced borrowers and directors of insolvent firms. The major data sources originate from mobile telephone companies, utility companies, the National Hospital Insurance Fund, National Social Security Fund and the Department of Registry of Persons under the Office of The President. The institutions provide valuable data which has proven to be successful in recovering debts that have been long outstanding. 14 2.3 New and Follow-on Products & Services GST limited intends to replicate the success achieved from the debt management business over the past eight years and move towards incepting a Credit Reference Bureau. The plan is to build up from the existing relationships the company has and existing data in its possession and obtain new information from information providers. The setting up of the credit reference bureau will herald new chapter for the firm as it will be able to also secure new contracts from other players in the industry whom provide data. Further, the setting up of the credit reference bureau will provide GST with additional revenue streams from different sources. This will originate from the credit reports that they shall be generating for different users and generating CRB clearance reports to individuals and institutions which have found themselves listed and have an adverse credit rating. We have provided an itemized breakdown of the inherent costs associated with the expansion drive for the new product. The firm has extensively researched on the viability, ability, capacity and resources it will have to employ to ensure the success of the new product. Currently, we have initiated the application process and the process I ongoing. To launch the product the project is expected to cost Kshs 165 million which shall cater for established expenses, fixed costs to be incurred in setting up the operations and working capital needs for a period of 12 months. The product licensing will take a maximum period of six months that will be ensure the award of an interim license from the Central Bank of Kenya upon meeting all the requisites. A pilot survey period of another six months will follow to pilot test the product ahead of the full launch. 15 3 The Market 3.1 Industry analysis Private sector growth in Kenya months prior to the interest capping law was at an all-time high averaging the mid-twenties. After the de-liberalization of the interest rate market, the private sector credit has been constrained since the year 2016 due to a myriad of reasons including political uncertainty surrounding the 2017 general elections and an unstable macro-economic environment. However, in the year 2018, the sector started showing signs of improvement as formal and non-formal debt providers devised innovative products to offer credit to the public. In 2018, private sector credit growth increased from a low of 1.6% to 4.4% in 2017 for instance to between 4% and 8% in 2018. The resultant economic growth in 2018 at 6.0% was supported majorly by increased credit growth in to the private sector. Going forward, in the year 2019 credit growth is expected to be supported by the stable macroeconomic environment and increased economic activity, which are expected to translate to a higher demand for credit from both firms and households. The table below illustrates the growth of credit uptake from the year 2016 to 2019 by provider. Chart 2: Credit Sector Growth Source: Central Bank of Kenya 16 The percentage of the Kenyans whom have accessed loans from both the mainstream and informal lending non deposit taking organizations and are in collections continues to rise. The motivators for this phenomena majorly arises from the ability to be able to repay loans and willingness to repay loans by borrowers. It is estimated that 2.7 million of Kenyans are in collections. From surveys conducted by FSD Kenya, 500,000 of people whom accessed loans in the year 2018 have been listed by the Credit Reference Bureau. The increasing number of the Kenyans who are delinquent provides a gruesome picture which is a boom to collecting agencies. As more entities, individuals accrue more debt the better the collection opportunities for private debt management firms. The adoption of IFRS 9 by financial institutions on the methodology used to compute impairment provisions on financial instruments required institutions not only to report incurred credit losses but also expected credit losses in future. This led to an increased provisioning for bad and doubtful debts incurred as well as expected to occur. Higher provisioning leads to lower profitability and commercial banks need to ensure they remain profitable. They need to maximize returns on investment by minimizing unpaid loans even if it’s a small fraction of their face value. Lenders cannot afford to continue writing off loans. This has seen most lenders outsource their business to external debt collection agencies to complement their in-house capacity thus increased demand for their services. Previously in the previous century, the debt collection industry was dominated by more aggressive auctioneers who terrorized the customers and tarnished the noble profession of debt collection. Up to 50% of the population perceives debt collectors in the same light as auctioneers who use gangster tactics to repossess assets in a bid to recover outstanding debts. However this has really changed and currently the practice of debt collection has transformed to debt management. The majority of users of this service constitute lenders who on one end would like to recover their money but also maintain the same customer experience and retain market status. A significant change in approach by debt management companies has seen considerable progress in recoveries through fostering a less aggressive approach and a more professional approach. Debt management firms in modern times use a more borrower centric approach which offers borrowers a best fit solution to clear their delinquent accounts. This involves negotiations to ensure loans are paid up in a comfortable manner with unnecessary confrontations. Due to their lean organizations and capacity to profile the distressed borrowers, debt collection agencies are able to make quick decisions and tailor make suitable repayment patterns on delinquent borrowers. 17 The Credit Reference Bureaus (CRB) in the country are regulated and licensed by the Central Bank of Kenya. Currently, in the local market we do have three licensed CRBs. Any delinquent account that has been overdue for more than 90 days can be reported for listing in any of these reference bureaus. Two of these players, also provide debt management services to money lenders. Through the CRB regulations under the Banking and Finance Act, financial institutions are mandated to share information through the CRBs to assist in vetting borrowers for eligibility for loans. Any lender or borrower will obtain information from the CRBs at a fee of around Kshs 200/= to access their status and also obtain clearance certificate upon listing. According to data from the latest Central Bank of Kenya annual report for 2018, there has been an increased request from lenders for credit reports from credit reference bureaus. In one year alone i.e. June 2017 to June 2018, the number of credit reports requests jumped up by 88% or 2.3 million reports. The commercial banks were the leading in credit report requests followed by micro finance banks and lastly by customers. All these reports were generated by the three existing CRBs and on average, each produced 767,000 reports. Table 7: Credit Report Requests Credit Reports Requests-Commercial Banks only Credit Reports Requests-Micro Finance Banks only Credit Reports Requests -Customers Jun-17 2,421,048 110,594 76,124 2,607,766 Jun-18 4,576,593 195,623 138,026 4,910,242 Change 2,155,545 85,029 61,902 2,302,476 %Change 89% 77% 81% 88% Source: Central Bank of Kenya Market Analysis The debt management business in Kenya follows a more traditional approach which involves debt collection firms being remunerated on a commission basis. In more developed countries collection agencies purchase the entire debt portfolio and collect on their own behalf. The size of the market therefore is dependent on the total outstanding non-performing loans market in the Kenyan market. We have 47 commercial banks operating in the country offering different credit products. There is a lot of consolidation happening in the financial services sector thereby stronger financial institutions and more capacity to lend. The co-operative sector in today’s market is revolutionizing their business model and accommodating members from different occupations and through leveraging on technology, expanding their credit products. The advent of digital credit in the Kenyan market in the past five years expanded the options for retail customers to access credit facilities. On the supply side, the options are provided by both mobile based applications and mainstream banking institutions. For instance the sheer growth of the digital credit market is confirmed by supply-side figures. Mshwari - Kenya’s first digital banking product offered by the Commercial Bank of Africa (CBA) - supplied over 20 million loans to 2.6 million borrowers in its first two years. To put that into perspective, CBA only had 13,000 18 open loan accounts the year before Mshwari was launched, between 2013 and 2015, CBA opened over twice as many loan accounts - 27,400 on average - per day, effectively transforming CBA from a niche bank serving corporate clients to a bank serving the mass market. Mobile based applications such as Tala have disbursed a total of Kshs 28 billion from 2014 and Branch has managed to disburse a total of 3.63 billion since the year 2015. On the demand-side, the introduction of digital loans met a need for a type of credit that had not been satisfied by other formal lenders. In 2009, only one in ten adults with a mobile phone had ever used a formal loan from a bank or non-bank financial institution , five times as many (one in two adults) had used a loan from informal sources, such as friends and family, an employer, or savings group. By 2017, almost three in four adults with a mobile phone had ever used a formal loan (including mobile loans). Over this time period, the prevalence of formal borrowing among the poorest 40% of the adult population increased more than two fold. The growth in exposure to formal loans accelerated significantly after 2013, strongly suggesting these trends represent digital credit’s influence in expanding the credit ‘frontier. It has been reported from different surveys that 50% of digital borrowers have repaid their loans while 12% of the borrowers, have defaulted. It also has been established that digital credit in the country has been used for consumption activities. This thereby increase the likelihood of a loan borrowed within the unregulated digital credit platforms will have a higher probability of not being paid. The total nonperforming loans ratio which combines the mainstream sector traditional loans and digital loans has been increasing over the last nine years. The table below illustrates the digital credit default rates by March 2019. Chart 3: Non Performing Loans Source: Central Bank of Kenya 19 As a private debt management agency the total addressable market is quite huge. The table below illustrates the potential addressable market size. 3.2 Total Addressable Market: Credit Supply by Region Chart 4: TAM Source: FSD Kenya Chart 5: Digital borrowers by location and provider Source: FSD Kenya 20 As credit risk exposure continue to rise, banking and non-banking financial institutions have never underestimated the important role the private debt collection agencies play in ensuring they are able to collect and recover the issued loans to the public. They understand that the collection firms usually seek to recruit and maintain high performance staff to perform the agency role. By offering good remuneration packages which is a retainer and commission, the staff within agencies is able to perform beyond expectations. Agencies further are able to subject their staff to training modules which sharpen their skills and ensures a qualified work force. To the debt providers, they immensely benefit from best business practice, expertise and technology which they would not ordinarily invest in. It is a fact the effectiveness of in-house expertise in financial institutions is underpinned by frequent rotation of staff and this reduces their proficiency. The market has been growing steadily over the last five years and is expected to grow going forward with robust economic growth. The number of players who provide credit management is also growing fast however professionalism, product differentiation and investment in technology shall differentiate the losers and winners in this industry. As players continue to lobby the government for legislation and recognition as professional service providers, which will be very much welcome, Gilchery Skip Trace Services will continue to be a market leader in provision of best in class services. With the buoyant economic environment as exhibited above all these organization’s involved in credit provision require reference checks to establish the credit worthiness of their borrowers to minimize their credit risk exposure. The demand which arises from both the retail and corporate sectors needs to be supported by a strong credit controls to enhance responsible lending. The ratio of non-performing loans in the mainstream banking sector has still remained unchanged albeit with the introduction of the CRB system from the year 2010, more still needs to be done especially within the non-banking sector. There exists a lot of information asymmetry especially in the non-bank credit only lenders with high levels of indebtedness amongst the public. Moreover lenders through moral suasion by the Central Bank of Kenya are being sensitized to strictly adhere to the CRB regulations and promote fair trade practices when it involves assessment of borrower’s applications. The situation can be reversed to ensure there are no disturbances in the credit system. Locally the private credit reference bureau sector players comprise of three registered firms namely Credit Reference Bureau Africa Ltd, Metropol East Africa and Credit Info Kenya. The three entities have been in operation for the past couple of years. The credit reference system modular scheme adopted in the country is a direct approach where players access information directly from the system. 21 3.3 SWOT Analysis: Skip Trace Services Table 7: SWOT analysis Factor Products Price Service Reliability Expertise Company ReputationPerformance Location Marketing Strength Weakness Well structured products Importance To Client Need of technological investment to expand service offering Very Important Market dependent N/A Very Important Important Limited office space as new mandates increase Very Important Cost of external training Very Important Very Important The firm has two local branches Limited resources Important Intention to expand to Sub Saharan Africa Geographic focus-Expansion needed Experience in the industry by the promoters Cost of marketing Diversified Investment in technology Good pricing -good margins Cost management practices Extension of customer experience accorded by lenders Professional services Adequate with current client mandates Adequate office space- status quo Expert staff Good training programs Very good company image among money lenders and the targeted clientele Good networks with debt providers(formal & informal) Ability to get referral mandates Very Important 3.4 Competitor analysis: Credit Reference Bureau We have listed below the players who provide credit reference bureau services in the country and their major products for comparison. Table 8: Competitor Analysis Firm Credit info Credit Reference Bureau Kenya Limited Metropol Credit Reference Bureau Credit Reference Bureau Africa Ltd(Transunion) Gilchery Skip Trace Ltd N/A Service Description Credit Reference Bureau Geographic Focus International Credit Management Credit Reference Bureau Local Credit Management Credit Reference Bureau International Credit Management Application for Credit Reference Bureau license in Progress Regional 22 4 Marketing Gilchery Skip-Trace Limited prides itself on being a market leader in the industry by providing the client with modern level of service whilst using the latest collection and debt skip tracing techniques. This will ensure client satisfaction and client referrals. The strategies used by the firm in its collection and recovery efforts, provides a strong marketing tool enabling the firm obtain more mandates due to its performance. 4.1 Performance The firm over the years has attributed its growth to having achieved good performance ratings owing to their collection strategies employed. GST uses simple and effective market segmentation strategies which are as described below. 4.2 Risk-based segmentation The objective is to identify a hybrid of high, medium and low propensity to pay distressed borrowers to ensure that appropriate, tilted treatments are applied across the delinquent life cycle. By analyzing the borrowers previous payment behavior combined with credit bureau data, GST will be able to identify where high risks, medium risk or low risk are. This segmentation into three basic categories gives the firm with the opportunity to treat each debtor appropriately based on risk. It is critically important to create and implement defined workout protocols that support rehabilitation and establishes an escalation trigger in early-stage collections. Ensuring the collections and recovery strategy covers the ‘rehabilitation, repayment and recovery mantra’. Our processes are situational – based on the delinquency cycle and asset/product class. Rehabilitation endeavors should be explored and exhausted before the commencement of one being listed at CRB. A fundamental requirement for consistent, accurate strategy execution is to deploy a tilted treatment framework across call scripts, short message services and any other engagement channel. Our techniques that are used for debtor segmentation include Know Your Customer (KYC) data provided during initial applications and parties engagement. By also using a method that includes machine learning, our debt collection software models are continuously updated with new information provided and will teach itself if a debtor was identified as lowrisk, but in fact, rolled on payment and how to determine such cases in future. By investing in the creation of a credit reference bureau GST will leverage on this through acquired data to segment these debtors. Combining through historical payments and operational data by clients from files supplied, with credit bureau data, it will enable the firm to get a more accurate picture of a debtor’s propensity to pay or roll over existing debt. 23 4.3 Target Strategy Gilchery Skip Trace Limited aims to work with a number of different organizations in different industries who want to maximize their cash-flow in their debt collection cycle. Gilchery Skip Trace Limited aims to provide services to corporates who represent at least 90% of the firm’s clients. Some of the clients are;       Financial institution e. g Commercial banks and Insurance firms. Established private corporate companies. Government bodies e.g. County and National Government, Parastatal SME and NGOs. Individual clients. Micro finance and deposit taking institutions. 4.4 Positioning Strategy An effective positioning strategy considers the strengths and weaknesses of the organization, the needs of the customers and market and the position of competitors. The purpose of a positioning strategy is that it will allow GST to spotlight specific areas where they can outshine and beat their competition. GST aims to provide innovative products, competitive pricing and excellent service associated with it. An important step in developing key operational strategies depends upon how a GST will position itself in the marketplace. This will make it competitive in areas like quality, cost, flexibility, speed, innovation and service delivery. 4.5 Product/Service Strategy The firm has structured and packaged the products and services with the clients in mind. It will seek to offer added value advantage to their customers, going an extra mile to ensure their satisfaction. The following are array of service GST customers will benefit from:      Call Centre Collection Commercial Collection Consumer Collection Debt Surveillance Tracing Services 24 4.6 Pricing Strategy The pricing of collection agencies operate on contingency fees. This means fees are charged on percentage of the collected debt as commission. Many factors contribute to the pricing, but in the end, it comes down to confidence in how much you can collect. The cost of debt collection can range from 10% to 95% dependent on the case. The following provide current breakdown per service on the following services; call center, commercial, consumer collection, debt surveillance and tracing services. Table 9: Pricing Strategy Services Debt collection and recovery Call Centre and Commercial Debt Consumer Collection Debt Surveillance And Tracing Gilchery Credit Reference Bureau Credit report Clearance certificate Rates 25% 10%-35% Depending On Case By Case Kshs. 2,500 Minimum, Kshs. 10,000 Maximum Kshs 200 Kshs 2,200 4.7 Distribution Channels The team of staff contemplated will by all means provide a medium upon which contacts shall be made directly to the customers about Gilchery Skip-trace Limited on debt collection. We have positioned ourselves in secure, accessible and customer convenient locations. 4.8 Promotion and Advertising Strategy A profitable debt collection service is about more than supply and demand. It's about designing ways to entice new customers to engage with your products and to encourage existing customers to increase the frequency of their purchases. Marketing a debt collection service has changed dramatically over the past twenty years. A robust marketing plan will cement GST relationships with customers. With that in mind, it's important to leverage marketing as a path toward better customer engagement in GST collection service's strategic plan. The marketing strategy for the gilchery services will be through; • • • • Advertisement media such as TV, Radio, Newspaper Advert, Flyers. Bill Boards / Road signs Websites and social media platform like Facebook, Twitter, Instagram, and YouTube. Referrals from corporate institutions 25 5 New Product Development In the spirit to further achieve growth the firm intends to incept a Credit Reference Bureau as part of its service offering. A Credit Bureau’s is a licensed agency that collects and researches individual credit information and sells it for a fee to creditors so they can make a decision on granting loans. CRB ensure that creditors have the information they need to make lending decisions. Fundamentally, it facilitates the exchange of information between credit providers and their customers and, as a consequence, to increase the availability of credit and financial services in the targeted region. The Banking (Credit Reference Bureau) Regulations 2013 governs the licensing, operation and supervision of CRBs by the Central Bank of Kenya. The information provided by CRB comes from many sources but falls into two main categories – public domain information and credit experiences:  Public Domain Information: Electoral Roll, Telephone & Postal Directory information, Court Judgments, Bankruptcies  Payment Performance Information: CRB subscribers share with each other details of their credit experiences. To achieve this, the firm will store details of these experiences as an independent and objective entity. This allows any subscriber to enquire, when a company or an individual applies for credit, how the credit applicant has performed on other subscribers’ credit facilities in the past. Gilchery CRB shall provide factual credit, identity and location information to businesses – for example banks, credit card companies, finance institutions and commercial enterprise- to assist them in making accurate and responsible decisions when companies or individuals apply for cash or goods and services on credit. The CRB also helps creditors guard against fraud, which is a growing and serious problem that ultimately affects all consumers. Leveraging on its current portfolio of clients which majorly consist of commercial banks, SACCOS, utility firms, non-bank credit only lenders commonly refereed as mobile lending applications and other consumer finance organizations, the firm has a large base of credit providers as its clients whom would want to access credit information and also would provide information to the bureau. 26 5.1 Solutions The product has been designed to offer to main services; i.e. 5.1.1 Individual Solutions Credit score reports This facility shall enable individuals to access their credit information at a fee in line with Credit Reference Bureau Regulations 2013. This involves the generation of credit score reports and clearance certificates. Credit monitoring This facility shall allow individuals to get alerts on any changes concerning their credit status amongst the existing credit bureaus. These added services will generate additional revenue streams to the firm. Financial profile Using this service, the public will have the capacity to see what prospective information lenders are viewing. They will also get to see the identity of the person who has requested to view their information and also get to understand their financial picture. This will of course also come at an extra fee over and above the credit score reports. 5.1.1.1 Process An individual whom desires to seek a credit score report will make an application to Gilchery CRB through its website, SMS USSD and a convenient mobile based application to availed on Google play store and App Store which will then gather the required information from its database. A credit report shall be generated which shall provide the individual a comprehensive report detailing the current credit score. The credit report shall attract a small fee depending on the applicant. For obtaining the clearance certificates a similar process shall be followed and the applicant will be required to remit a sum of Kshs 2,200. 27 5.2 Business Solutions 5.2.1 Decision Analytics Quick decision module Gilchery CRB will at best provide an accurate credit assessment through the quick decision module that will be tailor-made for lenders to enable them make credit decisions. Commercial banks and other credit providers will be able to obtain quantitative and qualitative information on third parties which they shall use as a base for decision making and evaluate their creditworthiness. Predictive Modeling Using these feature prospective lenders will be able to determine the loan applicant probable outcomes in future. Using big data, they will be able to determine likelihood of default or success in honoring obligations. Business enquiry- basic and comprehensive credit reports In addition, additional services shall include the provision of business background reports to third parties. This shall include the period of existence of target businesses, address and contact details of the businesses, the current directorship in the business, and a facility behavior summary. These services will be available upon request through direct contact with the firm on a contractual basis. 5.3 Timeline The roll out of the GST credit reference bureau will be done in two stages. The first stage will encompass the application for the required licenses and permits from the Central Bank of Kenya. The process is expected to take about six months at the outside. Later we shall have a pilot study period of six months which will culminate to the launch of the product within one year. 28 The below schedule illustrates the itemized schedule towards the launch. Chart 5: Milestones i • Preparation of the statutory documentation required by the Central Bank of Kenya for licensing. ii • Setting up adequate IT infrastructure both the hardware and software systems including databases management systems servers. iii • Set up operational manuals to guide in the management of the business unit. iv • Establish accurate information sources and enter into contracts with specific entities. The information should be factual and updated accordingly. The sources have to be approved by the CBK. v • Description of systems and their design of the data collection vi • Setting up of appropriate governance and management structures. vii • Development of the prototype of the final product for approval. viii • Submission of information to CBK for approval. ix • Approval from CBK. x • Launch 5.4 Cost Table 10: Expansion cost schedule Summary Total fixed costs Total operational costs Transaction advisory fees Total Kshs 110,160,000 54,960,000 9,756,000 174,876,000 29 6 Management 6.1 Company organization The company shall be organized to provide two products. These include credit management and credit reference bureau services. The credit management business function which is currently operational is structured as below with the respective personnel as highlighted including their key competencies. Table 11: Staff Bio Management Position General Manager Name Isaac Kimani Role Overseeing daily business operations. Developing and implementing growth strategies. Business Development Manager Finance Manager Peter Njoroge Thiongo, Diana Odero Training low-level managers and staff. Creating and managing budgets. Improving revenue. Hiring employees. Evaluating performance and productivity. Analyzing accounting and financial data. Researching and identifying growth opportunities. Generating reports and giving presentations. Overseeing the annual business planning Sourcing of opportunities Operations, and marketing Assist in underwriting Due diligence Strategies and execution for debt and credit management. Collecting, interpreting and reviewing financial information Predicting future financial trends Skills/Competencies 9 years’ experience in the debt collection industry Understanding of the various dynamics around collections & recoveries Manage & see the team grow from 10 to over 100 employees Clients & assets under management have also grown from 24 to 59 valued from 1.2Billion to over 10Billion Bachelors of Commerce (Marketing) Diploma in Business Information Technology Bachelors of Commerce (Accounting Option) Certified Public Accountant of Kenya Reporting to management and stakeholders, and providing advice how the company and future business decisions might be impacted Producing financial reports related to budgets, account payables, account receivables, expenses etc. Developing long-term business plans based on these reports 30 Reviewing, monitoring and managing budgets Developing strategies that work to minimize financial risk Analyzing market trends and competitors Operations manager Faith Mbage, Make important policy, planning, and strategy decisions. Develop, implement and review operational policies and procedures. Help promote a company culture that encourages top performance and high morale. Oversee budgeting, reporting, planning, and auditing. Work with the board of directors to determine values and mission, and plan for short and long-term goals. Support worker communication with the management team. ICT & Infrastructure Manager Stanley Huho Diploma in Business Administration Over 15 years’ experience in management and logistics Running regular checks on network and data security Degree in Applied Computer Science Identifying and acting on opportunities to improve and update software and systems Developing and implementing IT policy and best practice guides for the organisation Designing training programs and workshops for staff Conducting regular system audits Running and sharing regular operation system reports with senior staff Overseeing and determining timeframes for major IT projects including system updates, upgrades, migrations and outages Managing and reporting on allocation of IT budget Providing direction for IT team members Identifying opportunities for team training and skills advancement 10 years of experience in call center Information systems ICT Projects Management and ICT Operations 31 6.2 Junior Management Table 12: Staff Bio (JM) Position Portfolio Manager 1 Name Job description Skills and competencies Doreen Mwale Oversees daily operation and management of various debt and collection portfolio from different clients Diploma In Business Management Due diligence process She Brings 5 Years’ Experience In Debt Recoveries And Risk Management Bachelor’s Degree In Business And Economics Performing assessment and analysis and research in debt and credit management Portfolio Manager 2 Janet Kiptoo Oversees daily operation and management of various debt and collection portfolio from different clients Due diligence process Degree In Finance And Accounting 5 Years’ Experience In Administration Management. Finance Performing assessment and analysis and research in debt and credit management Portfolio Manager 3 Caroline Wangui Oversees daily operation and management of various debt and collection portfolio from different clients Due diligence process Certified Public Accountant CPA-K 3 Years’ Experience In Debt Recoveries And Risk Management. Performing assessment and analysis and research in debt and credit management Portfolio Manager 4 Portfolio Manager 5 Ruth Sang Mariam Miraji Oversees daily operation and management of various debt and collection portfolio from different clients Due diligence process Master’s Degree In Leadership And Management Bachelor Of Science -Nutition Performing assessment and analysis and research in debt and credit management Diploma In Nutrition And Dietetics Oversees daily operation and management of various debt and collection portfolio from different clients Due diligence process 5 Years’ Experience In Debt Recoveries And Risk Management. Diploma In Tours And Travel 5 Years’ Experience In Debt Recoveries And Risk Management. Performing assessment and analysis and research in debt and credit management 32 6.3 Management Style and Structure Skip Trace Services and CRB services Chart 6: Management Structure The organization will require a separate management structure to effectively rollout the credit reference bureau platform. The chart below illustrates the expected organogram of the new business unit. GILCHERY CRB MANAGEMENT STRUCTURE Chart 8: Management Structure (CRB) GILCHERY CEO ASSISTANT TO CEO HEAD OF IT HEAD BUSINESS DEVELOPMENT business HEAD CUSTOMER SERVICE HEAD OF STRATEGY ADMINISTRATION MANAGER IT SUPPORT TEAM (5) BUSINESS DEVELOPMENT OFFICERS CUSTOMER SERVICES EXECUTIVE (5) HEAD OF FINANCE SENIOR ACCOUNTANT ACCOUNTANT 33 6.4 Current Ownership Table 13: shareholding structure Name Title Number of Shares Percentage Gilbert Cheruiyot (Founder & CEO) Mr. 600 60% Caroline Jepkoech (Founder) Mrs. 400 40% 1,000 100% TOTAL 34 7 Operations 7.1 Operational Strategy GST has developed a more focused debt collection strategy to help reduce costs, save time and maximize resources. This has helped the firm refine its client’s debt management and recovery options. 7.1.1 Locate hard-to-find debtors Obtain up-to-date contact information for your most hard-to-locate debtors. Gilchery Skip Trace Limited frequently refreshes its extensive databases of consumer and commercial information, enabling it to locate elusive debtors, make contact and collect unpaid debt. 7.1.2 Collection prioritization and strategy. The company has improved on collection efforts and increased their client accounts receivable by identifying accounts with the highest payment potential, analyzing industry trends and testing new strategies. GST advanced scoring and segmentation tools arm you with complete portfolio. 7.1.3 Monitor unpaid debt Know when customers who’ve gone into arrears become solvent. Gilchery monitors the clients’ debtor accounts and let clients’ know when a customer’s ability to pay has improved so you can immediately return to working the account and collect the unpaid balance. 7.1.4 Collections management system A comprehensive collection system is critical to keeping clients company solvent. GST services collections is a unified debt management system that includes data connectivity, decisioning, workflow, and self-service capabilities that can be managed by users. The result is a more effective, customer-focused collections process that turns even hard to find and difficult debtors into valuable customers while increasing recoveries and reducing costs. 7.1.5 GST Credit Bureau Expertise In today's highly competitive markets, lenders need to ensure that they are making the right credit decisions. To achieve this, decisions need to be based on the most accurate and up-to-date information available. This will be provided by the Gilchery Credit Reference Bureau. 7.1.6 The Most Accurate Information Credit grantors in the credit market will benefit from the information services provided by Gilchery Credit reference Bureau. These services range from a simple credit report to sophisticated risk and customer management tools. This service will not only cover Kenya only but in the near future Sub Saharan Africa. 35 7.2 Location Being in the right location is a key ingredient in a debt management success and credit reference services. If a company selects the wrong location, it may have adequate access to customers, workers, transportation, materials, and so on. Consequently, location often plays a significant role in a company's profit and overall success. Currently GST has two branches; the headquarters is located along Mombasa Road at Alpha Center and another branch is located in Eldoret town at Khetias Building. Both of the location plays an important role in space and good working environment. 7.3 Personnel Gilchery Skip Trace has lean and efficient personnel that bring out productivity and success growth of GST. The personnel in this department are the active agents who are managed by the portfolio managers. The structure is as illustrated below. Chart 8: Operations Department Management Structure Agents Portfolio Manager Agents Operations Manager Portfolio Manager Agents 36 7.4 Suppliers The firm utilizes the below entities as its suppliers; FIRM Zoa Taka Pin Point Messages Labs Airtel Simbanet Safaricom Liquid Telecom Little Cabs City Prime Aquavita Crafted Ultimate Office Automation Rosewood Pompey Circuit Power Messohh Consult Infosky Solution Ltd Edel Africa Nation Media Group Ltd N Itec Designs Mafraq Eneterprises Sunstar Distribution Ltd Quick Books Online Creditinfo Credit Reference Avama Office Furniture Khetia Drapers Ltd Unified Business Platforms Glitz And Pixels Total Kenya Real Management 37 7.5 Credit Management Policies The following guidelines and procedures have been set and formulated by GST are intended as best practice in the management of ‘trading’ income and to reduce outstanding debtors by identifying considerations to be made before, during and after the services provided for by GST. The purpose is to:      Help to manage any financial and reputational risks to the company Provide efficient procedures Reduce the time and effort required to chase overdue debts Prevent bad-debt provisions being lodged against the Gilchery Skip Trace Limited accounts Prevent loss through minimizing the writing off of bad debts. 7.6 Credit risks It is important to consider the credit risks associated with the customer you (staff) are agreeing to extend credit to, in order to minimize the associated risks of late or non-recovery in all circumstances. The biggest credit risk to GST is non-payment of invoices due over a 45 day period. It’s important an agreement set out by company stipulates the interest accrues from late payment after 45 day period. These payments should be invoiced charging the appropriate VAT rate. 7.7 Credit worthiness of external customers Before agreeing to services on credit (i.e. without receiving payment in advance), the credit worthiness of a customer must be assessed. This is to ascertain whether the firm is in a position to honor payment on time when presented for payments. 7.8 Credit checks Assessment of the credit-worthiness of clients may involve obtaining credit references or having a credit check performed by registered Credit Reference Bureau. The Finance Manager should be asked to perform a basic credit check using an external credit reference agency covering limited companies and non-limited organisations. Typical information provided by credit checks includes: Limited companies    Company information – registered and trading addresses, industry, shareholders Accounts – profit and loss, balance sheet, capital and reserves, ratios Rating and limit – credit rating and recommended limit 38   County Court Judgment (CCJ) information Group structure – parent and subsidiary companies 7.9 Determining the correct VAT treatment Prior to any invoice being made it must be established whether VAT needs to be charged for the particular provision of service, to this particular client. 7.10 Payment methods Certain methods of payment of commissions due incur charges and it is therefore important to establish the method of payment by the clients. This is especially the case for all clients. Cash    This method should be discouraged to reduce potential security risks to staff. Payment in cash to be deposited in designated bank accounts provided. Foreign currency should also be discouraged as any loss or gain on exchange, as well as any bank charges, will be charged to the department. 7.11 Invoicing 3.1 Responsibilities All invoices raised must be in the name of Gilchery Skip Trace Limited and show the VAT number. Invoices must be raised promptly, properly recorded and processed and must comply with the VAT regulations. Invoices should be raised in the Accounts department to ensure that the transaction is immediately logged on the company’s accounts systems. Invoices must be raised promptly. This should be within one week of the files worked on and accounts reconciliation effected. All other invoices must be no more than one month subsequent to the transaction taking place. 39 7.12 Debt Management 7.12.1 Responsibilities The collection of income (and any subsequent debts) is the responsibility of the finance department requesting the invoice to be raised, with the finance team assisting with the task. The procedures detailed in this section outline best practice in relation to the collection of overdue debts from external clients (debtors). The risk of late or nonsettlement can never be entirely eradicated but there should be a structured, recorded and pro-active approach to recovery as soon as the invoice is raised. 7.12.2 Debt monitoring Credit control is a very important process that establishes controls to ensure the timely recovery of income and minimizes the risks of non-settlement. As debts become overdue, the risk of non-settlement becomes significantly greater. The finance department perform checks each month end for outstanding debts. 7.12.3 Agreeing to proposed payment plans Judgment may be taken to offer payment terms by installments in exceptional cases and if this is acceptable, terms and conditions of payment will be drawn up on a case by case basis. 7.12.4 Legal recovery If payment is still not received after 180 days from the date of invoice or if agreed payment terms are breached then the finance manager will make arrangements to contact the company lawyers to issue a demand letter. 7.12.5 Interest & fines The Company shall be entitled to charge interest per month or annum above depending on the case for any overdue payment from the date payment is due to the date payment is received on all invoices 40 8. Financials In this section we have illustrated the current performance for GST Ltd for the first quarter of 2019. A projected income statement for five years has been presented showing expected performance. 8.1. Operational income Q1 2019 GILCHERY SKIP TRACE LTD OPERATING INCOME STATEMENT FOR THE PERIOD ENDED 31 ST MARCH 2019 Table 14: Income Expenditure Statement Q1 2019 Budgeted Average Turnover Actual Turnover Difference Kshs Kshs Kshs 41,749,513 45,328,658 3,579,145 Telephone & Courier 913,455 725,300 (188,155) Print Copies & Upgrades 255,795 135,280 (120,515) Internet Expense 359,281 205,950 (153,331) 76,878 42,348 (34,530) Utilities (Electricity & Water) 115,279 108,325 (6,954) Professional fees 246,000 - (246,000) Hospitality & Sundry 434,551 256,800 (177,751) Travel, Fuel & Stay 477,175 490,256 13,081 Repairs & Service 269,217 149,652 (119,565) Rent & Rates 775,616 835,650 60,034 5,332,762 6,325,825 993,063 Auditors Fee 210,693 - (210,693) Cleaning & Sanitation 163,973 178,504 14,531 28,438 - (28,438) 159,294 145,245 (14,049) Mpesa Transaction Costs 4,473 5,627 1,154 Salaries and wages 21,092,698 18,763,689 (2,329,009) Total Expenses 30,915,577 28,368,451 (2,547,126) Profit 10,833,936 16,960,207 Income Operating Income Expenses Fuel & Service Market & Development Insurance Expenses Bank Charges 41 8.2. Financial projections The projections below provide an illustration of the expected net income for the credit management business and expected credit reference bureau services in two parts. 8.2.1. GILCHERY SKIP TRACE PROJECTED INCOME STATEMENT- Table 14: 5 Year Income Statement projections Period ending Actual Projected Projected Projected Projected Projected 31-Dec-18 31-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 Income 164,982,894 272,221,775 449,165,929 741,123,783 1,222,854,241 2,017,709,498 Total operating income 164,982,894 272,221,775 449,165,929 741,123,783 1,222,854,241 2,017,709,498 - - - - - Expenses Telephone & Courier 2,187,917 3,610,063 5,956,604 9,828,397 16,216,854 26,757,810 Print Copies & Upgrades 325,853 537,657 887,135 1,463,772 2,415,224 3,985,120 Internet Expense 349,665 576,947 951,963 1,570,739 2,591,719 4,276,337 Fuel & Service 152,234 251,186 414,457 683,854 1,128,359 1,861,793 Depreciation 3,317,740 5,474,271 9,032,547 14,903,703 24,591,110 40,575,331 Utilities (Electricity & Water) 387,493 639,363 1,054,950 1,740,667 2,872,101 4,738,966 Professional fees 480,000 792,000 1,306,800 2,156,220 3,557,763 5,870,309 Hospitality & Sundry 1,368,666 2,258,299 3,726,193 6,148,219 10,144,561 16,738,526 Travel, Fuel & Stay 1,334,755 2,202,346 3,633,870 5,995,886 9,893,212 16,323,800 815,808 1,346,083 2,221,037 3,664,712 6,046,774 9,977,177 3,020,899 4,984,483 8,224,398 13,570,256 22,390,922 36,945,022 19,569,768 32,290,117 53,278,693 87,909,844 145,051,243 239,334,550 355,600 586,740 968,121 1,597,400 2,635,709 4,348,921 27,222 44,917 74,112 122,285 201,771 Repairs & Service Rent & Rates Marketing & Development Auditors Fee Cleaning & Sanitation - Insurance Expenses 113,750 187,688 309,684 510,979 843,116 1,391,141 Bank Charges 455,126 750,958 1,239,081 2,044,483 3,373,397 5,566,105 Mpesa Transaction Costs 17,891 29,520 48,708 80,369 132,608 218,804 Salaries and wages 52,404,219 86,466,961 142,670,486 235,406,302 388,420,399 640,893,658 Total Expenses 86,657,384 143,011,906 235,969,645 389,349,913 642,427,357 1,060,005,139 Profit Before Tax 78,325,510 129,209,869 213,196,284 351,773,869 580,426,884 957,704,359 Corporate Tax @ 30% 23,497,653 38,762,961 63,958,885 105,532,161 174,128,065 287,311,308 Profit After Tax 54,827,857 90,446,909 149,237,399 246,241,708 406,298,819 670,393,051 Performance ratios 31-Dec-18 31-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 42 Gross margin 47% 47% 47% 47% 47% 47% Net income margin 33% 33% 33% 33% 33% 33% 43 8.2.2 GILCHERY CRB PROJECTED INCOME STATEMENTS- Table 15: Gilchery CRB 4 Year Income Projections Income Total operating income Less: Expenses Telephone & Courier Print Copies & Upgrades Internet Expense Fuel & Service Depreciation Utilities (Electricity & Water) Professional fees Hospitality & Sundry Travel, Fuel & Stay Repairs and maintenance Rent & Rates Marketing & Development Auditors Fee Cleaning & Sanitation Insurance Expenses Bank Charges Mpesa Transaction Costs Salaries and wages Total Expenses Profit Before Tax Less: Corporate Tax @ 30% Profit After Tax Gilchery CRB 31-Dec-21 921,600,000 921,600,000 Gilchery CRB 31-Dec-22 1,013,760,000 1,013,760,000 Gilchery CRB 31-Dec-23 1,115,136,000 1,115,136,000 Gilchery CRB 30-Dec-24 1,226,649,600 1,226,649,600 12,221,778 1,820,226 1,953,240 850,384 18,533,007 2,164,549 2,681,296 2,000,000 3,000,000 5,000,000 8,100,000 75,000,000 1,986,394 1,000,000 635,411 1,200,000 99,940 34,860,000 173,106,226 748,493,774 12,832,867 1,911,237 2,050,902 892,903 18,533,007 2,272,776 2,815,361 2,100,000 3,150,000 5,250,000 8,505,000 78,750,000 2,085,713 1,050,000 667,182 1,260,000 104,937 36,603,000 180,834,887 832,925,113 14,116,154 2,102,361 2,255,993 982,194 20,386,308 2,500,054 3,096,897 2,310,000 3,465,000 5,775,000 9,355,500 86,625,000 2,294,285 1,155,000 733,900 1,386,000 115,430 40,263,300 198,918,375 916,217,625 15,527,769 2,312,597 2,481,592 1,080,413 22,424,939 2,750,059 3,406,587 2,541,000 3,811,500 6,352,500 10,291,050 95,287,500 2,523,713 1,270,500 807,290 1,524,600 126,973 44,289,630 218,810,213 1,007,839,387 224,548,132 523,945,642 249,877,534 583,047,579 274,865,287 641,352,337 302,351,816 705,487,571 8.2.3. Performance ratios Period ending: 31-Dec-21 31-Dec-22 31-Dec-23 30-Dec-24 Gross margin 81% 82% 82% 82% Net income margin 57% 58% 58% 58% 44 8.3. Financial history and analysis 8.3.3. Financial history 8.3.3.1. Income Statement Table 16: Summarized Audited Income Statements For the period ending 31st December Operating Income Operating Expenses Administrative Expenses Finance Costs Net Profit/ Loss Net Profit Before Tax Corporate Tax Net Profit After Tax 8.3.3.1.1. 2013 2014 2015 2016 2017 2018 3,373,690 4,665,838 11,475,426 17,086,221 62,343,084 164,982,894 23,835,085 52,404,219 2,349,704 1,023,986 3,122,675 1,543,163 8,949,013 2,526,413 12,356,834 4,729,387 18,786,151 19,721,848 33,780,148 473,017 78,325,510 1,023,986 285,551 1,543,163 467,124 2,526,413 757,924 4,729,387 1,883,261 19,721,848 5,916,554 78,325,510 23,497,653 738,435 1,076,039 1,768,489 2,846,126 19,721,848 54,827,857 Positive Performance The firm has grown steadily over the years as shown by the growth chart below. Chart 9: Income Growth Income Growth KES 180,000,000 KES 160,000,000 KES 140,000,000 KES 120,000,000 KES 100,000,000 OPERATING INCOME KES 80,000,000 NET PROFIT AFTER TAX KES 60,000,000 KES 40,000,000 KES 20,000,000 KES 0 2013 2014 2015 2016 2017 2018 45 8.3.3.2. Balance sheet Table 17: Audited Balance Sheet for Gilchery Skip Trace Ltd From- Balance Sheet For The Period Ending 31st December ASSETS NON CURRENT ASSETS Property, Plant & Equipment Investments Total Non-Current Assets CURRENT ASSETS Debtors & prepayments Cash & bank balances Total Current Assets TOTAL ASSETS FINANCED BY LIABILITIES & EQUITY LIABILITIES CURRENT LIABILITIES Tax Payable Creditors & Accruals Directors contribution Total Current Liabilities LONG-TERM LIABILITIES Borrowings Total long-term liabilities TOTAL LIABILITIES EQUITY Share capital Retained earnings Shareholders’ funds TOTAL EQUITY TOTAL EQUITY & LIABILITIES 2013 2014 2015 2016 2017 2018 540,855 1,196,125 1,548,037 3,545,347 13,103,032 540,855 1,196,125 1,548,037 3,545,347 13,103,032 11,822,158 52,537,655 64,359,813 437,290 200,290 637,580 1,178,435 880,000 125,000 1,005,000 2,201,125 806,791 2,599,501 3,406,292 4,954,329 1,790,260 455,088 2,245,348 5,790,695 4,512,530 8,714,086 13,226,616 26,329,648 18,078,563 1,030,442 19,109,005 83,468,818 340,000 250,000 85,000 340,000 - 100,000 738,435 838,435 1,178,435 250,000 - 100,000 1,814,515 36,610 1,951,125 2,201,125 85,000 - 100,000 3,796,405 972,924 4,869,329 4,954,329 23,497,653 209,873 3,922,205 3,922,205 - 4,739,311 4,739,311 23,707,526 - 4,833,435 4,833,435 28,540,961 100,000 1,768,490 100,000 21,490,337 100,000 54,827,857 1,868,490 5,790,695 21,590,337 26,329,648 54,927,857 83,468,818 46 8.3.4. Ratio Analysis Table 18: Ratio Analysis Audited Accounts For The Period Ending: Gross profit margin Net Profit Margin 2013 2014 2015 2016 2017 2018 30% 33% 22% 28% 32% 47% 22% 23% 15% 17% 32% 33% 1.88 4.02 40.07 0.57 2.79 0.81 0.59 0.50 30.58 0.12 1.84 0.04 - 19% 13% 21% 42% 36% - 16% 12% 13% 31% 25% 297,580 755,000 3,321,292 (1,676,857) 8,487,305 (4,598,521) liquidity Ratios Current ratio Quick ratio Profitability ratios Return on Equity Return on Assets Working Capital 47 9. Funding Request 9.2. Offer The principal owners’ of Gilchery Skip Trace Ltd would like to invite you as our target investor to purchase 367 newly created ordinary shares at a price of Kshs 450,000 per share all with a total value of Kshs 165 million. The proceeds of sale will go towards investment in the launch of the new product, Gilchery Credit Reference Bureau. By subscribing to these shares you will acquire a shareholding of 27% of the company. By subscription, you will be participating in the management of an upcoming business venture in a vibrant industry with very high growth potential. The subscription shares will be entitled to all full rights ordinarily applicable to these class of shares. You will be also accorded upon expressed willingness, to a seat in the board of directors and management and partake in the decision making process and direction and control of the enterprise. 9.3. Capital requirements As mentioned, we need a capital injection of Kshs 165 million which will enable the expansion strategy in to offering credit information sharing. The product will run simultaneously together with the existing successful debt management business. Great strides have been made to procure the license for offering the new product which will roll out within a period of six months. Periodic inspections are being carried out by the regulator to ensure fit for the envisaged new business. 9.4. Risk and Opportunity The current and intended business is exposed to particular manageable and un-diversifiable risks that would impacts the organizations performance. 9.4.3. Market liquidity Liquidity in the market would limit the capacity of banking and non-banking institutions to offer credit. This would affect the income streams to be obtained as the GST greatly relies on commissions earned from collections on outstanding dent. Low volumes of credit disbursements would mean lower incomes negatively in the short run period. Further the ability of the targeted distressed borrowers to be able to repay defaulted loans is a significant risk. The turnover ratio of players determines the success in the business. 9.4.4. Geopolitical risks Periods of uncertainty as a result of heightened political activity especially surrounding the electioneering period have tendencies of limiting credit growth. This has been witnessed with the previous elections in 2017. As a debt management company business has always been 48 prevalent on the back of the fact that institutions sit on high volumes of non-performing loans which can ensure business continuity even in short periods of uncertainty. 9.4.5. Availability of Data Of critical importance in creation of a reference bureau is the availability of data concerning the individual and the enterprise. A huge budget needs to be invested in acquiring information to be stored in the firm’s databases and their timely update on different aspects concerning the targeted subjects to ensure reliability of reports from the bureau. The successes of any credit reference system lies in a functioning credit information sharing system. Through credit information sharing Kenya a tool developed by the by the Association of Kenya Credit Providers, data can be obtained to ensure sustainability of operations. Further to mitigate this risk the organization through its separate business unit has access to data through its collections business on particular persons and enterprises which will be input into the proposed CRB database. 9.4.6. Collection of Data Data collection plays a significant part as well in designing a proper reference bureau. The effort and extensiveness in obtaining data without infringing on personal rights and ensuring their protection from unauthorized use is mandatory as per the requirements of the Central Bank of Kenya. The data collected has to be verified before being uploaded or updated in the firms’ database. 9.4.7. Legal Risk As a credit reference bureau, the actions that follow any complaint from a subscriber introduces a risk element to the firm. When a customer expresses a reservation as to the accuracy of the information that has been presented in their credit report necessary steps should be taken to remedy the situation to avoid litigation against the CRB. According to the law, the CRB upon receipt of a complaint should follow precise procedures to ensure the dispute is resolved within the specified time frame. 9.4.8. Repeal of The Interest Rate Capping Law The expected repealing of the interest capping law will open the floodgates for renewed credit supply to the private sector. As new applications are made by SMEs, individual’s credit references will be required and this will benefit reference bureaus as they will be able to get income from issuing reports and applicants paying for the clearance certificate to exhibit qualification. 9.4.9. Macro-economic stability and increased private sector credit growth 49 Kenya’s economic growth has and will always be championed by the private sector. The forecast positive growth forecasts at 5.8% to 6.0 % in the year 2019 and 2020 respectively and will lead to higher demand for investment by the private sector. Access to credit will lead to increased lending and thus more business to the reference bureau as well. 9.4.10. Perception of negative CRB listing The consequences of negative listing with credit reference bureaus and upfront costs for clearance necessitate borrowers to clear outstanding loans with a very short duration. Further the inability to obtain credit from all lenders upon negative listing will ensure the users of credit make good accounts prior to intention of listing by debt providers. This will result in high collection rates for debt collection agencies in the field. 9.4.11. Outsourcing of debt management business In the recent past it has been witnessed banks are moving away from investment in house capacity and opting to outsource non-core functions to professional firms who employ ethical standards in collection of their overdue accounts. the importance of ethics and integrity is that in midst of cut throat completion in the lending market, banks and other financial institutions want to retain their customers thus enhancing customer experience is paramount. This creates the need to only work with more established and professional players. 9.5. Valuation of the business The firm is currently valued at Kshs 450 million. This was according to a valuation carried out on the 31st of May 2019. The valuation was based on the income approach by analyzing the income the business has been able to generate and forecasting on the future period. The valuation provided concluded providing the business value/enterprise value of the firm. 50 10. APPENDICES 10.2. APPENDIX 1: INCORPORATION CERTIFICATE 51 10.3. Expansion Budget Fixed Costs Establishment Expenses Kshs Registration Documents 50,000 CBK Preliminary License Fee 10,000 CBK License 100,000 Final Audit 1,500,000 Security and Systems Preliminary Audit 1,000,000 Total Establishment Expenses 2,660,000 Other Fixed Costs Furniture and Partitions 7,000,000 Enhanced Security Systems 2,000,000 Computers, Laptops, Networking and Accessories 10,000,000 Complete Data Centre (Software License Purchase, Hardware Servers, Software Development and Data Base Licenses 83,500,000 Miscellaneous Costs 5,000,000 Total 107,500,000 Total Fixed Costs 110,160,000 Key Staffing-Implementation Stage 34,860,000 Office Maintenance -Set Up Period 12,000,000 Annual Rental Building 4,500sqft @Kshs 150/SF Total Variable Costs 8,100,000 54,960,000 Transaction costs Legal costs 1,500,000 Fund raising fees 8,256,000 Total Transaction Costs 9,756,000 Total Costs 174,876,000 52 53