Guides · For lenders · 7 min read

8 checks to make before you lend to a new borrower

A checklist for money lenders, microfinance and SACCOs: identity, credit history, ability to pay, guarantors and collateral.

Most bad loans are bad on the day they are made. A short, consistent set of checks before you lend saves far more than chasing arrears afterwards. These eight checks work for a small money lender, a microfinance institution or a SACCO lending to members.

1. Confirm who they are

Check the national ID or passport against the person in front of you, and record the number. Take the photo, phone number and home and work addresses. A mobile money number registered in the same name is a good extra check.

2. Check their credit history

Many African countries have licensed credit reference bureaus. A bureau report shows other loans the person has, and whether they paid them. If your country has one and you are allowed to use it, check every new borrower, with their consent.

3. Work out what they can afford

Write down their monthly income and their regular expenses, including other loan repayments. A simple rule many lenders use: total loan repayments should not take more than about a third to a half of what is left after essential expenses. For a business, look at its takings over several weeks, not one good day.

4. Match the loan to the purpose

Ask what the money is for, and make the term and repayment frequency fit it. A trader who earns daily can repay weekly; a farmer may need repayments after harvest.

5. Get guarantors who understand what they sign

Call each guarantor yourself. Confirm they know the amount and that they will be asked to pay if the borrower does not. Check that they are not already guaranteeing too many other loans.

6. Value and record the collateral

Photograph the item, record serial numbers, and keep copies of ownership papers. Value it at what you could actually sell it for, not what it cost new.

7. Visit or call references

A home or business visit, or a call to a local leader or employer, catches most made-up stories.

8. Never approve your own loan

The person who prepares a loan should not be the only person who approves it. Even in a small business, a second pair of eyes on every loan (maker-checker) stops both mistakes and fraud.

Prograte records ID details, collateral photos and guarantors with each application, runs credit bureau checks where they are built in (Uganda today), and makes every loan go through the approval tiers you set.