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Credit Assessment Process

At liwwa, we focus on developing the most sophisticated tools for credit assessment and financial reporting. Our in-house credit model relies on a diverse set of inputs to arrive at one discrete output, the credit grade.

We employ a credit scoring system to provide users - both borrowers and lenders - with a clearer understanding of the assessment process. Doing so also allows us to deliver more fully on two of our core values: Transparency and Fairness.

As part of our assessment process the Credit Team first checks whether the applicant meets the minimum requirements to be considered for a liwwa loan, such as having a Certificate of Registration and Trade License and being in operation for more than a year.

Since small businesses often lack prepared financials, Credit Officers use bank statements and in-person assessments as proxies. Then, Credit Officers weigh and analyze the data collected to generate a credit report and credit grade, based on which the Credit Committee makes its decision on approving or rejecting a loan.

The credit grade is the outcome of our proprietary survival risk assessment model which uses advanced analytics combining historical data and industry expertise while factoring in three dimensions: the borrower’s profile, the business profile, and the business’ financial position.

Loans are assigned credit scores ranging from 0 to 10 which are translated into risk level grades from A (lowest risk) to D (highest risk). This range provides Investors with more granular ratings allowing for more refined choices among risk levels.

What is liwwa’s risk grading system?

liwwa’s credit grading system is an alphabetic grading that assigns each loan a letter score ranging from A to D corresponding to the expected level of risk:

How is it calculated?

liwwa’s credit grading system is based on a survival model, more precisely a Cox Proportional Hazard Model. The model estimates the survival probability of the loan, using the available data on three dimensions: the borrower’s profile, the business’ profile, and the business’ financial position. The model estimates the survival probability of the loan, using the dimension’s available data at each stage of the repayment schedule, to ultimately assign it a credit score which is translated into risk level grades (A to D).

The following visual illustrates the credit assessment process:

Important Note

The liwwa risk grading rating is not a measure of the quality of the investment and is not meant to replace individual due diligence. The information provided on any loan should not be interpreted as a warranty, or a promise of future performance. Further, historical data used to refine risk ratings is not necessarily indicative of future performance. Ratings are for informational purposes only. Ratings are not individualized for any specific investor’s financial situation and should not be considered investment advice. Furthermore, these ratings are not intended to be predictions of how any particular investment will perform. Each investor should carefully consider investments in any loan and be comfortable with his/her understanding of the investment.

What is the Internal Rate of Return?

The Internal Rate of Return (IRR) is a metric that allows investors to compare investments with different repayment schedules, tenors and amounts in a standardized manner. The IRR takes into consideration the structure of cash flows from your investment and accommodates for the time value of money. Note however, that the IRR is not an inflation-adjusted rate of return. An investment that pays $100 every month for 10 months will have a greater IRR than an investment that pays $200 every two months for 10 months. This is because, according to the time value of money, $1 today is worth more than $1 tomorrow. For example, earlier cash flows from the first investment can be used to make other investments and earn returns on them.

Does an IRR of 20% mean I will receive 20% more cash than I invest?

No, because IRR reflects both the amount and the timing of loan repayments (see 'What is the Internal Rate of Return?' above).

What is the difference between Internal Rate of Return and Annual Rate of Return?

The IRR is different from the Annual Return because it is a metric of time-adjusted returns, not just annual returns. Two investments that have the same annual returns can have different IRRs due to differences in their repayment schedules. Let’s study the case of two separate investments of $100 each that both have an annual return of 10%.

Although these investments both have annual returns of 10%, they have different IRRs – which means that they are not equally attractive from an investment standpoint. Since the IRR in scenario B is 20%, twice that of scenario A, scenario B is the better investment opportunity. This is because there is value in getting repaid sooner – you can re-invest this cash and start earning returns on other investments earlier.

How does liwwa calculate the IRR for a loan?

The first step is to look at the expected cash flow schedule from a loan. Payment schedules differ from loan to loan due to differences in tenor, grace period, and the periodicity of payments (e.g. every month vs every 3 months). Below is an example of a $100 investment to a loan with a 12 month tenor and 10% annual return, with a monthly repayment schedule.

The first item on the cash flow schedule is the investment made by investors, which shows as a negative amount (i.e. a cash outflow). The following items on the schedule specify the dates and amounts of payments to be made by the borrower.

Once we've established the expected cash flow schedule, calculating the IRR is straightforward, and can be done by applying the Internal Rate of Return formula to the cash flow schedule above. Many spreadsheet applications, like Microsoft Excel, offer a function that allows you to calculate the IRR easily. You can copy the schedule above to a Microsoft Excel spreadsheet and apply the XIRR formula on the values and dates above. Using this function, you should get an IRR of 22.67%.

liwwa's internal implementation of the IRR formula replicates the results produced by Excel's XIRR formula. Please note that rounding errors, especially when dealing with smaller numbers, can have drastic effects on IRR calculations. To account for potential rounding errors, liwwa’s backend system calculates return figures up to as many as 12 decimal places thereby providing highly accurate portfolio numbers – even if the investor only sees numbers rounded to 2 decimal places.

What happens once the borrower starts making repayments?

After the borrower starts making payments, the cash flow schedule will start including both the actual payments made and their dates, as well as the scheduled payments to be made in the future. If a borrower is late on payments, liwwa adjusts the cash flow schedule accordingly.

How are the risk-adjusted returns different from the unadjusted returns?

The unadjusted returns are calculated assuming that the borrower will make all loan payments on time. This is displayed by default.

The risk-adjusted returns take into account the likelihood that the loan is repaid late or only partially. The risk class and the tenor of the loan both influence the size of the adjustment.

The risk-adjusted returns are lower than the unadjusted returns, because they take into account the probability that a Class-B, twelve-month loan will not be repaid fully or on time.

Transparency is our motto. We have NO hidden fees!

liwwa generates its revenue from a service fee on successful loan payments and that fee is visible to investors for each loan.

For example, Mohammad is a borrower who needs a $10,000 loan to buy his new baking supplies. 10 liwwa investors buy into Mohammad’s loan, investing $1,000 each. When he makes his first monthly payment, say $1000, liwwa takes its 3% service fee ($30) and sends the difference ($970) to the 10 investors ($97 each). This will continue for all 11 loan payments, so each investor is expected to receive $1,067 on their $1,000 investment by the end of the loan.

Our service fee varies depending on the tenor of the loan. For example, we charge a higher fee for a loan with a twelve-month repayment period, than for a loan with a six-month repayment period.

6 months loan – 2%

9 months loan – 3.28%

12 months loan – 3.75%

liwwa provides investors with the opportunity to diversify their portfolio, realize high returns and support local small and medium enterprises in the MENA region. Given the intermediary role liwwa plays between investors and borrowers, risk management is inherently critical as we aim to create maximum value for investors, clients and communities. liwwa also takes a balance sheet stake in the loans hosted in its marketplace joined by banks and other financial institutions.

The ability to mitigate risk is a core competency for liwwa. To achieve this, our culture embeds risk mitigation in our daily conduct. We strive to ensure that the loans disbursed through liwwa’s platform provide an appropriate balance of return for the risks assumed by investors. Our risk management framework is based on three core mechanisms:

1. Advanced risk assessment using proprietary technology

liwwa’s credit assessment team includes experts with experience from some of the top financial institutions in the MENA region. The team utilizes various data points, machine learning technology, and their understanding of business lending to assess each application. By the end of the credit assessment, each loan application is given a credit score, which is based on the following inputs: borrower business experience, quality of the business, and financial performance.

2. Diversification

New funding campaigns are hosted on liwwa’s platform every two weeks. These campaigns are for a mix of businesses, from different sectors, and with different credit profiles. This variety provides liwwa’s investors with the flexibility to invest in different campaigns based on their risk appetite.

3. Recovery and collection

liwwa’s collection and recovery team works systematically to recover any late payments or bad debt. liwwa works with defaulting borrowers to get their payments back on track and to restructure their loans, if necessary. For any missed payment that is not resolved within a period of 60 days from the payment due date, liwwa takes the necessary legal action through an experienced legal team that handles all legal proceedings on behalf of the company.

Our ability to host creditworthy loans is one of the core pillars of our success. Not only does it protect our investors, but it also keeps liwwa’s marketplace attractive for new investors, and ensures the continuity of our business.

We work actively to host established and creditworthy loans on liwwa’s marketplace. In reviewing loan applications, we follow a streamlined approach using a refined review process, a comprehensive approach to due diligence, and extensive credit analysis.

The following diagram illustrates the process from the point an application is submitted until it is listed on liwwa’s marketplace.

Initial Submission & Screening

Business owners are typically referred to us by their friends, via advertisements or through our dedicated sales team who reach out directly to potential borrowers.

Business owners submit their online applications in a fast and easy process that takes less than 3 minutes to complete. After they submit their completed applications, they either get auto-accepted or auto-rejected. For applications to be automatically accepted, the company submitting the application needs to meet the following criteria:

• Registered in Jordan
• Actively operating for at least 1 year
• Have a company bank account in good standing for at least 6 months
• Have a current Trade License and Commercial Registration Certificate
• Have minimum revenues of JOD120,000 in the last fiscal year

Legal and Eligibility Checks

Automatically accepted applications move to the next stage where liwwa validates eligibility and ensures that each application is indeed qualified based on the outlined criteria.

Within 24 hours of the application submission date, liwwa requests supporting documentation from the applicant in the form of financials, income statement, balance sheet and cash flow statement, a copy of the bank statements, company registration, and finally a copy of the owner/owners ID.

We then run a legal review and conclude eligibility checks, covering both financial and non-financial aspects, utilizing the information provided in the application as well as external database and other external records.

Credit Assessment

The application then is transferred to the credit team where they study all related details including but not limited to the requested financing amount and tenor, as well as means of repayment.

After all information is collected, the credit team uses liwwa’s proprietary financial models to analyze the various data points provided in the application. Once the review is complete, the final amount and loan terms are determined.

By the end of the credit assessment, each loan is given a credit score, which is based on the triangulation of three main inputs:

1. The applicant's business experience: this includes their success record, their personal record, and overall integrity.
2. The quality of the business: the applicant's business model, market position, competitive landscape, in addition to historical and projected financials.
3. The strength of the business’s financial position: based on various financial indicators with a particular emphasis on credit profile.

On the marketplace

Once the contract is signed, the loan is then hosted on liwwa’s loan marketplace.