Here’s what your journey as an investor with liwwa would look like:
You deposit $1000 in liwwa account via wire transfer.
Activate auto-invest based on your risk appetite and investment horizon.
Auto-Invest invests in 150 SME loans.
Receive regular monthly payments.
Collect returns after 3 years.
You’ve turned your $1,000 into $1,300.
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:
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 has a fiduciary responsibility to ensure that investors receive payments due to them in full, and in a timely manner. Investor returns are calculated in real time and late payments impact portfolio returns (click here for more information).
Late Payment Collection Process
If a payment is not made on its due date, liwwa’s internal collections team will contact the borrower through multiple communication channels. The internal collections team will work with the borrower to bring the payment back on track. If internal collection efforts do not yield results, liwwa will transfer the case to a specialized legal firm, which will be responsible for conducting legal action.
Loan Status Definitions
We use the following industry-standard definitions to classify a loan’s status.
Current: Loans that are "Current" are 0-30 days late relative to their original payment schedules. Loans that have been restructured can become "Current" after making 3 consecutive payments of their restructured schedule.
For example, suppose a loan has a payment due on March 1st, 2018. If this payment is received before April 1st, the loan will be considered Current. If, however, the payment has not been received for 30 days, it will be marked as "Delinquent (30 days) as explained below.
Delinquent (30 days): Loans marked as "Delinquent (30 days)" indicate that the borrower is between 31 and 60 days late relative to the original payment schedule.
Delinquent (60 days): Loans marked as "Delinquent (60 days)" indicate that the borrower is between 61 and 90 days late relative to the original payment schedule.
Delinquent (90 days): Loans marked as "Delinquent (90 days)" indicate that the borrower is between 91 and 120 days late relative to the original payment schedule.
Delinquent (120 days): Loans marked as "Delinquent (120 days)" indicate that the borrower is between 121 and 180 days relative to the original payment schedule.
Delinquent (180 days): Loans marked as "Delinquent (180 days)" indicate that the borrower is more than 180 days late relative to the original payment schedule.
Written Off: Loans are "Written Off" when their recovery prospects become very low. Typically, these will be loans that are significantly delinquent, and for which liwwa's collection process is not yielding positive recovery outcomes. Loans are written off by a decision of liwwa's Collections Committee (see Write-Offs below).
Loans marked as "Written Off" indicate that the loan is likely to be charged-off without recovering the remaining outstanding balance. This status is determined by liwwa’s Collections Committee based on our Write-Off policy, irrelevant of how long the loan has been marked as delinquent. In some cases, loans marked as "Written Off" can still be recovered.
Repaid: Loans marked as "Repaid" indicate that the borrower has covered all outstanding dues. Some loans marked as "Repaid" may be subject to lawyers’ success fees, which means that the actual amount received by the investor will be less than the initial expected amount (see Legal Action below).
Legal Action
If internal collection efforts do not yield results, liwwa transfers the case to a specialized legal firm for legal action. All legal fees will be passed on to the borrower where possible. Furthermore, liwwa covers the outstanding costs of retaining a lawyer and applicable court fees. However, legal firms typically charge 7.50% - 10.00% of collected payments as success fees. Therefore, loans recovered through legal action are remitted to investors net of success fees.
Restructured Loans
In certain rare cases, where the borrower has demonstrated significant business interruptions, the Collections Committee may agree to restructure a loan based on a new payment schedule. Loans that have been restructured after missing three or more payments can return to "Current" status after making 3 consecutive on-time payments of their restructured schedule. While loans are typically restructured after the borrower has missed three or more payments, loans can also be restructured without three payments being late. In this case, the loan will remain in the "Current" status after restructuring, as long as the borrower continues to pay on-time according to the new schedule.
Loans that had any payment scheduled during the COVID-19 pandemic, (2020-03-01 to 2021-06-30) will also be moved to "Current" status after restructuring, as long as the borrower continues to pay on-time according to the new schedule.
Early Repayment
liwwa seeks to offer flexibility to borrowers, particularly where doing so will increase the likelihood of collection and thus safeguard your investment. For this reason, liwwa provides an incentive in the form of a discount for borrowers to repay their loans early. This incentive is designed to ensure that liwwa investors earn roughly the same IRR when a borrower pays early as they would have if the loan had been paid according to its payment schedule. The discount will appear as an Early Repayment Discount on the last payment of the loan.
Write-Offs
liwwa's Collections Committee conducts write offs on a quarterly basis. A write-off is a conservative measure, taken only when a loan is showing no progress in its recovery prospects. In all cases, no loan may be written off unless a full effort has been made to recover its balance as per the company's Collection Process and Policy. Even after a write-off, liwwa continues to pursue relevant legal and collections action to recover the loan's balance.
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.
What is Auto-Invest?
liwwa's Auto-Invest tool allows investors to automate their investment strategy by specifying their risk appetite, investment horizon, and level of diversification. Auto-Invest then creates and maintains a diversified, balanced loan portfolio on the investor's behalf. The tool invests an investor's available funds across many loans on a daily basis according to their strategy. This removes the burden of logging in frequently to make new investments, and ensures that any newly added funds and loan repayments are efficiently reinvested into new loan opportunities.
Currently, over half of liwwa's active investors are taking advantage of this feature to increase diversification, reduce volatility, and earn higher returns. Learn more about these benefits and Auto-Invest's historical performance compared to manually choosing loans in this blog post.
We have provided a simple guide below for investors setting up Auto-Invest for the first time to understand more about how the tool works:
How do I choose the Settings for Auto-Invest?
There is more than one way an investor can go about setting up the Auto-Invest tool, keeping in mind that there is no single "best" combination. Each investor should determine their personal risk tolerance and investment goals and choose their Auto-Invest parameters on that basis. The guide below explains how each parameter works so that investors can make informed decisions when setting up the tool.
Portfolio Distribution by Risk allows an investor to choose their target allocation across risk classes based on their risk appetite. If an investor has a high appetite for risk and chooses 30% for Class D, Auto-Invest will make investments that are more concentrated in the relatively few Class D loans currently offered on the platform. You can learn more about liwwa's risk grading system here.
Investors can opt for liwwa’s default risk allocation (Class A - 45%, Class B - 35%, Class C - 17%, Class D - 3%), which matches liwwa's overall loan portfolio. This means Auto-Invest would spread the investor's funds relatively evenly across all loans offered on the platform.
For example, if a new investor added $1,000 to their liwwa account today and activated Auto-Invest with the default risk allocation, Auto-Invest would invest $450 across the 9 Class A loans currently open on the platform ($50 per loan), $350 in Class B loans, $170 in Class C loans and $30 in Class D loans. After a few days, once the first batch of loan repayments for $55 is paid, Auto-Invest would then re-invest the $55 in a similar fashion, $24.75 in new Class A loans, $19.25 in Class B, etc.
liwwa typically offers loans with repayment periods between 6 to 18 months (loan tenor). Most liwwa investors have a long investment horizon of five or more years, so it generally makes the most sense to invest across the full spectrum of loan tenors offered. When an investor is ready to exit their liwwa investment, they can disable Auto-Invest and begin regularly withdrawing their repayments until recovering their full investment plus profits within about one year.
Investors that diversify their portfolio across many loans on liwwa's platform have witnessed more stable returns and reduced risk. Therefore, liwwa recommends investing only a small portion of your overall portfolio in any one loan. Auto-Invest automatically attempts to divide your funds among the most possible loans based on your settings. An investor using the default settings would typically be invested in 200-300+ loans within one year, with less than 1% of their portfolio invested in each loan.
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:
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:
On the marketplace
Once the contract is signed, the loan is then hosted on liwwa’s loan marketplace.
The Unlimited Investor tier was developed with our investors in mind, and makes it even more attractive to invest with liwwa for the long term. With this tier, investors that would like to invest $50,000 or more with liwwa can become an “Unlimited Investor”. In addition to an uncapped investment limit, Unlimited Investors who add at least $50,000 to their account, will also be able to make 3 free withdrawals annually, rather than 3 free withdrawals for all time, as we understand that this is an essential feature for those with a longer investment horizon on our platform.
Process to become an Unlimited Investor
If interested in becoming an Unlimited Investor with liwwa, please email [email protected] providing the following information with the Email subject: “Unlimited Investor Application”:
Once our Investor Team reviews your application, we will reach out to you to schedule a virtual appointment to discuss the matter further. Additionally, a contract will be provided to be signed to confirm that you understand how liwwa operates, the risks involved with investing on a peer-to-peer platform, and confirmation that you have read and understand our Investor Agreement. Please note that while the $50,000 cap will be removed, we will continue to restrict net deposits on the liwwa platform to 10% of an investor’s liquid assets. After this process is complete, you will be approved to become an unlimited investor with liwwa!
* The historical return range is based on the annualized Internal Rate of Return (IRR) of liwwa investors' actual portfolios, taking into account late payments, defaults, write-offs, recoveries and service fees for all loans originated since 2013. The range represents the 15th to 85th percentile of returns for investors whose accounts have been open for at least 12 months. Individual results may vary. Historical performance is no guarantee of future returns, and the historical return range is not intended as investment advice or as a guarantee of the performance of investment opportunities.
Important Note: liwwa, Inc. does not guarantee investors a return and all investments carry risk, learn more about the investment risks. All transactions enabled through liwwa.com are subject to Terms of Service and the Investor Agreement.
If at any point in the future, liwwa ceases to exist as a company, becomes insolvent, or faces any other distribution event, investors may experience delays in repayment of loans they have invested in. In this unlikely event, investors may lose a portion of or all of their invested funds.
All rights reserved. Copyright © 2022
* The historical return range is based on the annualized Internal Rate of Return (IRR) of liwwa investors' actual portfolios, taking into account late payments, defaults, write-offs, recoveries and service fees for all loans originated since 2013. The range represents the 15th to 85th percentile of returns for investors whose accounts have been open for at least 12 months. Individual results may vary. Historical performance is no guarantee of future returns, and the historical return range is not intended as investment advice or as a guarantee of the performance of investment opportunities.
Important Note: liwwa, Inc. does not guarantee investors a return and all investments carry risk, learn more about the investment risks. All transactions enabled through liwwa.com are subject to Terms of Service and the Investor Agreement.
If at any point in the future, liwwa ceases to exist as a company, becomes insolvent, or faces any other distribution event, investors may experience delays in repayment of loans they have invested in. In this unlikely event, investors may lose a portion of or all of their invested funds.
All rights reserved. Copyright © 2022