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Notice of AGM

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Credit is one of the cornerstones of the Lewis business model. Credit-based sales account for 75% of revenue and consequently one of the key risks facing the Group is the granting and management of credit.

Credit

Credit is one of the cornerstones of the Lewis business model. Credit-based sales account for 75% of revenue and consequently one of the key risks facing the Group is the granting and management of credit.

The Company operates a centralised credit function covering credit risk scoring, credit approval, underwriting, fraud prevention and customer account management.

The Group's total contractual arrears is calculated as all arrear amounts as a percentage of the outstanding balance.

Credit risk management

The Company applies one of the retail industry's most refined technology-based credit scoring systems to determine the credit risk of applicants. Credit scorecards were introduced in 1998 and these are regularly adjusted to take account of changing customer behaviour and progress in credit risk management. A third generation scorecard is currently in use.

During the past year, an average of more than 31 000 new credit applications were processed per month. These applications are transmitted by the stores via the VSAT Satellite Network to the Transact credit processing system which is the engine room for account applications. Transact interfaces with several databases including the credit risk scorecard, client payment history and the national loans registry before requesting information from independent credit bureaus. Transact also interacts with the Hunter fraud detection system. Lewis has a track record of low fraud rates.

Superior Credit Approval Process

The score assigned to an applicant is then used together with the applicant's income to calculate an initial credit limit for the new customer. This credit approval process takes between eight and 15 seconds to complete, with the average processing time in 2005 being nine seconds. This allows for an immediate response to the customer in the store.

The scorecard decision may be appealed by the store manager to the referrals department at head office in conjunction with divisional and regional staff. The interaction between the store manager and the customer is vital in the credit granting process.

In the past year, 20.5% (2004 - 22.3%) of new credit applications were declined.

Behavioural scorecards were introduced for existing customers in January 2005 and it is anticipated that these risk evaluation techniques will increase the pool of re-servable business and reduce credit risk levels.

Second generation credit application scorecards were developed and implemented for Best Electric and the foreign branches in November 2004.

Lifestyle Living's credit operation was also successfully integrated into the Lewis credit environment.

A payment rating system, measuring payment performance over the lifetime of the account as well as the payment performance over the last three months, is used to manage customer credit.

This enables Lewis to offer an "open to buy" (OTB) facility to customers which assists store sales staff in selling more effectively.

Credit collection

The success of the Lewis Group's credit collection process can be attributed to the decentralised nature of the operation, with stores being responsible for the cash collection and follow-up of their defaulting customers.

The declining bad debt trend of the past few years has continued, with bad debts and impairment charge reducing by 11.7% during 2005 to R101.6 million. This improvement can be ascribed to the favourable macroeconomic environment prevailing in South Africa combined with sophisticated credit granting criteria and effective follow-up.

The performance of each debtors clerk's book is monitored and these clerks are incentivised to meet monthly and quarterly targets.

Regional account managers support the store collection operation and report through to a divisional credit manager.