Credit
Core concepts
Credit work examines whether a borrower can and will repay. Candidates must know the classical 5 Cs - character, capacity, capital, collateral and conditions - and be able to distinguish capacity (ability to generate cash) from collateral (a fallback, not a source of repayment). Expect questions on the lending process and credit appraisal, credit scoring and rating models, financial analysis of borrowers (gearing, interest cover, DSCR, liquidity), covenants, security and perfection of charges, loan documentation, credit monitoring and early-warning signals, classification of non-performing loans, provisioning, and the Basel capital framework. Credit risk must be distinguished from market, liquidity and operational risk.
Traps
- Assuming strong collateral cures weak cash flow.
- Confusing DSCR with interest cover - DSCR includes scheduled principal repayment.
- Mixing preventive controls (appraisal, limits) with corrective ones (collection, recovery).
- Forgetting that guarantees and off-balance-sheet commitments are credit exposures.
- Treating a past-due account as automatically non-performing without checking the policy's days-past-due rule.
Worked example
A borrower has EBITDA of KSh 2.4m, interest of KSh 0.6m and scheduled principal of KSh 0.6m. DSCR = 2.4m ÷ (0.6m + 0.6m) = 2.0. Interest cover alone would be 4.0 times, which looks far stronger; the DSCR of 2.0 is the more honest test of debt service capacity. Many lenders set a minimum of 1.25 to 1.50.
Rule of thumb: lend on cash flow, secure on collateral, monitor on conduct. Collateral protects the lender after default; it does not create the repayment.