1.1 Credits

In banking, a credit (credit facility) is money, or a promise of money, that a lender makes available to a borrower on the understanding that it will be repaid, usually with interest and charges, within an agreed period and on agreed terms. Lending is the main source of income for commercial banks, microfinance banks and SACCOs, and it is also their largest risk, because depositors' money is what is lent out. Credit administration is the work done after a facility is approved: documenting it, disbursing it, monitoring repayment and recovering arrears. Example: a deposit-taking SACCO in Bura advances a member Ksh 300,000 repayable over 24 months, and the credit administration officer sets up the repayment schedule and monitors every instalment.

Key terms

• Principal: The amount lent or drawn, on which interest is calculated.
• Interest rate: The price of credit, expressed as a percentage per year; in Kenya banks price loans as a reference rate plus a premium that reflects the borrower's risk, under the Central Bank of Kenya's risk-based credit pricing framework.
• Tenor (term): The period over which the facility is to be repaid.
• Instalment: The regular payment of principal and interest, often calculated on a reducing balance.
• Security (collateral): Assets or guarantees the lender can rely on if the borrower fails to pay.
• Covenants: Conditions the borrower must keep, such as providing financial statements or keeping a minimum turnover through the account.
• Default: Failure to pay an amount on its due date or to keep another term of the agreement.

Types of credit facilities

• Overdraft: Permission to draw a current account below zero up to an agreed limit, repayable on demand and reviewed yearly; interest is charged only on the amount used.
• Term loan: A fixed amount disbursed once and repaid in instalments over a set period, used for business expansion, equipment or personal needs.
• Asset finance: Finance for vehicles, machinery or equipment, where the asset itself is the main security, often with the lender's interest noted on the logbook.
• Mortgage loan: A long-term loan to buy or build property, secured by a charge over the land registered under the Land Registration Act.
• Trade finance: Facilities that support trade, such as letters of credit, guarantees, invoice discounting and local purchase order (LPO) financing.
• Check-off (salary-backed) loans: Loans to employees repaid through deductions from salary by the employer under a check-off agreement, common for teachers and civil servants.
• Digital (mobile) loans: Small short-term loans applied for and disbursed through mobile banking or mobile money platforms, scored automatically.
• Credit cards: A revolving facility with a limit, used for purchases and repaid monthly in full or in part.

Classification of credit

• By purpose: Consumer credit (personal needs), commercial credit (business), agricultural credit, and mortgage credit.
• By term: Short term (up to one year), medium term (one to five years) and long term (over five years).
• By security: Secured credit, backed by collateral, and unsecured credit, backed only by the borrower's income and character.
• By repayment pattern: Instalment credit, revolving credit and bullet (single payment at maturity) credit.

The 5 Cs of credit

Lenders assess a borrower against five factors before approving credit, and the same factors are watched during monitoring.

• Character: The borrower's honesty and repayment history, checked through Credit Reference Bureau reports and the borrower's account conduct.
• Capacity: The ability to repay from income or business cash flow, measured by debt service ratios.
• Capital: The borrower's own investment or net worth, which shows commitment and absorbs losses.
• Collateral: Security available to the lender if repayment fails.
• Conditions: The purpose of the loan and the economic and industry conditions that affect the borrower.

Worked example: reducing-balance interest for the first months

A loan of Ksh 300,000 at 14% per year is repaid in equal principal instalments over 24 months.

Monthly principal = 300,000 ÷ 24
= Ksh 12,500

Month 1 interest = 300,000 × 14% ÷ 12
= Ksh 3,500
Month 1 payment = 12,500 + 3,500
= Ksh 16,000

Month 2 interest = (300,000 − 12,500) × 14% ÷ 12
= 287,500 × 0.14 ÷ 12
= Ksh 3,354.17
Month 2 payment = 12,500 + 3,354.17
= Ksh 15,854.17

The credit administrator loads such a schedule into the loan system so that each due date and amount can be monitored.