Part A: The borrower
Credit analysis
Key takeaways
- A lending decision is made within the lender's own philosophy: risk appetite, sector focus and portfolio positioning explain why two lenders can reach opposite decisions on the same application.
- A plausible borrower is not enough: the opportunity must also fit the lender's portfolio concentration and strategic sector focus.
- Each stage of the analysis is a decision gate, not just a data-gathering step, so a proposition that fails any gate is declined however strong it looked at an earlier one.
- The credit decision ends in one of four outcomes: approve as proposed, approve with modified terms, decline, or refer upward for a larger exposure.
- Disbursement is not the end: a lending decision commits the lender to a monitoring decision on how closely, how often and against what triggers.
This paper's own learning outcomes centre on making effective corporate lending decisions, so where CCP Financial Statements Analysis for Credit Managers introduced the five-stage analysis sequence as an analytical process, this chapter treats it as a decision-making discipline: at every stage, the question is not just 'what does the data show' but 'what should the lender actually do about it'.
Lending philosophy
A lending decision is only as sound as the philosophy behind it. Two Kenyan lenders can look at an identical loan application and reach opposite decisions, not because one is wrong, but because their risk appetite, sector focus, and portfolio positioning differ. A decision-maker's first discipline is knowing which philosophy they are deciding within, not treating every application as a fresh, unconstrained judgement call.
Identifying credit opportunities
Decision-quality opportunity identification goes beyond spotting a plausible borrower, it weighs whether the opportunity fits the lender's current portfolio concentration (a fifth horticulture exporter in an already horticulture-heavy book is a different decision from the first), and whether pursuing it advances or dilutes the institution's strategic sector focus.
Stages of analysis
Applied as a decision framework rather than a checklist: each stage is a decision gate, not merely a data-gathering step. A proposition that fails at screening should be declined before analytical resources are spent on it; one that clears financial analysis but fails management assessment (see the chapter on the management factor) should still be declined, however strong the numbers looked.
The credit decision
The actual decision synthesises every earlier stage into one of a limited set of outcomes:
- Approve as proposed.
- Approve with modified terms (tighter covenants, more security, a lower amount).
- Decline.
- Refer upward for a larger exposure.
A Kenyan credit committee's real skill is less in running the analysis (increasingly standardised across the industry) than in weighing conflicting signals, strong financials but weak governance, good management but a declining sector, into one defensible decision.
Credit monitoring
The decision does not end at disbursement. A lending decision made today implicitly commits the institution to a monitoring decision tomorrow, how closely, how often, against what triggers, developed fully in the chapter on credit monitoring and control but framed here as the decision's own natural continuation, not a separate later concern.
Exam tip
This paper's case studies typically present a completed analysis and ask what decision follows, not ask you to repeat the analysis itself (that is the territory of CCP Financial Statements Analysis for Credit Managers). Practise moving directly from a given set of findings to a reasoned approve/decline/modify recommendation.
Self-check
(a) A proposition clears financial analysis comfortably but fails management assessment. State the decision this paper's framing calls for, and explain why. (3 marks)
(b) Explain the difference between analysing a credit proposition (the focus of CCP Financial Statements Analysis for Credit Managers) and deciding on it (this paper's focus). (3 marks)
Show worked answer
(a) Decline, notwithstanding the strong financial analysis. Each stage of the analysis sequence is a decision gate, not merely a data-gathering step, so a proposition that fails at any gate, however strong its performance at an earlier gate, should not proceed on the strength of that earlier result alone (3 marks).
(b) Analysing a proposition produces findings, ratios, risk observations, qualitative assessments; deciding on it converts those findings into one of a limited set of actual outcomes (approve, approve with modified terms, decline, or refer upward), weighing and synthesising the findings rather than simply restating them (3 marks).