The Effect Of Financial Constraints On Small And Medium Enterprises Finance Essay

The Effect Of Financial Constraints On Small And Medium Enterprises Finance Essay CHAPTER 1 Introduction The relation between financial constraints and the survival and growth of the SME has been document across Africa and world. The researcher will look at the economy of Kenya and make evident of the financial constraints that are facing the small and medium enterprise hence affecting the survival and growth of small and medium size enterprises. There is a need to research in this field since the SME are the backbone of the Kenyan economy. In fact with the growing inflation, not to mention the difficulties the SME have in accessing the financial aids they are barely making it to the second birthday. Overview of the Context Kenyan is a developing country in Africa. The increasing role of the SME sector is confirmed by the recently completed Kenya 2003 Economic Survey, According to the survey, total employment recorded in the informal sector increased from 3.7 employees in 1999 to 5.1 million in 2002, while the formal sector increased only from 1.74 million to 1.76 million employees during the same period. However, the growth of the informal sector in number of employees does not necessarily reflect growth and high productivity of the enterprise itself, as the number of informal sector companies grew largely because of the depressed formal economy and under employment in the formal firms. Having said that, the SME in Kenya faces a lot of challenges and one of them is the financial constrains which really inhibits its growth and survival. Hence the call for this research paper. The researcher will use the research methodologies to extract evidence that really financial constraints is a major factor that affect the growth and survival of the SME in Kenya. Statement of the problem. In Kenya, SME have little access to finance, which thus hampers their emergence and eventual growth and survival. Financial constraint remains a major challenge facing SME in Kenya Wanjohi and Mugure (2008) and this will be evidence in this research paper. Their main sources of capital are their retained earnings and informal savings and loan associations, which are unpredictable and not very secure. SME can rarely meet the conditions set by financial institutions, which see them as a risk because of poor guarantees and lack of information about their ability to repay loans. The financial system in most of Africa is under-developed however and so provides few financial instruments. The researcher has come up with some of the reasons why SME find it hard to access finance in Kenya: High interest rates by the financial institutions Delay in the loan processing due to lack of securities and other requirements by the financial institutions. Some of the SME do not have a good track records hence most of the local banks fear to give them the unsecured loans. Banks are particularly nervous of smaller businesses due to a perception that they represent a greater credit risk. Kariukis (1995) study of bank credit access in Kenya illustrates this point further. A survey of 89 small and medium-scale firms in manufacturing and service industries, combined with secondary information from commercial banks, found that from 1985 to 1990 the average real volume of credit for the sample firms fell, except for the year 1986 which showed a marginal increase of 1.5 per cent. Small scale borrowers were found to be faced with higher nominal interest rates at higher inflation rates in the latter half of the 1980s. Moreover, the explicit transactions costs of borrowing were found to be high in relation to interest costs. Because the information is not available in other ways, SME will have to provide it when they seek finance. They will need to give a business plan, list of the company assets, details of the experience of directors and managers and demonstrate how they can give providers of finance some security for amounts provided. The researcher recognized that in the current context of the most severe financial and economic crisis in decades, various factors such as increased risk aversion, decreased liquidity, bleak prospects for economic growth, etc. are having or are expected to have a highly negative effect on SME and entrepreneurs access to short and long term financing. Small firms are particularly vulnerable because: It is more difficult for them to downsize since they are already small. They are individually less diversified in their activities. They have weaker financial structures or lower capitalization. They have lower or no credit ratings. They are heavily dependent on credit. They have fewer options for finance, especially in financial markets. With this in view, the measures that most governments are taking or planning to take to counteract the effects of the crisis and stimulate their economies should include easing SME and entrepreneurship access to finance. Numerous money lenders in the name of Pyramid schemes comes up, promising hope among the SME that they can make it to the financial freedom through soft borrowing. The rationale behind turning to these schemes among a good number of entrepreneurs is mainly to seek alternatives and soft credit with low interest rates while making profits. Objectives The general objective of the research is to establish the effects that the financial constraints have on the survival and growth of the small and medium enterprises in Kenya. Some of the specific objective that the researcher will bare in the study will evolve around the small and medium sized enterprises in Kenya. To establish effect of economic activities on the survival and growth of the SME in Kenya. To assess the impact of high interest rates by local commercial banks on the survival and growth of the small and medium sized enterprises in Kenya. To establish the effect of commercial banks lending policies and access to credit on the growth and financial performance of SME in Kenya. To establish the effect of the firm capital structure on the growth and survival of the small and medium enterprises in Kenya. To establish the impact of government policies in Kenya on the economic growth on the survival and growth of the small and medium business. 1.5 Research Questions How do high interest rates affect the survival and growth of the firm in Kenya? What effect do the banks lending policies and access to credit have on the growth and survival of the SME in Kenya? How do the government policies in Kenya on the economic growth affect the survival and growth of the small and medium sized business? What effect do the external borrowings have on the survival and growth of the small business enterprises in Kenya? How the economic activities affect the growth and survival of the firm in Kenya? 1.6 The significance of the study. Small and medium sized enterprises are the backbone of virtually all economies in the world. However, the process has long been constrained by the limited availability and accessibility of financial resources to meet a variety of operational and investment needs within the SME sectors. SME and entrepreneurs play a significant role in all economies and are key agents of employment, innovation and growth. A significant number of entrepreneurs and SME could use funds productively if they were available, but are often denied access to financing, thus impeding their creation, survival and growth. Although SME form a broad spectrum as far as their relative size, sector of activity, seniority, location and performance are concerned; there is a vital need for innovative solutions for their financing in particular for innovative and high- growth SME in a globalised knowledge-based economy. The researcher however will be interested to know how does this financial constraints really affect the growth and survival of SME and she will undertake the study t establish the necessary fact that make the growth of SME restrained in Kenya. 1.7 The scope of the study. The Kenya government is commitment to foster the growth of SME emerged as one of the key strategies in the 1986 report Economic Management for Renewed Growth. It was reinforced as a priority in the 1989 report, The Strategy for Small Enterprise Development in Kenya a document that set out the mechanisms for removing constraints to growth of the SME sector. In 1992, the government published the SME policy report, Sessional Paper No. 2, Small Enterprises and Jua Kali Development in Kenya. This report was reviewed in 2002, leading to a new policy framework that provides a balanced focus to SME development in line with the national goals of fostering growth, employment creation, income generation, poverty reduction and industrialization SME in Kenya have not seen much development since Kenyan independence due to financial constraints and other factors that are not going to be discussed on this research paper. Small enterprises have a potentiality of boosting a kenya economy. Although they are faced by many challenges, they still have opportunities to grow. These include linkage with multinational companies, networks with other businesses, diversification of market and products, enabling environment and franchising opportunities which is geatly being encouraged the coalition government that is currently running the government of Kenya although the impact has yet to felt on the small and medium enterpeises due to its size and limied resources. CHAPTER 2 LITERATURE REVIEW 2.1 Introduction. Kenya being a developing country, the researcher will borrow some of empirical research done by experts in other developed and developing countries. A large number of empirical studies have addressed the issue of financial constraints, mainly in order to study the relation between the firms investments and the availability of internal and external funds. Under perfect capital markets, internal and external sources of financial funds are perfectly substitutable Modigliani and Miller (1958), so that the availability of internal funds should not affect investment decisions. Small firms cannot exploit economies of scale in the same way as large firms can they face more financial constraints. Since young companies have not accumulated sufficient cash flow and are unable to rely on bank financing, they have to depend on the equity investments. The analysis of the effects of financial constraints on the firm survival and growth therefore is important. 2.2 Theoretical account of financial constraints The financing constraint literature has been the first to recognize that partitioning firms helps to provide important insights into their behaviors. The pioneers in this field have undoubtedly been Fazzari, Hubbard and Petersen (1988) who point out the fact that firms are definitely not homogeneous. They classify firms according to their dividend payout ratio. Their main aim in doing this is to show that firms that have different dividend payout ratios and therefore belong to different categories, have differential access to finance. Some firms are financially constrained while others are not. Following Fazzari, Hubbard and Petersen (1988), a number of studies have tried to distinguish between various categories of firms. For instance, Whited (1992) uses measures of indebtedness, interest coverage, and whether or not a firm has a bond rating to discriminate among firms. Kaplan and Zingales (1997) use both quantitative and qualitative data to distinguish among firms.Bond et al (1999) classify firms according to whether a firm operates in a bank-based or market-based system.Cleary (1999) uses a financial constraint index to differentiate between firms, which takes into account a number of factors such as firm liquidity, leverage, profitability, and growth. Carpenter and Guariglia (2003) use the number of employees to distinguish between large and small firms. However, the factor common to all these studies is that they have tried to discriminate only within firms that have access to capital markets. A high percentage of Small and Medium Scale Enterprises remains in the informal sector with limited opportunities for growth. Africa has one of the largest informal sectors in the world, World Bank, (2006). In Kenya the availability of finance tends to be extremely limited and difficulty to get external financing as researcher came to find out on this quest on the Kenya town and from the SME managers. The SME financial resources are usually restricted to equity capital and bank debt to those who are able to access it. As the business establishes itself, however, it gains access to resources from its own productive activity and sources of external finance. According to Aghion (2007), access to external finance improves market selection by allowing small firms to be more competitive. Additionally, financial accessibility significantly facilitates the growth of firms. Unlike large firms, SME are restricted in their funding options. Therefore, a new hierarchy of sources of finance for SM E can be defined. In this new hierarchy of sources of finance for SME there are three sources of finance, internal finance, debt finance and new capital contributions. Large firms that have access to capital markets are able to issue equity; however, SME do not normally have access to this form of finance of new capital contributions Cost of new debt financing Cost of internal finance 2.3 The Financial constraint variables According to many studies, small firms do not even recognize their own growth potential Scott Rosa (1996).This is more evident in the research since most of the managers of the small and medium size enterprises are more concerned about the survival of the firm rather than the growth of the firm in most Kenya region. This research however will look at some of the variables that help to clarify this phrase in the Kenyan market. 2.3.1 The effect of government policies. Similar evidence regarding the lack of importance given by small scale enterprises to tax policies is also found in Southern Africa, including Niger, Botswana, Swaziland, Lesotho, Malawi, and Zimbabwe Mead (1994). Studies for these locations found little concern for government regulations, except from those enterprises concentrated in targeted locations and specific sectors such as food processing. Instead the greatest concern for the majority of those surveyed was the lack of access to working capital, credit and finance. 2.3.2 The effect of commercial bank lending rates and access to credit. According to Holmes and Kent (1991), SME are characterized by 2 factors: they cannot issue equity and are concerned about ownership and control. Small firms usually do not have the option of issuing additional equity to the public. Even if they were able to issue private equity, managers of SME would restrain from doing so as issuing equity would lead to a dilution in ownership and control. Therefore, managers of SME will usually prefer to go for debt financing, mainly comprising of bank financing. On the other hand, managers of larger firms usually consider a broader range of funding options. As Steel (1994) highlights, high transactions costs and risks associated with small loans, a lack of collateral and an historical orientation towards larger enterprises, continue to restrict small scale enterprise access to formal credit. This no different from Kenya where access to credit is really issue and Kariukis (1995) study of bank credit access in Kenya illustrates this point further. 2.3.3 The impact of government policies Data on the SME sector in Kenya is scarce, although the National SME Baseline Survey provides comprehensive and reliable information; it has not been updated since 1999 and does not contain information for medium-sized firms. The survey indicates that the contribution of the SME sector to GDP increased from 13.8 percent in 1993 to 18.4 percent in 1999.Thia shows that the government policies put in place in Kenya also do affect the growth and survival of the small and medium size enterprises. 2.3.4 The effect of internal capital structure. It should be noted that growth is not the objective of all firms. For example, when firms are faced with serious difficulties during periods of economic downturns, they may shift their objective from growth to survival waiting for better economic conditions to expand. This has been observed in crisis economies where firms downsize and try to keep their costs as low as possible until the economic situation improves. Some firms may choose to remain small if their entrepreneurial capabilities are inconsistent with large size because financial constraints force the poor to start small business, the lack of firm growth could result in social immobility where the small firms remain poor. On the other hand, if small firms have the potential of becoming large, poor firm owners could become rich as their firms expand. Moreover, firm growth in Africa, where technology is usually labour intensive, is usually associated with job creation, which in turn is the key to poverty reduction. Therefore, whether firms have potential to grow or remain small has important policy implications. Slow growth of firms in Africa has been explained as being the result of the lack of access to financial resources McCormick et al. (1997) and Biggs and Srivastava, (1996). This is particular to developing economies where financial markets are under-developed. 2.4 Conceptual Framework. The financial constrained as outlined above is a diverse business phenomena that need to be researched since its the back bone of any business growth and survival may it be a small business in the slums or a major manufacturing business. The researcher is mainly focused on the small and unquoted firms in Kenya. The local commercial banks have a role to play in all this and so is the government. The firm own capital structure also do contribute a lot to the survival and growth of the firm. In Kenya the economic activities that are carried out also influence a lot the GDP of the country hence the economic growth. CHAPTER 3 METHODOLOGY 3.1 Introduction The researcher will mainly use secondary research methodology although the tertiary methodology or the search tool will also be used for the purpose of this research. This will include books, magazines, newspapers to collect data and information regarding the topic. The researcher will also make use of the internet to obtain information about SME and other related information. Secondary data are data that have been collected for some other purpose. Secondary data can provide a useful source from which to answer the research question(s). Punch (1998) mentions several advantages of using existing data. Expenditure on obtaining data can be significantly reduced and data analysis can begin immediately, so saving time. Also, the quality of some data may be superior to anything the researcher could have created alone Thomas (2004). On the other hand, the chosen research method also has several disadvantages such as data that have been gathered by others for their own purposes can be diffic ult to interpret when they are taken out of their original context. It is also much more difficult to appreciate the weak points in data that have been obtained by others. 3.2 Research Area The propose research area is the SME in Kenya. The length of time within which to finish this project will be estimated one month since time and resources might be a major constraint. The researcher proposes to choose at least 15 major towns in Kenya since Small business are all over the country and do research in a at least 10 firms in each town, so as to capture the operation of financial reporting in the country so as to ascertain whether financial constraints are really a major constraint in the survival and growth of small and medium size business in Kenya. As a mean of testing the hypothesis of the study, the researcher will apply the methods below of data collection. 3.3 Observation To judge the effect of financial constrains on survival and growth of a small business in Kenya. The researcher will have to visit the local banks and financial institutions and find out how ones access to finance limits the growth of the business. I propose to use time-series method to judge the observation. The observation will assist me to ascertain that the formal financial sector has provided very little or no service to small business men hence they are unable to finance their small business. 3.4 Interview This will be conducted individually. Structured and unstructured questions will be used to collect information on the subject under investigation. This is to help the researcher obtain responses to questions like; in your view is business growing? How best can it be financed? ,and others. I propose to conduct the interview in such a manner that each sector will have equal probability of being selected. Interviews will enable me to do most of the qualitative part of my research, and the information gained here is usually more realistic. 3.5 Questionnaire I will prepare systematic and well organized questions that will enable me; have responses to the questions raised in the introduction and moreover test the hypothesis of the research. This is demonstrated in Chapter 1 where several questions to this effect have been formulated. 3.6 Data Analysis I will not only rely solely on the information from the various responses from the varied sectors but, also the statistical publications from international organization in Kenya who have done a similar research on SME. I propose to make a thorough analysis of the official and unofficial data received. I will propose the use of quantitative and the qualitative analysis. REFRENCES Punch, K F. (1998), Introduction to social research: Quantitative and qualitative approaches. Kariuki N (1995) The Effects of Liberalization on Access to Bank Credit in Kenya, Small Enterprise Development, 6 (1), 15-23 Central Bureau of Statistics, International Center for Economic Growth, and K-Rep Holdings, National Micro and Small Enterprise Baseline Survey, 1999. Central Bureau of Statistics, Ministry of Planning and National Development, Economic Survey, 2003 Wanjohi, A.M. and Mugure, A.(2008). Factors affecting the growth of MSEs in rural areas of Kenya: A case of ICT firms in Kiserian Township, Kajiado District of Kenya. Republic of Kenya (1992). Sessional Paper No. 2 on Small Enterprises and Jua Kali Development in Kenya. Government Printer, Nairobi Biggs, T. and Srivastava, P. (1996) Structural Aspects of Manufacturing in Sub-Saharan Africa: Findings from a Seven Country Enterprise survey, World Bank Discussion paper No. 346. Modigliani, F. and Miller, M. (1958), the cost of capital, corporation finance and the theory of investment. Aghion, P., Fally, T. and Scarpetta, S. (2007): Credit constraints as a barrier to the entry and post-entry growth of firms, Economic Policy, vol. 22 (52): 731-790. Savignac, F. (2008): The impact of financial constraints on innovation: what can be learned from a direct measure? Economics of Innovation and New Technology, Volume 17 (6):553-569. Petersen, M. and Rajan, R. (1994): The benefits of firm-creditor relationships: Evidence from small business data, Journal of Finance, 49, 3-38. Aghion, P., Fally, T. and Scarpetta, S. (2007): Credit constraints as a barrier to the entry and post-entry growth of firms, Economic Policy, vol. 22 (52): 731-790. World Bank. (2006) Doing Business in 2005. The World Bank. Washington D. C., USA. Scott, M. Rosa, P. (1996). Opinion: Has Firm Level Analysis Reached its Limits? Time for a rethink. International Small Business Journal 14, 4, 81-89. Mead D (1994) The legal, regulatory and tax framework and small enterprises, Small Enterprise Development, 5 (2), 10-17 Steel W (1994) Changing the institutional and policy environment for small enterprise development in Africa, Small Enterprise Development, 5 (2), 4-9 Kaplan, S. and L. Zingales (1997), Do investment-cash-flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics, 112, pp169-216. Whited, T. (1992), Debt, Liquidity Constraints and Corporate Investment:Evidence from Panel Data, Journal of Finance, 4 ,pp1425-1460. Kaplan, S. and L. Zingales (1997), Do investment-cash-flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics,112, pp169-216. Carpenter R.E and A. Guariglia (2003), Cash Flow, Investment and Investment Opportunities: New Tests using UK panel Data, Unpublished. Fazzari, S., G. Hubbard, and B. Petersen (1988), Financing Constraints and Corporate Investment, Brookings Papers on Economic Activity, 1, pp141-95. Holmes, S. and Kent, P., (1991), An Empirical Analysis of the Financial Structure of Small and Large Australian Manufacturing Enterprises, Journal of Small Business Finance, 1 (2), pp141-154. QUESTIONNAIRES. Why did you choose to start a business in this area? Does your business follow the government policies in regard to paying taxes Yes â‚ ¬Ã‚  No â‚ ¬Ã‚  What is the number of the employees in your business? How is the business in this area affected by the economy trends preferring at the moment? Who is the highest ranking member of your business? What is the annual turnover of your business? Where does your business get the initial capital to start it up? What is your source of financing? What form of financial instruments do you have in place? Which banking or financial sectors do you operate in your business? How do the interest rates affect your business? What are some of the difficulties do you experience when getting bank access? What can you say is the reason for your business failure to grow? How is the government policies put in place in Kenya helping you achieve your financial goals? What are the major issues does your enterprise face when accessing credit facilities in the banking sectors in the Kenya? What would you say is the challenge facing the small business in Kenya in terms of finances?

Theism vs Antheism

Do you believe in God? God is a being that no one has ever been able to prove exists. When someone chooses to believe in God; that decision is based solely on their faith. It is a decision that someone decides in their heart, which is often based on experiences in their life; whether they are simply personal experiences or religious ones. It is not a secret to anyone that God has never been be seen, heard, nor touched by any living human according to history and the present day. Though, the bible gives the personal testimonies of many righteous men of God’s goodness and existence, how can one prove that to be true? According to Nils Ch. Raught (2007) â€Å"If [an] argument from religious experiences is to be successful, we must focus our attention on those religious experiences that closely resemble ordinary perceptual experiences† (p. 180). So, I will give you my personal account of God’s goodness in my life and why I personally believe Theism makes a stronger case than Atheism. In January of 2005, my wife and I decided it was time to have another baby. Right after our decision, we found out that my wife was pregnant right away! We were so happy to be adding another addition to our family; our eldest daughter was already five at the time and we didn’t want to have our children too far apart. We were incredibly excited and made our announcement that Valentine’s day to all of our friends and family. Everything was going great until my wife went to one of a doctor appointment for her first trimester pre-natal serum screening tests. Basically, this testing will determine if the fetus has any chromosome problems that include Down syndrome. This test is optional, even though my wife was never told that during her visit. The visit went fine and the nurse told her that she would be contacted if the tests came back abnormal. Well, three days later my wife had a message on her phone from the nurse saying she needed to call about her blood results. My wife was a mess. She cried and said she knew something was wrong. After talking to the nurse my wife’s fears were confirmed; the blood results had come back abnormal. This was an eye opening experience for my wife and I. We decided that if we were going to have a Down syndrome child that we wanted to prepare ahead of time, since we knew that they have special health care needs. We scheduled an Amniocentesis and had to wait two weeks to get that test done. They were the two longest weeks of our life. My wife was a nervous wreck and I was too. During this time, we spent a lot of time praying and just trusting that no matter what the outcome was; this is what was meant for our family. Not being mad at God was hard; even though I had never felt as close to him before in my life! Finally, the day came for the test and again we had to wait three days for the results. On the third day, we found out our baby was perfectly healthy and that we were having another little girl. Even though, in our situation, God blessed us; I know he let us go through this situation so we could grow closer to him. I could feel his presence in my life during that trying time. Not only did my wife give birth to a beautiful baby girl, she also had our daughter on her Mother’s birthday. This is very significant because her mother tragically died in a car accident in November, of 2003. My wife went into labor naturally and had our daughter on my mother-in-laws birthday! We truly felt like God was blessing us! We felt as though for trusting in God and being patient he was rewarding us. In conclusion, one must ask themselves; do I have a purpose in my life? Am I looking at the big picture here? After my body physically dies someday, is that it? Personally, I think not. When one adopts the Atheist point of view, that choice accepts there is ultimately no superior being and no life after physical death. According to Nils Ch. Rauhut (2007) â€Å"[If] we conclude that God does not exist, we are faced with a different situation. While we are then free to dismiss most religious activities as nonsense, we consequently have to accept the idea that we are finite beings who live in a universe without ultimate meaning or purpose† (p. 173). I cannot accept that humans exist to live without any ultimate meaning or purpose; especially when we live on a planet that is so complex and beautiful. Can any scientist tell us how the Universe came into existence? Or, how old it is? There are creatures on Earth that are still being discovered today! Perhaps, one could look at the beauty in a sunrise or sunset. Perhaps, one could believe in God when they watch their new born babies eye lashes grow over the course of a week after they’re born; it is truly amazing! God created all things with such imagination and carefulness-each living thing is amazingly unique and has a purpose on this Earth no matter how big or small that purpose may be. In my opinion, Atheism is a belief that doesn’t leave much to look forward to. Though, it may be hard to explain God’s existence because he cannot be physically seen or heard, it shouldn’t be so hard to believe that the human race was created for purpose; one that exceeds this life on Earth.

Great Argument Essay Topics - Overview

Great Argument Essay Topics - Overview In choosing your topic, it's frequently a good idea to start with a subject which you already have some familiarity with. The outline is the plan which you will utilize to compose your paper. When you're picking your topic, bear in mind that it's much simpler to write about something which you currently have interest ineven in case you don't know a great deal about it. When choosing what to write about, ensure that it is something which you understand about. There are just a few things that define whether an essay you're working on is going to be a good one. Now, if you would like to understand how to compose a grant proposal with some funny twist to it, it's necessary for you to stick with us too. One of the greatest approaches to change anybody's mind is with an emotional investment. The issue is that everybody's interpretation of what makes a great society differs. Getting the Best Great Argument Essay Topics In the event the professor did not give you the topic, think about doing it. You will be assigned a topic, or your professor will enable you to select your own. It's possible to select an intriguing topic from any area of science. It's important to select debatable argumentative essay topics since you need opposing points that you could counter to your own points. Moral argumentative essay topics are a few of the simplest to get carried away with. There are several argumentative essay topics. Recent argumentative essay topics that are related to society is going to do. A Startling Fact about Great Argument Essay Topics Uncovered Inspiration to make your own advertising or media argumentative essay topics isn't tricky to discover. What's funny to you might not be funny to your readers. The world wouldn't gain from disappearance of religions. Advertising and the media are now nearly inseparable from society for a whole. Using Great Argument Essay Topics Preferably, it needs to be something which you're an expert in. Learn which of the topics, you currently have a fairly good background on which will make it possible for you to have a relative edge. Besides, the dearth of appropriate grammar makes the listeners drop respect to the speaker. You're a true topic enthusiast! Want to Know More About Great Argument Essay Topics? Students ought to be permitted to pray in school. Most of the times, they either do not have enough experience of writing on argument essay topics, or they are not well versed in the subject. When they are writing their argumentative essays that have to find, read and analyze lots of material to perform good. To write a strong argumentative essay, they should begin by familiarizing themselves with some of the common, and often conflicting, positions on the research topic so that they can write an informed paper. Facts, finally, will always win out against how folks are feeling at a specific moment. One of the most significant hiccups in choosing funny argumentative essay topics is how comedy is quite a touchy field, and various folks have various opinions of what comedy is about. Some people today live their lives in accordance with their religion eve n though others don't think you should factor that into decision making in regards to determining rules for everybody. Our life is about words. A Secret Weapon for Great Argument Essay Topics After picking your subject, you should have the five kinds of arguments at the rear of your head throughout your writing. The broadest idea can be found on top, and as you keep on writing, you become more concentrated on the principal point, eventually coming to specific evidence to back up your claim. The arguments given so as to prove your point has to be strong and convincing. Even when you're stating your perspective, make sure you do not come off as biased. Even if you think in a specific argument very strongly, if you lack the evidence to demonstrate your point, then your argument might just be as great as lost. Finding the most suitable arguments can help you prove your point and win. You may restate your argument, which is quite a common practice amongst essayists. The arguments given to show your point needs to be strong and convincing. Great Argument Essay Topics Secrets Year round school isn't a good idea. When you're writing such essay, the objective is to come out with the ideal college essays. Children should have to read more.

Do Financial Institutions Follow Laid Down Procedures - Free Essay Example

Sample details Pages: 18 Words: 5267 Downloads: 2 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Introduction In the past people were using barter system in the form of commodity money to exchange goods that they donà ¢Ã¢â€š ¬Ã¢â€ž ¢t have, but with the advent of money, things have changed and nowadays to satisfy their basic needs necessities, to acquire luxuries, any other movables immovableà ¢Ã¢â€š ¬Ã¢â€ž ¢s people resort to credit financing through financial institutions or otherwise.. In the simplest language, giving credit to people means giving loans advances including customerà ¢Ã¢â€š ¬Ã¢â€ž ¢s lines of credit, overdraft and so on. The range of consumer durable goods has widened enormously and with the rising standard of living many of these things à ¢Ã¢â€š ¬Ã¢â‚¬Å" washers, cookers, refrigerators, etc have come to be regarded as normal household necessaries. Don’t waste time! Our writers will create an original "Do Financial Institutions Follow Laid Down Procedures" essay for you Create order Hire purchase makes buying too easy for some people who, however, in consequence may undertake more commitments than they can fulfill. Giving credit to individuals, corporate, small scale enterprises, factories and others is a highly lucrative business as well as risky. Millions of rupees are advanced to the latter for investment purposes, to create jobs, and actively participate in the countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s development. Though profitability is the main objective of every lender, it must be ensured at the same time that borrowers are able to pay back the amount taken inclusive of interest (risk premium) under some agreed terms conditions at the respective time period. 1.2 Problem Statement 1.3 AIMS AND OBJECTIVES OF THE DISSERTATION The goal of the study is to analyze to what extent financial institutions is prepared to advance credit to a wide range of different stakeholders of the economy. In the Mauritian context, there has been a lot a debate since the 2008 financial crisis as to whether the banking sector is playing their role efficiently effectively to face the challenges ahead of us. Objectives of the dissertation: To find out the effectiveness of credit appraisal in the banking sectors. Carryout bankers satisfaction survey to find out the perspective of the banking sector towards the appraisal process The procedures adopted by banking sector to evaluate the credit worthiness of their customers. OUTLINE OF THE STUDY Chapter one: Introduction This chapter gives a brief background of credit in a general view and in the context of Mauritius. Moreover this chapter gives the problem statement and eventually it ends up with the aims and objectives. Literature Review Literature Review for this project will be divided into three chapters Chapter Two Credit appraisal Chapter Three Financial Institutions (context of Mauritius) Chapter Four Procedures These chapters above provide the definition of credit appraisal, the different steps involved in the process of appraisal, and the reasons of having good and established credit policies and procedures. It is about reviewing the literature by means of different articles relating to the area under discussion. The literature review enables us to have a useful insight on the findings the researchers about credit appraisal through scandals around the world. Chapter Five: Research Methodology This chapter defines the methodologies used to attain the purpose of the project. This describes who the target population for this survey, techniques used for data collection, the methods used to analyze data to acquire the results and the limitation of the study. Chapter Six: Analysis Results and Discussions This chapter shows how the data collected is analyzed through different tests and diagrams using the software SPSS. Chapter seven: Conclusion and Recommendations In this chapter, conclusion is derived from the study and some recommendations are suggested. Chapter 1 Financial Institution Financial Institution SubprimeMortgage(Source:https://www.investopedia.com/slide-show/top-bank-failures/indymac-failure.aspx) In the year 2000, there was a downfall in companies that relies too much on internet transactions and this was to be aggravated by the Sept 11 terrorist attack in 2001. So in order to keep the economy going, central banks around the world reduce it interest rates which in return created an excess in liquidity on the market. As money was available at a cheap rate, investors were prepared to put their money in riskiest securities. Lenders, especially banks approved subprime mortgage loans even to borrowers having a poor repayment capacity in order to increase their profit. This enable more people to take mortgage loans which ultimately increased the price of houses (ddss). The figure whereby the mortgage lender creates a mortgage secured by some amount of the mortgagorà ¢Ã¢â€š ¬Ã¢â€ž ¢s real property was at its peak in 2005. Finally in 2006 the anticipated trend collapsed. T he end result of these events was that as stipulated in their contract, if the homeowner is unable to pay the principal and/or interest on his or her mortgage, the bank can seize and sell the property. Eventually large lenders and hedge funds were declared bankrupt which create further downfall in economic activity. The following banks were closed during the crisis due to an eroding loan portfolio: Indymac bank based in Pasadena (July 11 2008) à ¢Ã¢â€š ¬Ã¢â‚¬Å" total assets -$32.01 billion/ deposits $19.06 billion Washington Mutual -the single largest bank failure in history by assets, went under in September 2008 with more than $30billion losses ( bought by JP Morgan) Merrill Lynch was put into a pre-packaged sale to Bank of America Bear Stearns acquisition by JPMorgan Chase and Countrywide Financial by Bank of America. AIG (AMERICAN International Group) was bailout in September 16, 2008 by the American government through a loan to AIG in exchange for 79.9% of the companys equity as the company was considered too big to fail. Chapter 2 CREDIT APPRAISAL Credit Appraisal Credit appraisal assessment differs from one institution to another but in general the main criteriaà ¢Ã¢â€š ¬Ã¢â€ž ¢s upon which the decision is based remain the same. The judgment taken to sanction or discard the proposal has to be based on a careful study of various facts offered by the borrower pertaining to him and the proposal as assessed by a relationship manager. Such an objective and thorough study of the information and records should persuade the sanctioning power that the money lent to the borrower for the desired purpose will be safe and it will be repaid with interest over the desired period, if the statement and terms and conditions on which it is sanctioned are satisfied. Such an in-depth study is called the pre-sanction credit appraisal. It helps the approver to sanction the proposal. Credit appraisal is the process by which a lender appraises the technical feasibility, economic viability and bankability including creditworthiness of the prospective borrower. I t also helps in assessing if that customer will be able to repay the loan amount in the stipulated time, or not. The credit-worthiness of a borrower is determined by the banks that have their own methodologies for assessment. Being a very crucial step in the sanctioning of a loan, the borrower needs to be very careful in planning his financing modes. The banks need to be cautious; else they might end up increasing their risk exposure. All banks employ their own unique way of evaluating the creditworthiness of their customers. Basic information required by the bank while assessing a customer is: income of applicant and co applicant Age of applicants Educational Qualification Profession Experience Other information might include additional sources of income, past loan record, family history, employer/business, security of tenure, tax history, assets of applicants and their financing pattern, recurring liabilities, other present and future liabilities and investmen ts (if any). Out of these, the incomes of applicants are the most important criteria to understand and calculate the credit worthiness of the applicants. As stated earlier, the actual norms used for assessments decided by banks differ greatly. Based on these parameters, the maximum amount of loan that the bank can sanction and the customer is eligible for is worked out. The broad tools (e.g. Credit Scoring) to determine eligibility remain the same for all banks. The assessment of the various risks that can impact on the repayment of loan is credit appraisal. In short, the banks are determining à ¢Ã¢â€š ¬Ã…“Will I get my money back?à ¢Ã¢â€š ¬?. Depending on the purpose of loan and the quantum, the appraisal process may be simple or elaborated. For small personal loans (individual) credit scoring based on income life style and existing liabilities may suffice. However for project financing, the process comprises technical, commercial, marketing, financial, managerial appraisals Monitoring Credit Documentation Credit Scoring Credit Appraisal Process Credit Processing Credit approval/sanction Disbursement Managing credit/recovery Credit Administration Figure 1 Credit appraisal Modern approaches The recent approaches for credit appraisal are statistical in nature. These approaches are more objective as they are based on statistical model. One of the most common approaches is the credit scoring model. Credit-Scoring Banks mostly relied on the analysis of financial statement to evaluate the applicantà ¢Ã¢â€š ¬Ã¢â€ž ¢s ability to pay bank a loan. This is effective to a certain degree but was limited in the sense that, the willingness of the application to continue the payback could not be determined even if the later is financially well off. This flaw can be addressed by using the credit scoring model to evaluate the loan applications they receive from consumers. Each financial institution can develop their own credit scoring models on retail lending. These models are created by analyzing facts about previous financial transactions and current situation of an individual or organization. Step 1 Credit Processing This phase of the credit processing is where all the necessary information or data is collected and whereby credit applications are screened. The credit application must be adequately detailed to allow the gathering of all information required for credit evaluation at the beginning. Thus financial institutions must ensure that they have in place the necessary checklist to verify that all necessary information is available. Organizations should set out pre-qualification screening criteria, which would act upon as a guide for their officers to be able to establish the types of credit that are up to standard. For Example, the criteria may include rejecting applications for blacklisted customers. These criteria would save time by avoiding institutions to process applications that would be later rejected. In addition, all credits should be for genuine purposes and adequate procedures should be established so as to make sure that financial institutions are not used for fraudulent a ctivities. Institutions must safeguard their reputation by not granting credit to customers of questionable repute and integrity. Credit screening is the stage where organization analyses the customerà ¢Ã¢â€š ¬Ã¢â€ž ¢s ability to meet his obligation. Here financial institutions should ensure that facilities are granted to creditworthy customers who will be able to reimburse from a reasonably determinable sources of cash flow on time. Usually financials institutions will require collaterals or guarantee to secure a credit facility in order to mitigate risk. It should be noted that these securities are only to mitigate risk and by means a substitute for a customerà ¢Ã¢â€š ¬Ã¢â€ž ¢s ability to honor its debts. Security offered should not prevent a full assessment of a customer ability to reimburse its loan facility nor should they compensate for insufficient information from the borrower. Moreover proper care should be taken while financing working capital. Financial institu tion should not only rely on guarantees given by the borrower but also on the repayment capacity of the borrower. These types of financing should be in fact supported by an appropriate analysis of projected sales, cash flows, potential working capital ratio, past experience of working capital financing contribution of the borrower. The appraisal criteria will vary between individualà ¢Ã¢â€š ¬Ã¢â€ž ¢s customers and corporate credit customers. Corporate customers must provide audited financial statements in support of their application. Generally the appraisal criteria will focus on the following: Sources of repayment of the borrower. Amount and purpose of the required facility Reputation and integrity of the customer Background of the customer, if any credit previously granted by financial institutions The repayment capacity of the borrower based on his business plan, and projected cash flow (if any) Site visits inspection of the borrowerà ¢Ã¢â€š ¬Ã¢â€ž ¢s busi ness location Experience in the business field collateral Credit approval Financial institutions have the task to put in place guidelines pertaining to credit approval process. For transparency purposes, these should also include the list of approved individuals and/ or committees and the bases of their decision making. Usually selected authorities are approved by board of directors. The approval authority may sanction new credit approvals; renewal of existing credit facilities, and changes in terms of conditions of in the past approved credits, primarily credit restructuring and every decision taken should be documented and recorded. In order to have a more credit caution approach, the credit approval committee must not have any connection with the customer. Approval authorities of individuals should be equal to their rank in management and their experience. It is more practical to have two officers to approve the credit application in harmony with the boardà ¢Ã¢â€š ¬Ã¢â€ž ¢s policy, depending on the nature and size of the credit. The approval proce ss should also be on a system of checks and balances. More complex credit applications should be viewed by the credit committee. Local banks operating through branches in Mauritius should centralize their credit approval process at the Head office. All credit approval should be at the same standard, based on established criteria. Financial institution should also have well experienced professionals that will be able to assess, judge, approve and manage credit risk. All credit approval should be scrutinized so that no senior individual in the financial institution is able to take priority over the established credit granting procedure. Board of Directors should review the related party transaction under due processes of good governance. Credit Documentation The fundamental part of the credit process is the documentation. Documentation is needed at each phrases of the credit cycle, together with credit application, credit analysis, credit approval, credit monitoring, collateral valuation, impairment recognition, and foreclosure of impaired loan. Credit files must be of standard format and keep in order, with a proper arrangement of cross-indexing to smooth the progress of assessment and follow up. Bank of Mauritius will pay particular consideration on the maintenance of credit files. these files should be efficiently maintained with a good system of cross- indexing to smooth the progress of review and follow up of files. Financial institutions must make sure that contractual agreements with their customers are vetted by their legal advisers. Credit application must be processed in any case either of their approval or rejection. Bank of Mauritius should have all documentation on hand for examination At each phase of the cycle fina ncial institutions must set up policies on information to be documented. Details of information will depend on the nature of facility and his previous performance with the organization. For each customer, separate credit file should be maintained. If new files are created, it should be properly cross-indexed. Financial institutions should keep only the copies of critical documents for safety measures (that is those of legal value, letter of offer also known as sanction letter, sign credit agreements or loan agreements) in the credit files, while retaining the originals in more protected custody. Credit files should not be removed from the organization premises and kept in fire proof cabinets. Financial institutions should sustain a checklist that can confirm all their policies and measures ranging from pre-sanction to post-sanction are being complied with. The checklist should also comprise the identity of the staff or committee involved in the decision making procedure. Credit Administration Financial Institutions must make sure that their credit portfolio is correctly managed, such as loan agreements are correctly prepared, renewal advices are sent regularly to customers and credit files are updated on a regular basis. An establishment may allocate its credit administration procedure or function to a separate unit or to designated individuals in credit process, depending on the volume and density of its credit portfolio. As a minimum, a financial organizationà ¢Ã¢â€š ¬Ã¢â€ž ¢s credit administration function should ensure that: Credit files are classified in order, cross-indexed, and their removal from the organization/premises is not allowed. The borrower has assigned the required insurance policy in favor of the bank and premiums are effected regularly. Rental-fee is being effected by the borrower on time in respect of charged leasehold properties. Disbursement of credit facility is being effected only after all the contractual terms and conditions have been complied and all necessary documentation has been obtained. Collateral value is monitored on a regular basis. Principal and interest is being serviced on time by the borrower as well as any agreed fees and commissions. Information provided to management is both correct and appropriate. Duties or responsibilities within the financial organization are effectively segregated. Funds disbursed under the credit agreement are actually used for the purpose for which they were granted to customers. à ¢Ã¢â€š ¬Ã…“Back officeà ¢Ã¢â€š ¬? duties and functions are controlled properly The policies and procedures of the organization are complied with along with other relevant laws and regulations. On-site inspection of the borrowerà ¢Ã¢â€š ¬Ã¢â€ž ¢s asset or company is effected regularly. Disbursement A letter of offer (also called sanction letter) is sent to the customer once the credit facility is approved with all the terms and conditions mentioned. Two copies of the letter of offer are sent to the customer and the duplicate should be duly signed in token of having accepted the terms and conditions and return back to the financial institutions. In case where the customer do not signify the interest within the next 30 days on receiving the letter, the availability of the credit facility shall expire and the bank will not be obliged to even revive the facility. Disbursement of the credit facility will be effected only after all relevant documents are submitted to the financial institution and after completion of all necessary documentation and registration of collateral , insurance cover in favor of the institution and the vetting of documents by a legal expert and that all terms of sanction are complied. The disbursement of the credit facility will be released prior to c ompliance with pre-disbursement terms and conditions and approval by the relevant authorities in the financial institutions. Monitoring In order to protect the financial institutions against any potential failure, problem facilities need to be identified before time. An appropriate credit monitoring system will make sure that quick and corrective measures are taken when warning signs shows a weakening financial health of the borrower, for example, unauthorized drawings, arrears in loans and deterioration in the borrowerà ¢Ã¢â€š ¬Ã¢â€ž ¢s operating environment. Financial institutions should have a proper system in place to review the status of the credit and financial health of the borrower al least once a year. More frequent assessment (that is at least quarterly) should be done for large credits, problem credits or when business of the customer is undergoing major changes. In broad term, the monitoring activity of the establishment should ensure: Disbursement of funds is strictly used for the purpose stated of the letter of offer (sanction letter) Financial situation of the customer is frequently track, and management advised in a timely approach. Contractual agreements are being abided by the borrower. Collateral exposure is assessed on a regular basis and related to the borrowerà ¢Ã¢â€š ¬Ã¢â€ž ¢s financial health. The organizationà ¢Ã¢â€š ¬Ã¢â€ž ¢s internal risk ratings reflect the current circumstance of the borrower. Non performing loans or facilities are identified and classified on a timely basis directly to management for corrective measures. In order to monitor credits, a review of the up-to-date data or information on the borrower should be examine like: Background information of the customer from other financial institutions with whom customer is operating. Findings of site visits The audited financial statement and latest management accounts Business plan details of the customer. Cash flow projections and financial budgets. Board resolution is required for corporate customers The borrower should be asked to give explanation of any va riances in the projections provided. Managing non Performing accounts or Recovery Financial institution should clearly define how non performing accounts are to be managed. The positioning of this responsibility in a credit department will depend on the volume and density of credit operations. It can form part either of the credit monitoring section of the credit department or as an independent unit called the credit workout unit within the department. Very often, it is more caution and preferable to isolate the credit workout activity from the department that sanctioned the credit facility so as to have a more separate assessment of the non performing accounts. This unit will be responsible to follow the aspects of the problem credit, including a repayment plan of the borrower, rescheduling of the credit facility, monitoring the value of applicable collateral, examine thoroughly all legal documents and also dealing with receiver/manager until the recovery matters are finalized. Financial institution should also put in place a system that make sure that ma nagement is kept advised on a regularly on all developments in the recovery process, from the credit workout unit. Clear evidence should be kept on file for all steps including legal procedures taken by the financial institution in recuperating the claims against a delinquent customer If there is a delay in the liquidation of security or other recovery processes, the grounds should be correctly documented and projected actions recorded taking into account any updated plans submitted by the borrower. The accountability of individuals/committees who sanctioned and monitored the credit should also be revisited and lessons learned from the examination should be properly recorded in file Chapter 3 PROCEDURES Procedures Continue process KYC for Individual customer KYC for corporate customer Certificate of Incorporation Trade Licence Financials statement for at least last two years Forecast cash flow (New company) Collateral (if property valuation report Application form MCIB disclosure Company Searches or Search report CBRIS 5Cà ¢Ã¢â€š ¬Ã¢â€ž ¢s of evaluating credit Credit Application and (Communication) Figure. Procedures in the analysis process prior to credit appraisal Request for credit facility usually begins with the completion of a Credit Application. This information in most cases is procured by the relationship manager for the Credit department to make decisions in setting the credit terms and conditions. It is a direct source of information and it is directly proportional to the quality of discussion with the subject matter. Information gathering is pushed on another step when references about the applicationà ¢Ã¢â€š ¬Ã¢â€ž ¢s current bank and other financial institution are sought. This will have the applicant providing financial statements which can be misleading sometimes but this helps in consolidating the information being compiled for the latter. Types of Credit Credit is granted to two main types of customer categories: Individual Customers This type of credit is granted to a particular individual customer, for their own use and who is not involved in a profit-making activity. Commercials Commercial credits are given to business organizations, traders or retailers who for example sell of goods in large quantities or in volume for the sole purpose of making profit in future. Reasons for granting credit The main reasons for any company or firm to grant credit are as follows: To retain old and existing customers To acquire new customers and new businesses To increase market share, especially in growing market. Competitions: When an organization is operating in a highly competitive market it will try to acquire customers in an aggressive manner Buyerà ¢Ã¢â€š ¬Ã¢â€ž ¢s requirements: In the business sectors buyers/dealers finance is required for business startup or day-t-day operations. Most of the time this is not readily available, thus the need to take credit facilities. Relationship with dealers: Firms sometimes extend credit to dealers to forge long and strong relationships with them. Thus before granting credit to any customer, laid down procedures should be followed. One of the utmost important procedures is to Know Your Customer (KYC) Know Your Customer (KYC) Know Your Customer that is identity of customer must be established for examples (Full name, address, and contact number) so as to know who to contact if in case payment is not being effected or in case of default payment. Individual customer should produce Identity Card (ID) and utility Bills (Proof of address, last three months) as proof documents. Corporate bodies as KYC should produce Certificate of Incorporation, Trade License and of course utility Bills. Undoubtedly, in the credit appraisal process there is nothing more vital to the process of controlling credit risk than knowing your customers which is an ongoing procedure. To get to know customers requires effective communication. Among the main reasons are the ability to identify if there is any money laundering concerning a particular customer and also if the customer is found in a blacklist of bad payers. For examples: The Mcb/Npf fraud case (Source: https://www.mcb.mu/news) According to the news broadcasted in February 2003, an accountant of the National Pension Fund (NPF) called at the MCB to take the fixed deposit balance of funds placed by the NPF with the bank. When they told her there was only Rs100 million in the account, she was shocked. Actually the deposited fund should have been around Rs700 million excluded the interest. This is due to lack of internal control. The repercussion of thus case is that Mauritius enters the gray list but fortunately not in the black list. Other documents to be produced for Individual customers can consist of: Pay slip (last three months) Employment Confirmation letter Bank statement for last six months (for new customers) Collateral (if property is given as collateral valuation report is needed). As per Bank of Mauritius (BOM) property given as security for a particular facility need to be revaluate each three years. For Corporate Bodies other documents to be produce d can consist of: Financial Statement (last two years) Fore cast cash flow for a start-up business. After having obtained all the KYC and other documents, application form should be filled in and duly signed by the customer along with the MCIB (Mauritius Credit Information Bureau) disclosure form. The MCIB disclosure form is very important as it gives the financial institution the right to inquire on the indebtedness of the customer. Without the customer authorization the financial institution can not retrieve the MCIB, it will be an illegal act retrieving MCIB without customer consent. Mauritius Credit Information Bureau (MCIB) Bankà ¢Ã¢â€š ¬Ã¢â€ž ¢s, Leasing Companies and Insurance (only SICOM) participating in the MCIB will submit information on their customersà ¢Ã¢â€š ¬Ã¢â€ž ¢ debts. For Insurance Company only SICOM is participating in the MCIB because it is relatively costly to the other insurance companies. But as per Bank of Mauritius all Insurance company will soon be listed in the MCIB database. For commercial banks, it is to be noted that the access to MCIB is free as this facility is given by their regulator, whereas insurance company is being regulated by the FSC (Financial Services Commission). The data submitted are complied in a database of the MCIB and then made available to all commercial banks in Mauritius. It is mandatory for all participating banks to make inquiries in the MCIB database before approving, increasing, or renewing any credit facility Details that will obtain from an MCIB are as follows: If the customer is acting as borrower or guarantor Type of facility granted from other institutions (Loans, credit cards, overdraft, bank guarantee, and letter of credit) Exchange of credit data with other companies having the same customers Original amount of facility taken Outstanding balance that remain to pay What is the collateral securing the facility (property, insurance policy or fixed deposit) And lastly if the customer having any arrears (default) with the existing institutions This will help financial institutions to have a complete picture of the borrowerà ¢Ã¢â€š ¬Ã¢â€ž ¢s overall indebtedness before taking a final decision whether or not to grant the credit applied for. Company Searches or Search Report This is very common in banks. Information can be gathered from the search report obtained at the Conservator of Mortgages in the name of the borrower (Individual or Corporate). This piece of information is very important as it shows the overall mortgages in the applicant movables immovables. CBRIS (Companies and Business Registration Integrated System) This facility is being granted by the companies division, Ministry of Finance and Economic Development. The CBRIS give information on corporate bodies, societies and partnerships, if they are operating (status live) or not operating (status wind up). The importance of the 4Cs According to Bobby Rozario, (2002) the 4 Cà ¢Ã¢â€š ¬Ã¢â€ž ¢s of credit helps in making the assessment of Credit Risk. They provide a structure within which information could be gathered, segregated and analyzed, thus considering the four Cà ¢Ã¢â€š ¬Ã¢â€ž ¢s: Capacity Capital Conditions and Character. The Cà ¢Ã¢â€š ¬Ã¢â€ž ¢s have been extended to five by adding the à ¢Ã¢â€š ¬Ã‹Å"Collateralà ¢Ã¢â€š ¬Ã¢â€ž ¢ or extended to six by adding à ¢Ã¢â€š ¬Ã‹Å"Competitionà ¢Ã¢â€š ¬Ã¢â€ž ¢ to it. No matter how many Cà ¢Ã¢â€š ¬Ã¢â€ž ¢s we come up with, the primary question that remains to be answered is à ¢Ã¢â€š ¬Ã‹Å"Will I get paid on timeà ¢Ã¢â€š ¬Ã¢â€ž ¢. For simplicity, it is more appropriate to discuss the structure of credit analysis within the context of the five Cà ¢Ã¢â€š ¬Ã¢â€ž ¢s of credit: Capacity Cash and only cash can pay bills. Capacity refers to the customersà ¢Ã¢â€š ¬Ã¢â€ž ¢ ability to pay. The capacity of any commerce to reimburse its bills would stem from good cash flow. Capital Capital would refer to the financial status of the customer. What is he/she worth in term of financial stability? Capital would refer to the financial resources obtained from financial records that a company may have in order to deal with its liability. Very often relationship manager would make this information the most important one. In fact one must know how to examine a financial statement and that too from the point of view of the creditor. Conditions Conditions refer to the general economic conditions that may impact on the customerà ¢Ã¢â€š ¬Ã¢â€ž ¢s ability to pay back his debts. Thus refers to the external impact surrounding the customerà ¢Ã¢â€š ¬Ã¢â€ž ¢s business. For example the tourism industry might get influenced by the financial crisis and may not have that kind of creditworthiness and ability to pay. Character Character refers to the customerà ¢Ã¢â€š ¬Ã¢â€ž ¢s intention and willingness to pay. People who voluntarily refused to honor their debts (Bad character). The relationship manager should judge whether the customer will make honest efforts to honor their credit responsibility. J.P Morgan (2002), a successful businessman once said that à ¢Ã¢â€š ¬Ã‹Å"I will do business with anyone as long as he/she is honest!à ¢Ã¢â€š ¬Ã¢â€ž ¢ As far as character is concerned, in analyzing individual credit, one would consider the following: Does the customer have a stable job? Does the customer have a good credit record in the past and present that is any default? Has the customer previously declared bankrupt? Does the customer have sufficient income for repayment and what is the source of repayment? Whereas, in analyzing commercial credit one would consider the following: Size of business/operation Where is the location of the business company? Amount and purpose of facil ities and sources of repayment? Is the business a sole proprietor, corporate bodies or partnertship? Background information on shareholders, directors, and beneficial owners? Borrowerà ¢Ã¢â€š ¬Ã¢â€ž ¢s business expertise, and how long in the business? Any previous insolvency record regarding the company? The integrity and reputation of the borrower and also if there is any lawsuits pending against the customer? The repayment capacity of the borrower based on his business plan and projected cash flow. Collateral Collateral refers to the guarantees/ security (instruments of risk mitigation) that may be offered in support of a credit in order to mitigate risk. In some cases assets may be necessary and to what extend they are available. The steps discussed in this section are those followed by financial institutions in Mauritius à ¢Ã¢â€š ¬Ã¢â‚¬Å" mostly commercial banks à ¢Ã¢â€š ¬Ã¢â‚¬Å" in performing the procedures of credit appraisal. After these procedures, a financial institution will be better equipped with information about the customer creditworthiness to move forward on the second stage of credit appraisal also known as the Pre-Sanction stage.