INSTITUTE OF ACCOUNTANCY ARUSHA
(IAA)
INDIVIDUAL ASSSIGNMENT
PROGRAMME: ORDINARY DIPLOMA IN FINANCE AND BANKING
MODULE CODE: {FBT 06105}
MODULE NAME: PRINCIPLES OF BANKING OPERATIONS
SEMESTER: I
LECTURER: MR MASEKO
NAME: EVA COSTA MAIKO
Question.
I. Explain the meaning of loan and component of loan
II. Identify the type of credit facilities available from a commercial bank
III. Report the credit worthiness of a small loan applicant
IV. Explain the loan application process
V. Explain decision framework to be adopted by a loan officer when dealing with loan proposal
VI. What is the issue to considered as component of good leading
i. Meaning of loan and component of a loan
Loan: is sum of money that is borrowed from a lender, typically a bank or financial
institution, with the agreement to repay it over time with interest. Loan can be used for
various purpose, such as buying a home, paying for education, or starting business
COMPONENT OF LOAN ARE:
I. Principal;
This is the original amount of money that is borrowed. It is starting point before
any interest or fees are applied. Fore example, if you borrow $10,000, that’s the
principal. Over time, as you make payments, the principal decreases.
II. Interest rate;
The interest rate is the cost of borrowing money, expressed as a percentage of
the principal. It represents the profit the sender earns for provide the loan.
III. Fees;
In addition to the principal and interest, loans can come with various fees that
can add to the cost of borrowing;
Original fee; a fee charged by the lender to process the loan.
Late payment fee; charged if a payment is not made on time.
Prepayment penalty; a fee for paying off the loan early, intended to
compensate the lender for lost interest income.
IV. Collateral {secured loan};
For some loans, the borrower must provide collateral-assets that the lender can
seize if the borrower default on the loan.
ii. Identify the type of credit facilities available from commercial banks
Overdrafts;
An overdraft allows a customer to withdraw more money than they have in
their account, up to a pre-approved limit.
Personal loans;
These are unsecured loan that individuals can use for personal expense, such as
buying a car, paying for education, or consolidating debt.
Term loans;
A term loan is a type off credit facility where the borrower receives a lump sum
of money upfront and agree to repay it a specific period, with interest.
Removing credit;
This type oof credit allows the borrower to borrow up to specified limit, repay
it, and borrow again without needing to reapply for credit.
Credit cards;
A credit card is a form of revolving credit, allowing the holder to borrow money
for purchases up to a pre-set limit.
Letters of credit;
A letter of credit is a bank-issued guarantee to pay a seller on behalf of the
buyer, typically used in international trade transaction.
Trade finance/import and export financing;
Commercial banks provide financing for businesses involved in international
trade. This can include both short-term loans and long-term trade finance
products to help businesses import or export goods and services.
iii. Report the credit worthiness of small loan applicant
Creditworthiness report for small loan applicant.
Applicant information
Name; (applicant’s name)
Application date; (date of application)
Loan amount requested; (amount requested)
Purpose of the loan; (purpose)
Loan type; small personal loan/small business
loan/other (specify)
Credit history overview;
A review of the applicant’s credit history is essential to assess their likelihood of
repaying the loan. The credit report provides details about past borrowing
behavior, including payments made on time, outstanding debts, and any past
delinquencies.
Credit score; {credit score range (e.g., 600-650, 650-700, etc.)}
Good; typically 700 or above, indicating a strong ability to repay.
Fair; typically 600-699, indicating an acceptable level of risk but may
require higher interest rates.
Poor; bellow 600, suggesting higher risk and a possible history of
missed payments or defaults.
Outstanding debs; {total outstanding debt amount, if any}
Recent late payments; {details of any late payments in the last 12-24
months}
Bankruptcies/defaults; {any recent bankruptcies or defaults, if
applicable}
Income and employment stability;
Assessing the applicant’s income and employment history helps determine their
ability to make consistent loan payments.
Employment status; {full-time, part-time, self-employed, etc.}
Current employer; {employer name, if applicable}
Length of employment; {duration at current job or in current business}
Monthly/annual income; {total income from all sources}
Additional income; {any secondary income sources such as investments,
rental income, etc.}
The applicant’s stable income history supports their ability to make regular loan repayment. Longer
tenure with current employer indicates greater financial stability.
Debt-to-income ratio {DTI};
The debt-to-income ratio measure the applicant’s debt burden relative to their
income. A lower DTI indicate the applicant has more disposable income to make
loan payments.
Total monthly debt payments; {total monthly payments on existing
loans, credit cards, etc.}
Monthly income; {monthly or annual income}
DTI ratio calculation; {total monthly debt payments/monthly income}
times 100
A ratio of below 36% is the generally considered manageable.
A ratio of above 40% may indicate high debt obligations and
could increase the loan’s risk.
Collateral {if applicable};
For secured loans, assessing the value of collateral can help mitigate the
lender’s risk.
Type of collateral; {car, property, equipment, etc.}
Estimated value of collateral; {value based on appraisal or market value}
Ownership status; {fully owned, partially financed, etc.}
If collateral is offered, it adds security to the loan and reduces the lender’s risk in case of default.
iv. Explain the loan application process
Determine your loan needs:
Decide the type of loan you need and determine how much money you need to
borrow
Research lenders:
Compare banks credit unions, online leaders, or other financial institution
offering competitive rates and understand the interest rate and fees
Gather necessary documents:
Leaders my require identification, proof of address and your social security
number and information of any existing loans, credit cards
Submit your loan application:
Complete the loan application form, either online in person or by phone and
submits all require document
Accept the loan:
Once you understand and agree to the loan terms, sign the loan contact after
sign the lender will release the funds to you either through a check, direct
deposit
V. Explain decision framework to be adopted by loan officers when dealing with
loan proposal
a) Purpose of the loan:
Understand the purpose of the loan is crucial. For personal loans,
