MEMORANDUM REPORT

ZIMBABWE BANK ZB

TO: Chief Executive Officer (CEO)

FROM: Debtors Department (Kwekwe)
DATE: 08/07/22
SUBJECT: Report of Zimbabwe Bank ZB on how would they manage their five C’s in debtors’
department using canon of landing.

This memo serves to present a report on the five C’s that is capital, condition, character, capacity
and collateral in debtors’ department for Zimbabwe Bank using cannon of landing. As they are
explained below in more details.
CAPACITY
According to According to Pandey (2004), capacity is the ability of an individual or operation to
generate sufficient earnings to cover their debt obligations, repay any new debt and maintain an
adequate margin for family living, capital asset replacement and accumulation of a reserve for
adversity.
According to Zimbabwe Bank (ZB) a borrower’s capacity to repay the loan is a necessary factor
for determining the risk exposure for the lender. Whereas the one’s income amount, history of
employment, and current job stability indicate the ability to repay outstanding debt. For example,
small business owners with unsteady cash flows may be considered low capacity borrowers.
Other responsibilities, such as college-bound children or terminally ill family members, are also
factored in to evaluate one’s future payment obligations. An entity’s Debt to Income Ratio, the
ratio of its current debt to current income before taxation, may be evaluated. Collateral is not
considered a fair metric for quantifying one’s capacity because it is only liquidated when the
borrower fails to repay the principal amount of a loan that is in the worst case scenario of a credit
transaction. Moreover, no collateral is declared in cases of unsecured loans such as credit cards.
CHARACTER
According to According to Pandey (2004), character is defined as the customer’s willingness and
determination to repay the loan, regardless of unforeseen adversity. Character includes qualities
such as honesty, cooperation with the lender, openness, integrity and self-discipline.
However, according to ZB, character is the most comprehensive aspect of the evaluation of
creditworthiness. The premise is that an individual’s track record of managing credit and making
payments indicates their “character” as relevant to the lender that is their propensity for repaying
a loan on time. Past defaults imply negligence or irresponsibility, which are undesirable
character traits. Owing to the degree of specialization required in compiling a detailed list of an
individual’s credit history, financial intermediaries such as credit rating agencies or banks
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provide rating services. There may be a certain degree of variance in reports compiled by
different organizations. They include the names of past lenders, type of credit extended, payment
timeline, outstanding liabilities, and so on. In some cases, credit scores may be assigned to
express one’s creditworthiness numerically. A common standard is a Fair Isaac Cooperation
FICO Score which consolidates data from credit reporting bureaus that is Experian, Equifax, and
Trans Union and calculates an individual’s credit score. A high score signifies less risk for the
lender. Well some believes that character is destiny.
COLLATERAL
when being assessed for a secured product such as a car loan or a home loan, borrowers are
required to pledge certain assets under their name as collateral. They may include fixed assets
such as the title of a parcel of land or financial assets and securities such as bonds. The value of
the collateral is evaluated by deducting the value of current loans secured through the same asset.
The remaining equity indicates the true value of collateral for the borrower. The evaluation of the
liquidity of collateral is also dependent on the type of asset, its location, and potential
marketability.
CAPITAL
According to Wikipedia, capital refers to the customer’s financial position and progress, asset
quality, liquidity, and debt structure. The analysis of these factors involve historical and current
balance sheet. Lenders will evaluate if a customer’s financial position has improved or
deteriorate over time.
According to Zimbabwe Bank, capital represents the overall pool of assets under the name of the
borrower. It represents one’s investments, savings, and assets such as land, jewelry. Loans are
primarily repaid using overall household income; capital is additional security in case of
unforeseen circumstances or setbacks such as unemployment.
CONDITIONS
According to J. White (2002), conditions relate to the purpose of the loan as well as other items
the lender has control over, that is loan amount, use of funds, terms of repayment. Lenders may
in certain circumstances, add additional requirements or restrictions to the loan. These are
usually based on individual’s current situation as well as what is predicted to happen in the
future.
According to ZB, conditions refer to the specifics of any credit transaction, such as the principal
amount or interest rate. Lenders assess risk based on how the borrower plans to use the money,
should they receive it. Other external features, such as state of the economy, prevailing federal
interest rates, industry-specific legislation, and political change are also considered. The features
are not individualistic as they cannot be influenced by the borrower. Nevertheless, they indicate
the level of risk associated with a certain investment. For example, during a recession, even
borrowers with a 700+ Fair Isaac Cooperation FICO score may not be able to access credit.
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CONCLUSION
In a nutshell, At Zimbabwe Bank ZB has its own method for analyzing a borrower’s credit
worthiness, but the use of the five C’s that is, conditions, capacity, capital, character and
collateral of credit is common for both individual and business credit applications. Of the quintet,
capacity basically, the borrower’s ability to generate cash flows to service the interest and
principal on the loan generally ranks as the most important. But applicants who have high marks
in each category are more apt to receive bigger loans, a lower interest rate and more favorable
repayment terms.

Compiled by: DERERA GAMUCHIRAI M

Signature: ……………………………………….
DATE: 08 July 2022