RSK4804
ASSIGNMENT 1
YEAR 2021
, Table of Contents
1.1. Explain why credit is considered a powerful driver of the economy. ...................................... 3
1.2. Outline the credit process of your preferred organisation (financial or retail) and in your
own words, provide details of each phase. ............................................................................................ 5
2.1. The CEO of Sizwe Aviation Services approached your bank for a credit facility. The
following are ratios for Sizwe Aviation Services for the 2016 financial year. .................................. 11
3.1. List and briefly describe five factors that might affect the LGD of a loan ............................ 13
3.2. As head of credit risk at Rosslyn Savings Bank, you are considering approving a five-
year credit asset (business term loan) with a bullet (balloon) repayment at the end of a term.
The term loan shows a marginal probability of default of 1.2%, 1.4%, 1.5%, 1.7% and 2% for
each of the five years respectively. How would you go about finding the cumulative probability of
default over the five-year period for pricing purposes? ...................................................................... 15
4.1. Calculate of current ratio, level of inventory, receivables and a recommendation to the
credit manager .......................................................................................................................................... 15
, QUESTION 1
1.1. Explain why credit is considered a powerful driver of the
economy.
Introduction
The discovery and control of fire has brought several benefits to mankind and it touches
the day-to-day life of almost every human being. However, unless fire is used carefully, it
can be disastrous. Like fire, if used cautiously, credit is useful to mankind. It brings
benefits not only to the lender and user but to the entire economy as well. However, on
the other hand, misuse of the credit will bring woes. Let us look at the advantages of credit
to the borrower, which propels the demand for credit.
Powerful driver of the economy can be easily be implied to driver of gross domestic
product, and thus one would suggest that, the reasons behind credit being the powerful
driver of the economy comes from prosperity individual household and society at large.
As a result, one would suggest that, the benefits of credit as driver of the economy include
among others, socio-economic advantages, business control, convenience, tax planning
tool, wealth creation and maximization. Ciby (2013) argued that, credit allow and
encourage the productive and efficient use of idle resources in the economy. Borrowers
who do not have enough resources to pursue an activity can borrow the resources, which
can be returned to the lender after having achieved the objective.
Prudent use of credit results in economic growth of borrowers
Prudent use of credit results in economic growth of borrowers, which in turn leads to the
overall economic well-being of the society and ultimately the country. Credit stimulates
both household consumption and business investment. Hence, a national credit policy is
an important tool used to encourage industrial development and business investments,
thereby creating employment opportunities and improving the standard of living of the
general population. As purchasing power increases, people will tend to spend more on
consumer goods and this will stimulate further economic growth. Successful businesses,
ASSIGNMENT 1
YEAR 2021
, Table of Contents
1.1. Explain why credit is considered a powerful driver of the economy. ...................................... 3
1.2. Outline the credit process of your preferred organisation (financial or retail) and in your
own words, provide details of each phase. ............................................................................................ 5
2.1. The CEO of Sizwe Aviation Services approached your bank for a credit facility. The
following are ratios for Sizwe Aviation Services for the 2016 financial year. .................................. 11
3.1. List and briefly describe five factors that might affect the LGD of a loan ............................ 13
3.2. As head of credit risk at Rosslyn Savings Bank, you are considering approving a five-
year credit asset (business term loan) with a bullet (balloon) repayment at the end of a term.
The term loan shows a marginal probability of default of 1.2%, 1.4%, 1.5%, 1.7% and 2% for
each of the five years respectively. How would you go about finding the cumulative probability of
default over the five-year period for pricing purposes? ...................................................................... 15
4.1. Calculate of current ratio, level of inventory, receivables and a recommendation to the
credit manager .......................................................................................................................................... 15
, QUESTION 1
1.1. Explain why credit is considered a powerful driver of the
economy.
Introduction
The discovery and control of fire has brought several benefits to mankind and it touches
the day-to-day life of almost every human being. However, unless fire is used carefully, it
can be disastrous. Like fire, if used cautiously, credit is useful to mankind. It brings
benefits not only to the lender and user but to the entire economy as well. However, on
the other hand, misuse of the credit will bring woes. Let us look at the advantages of credit
to the borrower, which propels the demand for credit.
Powerful driver of the economy can be easily be implied to driver of gross domestic
product, and thus one would suggest that, the reasons behind credit being the powerful
driver of the economy comes from prosperity individual household and society at large.
As a result, one would suggest that, the benefits of credit as driver of the economy include
among others, socio-economic advantages, business control, convenience, tax planning
tool, wealth creation and maximization. Ciby (2013) argued that, credit allow and
encourage the productive and efficient use of idle resources in the economy. Borrowers
who do not have enough resources to pursue an activity can borrow the resources, which
can be returned to the lender after having achieved the objective.
Prudent use of credit results in economic growth of borrowers
Prudent use of credit results in economic growth of borrowers, which in turn leads to the
overall economic well-being of the society and ultimately the country. Credit stimulates
both household consumption and business investment. Hence, a national credit policy is
an important tool used to encourage industrial development and business investments,
thereby creating employment opportunities and improving the standard of living of the
general population. As purchasing power increases, people will tend to spend more on
consumer goods and this will stimulate further economic growth. Successful businesses,
