Appraising a loan: the 5 Cs

Appraising a loan means checking whether a member can really repay before you lend. The classic framework is the 5 Cs of credit, used by lenders everywhere to weigh risk in a balanced way.

Why it matters: most defaults trace back to weak appraisal, not bad luck. Lending against collateral alone, or trusting figures you never verified, is how good SACCOs lose members' savings.

The 5 Cs

• Character: the member's repayment history and reputation. Have they repaid before? What do guarantors and records say?
• Capacity: the real ability to repay from cash flow. This is the most important C.
• Capital: what the member has invested themselves (savings, own funds in a business).
• Collateral: security you can fall back on, but it is a backstop, not the reason to lend.
• Conditions: the loan purpose plus outside factors like the season, prices, or the local economy.

Focus on cash flow, not just security

• Work out income minus living costs and existing debts to see what is left to repay.
• Make sure the new instalment fits comfortably within that surplus.
• Seizing collateral is slow, costly, and bad for member relationships, so avoid relying on it.

Verify before you approve

• Confirm income with payslips, bank or M-money records, or business books.
• Visit the business or farm where it matters.
• Check existing loans and guarantor commitments.

Common mistakes that cause defaults

• Approving on collateral value while ignoring cash flow.
• Taking stated income at face value without proof.
• Ignoring how much the member already owes elsewhere.
• Rushing approvals to hit lending targets.

In CAMS, appraisal notes and supporting documents attach to the loan application for review.

Quick checklist

• All 5 Cs assessed and written down.
• Repayment ability proven from cash flow.
• Income and documents independently verified.
• Existing debts and guarantor load checked.
• Loan purpose is clear and realistic.
• Decision recorded with reasons.