Lending November 2015 Past Examination Question Paper – KNEC
This Past Paper examination was examined by the Kenya National Examination Council (KNEC) and it applies to the following courses:
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THE KENYA NATIONAL EXAMINATIONS COUNCIL
DIPLOMA IN BANKING AND FINANCE
Time: 3 hours
1. Kamanda is the Managing Director (MD) of Kamn Enterprises, a small-sized value addition factory. They deal in processing and packaging of milk products. Since its incorporation five years ago, the company has increased its sales and profitability.
Three months ago, the bank increased the company’s overdraft to Ksh.3 million, secured by a fixed charge and a floating charge over the assets of the company and a guarantee by Kamanda, supported by a legal charge over his residential property.
i) However, the bank is not willing to grant further facilities unless the company changes its management structure and also increase its capital base.
ii) Identify a facility that will enable the company meet the bank’s conditions. Explain three advantages of the facility identified in (i) above to the company. (15 marks)
b) Outline five ways in which banks can minimise bad debt related losses. (10 marks)
2. a) Smart contractors are your long time bank customers. They are building several classrooms and laboratories across County Y, funded by the Constituency Development Fund (CDF).
On appointment, Jack the Managing Director has called in to discuss a financing proposal. He informs you that they have also secured a contract to build a headquarter complex for Maono (K) a Non-Governmental Organisation. The cost of the project is Ksh.300 million which they are seeking from your bank. Further, he informs you that most of their funds are held by the CDF projects.
Giving reasons, outline seven considerations that may influence the company repayment ability. (14 marks)
b) Outline the factors that may be considered when assessing a lending proposition in respect of the‘.
i) Customer’s character (6 marks)
ii) Amount requested for. (5 marks)
3. a) Sigma Enterprises has been overtrading to keep itself afloat in an effort to meet the suppliers settlement deadlines.
Explain the effect of this step adopted by Sigma Enterprises to help settle their debts obligations. (13 marks)
b) i) Distinguish between property investment and property development.
ii) Describe five elements considered in effecting a safe lending on the properties in (i) above (12 marks)
4. (a) Shiba Limited imports electronics from US.A. The consignments are distributed to major outlets across the country. The contract calls payment under a documentary credit. Your bank issued the L/C which provides for payment at sight by drafts drawn on the bank.
On appointment, the Managing Director (MD) has called in to discuss the financing of the consignment. The MD has requested for an increase in the overdraft facility to help meet the consignment cost. The bank is willing to consider the request on condition that the company provides an adequate security.
However, the company’s acceptable securities are charged elsewhere.
(i) Recommend an alternative form of facility to the customer.
(ii) Outline the operations of the facility in (i) above. (13 marks)
(b) Beta Limited is a garbage collection company. Since its inception, the company has banked with your bank. The company has negotiated with the County Government to collect garbage for a 3-year contract. The company requires Ksh.90 million to acquire large garbage trucks.
However, the County Government is demanding a performance bond from the company. The bond is drawn in the form of guarantee in favour of the County Government with a maximum of Ksh.20 million by the bank. The bank insists on taking a counter-indemnity from Beta Limited.
Explain the measures the bank can take to perfect the security. (12 marks)
5. (a) Yona has banked with you for five years. He works at a local company. He has enjoyed various facilities with your bank which he has serviced promptly.
Yona has visited the bank to seek a loan of Ksh.7.2 million to enable him purchase a house. The costs associated with the transaction are as follows:
Stamp duty 4% of the purchase price
Legal fees Ksh 110,000
Valuation fees Ksh. 75,000
Other costs Ksh. 45,000
In your books, is an outstanding= loan balance of Ksh.1 050,000 in respect of a mortgage of Ksh.4.6 million taken ten years ago.
The seller requires immediate payment.
Respond to Yona’s request. (15 marks)
b) Despite a spirited Government of Kenya’s effort to provide access to finances, commercial banks have maintained their traditional reluctance to lend to small enterprises.
Outline the reasons for this trend. (10 marks)
6. a) Hada Traders are your bank customers. The company dea)s in the manufacture and sale of fresh juice. They are seeking a Ksh.2.4 million overdraft to increase their working capital. In support of their request, they have presented an extract of their accounts as follows:
Statement of Financial Position as at 31st December 2014
|Sh. 000||Sh. 000|
|Plant and machinery||3,800|
|Net Current Assets||2,902|
In your appraisal, you establish the following accounting rations:
Debtors turnover 60 days
Creditors turnover 30 days
Stock turnover 90 days
(i) Assess the customer’s request (Use 360 days in a year)
(ii) Outline the factors that necessitate a bank to restructure a non-performing loan. (15 marks)
(b) In evaluating a proposal for lending to farmers, explain the:
(i) Items considered in the computation of the rental equivalent.
(ii) Significance of the bank’s official visit to the farm. (10 marks)