Understanding 5Cs of credit analysis for small businesses / Anita Abu Hassan and Mohd Syazrul Hafizi Husin

In Malaysia, under Financial Services Act 2013 (FSA 2013) a bank is licensed to conduct a banking business. One of the activities categorized as banking business is the provision of finance. The lender or financier encounters several risks while providing funding, including business risk, industry regulation, and competition, not to mention repayment and collateral risk. The bank has a stringent credit analysis procedure because there are so many factors to consider before approving a loan. In commercial lending, the credit analysis and review process occurs during the origination and approval stages of the loan application. To determine if a borrower is creditworthy, the 5Cs model is utilized. According to Mohd Harif et al. (2011), the evaluation of creditworthiness for commercial borrowers is commonly conducted by financial institutions in Malaysia using this technique. Because it bases its evaluation of a borrower's creditworthiness on five factors, all of which begin with the letter C, this method is called the 5Cs model. These elements include character, capacity, capital, condition, and collateral. Every pertinent detail regarding the prospective borrower would be disclosed and examined in light of these five criteria, in addition to the mitigation strategy devised to alleviate any associated risk. To have a better understanding of the information that pertains to each of the 5C elements, we will be utilizing the Lending to the Agriculture Sector Toolkit—December 2012, which is available on the World Bank website. This toolkit is designed specifically for small companies.