WOLDIA UNIVERSITY

FACULTY OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

A SENIOR ESSAY SUBMITTED TO THE DEPARTMENT of

ACCOUNTING AND FIANCE OF WOLDIA UNIVERSITY IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR BACHELOR OF BA
DEGREE IN ACCOUNTING AND FINANCE.

ASSESSMENT OF CONTRIBUTION OF LOAN PROVIDED BY

COMMERCIAL BANK FOR BORROWERS (CASES TUDY CBE,
ADAGO BRANCH)

MAY, 2010/2018

WOLDIA, ETHIOPIA
Acknowledgment

First and foremost we would like to praise almighty God for letting our staying in life to this day
and enables the researchers to accomplish this study, gave our endurance and strength throughout
the duration of program. Then we are deeply grateful to our advisor, Nitsuh Alemayehu (Msc) and
co-advisor Birhanu Nega (BA degree) for their precious comment, guidance and unreserved
support in checking and giving constructive suggestions. Moreover, we extend our special thanks
to our family and friends for their moral and financial support for the successful completion of this
paper. Also we would like to thanks the manager of CBE and respondents for their genuine
response and cooperation in providing the necessary Data requested
ABSTRACT

A loan is granted for a specify time period. Generally, commercial banks provide short term
loans. But term loans, i.e., loans for more than a year, may also be granted. The borrower may be
given the entire amount in lump sum or in installments. The main objective of this study is to
assess the contribution of loan provided by commercial bank for borrowers at woldia branch in
order to achieve the objective of the study. Data was collected from both primary and secondary
data source. The primary data collected through questionnaire and interview and also internet
source was used as the secondary data. The study was applied percentages and tables to analyze
the data collected through the questionnaire. The major findings of the study were the problems
that arise due to unable repay the loan on the due date and different types of the risks that the
borrowers face on their activity and to minimize the above problems .Finally, based on the above
findings the researchers were put possible recommendation for these findings related the
problems.

LIST OF TABLES

Table 1 General back ground of the respondents.............................

Table 2 the length of time that the borrowers spent to get the loan service……..

Table 3 the quality of services the bank given for the borrowers……………….

Table 4 the banks have put limitation on the amount .....................

Table 5 the borrower’s fixed asset for securing the loan...................

Table 6 the satisfaction of borrowers by loan...................................

Table 7 the borrower’s deposit account in the bank.........................

Table 8 the motivation of the borrowers to borrow the loan..............

Table 9 the purpose of the loan that they borrow from the bank…………………..

Table 10 the repayment of the loan on the due date …………………………

Table 11 the type of risk the borrowers facing ……..........................

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 ACRONYMS

CBE …………………………… COMMERCIAL BANK OF Ethiopia

RBI ……………………………. Reserve bank of India

EMI ………………………….. Equated monthly installment

FD …………………………… Fixed deposit

ATS…………………………. Automatic transfer service

CDS ……………………….. Negotiable certificate deposit

MMDAS ………………….. Money market deposit Account

Table of contents

Contents Page

Acknowledgement.......................................................................... I

Abstract..........................................................................................II

Table contents...............................................................................III

List of tables..................................................................................IV

Acronyms........................................................................................v

CHAPTER ONE

1 Introduction.................................................................................

1.1 Back ground of the study...........................................................

1.2 Statement of the problem...........................................................

1.3 Research question …………………………………………………….

1.4 Objective of the study................................................................

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 1.4.1 General Objective.................................................................

1.4.2 Specific objective.................................................................

1.5 Significant of the study..............................................................

1.6 Scope of the study.....................................................................

1.7 Limitation of the study...............................................................

1.8 Organization of the paper..........................................................

CHAPTER TWO

2. Review of literature......................................................................

2.1 Contribution of commercial bank...............................................

2.2 Roles of the commercial Bank....................................................

2.3 Loans.........................................................................................

2.4 Type of loans.............................................................................

2.4.1 Type of commercial loan………………………………………….

2.5 Advances...................................................................................

2.5.1 Cash credit.......................................................................

2.5.2 Loans for purchase of automobile.....................................

2.5.3 Advances against the security of goods.............................

2.5.4 Advance against he fixed deposit receipts.........................

2.5.5 Advance against book debts..............................................

2.6 Bank source of funds.................................................................

2.6.1 Transaction deposits.........................................................

2.6.2 Savings deposits...............................................................

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 2.6.3 Time deposit.....................................................................

2.6.4 Certificates of deposits......................................................

2.6.5 Negotiable certificates of deposits......................................

2.6.6 Money market deposit accounts........................................

2.6.7 Federal funds purchased..................................................

2.6.8 Borrowing from the Federal Reserve Bank........................

2.7 commercial banking principles................................................

2.8 bank credit..............................................................................

2.8.1 Types of bank Credit .........................................................

2.9 Important characteristics of credit..............................................

2.10 Principles in credit Risk management.......................................

2.11 methods for Reduction of the credit Risk...................................

CHAPTER THREE

3 Research methodologies................................................................

3.1 Research design.........................................................................

3.2 Target group..............................................................................

3.3 source of data............................................................................

3.4 Methods of the data collection...................................................

3.5 Sample technique .....................................................................

3.6 Sample size................................................................................

3.7 Methods of data analysis...........................................................

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 CHAPTER FOUR

Data Analysis and Interpretation……………………………………….

4.1 Introduction to data analysis……………………………………………

4.2 General Background of Respondents………………………………

4.3 Analysis of the interview questions for the manager..................................................................

4.3.1 About the benefit of loan for the bank and for the borrowers……………

4.3.2 Interview analysis of the problem of bank faced related to loan…………

4.3.3 Analysis about the criteria that the borrower should full fill to borrow
from CBE ….……………………………………………………………………………………….

4.3.4 The ability of the borrowers about the repayment of loan………………….

4.3.5 Analysis about the contribution manager weather or not the borrowers
are used the money for the correct purpose……………………………………………….

CHAPTER five

4 Summary of findings, conclusion and recommendation................

4.1 Summary of findings..............................................................

4.2 Conclusion.............................................................................

4.3 Recommendation....................................................................

Reference................................................................................

Appendix I .............................................................................

Appendix II.............................................................................

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 CHAPTER ONE
Introduction
1.1. Background of the Study
The name bank drives from the Italian word banco,’’banko’’ ‘’desk/bench’’, used
during the Renaissance era by Florentine bankers, who used to carry out their
transactions on a desk covered by a green table cloth. However, traces of
banking activity can be found even in ancient times. Commercial banks -are
banking institution that accept deposits and grant short term loans and advance
to their customers. In addition they also give medium and long term - loan to
business enterprises. Now a day, some of the Commercial banks are also
providing housing loans on a long term basis to in individuals (Dur, 2009).
The history of Commercial bank of Ethiopia dates back to the establishment of
the state bank of Ethiopia in 1942. It was legally established as a share company
in 1963. In 1974, Commercial bank of Ethiopia merged with the privately owned
Addis Ababa bank. Since then, it has been playing significant roles in the
development of the country.
The Commercial bank of Ethiopia was established to perform major banking
functions, including:
 Accepting saving, demand and time deposits;
 Providing short, medium and long term loans;
 Buying and selling foreign exchanges;
 Buying and selling negotiable instruments and securities issued
by the government, private organizations or any other person and
engaging in other banking activities customarily carried out by
Commercial banks.

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 The vision of the Commercial bank of Ethiopia is to become a world class
Commercial Bank by the year 2025 and its mission is committed to best
realizing of stakeholders’ values through enhanced financial intermediation
globally and supporting national development priorities by employing highly
motivated, skilled and disciplined employees as well as state of the art
technology. It strongly believes that winning public confidence is the basis of its
success.
Now a day commercial bank of Ethiopia has around 2110 branches including
woldia branch. Woldia branch was founded in 1968. At that time there were 5
employees including the manager. Now a day there are 65 employees including
the manager, from these 50 are males and 15 are females.
Commercial banks in aggregate are the most dominant depository institution.
They serve surplus units by offering a wide variety of deposit accounts, and the
transfer deposited funds to deficit units by providing direct loans or purchasing
debt securities. Commercial banks serve both private and public sector as their
deposit and lending services are utilized by households, businesses, and
government agencies (Kidwell, 2005).

1.2 Statement of the Problem

The most basic role of bank is granting loans for the borrowers that they would
pay back at a certain period and it affected by many problems related with them.
In other words, the Contribution of loan provided by commercial bank for the
borrowers and these loans are repayable with the principal and interest. In
contrary to these the failure of repayment of the disbursement amount of loan is
one of the problems that affect the bank’s contribution of loan. To solve this
problems Asnake Abebe et al(2008) at Jimma University studied on the
assessment of loan contribution by CBE for borrowers at Jimma branch.

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The gap between the previous study and this study is that, the previous
researchers were focus only on the problem of failure of repayment the dispersed
amount of loan on the specified date. But, we studied including the quenciqunce
of realization and the scale of pledged collateral to settle failure amount of loan
on the due date. In addition to this the time and place gap is our focused that we
like to solve these problems by attempting the following research questions.

1.3 Research question

•What are the problems affect the contribution of loan provided by commercial
bank for borrowers?
•What are the problems that are related to loan repayment in bank?
What are the conditions that affect the borrower to get benefit from the loan?
•How the bank makes secured loan?
• What type of risks bank facing when granting the loan?

1.4 Objectives of the Study

1.4.1General objective
The general objective of the study is to assess the contribution of loan provided
by commercial Bank for borrowers (in the case CBE, woldia branch).

1.4.2 Specific Objective

The specific objective of the study would be:
1. To identify the problems affect the contribution of loan provided by
commercial bank for borrowers.
2. To assess the problems related to loan repayment in commercial bank.
3. To assess the conditions affecting the borrower to get benefit from the loan.
4. To assess how the bank makes secure loans.
5. To identify the type of risk facing in granting the loan.

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1.5 Significance of the Study
The study was very important for both the borrowers and the financial
institutions. Some of the most important significance of the study is includes:
 To enable private potential investors to expect their business in urban and
rural part of the society.
 It would be the value of money in the mind of the borrower.
 It might enable the borrowers to capitalize the opportunity of financial
institution provide to make use of an idle resources.
 It would very important for the researchers who are interested to study on
the same area.

1.6 Scope of the Study

The study would be delimited to the contribution of loan provided by
commercial bank for borrowers in Woldia branch. This branch contributes
accepting deposits, granting loans, and transfers of money services for
borrowers. Besides to these services, the bank encourages to contribute facilities
and agricultural sectors. Due to these reasons the study would focus on this
institution and the study takes the borrowers section of the bank.

1.7 Limitation of the Study

The research study from its initiation to its completion has various problems and
constraints to be encounter. The following are some of the constraints and
problems faced for the researchers to accomplish the study.

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  In sufficient time to gather sufficient data to support the finding and
recommendation.
 Lack of capital requirement for completion this research study.
 Lack of adequate reference text in the library.
 Lack of required facilities like internet and computer.

1.8 Organization of the Study

The paper contains five chapters. The first chapter deals with the
introduction part of the research and the statement of the problem,
objectives of the study under this general and specific objective, scope of
the study, limitation of the study and organization of the papers. The
second chapter focuses on literature reviews were done to gather relevant
information concerning the contribution of loan provided by commercial
bank for borrowers. Chapter three deals the methodology part, this
chapter focuses with research design, target population, source of data,
method of data collection, and also contain sample design and size.
Chapter four contains data analysis, presentations of the data, and data
interpretations. The last chapter, which is chapter five, focus on
summarizes, conclusions, and recommendations of the study.

CHAPTER TWO

Review of Literature

2.1 Contribution of Commercial bank of Ethiopia for borrowers

There are different types of financial institutions such as thrift, insurance

company, finance company, mutual funds, pension funds Banks etc. (Madura,
2006).In addition, there are various types of banks which operate in our country
to meet the financial requirements of different categories of people. These banks
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are central banks, cooperative banks, industrial banks, commercial banks etc.
(Dura, 2009). But, we need to focus on the contribution of loans provided.by
commercial bank of Ethiopia for in Woldia branch.

2.2. Roles of the Commercial Bank

The two essential functions of commercial banks may summarize as the

borrowing and lending of money. They borrow money by taking all kinds of
deposits. Deposits may be received on current account where by the banker
incurs the obligation of paying legal, tender on demand or on fixed deposit
account where by the banker undertakes to pay the customer an agreed rate of
interest on it in return for the right to demand from him on agreed period of
notice for withdrawals. Thus a commercial banker, whether it be through
current account or fixed deposit account, mobilize the savings of the society.
Then he provides fixed loans by discounting bills of exchange or the banker is
that of a broker and a dealer in money. By discharging this function efficiently, a
commercial banker renders a valuable service to the community by’ increasing
the productive capacity of the country and there by accelerating the pace of
economic .development limits idle money. Then he combines these small
holdings in amounts large enough to be profitably employed in those) enterprises
where they are most called for most needed.
Besides these two main functions a commercial banker performs a variety of
other functions, which may be grouped under two main heads viz., the agency
services and the general utility services (Shakhar, 1961).
In addition to the above role of commercial bank, there are also other
contributions of commercial bank such as loans and advances that grants to the
borrowers (Dura, 2009).

Lending money is one of the two major activities of any bank. The bank acts as
an intermediary between the people who have the money to lend and those who
need money to carry out business transactions. This activity places its own

11
requirements on the resources of the bank. For effective functioning of this, a
bank must possess the followings:
 Sufficient deposits
 Appraise the skill of potential borrowers and the activity
 Legal skills for documentation
 Legal skills for recovery of its dues through the courts or
agent
 Skills to follow up and monitor the end use of money lent by
it
 An effective credit delivery system
 Review' of credit portfolio
Banks accept deposits from the public for safe keeping and pay interest to them.
Then they lend this money to earn interest on it. The difference between the rate
at which the interest is paid on deposits and is charged on loans is spread.
Banks lend money in various forms and perform practically every activity. They
guaranty loans and advances to members, of the public and to the business
community at a higher rate of interest than allowed to various deposit accounts.
The rate of interest charged on loans and advances varies according to their
purpose and period and also the mode of repayment (Dura, 2009

2.3. Loans
A loan is granted for a specific time period. Generally, commercial banks provide
short term loans. But, term loans, i.e., loans for more than a year, may also be
rated. The borrower may be given the entire amount in lump sum or an in
installment. Loans are generally granted against or in exchange of the ownership
(physical or constructive) of various types of tangible items. Some of the
securities against which the banks lend .are (i) commodities, (ii) debits, (iii)
financial instruments, (iv)automobiles, (v) consumer durable .goods and (vi)
documents of title. Banks lend money as term loans when the repayment is
sought to be made in fixed predetermined installments. This type of loan is

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normally given for acquiring long term assets that will be fit the borrower over a
long period (exceeding at least one year). Financing for purchase of plant and
machinery, constructing building for factory, setting up new projects,
purchasing automobiles, and construction of infrastructure all fall in this
category (Dura, 2009).

2.4 Types of Loan

Loans are classified as follow according to sounder and Cornett, (2001, P: 571)
Commercial Loan, Real estate Loan and consumer Loan.

2.4.1. Types of Commercial Loan

Short term loan: is usually repaid within one year limit. This type of loan is
given for business persons in order to meet their working capital needs. That is
the fund which needed to cover expense and other cost related to the operation
of the business, such loan is usually paid on monthly, quarterly, or the total
payment could be mode when the loan matures (shekhars, 1961).
Middle term loan: - is a Loan usually due from one to five year time. In order to
secure such loans the bankers usually request personal possessions like
machine production faculties as a collateral property’s guaranty for the
repayment of the Loan. The repayment for the loan is usually based on the
agreement between the banks and the borrowers (JyotsnasethiNishwan Bhatia,
2011).
Long term loan: - When funds are available, banks frequently make loans for a
period of over five years. They often stipulate certain restriction for the borrowers
such as requirement to get the lenders borrowers such as requirement to get the
lenders permission before assuming more debts. The most common long term
loan is a mortgage loan. This is a long term loan secured by giving some kind of
valuable and tangible properties such as buildings and equipment as collateral
(E.Narayanam Nadar, 2013).

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2.5. Advances

An advance is a credit facility provided by the bank to its customers. It differs

from a loan in the sense that the latter may be granted for a longer period, but
the former are normally granted for a short period of time. Further, the purpose
of granting advances is to meet the day to day requirements of business. The
rate of interest charged on advanced varies from one bank to another. Banks
grant short term financial assistance by way of cash credit, overdraft and bill
discounting. Let us now learn briefly about these (Dura, 2009).

2.5.1. Cash Credit

Cash credit is an arrangement whereby the bank allows the borrower to draw
amount up to a specified limit. The amount is credited to the account of the
customer. The customer can withdraw this amount as and when he requires.
The interest is charged on the amount-actually withdrawn. Cash credits in
theory one payable on demand. These are counterparts of 'demand deposits of
the bank. Cash credit is granted as per the terms and conditions agreed up on
with the customers. Once a security for repayment has been given the business
that receives the loan can continuously draw from the bank up to .a certain
specified amount. This type of financing is similar to a line of credit (Dura,
2009).

2.5.2. Loans for purchase of automobile

Consumer durable items most banks nowadays have a product for financing the
purchase of automobiles and other consumer durable items. The quantum of
loan is generally determined by the repayment capacity of the prospective
borrower. This in turn depends up on the monthly income. Most banks have
14
their own method to calculate the maximum monthly repayment capacity of a
person. Thereafter, a loan for which equated monthly installment (EMI) is within
his capacity is considered the outer limit for a person. The bank will be glad to
finance to this extent for the purchase of an automobile or any other consumer
durable item.
Most banks judge the monthly income with reference to either the lattes salary
certificate from the employer (in case 'of employees) or the last year's income tax
return (in case of self-employed persons). Other methods are also employed to
appraise the maximum limit considered desirable for a person.

2.5.3. Advances against the Security of Goods

Goods can be given as security against a loan either as a pledge or

hypothecation. The banker has to examine the document of title to the good and
ensure that there is no prior charge or hypothecation on the property. A majority
of the loans and advances sanctioned by the commercial banks are against the
security of goods such as plantation products, food materials, metals, minerals
and industrial goods. The banker should adopt following procedure (precautions)
before granting all loans against security of goods:
●Enquire the purpose for which the loan is taken
●Enquire the credit worthiness and financial soundness of the borrower.
● Evaluate the nature of goods perishable (durable).
●Price variation and the type of storage required.
●Appraise the value and quality of goods with the help of qualified appraisers
●Verify the document of title and the related other documents of exports
(Imports)
● Ensure that these goods are insured against contingencies such as fire and
theft
● Verify that the borrower has obtained the required license to deal with the
goods.

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2.6 Bank Sources of funds

To understand how any financial institution obtains and uses funds, its balance
sheet can be revived. It reported liabilities and equity indicate resources of
funds, while reported assets indicate its uses of funds. The major sources of
commercial bank funds are summarized as follows (Madura 2006).

2.6.1 Transaction Deposits

A demand deposit account or checking account is offered to customers who

desire to write checks against their account. A conventional demand deposit
account requires a small minimum balance and plays no interest. From the
banks perspective, demand deposit accounts are classified as transaction
accounts that provide a source funds that can be used until withdrawn by
customers.
Another type of transition deposit is the negotiable order of with drawl account,
which provides checking service as well as interest. Since 1981, commercial
banks and other financial institution throughout the entire country have been
allowed to offer these accounts because negotiable order of accounts at most
financial institutions require arrange minimum balance the some consumers are
willing to maintain in transaction account, traditional demand deposit accounts
are still popular. Now accounts at most financial institutions require a larger
minimum in a transaction some customers are willing to maintain in a
transaction account, traditional demand deposit accounts are still population.

2.6.2. Savings Deposits

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The traditional savings' account is the pass book savings account, which does
not permit check writing. Until 1986, regulation restricted the interest restricted
the interest rate banks could offer on pass book savings. The idea was to prevent
excessive competition that could cause bank failures, but in actuality the
ceilings prevented commercial banks from competing for funds during periods of
higher interest rates. In 1986, regulation was eliminated. Passbook savings
accounts continue to attract savers with a small amount of funds; as such
accounts often have no required minimum balance, although legally customers
are required to provide a 30 day written notice to withdraw funds, most banks
will allow withdrawals from these accounts on a moment's notice.
Another type of saving account is the automatic transfer service (ATS) account,
created in November 1978. It allows customers to maintain an interest bearing
savings account that automatically transfer funds to their checking account
when checks are written. Only the amount of funds needed is' transferred to the
checking account. Thus, the ATS provides interest and check writing ability to
customers. Some ATS were eliminated when now accounts were established.

2.6.3. Time Deposits

Time deposits are deposits that cannot be withdrawn until specified maturity
date. Although savings deposits are sometimes classified as time deposits
because of the legal 30 day notice described above, they are treated separately
here because the 30 day notice normally is not enforced the two most common
types of time deposits are certificates of deposit.

2.6.4 Certificates of Deposits

A common type of time deposit- known as a retail certificate of deposit (or retail
CDs) requires a specified minimum amount of funds to be deposited for a
specified period of time. Banks offer a wide variety of CDs to satisfy depositors'
needs: annualized interest rates offered on CDs, vary among banks, and even

17
among maturity types at a single bank. There is no organized secondary market
for retail CDs. Depositors must leave their funds in the bank until the specified
maturity or they will normally forgo a portion of their interest as a penalty. CDs
rates are easily accessible on numerous websites. For example, Bank Rate and
Bank CDs rates can identify banks that are paying the highest rates on CDs at
any point in time. Because of easy access to CDs rate information online, many
depositors invest in CDs at banks far a way to earn a higher rate than that
offered by local banks. Some banks allow depositors to invest in CDs on line, by
providing a credit card number.
The interest rate on retail CDs have historically been fixed. In recent years,
however, move exotic retail CDs have been offered. There are bull markets CDs
that reward depositors if the market performs well and bear market CDs that
reward depositors if the market performs poorly. These new types of retail CDs
typically require a minimum deposit of $1000 to $5000. Like more conventional
CDs, they quality for deposit insurance (assuming that the depository institution
of concern is insured).

2.6.5. Negotiable Certificates of Deposits

Another type of time deposit is the negotiable CD (NCs), offered by some large
banks to corporations. NCDs are similarly to retail CDs in that they require a
specified maturity date that requires a minimum deposit. Their maturities are
typically short term, and their minimum deposit. Requirement is $ 100000. A
secondary market for NCDs does exist.

2.6.6. Money Market Deposit Accounts

Money markets deposit accounts were created by a provision of the garnet

Germaine Act of December 1982. They differ from conventional time deposit in
that they do not specify a maturity. MMSAs are more liquid than retail CDs from
the depositors point of view. Because banks prefer to know how long they will

18
have the use of a depositor's point of view. Because banks prefer to know how
long they will have the use of a depositor's fund, they normally pay a higher
interest rate on CDs. MMSAs differ from now accounts in that they provide
limited check writing ability (they allow only' a limited number of transactions
per month. Require a large minimum balance, and offer a higher yield (Madura,
2006)

2.6.7 Federal Funds Purchased

The federal funds market allows depository institutions to accommodate the

short term liquidity needs of other financial institutions. Federal funds
purchased (or borrowed) represent a liability to the borrowing bank and an asset
to the lending bank that sell them. Loans in the federal fund market are typically
for one to seven days. Such loans can be rolled over so that services of one day
loans can take place. The interest rate charged in the federal funds market is
called the federal funds rate. Like other market interest rates, it moves in
reaction to changes in demand or supply or both the federal funds. Market.is
typically most active on wends clay, because that is the final day of each
particulars settlement period for which each bank must maintain a specified
value of .reserves required by the federal (Madura, 2006).
'

2.6.8. Borrowing from the Federal Reserve Banks

Another temporary source of funds for banks is the Federal Reserve System.
Along with other bank regulators, the Federal Reserve district banks regulate
certain activities of banks. They also provide short term loans to banks as well
as to some other depository institutions. Loans from the discount window are
short term, commonly from one day to a few weeks (Madura, 2006).

2.7. Commercial Banking Principles

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The most important objective of banking business like any other business is to
earn a profit from its borrowers. The problem for the banker is to assess the
proportion in which his fund should be divided between liquid assets and more
profitable assets. Geoffrey crow their says, "The secret of successful banking is
to.distribute resources between the various form of assets in such a way as to
get a sound balance between liquidity and profitability, so that there is a cash to
meet every claim, and of the same time enough income for the bank to pay its
way and earn profits for its shareholders". The traditional principles followed by
the commercial bank namely, liquidity, profitability and security are discussed
below in broad (Shekhar, 1961).

Liquidity
Liquidity means the capacity of the banker to convert his assets in to cash on
demand. The banker gets his funds from deposits and these deposits are
repayable on demand. The existence of a bank depends on the confidence that
the public has in the bank. The public feels confident about the bank only when
it is able to convert its assets in to cash to meet the demands of the depositors.
The customers make their demand by the issue of cheques and the banker has
got a statutory obligation to honor the cheques. These cheques are to be paid on
demand and here is no question of postponing the payment. For this, a banker
has to maintain enough reserves. And as such, he cannot lock up funds in
securities which have a permanent nature.

Profitability
Profitability is another important principle to be observed in determining the
lending policy. Like every another business, banking also should earn some
profits for the shareholders. Therefore a banker should canalize his resources
through profitable investment. To earn more profits, the funds should be
invested in long term assets. But the banker cannot lockup funds for long
periods without affecting liquidity. The banker should strike a balance between

20
liquidity and profitability by investing apportion of their funds in liquid assess
and a portion in long term assets.

Security
Every loan proposal under consideration of a bank involves an element of risk
that the loan, if made will not be paid as per the terms of the agreement. To
avoid the risk of loss, experienced bankers never lend money without sufficient
security. Banks prefer to invest their funds in assets which are less risky.

2.8. Bank Credit

The commercial banks are major sources of finance to industry and commerce.
The outstanding credit to commerce and industry goes on increasing.

2.8.1. Types of Bank Credit

Lending money is one of the primary functions of commercial bank. The banks
lend money is different forms and, generally for short periods. Since the
depositors are repayable on demand, they cannot lockup funds for long periods.
Usually, loans are granted a giant collateral security but, in special case,
advances are also given purely on the personal security of the borrowers (Gomez,
2008). Therefore, according Gomez, the loans and advances granted by the
commercial bank can be classified in to two
A. Secured advances
B. Unsecured advances
A. Secured Advances
Secured advances have impersonal security, i.e., the security has to be a
tangible asset against which the loan is to be granted. Primary security is an
asset against which the loan is given, and collateral security is a security, given
in addition to the existing primary security. These primary and collateral
security can be movable on the security man vary.
B. Unsecured Advances

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Unsecured advance on the other hand, has a personal security of any individual
or the borrower with or without a guarantor. It will be classified as unsecured
advances in the absence of any tangible security through personal security are
given by an individual by way of an obligation for repayment. These loans are
treated as unsecured. However, all those loans that have the guarantee of a
bank/government are categorized as ‘’advances covered by bank or government
guarantees,” and hence are not reported under the unsecured loans category
(Dura, 2009).

2.9. Important Characteristics of Credit

Credit is a very important aspect of buying a home. A lender wants to make sure
that the loan will pay back. In order to determine if an individual is a good credit
risk, a lender looks at four things, called 4c’s credit such as capital, capacity,
credit history and collateral.
Capital
Capital refers to the capital assets of the business. Capital asset might include
machinery and equipment for a manufacturing company, as well as produce
Inventory, or store or restraint fixtures.
Capacity
Capacity refers to the 'ability of the business to generate revenues in order to pay
back a loan. Since a new business has no “track record” of profits, it is a risk for
a bank to consider.
Character
Character refers to the financial history of the borrower that is what kinds of
financial citizen sis this person or business? By looking at the credit history,
particularly as it is started in the credit score.
Collateral
Collateral is the cash and asset a business owner pledges to secure a loan. In
addition to having good credit, a proven ability to make money and business
assets, bankers will offer require on owner to pledge his or his own personal

22
assets as security for the loan. Banks require collateral be causes they want the
business owner to buffer if the business fails. If an owner did not have to put up
any personal assets, he or she might just walk away from the business failure
and at the bank take what it can from the assets.

2.10. Principles in credit risk management

A bank has to follow three key principles in its credit risk management which
are selection, limitation, and diversification (sin key, 1986).

Selection
The first requirement is for whom to lend. This is based on customer's request. A
model loan request would be interims of filing all the information amount of
loan, purposes of loan, repayable and collateral..: Information on the
organization of the business proprietorship, partnership, company (private or
public), trade or industry area and other banking relationships would be
required.
Limitation
Loans may be classified by size and limit the bank exposure to losses from loans
to anyone borrower or to a group whose financial conditions are interrelated. A
system of credit limits restricts losses to a level which does not compromise
bank's solvency. Lending limits have to be set taking into account bank capital
and resources. Any on credit has to accompany by a genera limit on all risk
assets. This would enable them to hold a minimum proportion of assets such as
cash and government securities whose risk of default is zero.

Diversification
Diversification involves' the spread of lending over different types of borrowers,
different economic sectors and different geographical regions. To a certain

23
extent, credit limits which help avoid concentration of lending ensure minimum
diversification. The spread of lending is likely to reduce serious credit problems.

2.11. Method for reduction of credit risk

The commercial bank can reduce the credit risk by;

Raising credit standards to reject risky loans
Obtain collateral' and' grantees
Ensure complains with loan agreement.
Transfer credit risk by selling standardized loans
Transfer risk of; changing interest rates by hedging in financial futures,
options, or by using swaps.

Make loans to a variety of firms whose returns are not perfectly positively
correlated.

2.12 Empirical review

According to Amidu (2006), bank credit channel has focused on two issues. The
first issue centered whether there are categories of borrowers who depend on
bank lending in that any change in banks’ willingness to lend immediately
affects their investment and spending decisions. The other issue is whether
monetary policy changes directly constrain bank lending to borrowers. Both
conditions are necessary for bank lending to play a special role in the monetary
transmission mechanism. Some recent research provides support for the view
that certain borrowers, especially small businesses, are very dependent on
banks for financing (Abor, 2004).

CHAPTER THREE
3. RESEARCH METHODOLOGY
3.1 Research design

24
 Research design is a plan which specifies how data is related to a given
[problems and how data should be collected and analyzed. It provides the
procedural outline for the conduct of any investigation (Kothari, 2007).
The researchers used the descriptive type of research approach. Because, it is a
fact finding study with adequate and accurate interpretation of findings.
Therefore, this study describes the assessment of loan contribution provided by
commercial bank for borrowers at Woldia branch.

3.2 Target group and population

The target groups of this study were borrowers and manager of commercial bank
of Ethiopia at Woldia branch.
3.3 Type and Source of data

The researchers used both primary and secondary data. The primary data was
the first hand of information which would be obtained directly from the
borrowers and manager in the form of questionnaires and interviews which were
designed based on the research questions and specific Objective. The secondary
data collects from internet, websites, and books.
3.4 Methods data collection

The researcher use structured interview for the manager of commercial bank of
Ethiopia in Woldia branch and questionnaires to the borrowers which contains
both close and open ended questions in order to obtain relevant information.

3.5 Sampling technique

In this study, the researchers were used random sampling technique to choose
specific respondents based on their ability to give information ready since the
study require specific information. We have selected borrowers and manager of

25
the commercial bank. Because in simple random sampling each member of the
subset has an equal probability of being chose.

3.6 sample size

The researchers applied the probability sampling technique to select the

appropriate sample size from the 400 total borrowers to collect relevant data. So,
commercial bank of Ethiopia in case of Woldia branch has 400 borrowers.
Therefore, from the total population, we have selected 80 borrowers as a; sample
randomly. These borrowers provide relevant data for the questionnaire. We used
Yamane's formula (1967).
n = N/ 1+N (e) 2
=400/1 + 400(0.1)2= 80
Where, n= sample size
N= total population
e= acceptable error

3.7 Data analysis and interpretation technique

The response that obtained from questionnaires and interviews are presented in
the form of number, percentages, and tables. Because, the table form simply
describes the respondent’s data analysis.

CHAPTER FOUR
DATA ANALYSIYS AND INTERPITATION
4.1 Introduction to data analysis

This chapter discusses on the analysis of the collected data from the borrowers
and manager of commercial bank of Ethiopia Woldia branch. The researcher has
26
taken 80 borrowers of the bank by using probability sampling technique, and at
the time of data collection all of the questionnaires were collected due to the
researchers help to distributed and accepted all questionnaires at the time of
data collection.

4.2 General Background of Respondents

Table 1 Background of the respondents

S. no Items Variables No of Percentage

"' respondents (%)
1 Sex Male 60 75%

Female 20 25%
Total 80 100%
2 Age 20-30 14 17.5%
31-40 56 70%
41-50 10 12.5%
> 51 0 0%
Total 80 100%
3 Occupation Merchant 46 57.5%
Farmer 8 10%
Employee 18 22.5%
Others 8 10%
Total 80 100%
4 Monthly in come 2000-2500 4 5%
2501-3000 4 5%
3001-3500 8 10%
3501-4000 18 22.5%
>4000 46 57.5%
Total 80 100%
5 Education Technical 8 10%
qualification school
Secondary 36 45%
school
Collage(diploma) 14 17.5%
Collage(degree) 12 15%
Other 10 12.5%
Total 80 100%
Source: primary source (questionnaires), 2010EC

27
The above table 2, shows that most of the respondents are male which accounts
75% of the total respondents and the remaining 25% of borrowers are females.
From this we can understand that the commercial bank has a greater number of
male borrowers. As we shown that the age composition of borrowers that most of
them are between age range of 31-40 which constitutes 70% of the borrowers
and the next one becomes 17.5% of the respondents lies on the range between
20-30 and the remaining 12.5% of the borrowers grouped up on the age
between41-50. From this the researcher concluded that the age intervals of the
bank users are highly dominated between 31-40 years old. Therefore, the age
categorization of the respondents based on that they have expected to full
capacity to repay the loan.

As indicated from the above table, most of the respondents are merchants that
hold 57.5% of the borrowers and based on the occupation category there are
another borrowers like employees the second largest number of borrowers which
accounts 22.5% and the same percentage that responded for both farmers and
drivers which accounts 10%.
For the respective respondents, we can conclude that most the respondents
have monthly income above birr 4000 of the borrowers which constitutes 57.5%.
The second largest category of respondents according to their monthly income is
ranged from 3001-3500 that accounts 8 respondents which constitutes 10% of
the borrowers and the respondents which constitutes the same percentage at 5%
for both of them. But they are different according their monthly income.
As indicated in the table 45% of respondents qualification are secondary school
and the second largest are 17.5% are collage of diploma whereas the least
borrowers whose qualifications are technical school

Table 3 the length of time the borrowers spent to get loan service from the
bank

28
Description Respondents

No Percentage (%)

Long period of time 18 22.5%

Medium period of time 40 50%

Short period of time 22 27.5%

Total 80 100%
Source: primary source (Questionnaires), 2010

As shown from the above table 3, 22.5% of the respondents responded that it
takes long period of time and 50% of the respondents responded that they take a
medium period and 27.5% of the respondents responded that they take a short
period of time depend on the type of term loan. For example when a loan is a
medium term loan the life of the loan is limited to a maximum of two years. So it
has not taken along procedures and gets a loan in medium period from starting
to generate cash flow. Because of this it have a long procedure and takes a long
period to get the loan when the term of a loan is less than one year. Therefore,
the researchers concluded that the majority of the respondents' responded that
the borrowers take a medium period of time to get the loan services from the
ban.

Table 4 the quality of service the bank given for the borrowers

Description Respondents

No Percentage (%)

Very good 40 50%

Good 24 30%

Poor 16 20%

29
 Total 80 100%
Source: primary source (Questionnaires), 2010EC

Table 4 shows that the large portions of the respondents 50% are responded
that they were gate very good loan service.
Some of the respondents 30% are responded that a good for the quality of
services provided by the bank and 20% of the respondents are not satisfied by
the quality of services given by the bank for the borrowers. Therefore, most of the
respondents responded that the quality of service that the bank gives for the
borrowers is very good.

Table 5 the bank put limitation on amount of loan

Respondents
Description No Percentage (%)

Does the bank have put limitation - -

on the amount given? To you?
Yes 80 100%

No 0 0%

Total 80 100%
Source: primary source (Questionnaires), 2010EC

The above table 5 shows that all (100%) of the respondents are responded that
the bank has put maximum amount of money that the borrowers can borrow.

Table 6 the securing of loan by fixed asset

Respondents

30
 No Percentage (%)
Description

Yes 64 80%

No 16 20%

Total 80 100%

The Source: primary source (Questionnaires), 2010EC

The above table 6, shows that 80% of the respondents are responded that they
have collateral securing their loan. Most borrowers have a fixed asset like house,
car and other assets as collateral when they borrow. This is because of securing
their loan during the time of failure of repayment of loan, the borrowers
collateral could be sold for the loan. Therefore, the researcher concluded that
most of the respondents hold collateral for securing the loans.

Table 7 the satisfaction of borrowers by the loan

Respondents
Description No Percentage (%)

V. much 56 70%

Little satisfaction 24 30%

V. little satisfaction 0 0%

Total 80 100%
Source: primary source (Questionnaires), 2010EC

As indicated in the above table 7, a large portion of the respondents 70% are
satisfied by granting loan and some of them are also felt little satisfaction with
the loan. There is no any respondent that feels very little satisfaction. They

31
 concluded that most of the respondents responded that, they have obtained very
much satisfaction with the granting

Table 8 the borrower’s deposit account in the bank

Respondents

No Percentage (%)
Description
Do you have deposit account in the bank?

Yes 72 90%

No 8 10%

Total 80 100%
Source: primary source (Questionnaires), 2010EC

As in the above table 8, responded that the 90% of the respondents have money
deposit account in the bank for the purpose of the protecting future emergency,
to safeguard money the borrowers to obtain the loan from the bank. But 10% of
the borrowers have not deposit account in the bank. Therefore, the large portion
of the borrowers have deposit account in the bank for the purpose of obtaining
the loan from the bank.

Table 8 the motivation of borrowers to borrow from CBE

Respondents

No Percentage (%)
Description

32
What motivated you to borrow
from the bank?
Give low interest 36 45%

Ask low collateral 24 30%

Given loan for a long period of 12 25%

time

Other specify 8 10%

Total 80 100%

Source: primary source (Questionnaires), 2010EC

As shown in the above table 8, 45% of the respondent responded that they
encourage taking a loan from CBE is the lowest inters rate and low collaterals
pledged relative to the other banks. Whereas of the 25% borrowers motivated by
the length of time period and the remains 10% were motivated by other things
like the quality of banks service. Therefore; majority of the respondent have
motivated due to the low of interest rate.

Table 9 the purpose of loan that they borrow from the Bank

Respondents
Description No Percentage (%)

To start new business 55%

44
For consumption purpose 0 0%

To expand existing business 30 37.5%

Other specify 6 7.5%
33
Total 80 100%
Source: primary source (Questionnaires), 2010EC

As shown from table 9, most of the respondent 55% responded that the purpose
of the loan that they borrow is to start new business and 37. 5% of respondents
responded for the purpose of expanding existing business, and 7.5% were for the
other purposes like to buy cars and no one borrower borrowed to the
consumption.

Therefore, most of the respondents responded that the aim of the borrowers
borrow to start new business.

Table 10 the repayment of loan on the due date

Respondents
Description No Percentage (%)

Do you repay the loan on the due date?

Yes 68 85%
No 12 15%
Total 80 100%
Source: primary source (Questionnaires), 2010EC

As shown from the above table 10, 85% of the respondents responded that they
repay on the due date but other 15% don’t repay on the specified period because
of, the borrowers have no enough capital for the repayment of the loan, due to
the business failures and risk exist in the business of the borrowers, and when
the repayment amount is beyond their capacity during the due date, improper
business profit, and other reasons. But, most of the respondents are repay the
loan in the stated date even if others failed to pay.

34
 Table 11 the type of risk the borrowers facing

Respondents
Description No Percentage (%)

Interest risk Credit risk 12 15%

Liquidity risk 26 32.5%

Operation risk 6 7.5%

Business risk 16 20%
Credit risk 10 12.5%
Other specify 0 0%
Total 80 100
Source: primary source (Questionnaires), 2010EC

Table 11, shows that 32.5% of the respondent responded that exposes for the
liquidity risk and 20% is faced by business risk, 15% of the respondents
responded that they face interest risk in their loan some of the respondents
12.5% of the respondents responded that they exposed to credit risk in the loan
and the 7.5% is operational risk.
Generally, most of the respondents are faced by liquidity risk and business risk
respectively.

4.3 Analysis of the interview questions for the manager

Under this section, we include summarized questions presentations of idea that

the interviewee (the manager of CBE) in our case. Researchers asked some
questions to be explained orally by the manager. The manager answered each of
the questions. So this section will present you a summary of what the manager
said about the contribution of loan provided by commercial bank for borrowers.

35
4.3.1 About the benefit of loan for the bank and for the borrowers

As the manager responded, the loan has many advantages for the borrowers.
Some of the most important of loan for the borrowers are:
 In order to maximize their income
 For investment expansion
 For improving small business enterprise into large scale enterprise
 For improving the living standard of the borrowers
 To improve the savings habits
 To maximization of profit
 To start new investment and business
 To expand the existing business
 For purchasing of and building new house
Also the bank improves its capital by lending for different borrowers and by
collect interest form lent. In addition to this the ban would competitive as well as
a profitable by increase its customers.

4.3.2 Interview analysis of the problem of bank faced related to loan

As the manager said the before this there is no strong risk that the bank faced.
But, some borrowers can’t repay the loan on the due to efferent reasons such
as business risk, credit risk, liquidity risk and, operation risk

4.3.3 Analysis about the criteria that the borrower should full fill to borrow
from CBE
According to the manager that to borrow from CBE the borrowers must full fill
the basic requirement like collateral pledged to the bank. Because, it makes to
be secured the loan, if the borrower cannot repay on the specified period of time.
Sometimes the bank requires such like capacity, capital, and business plans of
the borrowers. Because, if there is no any of full fill the above criteria the lent
money can’t repay on the stated period of time.

36
4.3.4 The ability of the borrowers about the repayment of loan

As the manager responded that most borrowers can return the loan on the due
date. In opposite to this some borrowers don’t repay. The ability to repay rule
requires most mortgage lenders to make a reasonable and good faith
determination that the borrowers are able to pay back the loan. So the
borrower’s ability to pay is more or less is good even if there are some
exceptions.

4.3.5 How much is your contribution weather or not the borrowers are used
the money for the correct purpose

According to the manager, always the manager assess the borrowers weather
they are use their borrowed funds for correct and for expected purpose by
visiting the borrower’s work place,

CHAPTER FIVE
Conclusion and Recommendation
This chapter as a whole presents the concluding remarks for the main findings
in chapter four and important recommendation on the assessment of
contribution of loan provided by commercial bank for borrowers in Woldia
branch

5.1. Conclusion
As it has been pointed out in the findings, the following conclusions are
suggested as follows.

37
●The contribution of loan provided by commercial bank for the borrowers is
affected by the failure of repayments of the amounts of the principals and
interests on a due date.
●The purpose of borrowing from commercial bank of Ethiopia is in order to
maximize their income, for investment expansion, to enhancement of job
opportunity, for improving small business enterprise into large scale enterprise,
to improving the living standard of the borrowers, to improve the savings habits,
to maximization of profit, to start new investment and business, to expand the
existing business, for purchasing of and building new house.
● Most of the borrowers are borrow for the purpose of start new business and to
expand the existed business.
● Most the borrowers are repay the loan on the due date but some of them did
not repay at the specified period because of liquidity, credit and other risks.
● the majority of borrower spent a medium period of time to get the loan service
from the bank and the quality of service that the bank given for the borrowers.
●the respondents responded that the quality of service that the bank given for
the borrower was said to a very good.
● the bank has put limitation on the amount to given the borrowers of
commercial bank of Ethiopia and most of the borrowers in the bank have
collateral for securing the loan. Because the bank has an obligation to hold
collateral in case failure of repayment is at stated period.
●The type of collateral for the bank, such as, building, house, vehicles like cars
and others as collateral because this fixed assets make the loan secured.
●Most of the borrowers have deposit account in the bank for the purpose of
protecting future emergency, to safeguard money, to obtain loan from the bank
and due to low interest rate , the quality of service have motivated to borrow the
loan from CBE.
●The manager asses the borrowers whether they are used the loan for the
correct purpose and to borrow from CBE there is requirements such that fixed
asset for a collateral and there business plan.

38
● The contribution loan provided by CBE is for starting new
business/construction different buildings/ agricultural and expand existed.

5.3 Recommendation

According to the findings the following recommendations are presented as

follows.

● The researchers suggest that the major contribution of granting loans for the
borrowers was provides for improving the living standard of borrowers.
● The borrowers have no enough capital, lack of knowledge; business failure
and risk exist in the business, improper business profit during the due date.
● To avoid a long period of time to obtain the loan from the bank, but spent a
medium period of time for the loan services.
● the bank have collateral for securing the loan of borrower's and for avoiding
unable to repay the loan and the researchers suggested they have got a very
much satisfaction by of the loan.
● The borrowers should have deposited to protect future emergency, to
safeguard money, to obtain loan from the bank.
● The researchers suggest that the purpose of the loan is to start new business
mostly.
● Most of the borrowers were going to be faced credit and business risk and
try to minimize these risks.

● Most of, the time the types of loan provided for borrowers is an over drat loan
and which is more widely used by the borrowers.

39
 WOLDIA UNIVERSITY
Faculty of Business and Economics
Department of Accounting and Finance

The main purpose of this interviews are for the preparation of the senior essay
on the topic assessment of contribution of loan provided by commercial Bank for
borrowers (case study Commercial bank of Ethiopia, Woldia branch) in partial
fulfillment of the requirements of BA Degree in Accounting And finance.

We would like to thank you for your great cooperation in advance!

Interview questions

1. What are the benefits of loan for the bank and for the borrowers?
2 .What problems have your bank faced with related to loan?
3 .What are the criteria that the borrowers should full fill to borrow from the
bank?
4. How does evaluate the ability of borrowers about repayment of the loan?
5 .How much is your contributions weather or not the borrowers are used the
borrowed money for the correct purpose?

40
 WOLDIA UNIVERSITY
Faculty of Business and Economics
Department of Accounting and Finance
The main purpose of this questionnaires are for the preparation of the senior
essay on the topic assessment or contribution of loan provided by commercial
Bank for borrowers (case study Commercial bank of Ethiopia, Woldia branch) in
partial fulfillment of the requirements of BA Degree in Accounting And finance.

We would like to thank you for your great cooperation in advance!

General instruction
●Put “” mark on check boxes that fit your response
●No need of writing your name
●The information you provide remains confidential

I. General background of the respondents

Questioners related to borrowers

Personal information:
1. Age: 20-30 31-40 41-50 Above 51
2. Sex: Male Female
3. Occupation: Merchant Farmer
Other specify…………………………………………………………..
4. Education qualification: Technical school secondary school
41
 College (diploma) College (degree)
Other specify…………………………………………..
5. Monthly income;
2000-2500 2501-3000
3001-3500 3501-4000 Above 4000

II. Detail questions:

1. For what purpose you borrow the fund?
To start new business To expand existing business
For consumption purpose Other specify………………………………….
2. What motivated you to borrow the loan from the bank?
Give low interest Give low collateral
Give loan for a long period of time Other specify…….……………………
3. Do you repay the loan on the due date? Yes No
4. For question number ’3’ your answer is "No" why you cannot repay the loan
on the due date? ………………..........................................................................
5. What is the length of time you spent to gate the loan services from the hank?
Long period of time Medium period of time Short period of time
6. How do you see the banks’ overall quality services giving for you'?
Very good Good Poor
7. Does the bank have put a limitation on the amount to be given to you?
Yes No
8. Do you have a fixed asset for securing the loan?
Yes No
9. If your answer on question number '8' is "Yes" what kind of collateral is?
………………………………………………………………………………………
10. How much you are satisfied with the granting of loan?
Very much little satisfaction Very Lillie satisfaction
11. Do you have deposit account in the bank? Yes No
12 If your answer question number ‘11’ is ‘’Yes’’ what type of deposit is it?
…………………………………………………………………………………………….………………………………………………………
42
13. Which type of risk is facing you in the loan reaping?
Interest risk Credit risk
Liquidity risk Operation risk
Business risk Other specify………………………

15. How do you solve these risks? ......................................................................

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44