Professional Documents
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Abdul Kuadir Full N Final2222
Abdul Kuadir Full N Final2222
Abdul Kuadir Full N Final2222
The development of banking in ancient time was closely associated with the business of money
changing. The first people to have begun the concepts of banking operation were believed to be
the gold smiths. Since the gold smiths had strong boxes to keep their gold they dept in trust
money ornaments made of silver, gold and other valuable articles. However, in long own, the
gold smiths came to be aware that among the depositors i.e. the owners of the receipt only a few
of them came to with draw their money. Hence, modern banking system begins in this was where
than 500 years ago. The oldest recognized bank is supposed to be the “bank of Venice”
established in 1157. Following it’s as establishment, were established the bank of Barcelona and
the bank of Genoa in 1407 respectively.
Generally, the early development of banking and credit was closely associated with three
elements merchants, moneylenders and smiths (Belie Giday, 1987).
The commercial bank of Ethiopia (CBE) was incorporated as a share company on December 16,
1963 per proclamation no 207-1955 of October 1963 to take over the commercial banking
activity of the former state bank of Ethiopia under this name, it began operation on January1964
with a capital of the $20,000,000 and served for about 16 years. The bank was wholly owned by
the state and operated as an; autonomous institution under the commercial code of Ethiopian.
Commercial Bank of Ethiopia Hare branch is one of the financial intermediaries in Ethiopian,
which serves universal banking activity as a channel for loan able funds prom savers to
barrowers. The source of these loan able funds is demand deposit and saving deposits made by
the customers. The bank provides various types of loans to customers expert loan so the study
will they to assess the acting of the bony regarding credit assessment and analyzing and
examining the credit operation of the bank.
The commercial bank of Ethiopia (CBE) was incorporated as Share Company on December16,
1963 proclamation no.207-1955of October 1963 to take over the commercial banking activities
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of the former state Bank of Ethiopia. Under this name, it began operation on January 1, 1964
with a capital of Eth.20, 000,000 and served for about 16years. The bank was wholly owned by
the state and operated as; an autonomous institution under the commercial code of Ethiopia.
The commercial bank of Ethiopia Share Company and Addis bank had identical objectives,
powers and duties. Hence, it was necessary to merge them, in order to eliminate the duplication
of efforts and bring them under a centralized banking structure. Consequently, the present day
commercial bank of Ethiopia was established under proclamation no, 184 of August 2, 1980.
According to this proclamation, the main objectives of the commercial bank of Ethiopia are as
follows:-
Commercial bank is one of the business organization that may face difficulties in engaging
ascertain business activities, when it don’t have appropriate and effective credit analysis and
processing activities. Those appropriate and effective credit analysis and processing activities
enable to the commercial bank of Ethiopia to handle its credit analysis and process in the most
economic way. These, the company is continues its operation, surreal, and profitability’s when
only it has appropriate and effective credit analysis and process practice. That is why the
researcher is initiated to study on the selected topic; the researcher will try to assess what kind
of problem is mostly or repeatedly occurred to the bank and its overall activities of the credit
analysis and process problems.
Generally as per the researcher knowledge there are many research has been conducted in
commercial bank of Ethiopia around Harar on credit analysis and process practice and
performance but there is no any research conducted on the problem of credit analysis and process
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so the researcher try to assess the problems of credit analysis and process practice and
performance in case of commercial bank of Ethiopia Harar branch.
The general objective of the study is to assess credit analysis and processing of commercial bank
of Ethiopia Harar branch.
Though some research were made by credit and market research department of commercial Bank
of Ethiopia Harar branch how to enhance the credit performance of the bank to solve the
problems that face in assessing and analyzing loans to be disbursed, the study further helps the
credit appraisal for the frame work of decision analysis.
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To invest the banks fund at adequate rate of return in order to meet the government,
legitimate demand for profit
To consider the risk involved in loan in order to protect the bank and continue to a large
the risk factors during the entire term of the loan.
To provide reasonable, contractive, credit needs of the banks customer based on their
capacity and requirement.
To identify the practical application of transparency and accountability using external
auditors and government agencies in order to protect both the government and the public
from unfair banking practices which may lead to bankruptcy and loss of customer
confidence.
To enable the bank in operating competently
1.7 Scope of the study
Commercial Bank of Ethiopia has different branches. Because of time, place, and cost constraint,
the study is concerned on commercial bank of Ethiopia Harer branch.
One research work cannot be found without problems. Some limitations of this study work
would be:
Lack of information
Lack of resource, like computer, internet access, references etc
Lack of finance and enough time
Lack of experiences
For the successful completion of this studying primary data is collected. The primary data was
collected through questionnaires to CBE business banks offices (Loan officers, Branch Managers
and Credit department officials).
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1.9.2 Sampling plan and sampling size
To acquire the necessary information, with shortage of time, & money for accuracy purpose, the
study used two sample techniques. From the total 62 population, the researcher selects 16 of
them as a sample out of them 10 were selected from employees of Commercial Bank of Ethiopia
by using judgmental sampling technique and 6 were selected from debtors by using random
sampling technique.
After the data required for the study is collected, statistical measures like percentage, ratios and
tables were used for data presentation analysis.
The study contains four chapters. The first chapter deals with introduction, statement of the
problem and its approach and scope of the study. The second chapter contains literature review
of loan processing and credit analysis. The third chapter contains about data analysis and its
finding and the farther chapter contains about summary, conclusion and recommendation.
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CHAPTER TWO: RELATED LITRATURE REVLEW
It may be said that, Banking in its most simple farm, is as old as authentic history. As easier as
2,000 BC, Babylonians had developed a system of banks. In ancient Greece and Rome, the
practice of granting credit was widely prevalent; Traces of credit by compensation and by
transfer orders are found in Assyria, Phoenicia and Egypt before the system attained full
development in Greece and Rome.
In Rome, Some of the banks carried business on their own account and others ware appointed by
the government to receive the tax. They used to transact their business on similar lines as those
of the modern banks. During the earlier period, a though the baking business was mostly done by
private individuals, many counties established public banks either for the purpose of facilitating
commerce or to serve the government. The oldest recognized bank is supposed to be the “Bank
of Venice” established in 1157, originally; it was it was not a bank in the modern sense being
simply an office for transfer of public debt.
As early as 1349, the drapers of Barcelona carried on the business of banking. The drapers were
not allowed to commence this business until they had given sufficient security. In 1401, a public
bank was developed in Barcelona and it used to exchange money, receives deposits, and
discounts bills of exchange. During 1407 and 1609, the bank of Genoa and bank of Amsterdam
was established respectively (Banking theory and practice, shekhar, 1961).
It is the agreement of that was reached in 1905 between Emperor Menilik II and Mr., Ma
Gillivary; the Emperor inaugurated representative of the British owned national bank of Egypt
marked the introduction of the then modern banking in Ethiopia in February 16, 1906. The bank
earned no profit until 1941; profits were record in 1941, 1919, and 1920 and from 1924 onwards.
During the invasion (1935) the Italians established branches of their main banks namely bankca
d’Italia, Banco di Roma, Banko di Napoli, and Banco Nazionale del lavoro, In 1941, another
foreign bank, Barclays Bank came to service in Addis Ababa still it withdraws in 1943, shortly
before the commencement of full operation of the state Bank of Ethiopia.
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The state bank of Ethiopia acted as the central bank of Ethiopia and as the principal commercial
bank in the country and engaged in all commercial banking activities until it exists by bank
proclamation issued on December 1963. The national bank of Ethiopia performs central banking
functions which commercial bank of Ethiopia took over commercial banking activities of the
former Ababa Bank Share Company was also come existence in 1964.
In 1945, Agricultural Bank that provide loans for agriculture and other relevant project was
establishing and replaced in 1951 by investment bank of Ethiopia. In 1965, its name once again
changed to Ethiopia Investment Corporation Share Company.
Following the introduction of socialism economic system in 1974, the banking sector was
changed to a monopolistic banking system. The housing and saving bank was establish in 1975
by merging for former saving and Margate Corporation of Ethiopia S.C and the imperial saving
and home ownership public association with the objective to provide loans for residential and
commercial construction industries. Then Addis Ababa Bank and commercial bank of Ethiopia
S.C was merged by proclamation number 134)1980 to form the sole commercial bank in the
country still 1994 (www. nbe. Gov.et /History/).
Loan documentation is a critical aspect of lending process. It includes written analysis of the
credit request, appropriate instruments that communicate (i.e. notes, security agreements and
loan agreements, and documentation of actions.
The loan officers are the front line troops of the lending operation. They are charged with the
challenging responsibility of dealing with the banks borrowing customers on a day- by- day
basis: helping the borrower determine his credit needs; obtaining, assembling and analyzing the
information required to make a sound decisions on a loan applications. And negotiating the terms
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of each loan with the borrower in such a manner that the loan is both satisfactory to the
borrower(Behrens, 1974, P.H).
The following phases occur in every lending situation. Each phase is equally important. The loan
officer needs to document each phases. The phases of the lending process are:
The loan officer should be assumed that he/she will gather as much of the data necessary for the
credit granting decision as possible. In order to gain efficiency and credibility, checklists should
be developed and used the type of worksheet will depend on the type of loan being requested.
(Linder 1993.P.117).
Interview
The interview is the first contact with borrower and provides an opportunities for the banker to
explore about the applicant bay and loan application (Tefer seifu, 2002, p-1).
It should be friendly discussion in which, the banker tries to see through loan request. He should
touch on points like:
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How he intends to pay off the loan etc.
The interview should not be striated to the borrower only. The personal guarantor, if proposed
also is interviewed for a deeper insight to determine his credit worthiness and liabilities.
Applications
An application for credit should be completed for every loan request, while it is a realignment
that banks have a completed signed and data application types of dwelling related loans,
regulatory, guidelines strongly suggest that an application be obtained in all situation. It becomes
the document where the loan officer records the answer to the information discussed above
(Linder, 993, p-167).
Loan purpose
As Linder mentioned (1993), knowing the purpose of the loan request is important for several
reasons. By determining the purpose of the loan, the loan officer will know.
Loan request
Every loan application should indicate whether the loan request is to be considered:
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The loan amount the maturity and the interest rate requested.
Signatures
The application should be signed by the individual applying for the loan. A financial institution
may not request the signature of an applicant, an only loan, if the applicant qualifiers under the
credit criteria established by the bout. If the bank required a cosigner, it was not specify who that
person is to be, unless the applicant resides in a community property state and the bank is relying
on that property to satisfy the debt. (Linder, 1993, p.11).
The second phase of the lending process involves the gathering of additional information
necessary to make an informed credit decision.
Among these, the loan officers should raise the following questions:-
The primary purpose of the credit investigation is to determine the personal and business
repletion and responsibility of the borrower. Prompt and compete repayment of the loan with
interest depends, largely, on the honest, and managerial- financial and technical- ability of the
borrowers. (Linder; 1993, p.112).
This is the critical phase of the credit granting process. It is an area where the loan officer needs
to document that, he/she has actually performed proper analysis of the various risks involved
with the particular credit request. In addition to the areas already mentioned, document the
analysis of the five C’s of credit i.e. character, capital, collateral, capacity, and condition.
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2.4.4. Recommendation for Approval, counter-officer, or denial
Once the previous steps have been completed, the loan officer should be ready to make a
decision on whether to recommend approval of the loan as requested; to propose a counter- offer
to the customer, which if accepted by the customer, would be approved by the bank; or deny the
loan request.
The proper completion of all required documents is critical to the collection of the loan. If the
borrower experiences problems, the financial institution must have strong documentation in
order to minimize the risk of financial loss. (Linder, 1993, p-139)
Security Agreement secured party that creates a security interest in personal property or fixtures,
(Linder, 1993, p 160)
It must be in writing and must be signed by the debtor, except in situation where
the collateral is in the possession of the secured party.
It must contain a “granting” clause in which the debtor gives to the secured party a
security inter performance of an obligation.
It must contain a description of the collateral.
It must contain a recital of the obligation secured by the collateral.
Credit files will be examined by the examiners to determine if the loan officer has properly
analyzed the credit in relation of the C’s of credit. The loan officer needs to document his/her
analysis of human/management factors (character); the borrower’s financial position (capital).
The borrower’s ability to repay the loan as it has been structured (capacity); the establishment of
security pledged for the loan including identification, valuation and the method of determining
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the value of the security (collateral); and the economic conditions existing which could affect the
collectability of the loan, both currently or in the know future (condition). (Linder, 1993, p.160)
While this task is normally the duty of clerical personnel in lending, it is the responsibility of the
loan officer to be assumed that the loan has been beaked on a timely basis and that the customer
has received proper credit for the proceeds of the loan.
Credit Files
The details regarding the borrower are essential not only during the loan appraisal time but also
throughout the tenure of the loan. This is essential especially since there may always be a
probability of default or a change the risk return profile of a customer, continues evolution is
possible with the help of a credit file, which keeps track of the historical record of the borrower.
In this context, the loan policy can specially mention the inputs required for maintaining the
credit file for varying types of loans.
The credit file should reveal all the parameters considered while accepting the proposal. It is
useful to keep a record of any specific events or experiences with indicates whether the decision
taken for granting such a loan was sound or not, the contents of credit file should include all
details of the borrower including detailed financial statement and analysis, compensating
balances, etc (D.Muraleedharn, 2002, p.218).
It is the responsibility of the loan officer to obtain all required but missing documentation. A
system should be established for this purpose.
A lender who negotiates a firm, specific, workable repayment program with the borrower at the
time the loan is made and who then follows upon the borrower repayment the successful
collection of the loan.
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2.5. Loan administration
Effective administration is the key to success of the lending policy for improving its efficiency,
the authority of the loan executives. The loan policy should state the sanctioning powers of the
loan officers regarding the credit limit. The credit limits, which are generally get- based on the
responsibility and the experience of the loan officer, should be done diligently. Too low a limit
will lend to a situation where a major part of the senior managements time is spent a smaller
quantum of loans. In contrast, the rise of the bank may increase when loan sanction powers are
too high.
While lending decisions are crucial for a bank, it is neither feasible nor desirable for the top
management to review and clear every single loan proposal that the bank receives. This arises
not only due to the process involved in such an activity but also due to the numbers.
Furthermore, for most of loan proposals, whichever industry they may belong to, the modus
operandi remains the same-analysis, selecting, sanctioning and monitoring. Hence the tap
management needs to set the standards, standards relating to the exposure limits for
individual/company/ industry, credit quality of the borrowers, lending rate, risk level, etc, enable
decentralized decision making by the lending officers, (D.Muraleedharan, 2009, p-216).
The first step to framing a loan policy is formulating the objectives of the lending activities. Due
to the presence of multifarious objectives such as profitability, liquidity, volume of business, and
risk level, there will be prioritization of objectives while drafting the policy. But due to certain
conflicting situations, one conciliation or trade-off between different objectives may become
necessary. By stating the related regulatory aspects in the policy, the loan officers will be fully
aware of the important of the policy measures.
The policy should specify the targeted composition of the loan portfolio, such composition being
in terms of industry, location, size, interest rate or security. Decision regarding the loan portfolio
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will depend on the size of the bank, the credit requirements in its operational areas and the
expertise available with the bank. Generally, exposure levels, which, the banks can have for the
There are various locations from where a bank conducts its operations. While operating in any
area, the bank should have the requisite funds and expertise to meet the credit demand,
(D, Muraleedharan, 2009-p-216)
The policy document shall specify a process for evaluation across areas or people. Evaluation
involves a careful selection of the barrowers by understanding their credit worthiness. While
evaluating the proposal, banks should access not only the ability of the client to pay back the
loan but also his willingness to repay. They need consider the following variables while
evaluating a loan proposal.
It needs to be performed to study the prospects the industry, and it most importantly includes a
study of the: (i) industry cycle, (ii) threat from substitute (iii) shifts in customer demands, and
(iv) regulatory environment.
The company level credit rating is conducted to assess the operational efficiency of the client
company. The critical as pacts that are to be evaluated in this process fall into the following
categories: (i) operating margin, (ii) stability and growth of market share, (iii) access to key raw
materials, and (iv) benefit from economies of scale.
Repayment of the loan by the clients depends greatly on their financial soundness. Hence,
financial analysis becomes an imperative part of credit crick analysis. It includes an analysis of
(i) financial leverage, (ii) coverage ratios, (iii) cost of capital, (iv) ability to raise funds, (v)
working capital, management, and (vi) interest rate risk management.
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Management Evaluation
The management evaluation throws light on the willingness of the client to repay. It includes a
study on the performance of the promotion, top management and the performance of the
promoter, top management and the performance of group companies under the same
management. (D.Muraleedharan, 2009, p-217)
The term-loan review system refers to the responsibility assigned to various areas such as credit
underwriting, loan administration, problem loan work out, or other areas.
Accurate and timely credit grading is a primary component of all-effective loan review system
credit grading involves an assessment of credit quality, the identification of problem loans and
the assignment of risk ratings. It is performed by individuals independent of the lending function
are preferred because they often provide a more conservative assignment of credit quality.
When developing the accept or reject grades, banks must obtain data on applicant characteristics
when loans were originally requested for both accepted and rejected loans. (Mager, 1975, p-721)
How creditors collect, what is owed to them various according to the company, every company
that gives credit has a define to collection system. Here is the general procedures are follows:
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2.11 Loan problems
The examiner evolution of the party olio involves much more than mealy appraising the
individual loan there in, prudent management and administration of the overall loan account,
including establishment of sound lending and collection policies are of vital important if the bank
is to be continuously operated in an acceptable manner.
A problem loan can be defined as one in which there is major break down in the repayment
agreement resulting in an undue delay in collection, or in which it appears legal actions may be
required to effect collection, or in which there appears to be a potential loss.
By classifying the total advances based on the nature, security, and purpose, the bank will be in a
better position to analyze its loan profile from various angles. This kind of classification helps
the roader of a balance sheet to understand the bank better. Having decided on the type of credit
advances if will be offering the bank will then have to take crucial decisions regarding the loan
appraisal, loan pricing and other loan components. And it is one part of credit processing and
assessment. It deals with loan discussion, loan analysis and review of files (D.Muraleedharan,
2009, p-213).
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2.12.1. Review of files and records
Commercial loan liability ledgers on comparable subsidiary records vary in quality and detail.
Generally, they will provide the barrowers total commercial loan liability to the bank, and the
postings there to will depict a history of debt. Collateral records should be scrutinized to afire the
necessary descriptive information and to ascertain that collateral held to secure the notes is as
transcribed.
The examiner must comprehensively review all data collected on the individual loans. In most
banks, this review should allow the majoring of loans to be passed with ant criticism, obviating
the need for discussing these lines with appropriate bank officer.
In the appraisal of individual loans, the examiner should weigh carefully the information
obtained and arrive at a judgment as to the credit quality of the loan under review. Each loan is
appraised because of its own characteristics.
Consideration is given to the risk involved in the project being financed; the nature and degree of
collateral security; the character, financial responsibility, and record of the barrower; and the
feasibility and probability of its orderly liquidation in accordance with specified time (Manual).
Financial statement analysis is not being adequately performed in order to determine the
financial strength (weakness) of the borrower. As a loan administrator, it is essential that
financial statement analysis procedures be developed and implemented.
The purpose of financial statement analysis as done by a financial institution is to determine the
ability of the borrower to meet the credit under writing standards of the institution is regard to
the loan request.(Linder, 1993,p-173)
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Financial statement consists of three documents;
1. Balance sheet
2. Income statement
3. Cash flow statement
There are three major concerns that the loan officer must address when analyzing financial
statements; (1) the quality of the information, (2) the relationship between items and, (3) the
timing of the statements.
Financial statement includes balance sheet income statement and cash flows. Balance sheet
includes assets, liabilities and equity. In came statement relates the sales of a given period to the
manufacturing or production costs incurred in producing the goods that were sold and to the
other expenses in culled in that period. Cash flow statements include trend analysis and ratio.
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CHAPTER THREE: DATA ANALYSIS AND PRESENTATION
The primary data used for this study is collect from two types of respondents, from CBE staff working on
loan and from the bank borrowers. These two groups are select because surveying and presenting the
opinion of these groups is believe to be relevant and meaningful to study the problem properly. Therefore,
the researcher was tried to analyze the questioner collected separately. Respondents were made aware of
the objective of the study so that they could give genuine and relevant information. Analysis and
explanations for amounts in the table is giving only for most frequent and extreme figures.
10 questionnaires were prepared and distributed to CBE bank staffs but only the 9 were properly filled
out and returned. All the 9 questionnaires were filled out by the bank’s staffs who are directly involved in
the process of related tasks. As shown in Table 1, from the total 9 respondents, 3 found to be
female and the rest 6 are male.
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Out of the total questionnaires distributed to the bank’s staffs, 3(33.34%) response are obtained
from the branch manager, 2(22.22%) of the response obtained from loan officer, 2(22.22%) of
the response are obtained from loan clerks and 2(22.22%) of the response are obtained from
joiner loan officers.
The educational level and experience of the respondents was also inquired Table 3.1 shows that
out of the 9 respondents, 7 (77.78%) are degree holders and the rest with diploma level.
Regarding their experience, most of them have worked for more than 4 years in the bank
4(44.44%). From this, the researcher concludes that most of the Bank’s credit employees are
qualified & experienced.
How long does it take for the new Number Percentage (%)
applicants interviewing, document
collection and credit analysis?
Less than One month 6 66.67%
Two months 2 22.22%
Three months 1 11.11%
> Three months 0 0
Total 9 100%
Most of the time loan staffs give much time in interviewing, document collection and credit
analysis. This is simply to increase or to build their confidence and to minimize the time
required while making the loan assessment. As shown in table 3.2, most of the respondents 6
(66.67%) responds that customer’s requests will be answered in less than one-month period. The
remaining 2(22.22%) and 1(11.11%) were respond that the new customer’s request will be
answered in two and three months respectively. Generally, the total time consumed for
interviewing, document collection and credit analysis i.e. more than one month (33.33%) as per
the respondent is not fair. Thus according to the responses obtained from the customers the
researcher conclude that the time taken for pre-loan process tasks is longer in CBE’s current
practice.
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Table-3.1.1.3: Responses on Financial Analysis of Business Applicants
The response of the staff as shown in table 3 indicates that out of 9 respondents 7 (77.78%)
responded that the bank conducts financial analysis properly, while 2 (22.22%) of them
responded that the bank does not conduct financial analysis properly. From table 3 the researcher
infer that there is a proper financial assessment practice to evaluate the proposals of business
applicant, which will impose strictness on mal processing/misuse of the financial resources.
Table-3.1.1.4: Responses Regarding the Bank’s Standard Criteria & Forms to Make Credit
Analysis & Assessment
Do you use the banks standard criteria to make Number Percentage (%)
credit analysis?
Yes 8 88.89%
No 1 11.11%
Total 9 100%
From the 9 respondents majority of them i.e. 8(88.89%) responds that the bank uses standard
criteria and forms to make proper credit analysis and assessment. The rest 1(11.11%) of the
respondent do not agree with that the bank doesn’t have standard criteria to make credit analysis.
Generally, Banks are required to have a set of standard criteria’s and forms to make proper credit
analysis and assessment. This shows that there is a need for little further work and revision
required on the credit assessment of the bank.
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Table 3.1.1.5: response given about the adequacy of bank's standard credit analysis forms
As shown in table 5 out of the 9 respondents 8(88.89%) responds that the bank standard credit
analysis forms are adequate to make the credit assessment and the remaining 1(11.11%) of the
respondent are responds that the bank standard credit analysis form are not adequate. From the
respondent’s response the researcher concludes that the banks standard credit analysis forms are
adequate enough to make the credit assessment.
Table-3.1.1.6: Responses given about the Credit Analysis form Used for Loans
Do you use the same credit analysis form Number of Percentage (%)
for all types of loans before granting the respondent
loan?
Yes 1 11.11%
No 8 88.89%
Total 9 100%
As shown in table 6, out of 9 respondents 8(88.89%) respondent respond that they do not use the
same credit analysis techniques because, different credit assessment will made based on the type
of loan requested by the borrower, which could be business loan, commercial loan, and personal
loan. And the remaining 1(11.11%) responds that they do use the same credit analysis technique.
This shows that the Bank almost issues different credit assessment techniques depending on the
type of loan required by borrower. The credit assessment increased with the amount of the loan,
credit risk details are also strength the documents the borrower provides and viability of the
project.
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To judge the payment capacity of the borrower the bank uses different approaches like cash flow
analysis and financial statements of the borrower.
As can be seen from table 7, 6 (66.67%) of the respondents indicate that, the bank’s criteria of
determining borrower’s loan capacity are sufficient, whereas 3(33.33%) of these indicated to be
insufficient. Most of the time, the loan capacity determination criteria are sufficient to judge the
borrowers borrowing capacity. As information gathered from officers, the criteria’s for capacity
determination have two aims, first it mitigates problems that the officers face on follow-up,
second it saves the borrower. Thus, it is very critical that, loans should only be advanced up on
the sufficient borrowing capacity of the borrowers.
Table-3.1.1.8: Responses Given Regarding the Degree of Rejecting Loan by the Assessment
Result
Before loans are disbursed to borrowers, they are required to be properly assessed in order to
determine whether the project is viable or not. However, in CBE as the above table 3.8 shows,
44.44% of the respondent respond that loan are reject moderately and 22.22% of the respondent
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respond that loan rejection rate are very high. The remaining 3(33.33%) of the respondent
responds that the loan are not rejected. This makes sure that CBE’s customers mainly have
capacity of borrowing and fulfill the criteria.
Even if these problems came from external factors, because of lack of reliable data and absence
of true information from the borrowers. The bank has a failure in assessing and analyzing the
data forwarded by the borrower to grade its loan, to estimate the profitability of the project and
loan repayment capacity before disbursement and compare the actual result to upgrade or dawn
grade its loans.
As shown in table 9, out of the 9 respondent ,3(33.33%) of the respondents had answered that
customers are not satisfied by the bank’s credit processing requirement because, it takes long
processing time, poor customer handling, inefficient bureaucracy and the approval limit of the
branch is limited. While the rest 6(66.67%) indicated that customers are being satisfied with the
loan processing requirements of the bank. Hence, CBE’s prerequisites for credit processing are
considered to be appropriate and necessary for which will result in a sound credit risk and
incapacitating non-performing loans.
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Table 3.1.1.11: Responses on Collateral Criteria for Evaluation of Loan Request
For the Bank, collateral is a vital thing and in the absence of it no loan will be secure. However,
existence of collateral is not sufficient by itself but it needs to be accompanied by repayment
capacity of the will be borrower, which could be proved through salary and business income. As
shown in table 10, 2(22.22%) of the respondents indicated that collateral is not the primary
criteria for evaluating loan request. Whereas, 7(77.78%) of respondents mentioned collateral as
one of the primary criteria’s for loan request. Therefore, collateral is not the only criteria’s for
evaluating loan request but the key factor determining the loan’s consideration for approval,
holds the biggest and consideration on loan. Therefore, for loans to be approved, the essence of
collateral is a key factor to be considered while processing a loan. But, it should be noted that,
there are some loans that do not require collateral security to be approved.
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As per the Banks credit procedure, buildings, which are held as collateral in connection with
credit facility like overdraft, are required to be estimated every two years. The summarized
response of the sampled respondents in table 11 also prove that out of the 9 respondent,
5(55.56%) of respondents believes that the collaterals held should be updated every two years,
2(22.22) % of the respondents replied that, the bank takes one year time for re-estimation of
collaterals and the rest2 (11.11%) responded that collateral values should be updated every three
years and more than three years. But respondents feel there is no estimation made on collateral if
there is no renewal of the facility or additional loan requested on the same collateral pledged.
The above respondent prove that the bank gives due consideration on updating the collateral
value not only on while changes are made on the collateral. The collateral previously estimated
may appreciate or depreciate or might lose market value because of different cases.
Thus, it is imperative to update the values of the collateral pledged for a loan frequently, if
possible, whereas, in the case of CBE, which updates collateral values every two years, which in
fact is supported by 5(55.56%) of the respondents.
Assessing the problems of lending procedures is the crucial task of the banks. As shown in table
12, 2(22.22%) of the respondents indicated that there is a problem in lending procedure. The
remaining 7(77.78%) respondent respond indicated that there is no problem on the bank lending
procedure. The interest and other factors are not flexible with the market need.
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According to the respondents who said the bank’s lending procedure has had a problem due to:
Thus, as per the responses given, it is evident that the banks’ lending procedure has some defects
that should be modified to cop up with the current market situations. Moreover, the management
of the bank should regularly update and modify the bank’s lending strategy to make it
competitive in the banking industry.
Assessment was also made to see if the loan staffs of the Bank are being properly evaluated
before assigned. As shown in table 13, 2(22.22%) of the respondents assumed the loan officer
selection of the bank is very good, 3(33.33%) good and fair 3(33.33%). While the rest 1(11.12%)
of the respondent respond that loan officer selection is poor. From this data, it is safe to say that
the Bank’s system of assigning employees as loan officer is acceptable but the respondents that
say poor 1(11.12%) will have a significant role on unavailability of good selection and
assignment. This may lead to loss of customers in today’s competitive market.
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Do loan officers get enough Number Percentage (%)
training before assignment?
Yes 3 33.33%
No 6 66.67%
Total 9 100%
Regarding the loan officers training before assignment, it is essential to get enough training
because well-trained officers can properly handle credits. As shown in table 14, 6(66.67%) of
the respondents responds that the officer’s does not get enough training before being assigned.
The rest 3(33.33%) has responds that the officer's get training before assigned. This is necessary
because technical skills and competence is advantageous in the competitive market. This would
affect the process of credit analysis and assessment. The grass root of CBE’s problem started
here on and the other dalliance issue, mistakes made by loan officers and the analysis problem
will emerge because of inexperience and poor training before assignment of loan officers.
Assessing credit properly is a crucial task for banks because it is one of the most sources of
income generated for them. As shown in table 15, 6(66.67%) of the respondents feel there is no
problem on the credit assessment, whereas 3(33.33%) of them respondent indicate there is
problems in the bank’s credit assessment. However, the credit assessment report is not properly
filled by the loan officer and does not provide genuine information about the loan. In addition,
CBE’s updating information is weak and also financial analysis relies on personal judgment.
This all indicate that there are some problems on credit assessment in CBE.
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Table-3.1.1.17: the response of monitoring system on credit analysis is strong
According to table 16, out of 9 respondents, 7(77.78%) respondents respond that the monitoring
system on credit analysis is strong. Whereas, the remaining 2(22.22%) respondents respond that
the monitoring system on credit analysis is not strong. It indicates that the monitoring system on
credit analysis is strong enough to keep the bank from face the risk and it reduced bad debt.
As shown in table 3.1.1.18, to assess wither the internal auditor of the company are independent,
6(66.66%) of respondents responds that CBE internal auditor is independent and the remaining
3(33.33%) of respondents responds that company' internal auditor is not independent. This
indicates that the internal auditor of the company is independent.
The researcher also tried to collect information about how much interest rate are giving for
savings. Then, the respondents say that for savings only 5% interest rate are giving and also
another savings without interest like none interest bearing saving and special demand deposit
(SDD).
There are different types of loans providing by the bank to customer like-
29
Agriculture term loan
As shown in table 3.18, 4(66.67%) of the respondent responded that there is credit kind of past
relationship they have with CBE and 2(33.33%) of respondent responds that they have both
saving and credit relationship with the CBE.
From this, the researcher understands that there is credit kind of relationship between customer
and the commercial bank of Ethiopia according to the majority of the respondent.
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other bank? respondent
Yes 1 16.67%
No 5 83.33%
Total 6 100%
This question presented to the sampled borrowers was to check whether borrowers choose other
banks loan or not. As indicated in table 3.19, 1(16.67%) of borrowers have chosen other banks
because of simplicity in getting loan and lesser collateral requirement. Other respondents choose
for being close relationships with some employees, need for near branches to their neighbor and
simple from the promotion the banks made will attract them to use their service. Thus, it is likely
that almost half of the banks customers have relations with other banks. This shows that
customers have the habit of wondering from bank to bank for so many reasons.
Table-3.1.1.21 Respondents response any kind of credit facilities provided by the bank?
From the above table 3.20, 2(33.33%) of respondent replied that the customer have used credit
facilities provided by the bank and 4(66.67%) of the respondent replied that they have not used
any kind of credit facilities provided by the bank. From this the researcher understand that
majority of the customer have not used any kind of credit facilities provided by the bank
according to the majority of the respondent.
There are different reasons why borrower(s) use loan like for construction of residential house,
commercial building and others, personal loans and any other reasons. Developments of
economy in the business sector in which the borrowers operate are among the main reasons for
the increasing loan need. As shown in table 3.21, 4(66.67%) of use for residential construction.
The other use for different purposes like personal loan 1(16.67%) and 1(16.67%) is for other
purposes like, purchase of machinery and equipment. This indicates the most of the Bank’s loan
is meant for Residential Construction and for other services.
What is the time taken for processing your Number Percentage (%)
loan application? respondent
1-2 weeks 4 66.67%
3-4 weeks 1 16.67%
5-7 weeks 1 16.67%
Total 6 100%
Even if recently the management of the bank is studying the way to shorten the time taken for
loan processing, there was a practice in the bank to process one loan file more than several weeks
as some borrowers informed. The reason for this is the decision was made at different level of
the credit committee including board of directors. Due to this, the bank looses many customers.
As shown in table 3.22, almost 4(66.67%) of the loan process takes long time and 1(16.67%)
32
replied it takes shorter time. Time is the most precious resource now a day and customers are
sensitive about the time that the process takes. CBE’s focus given for time taken was less.
Therefore, the competitors are so alert on searching gaps the other bank face and will publicly
announce to compute on it.
Even though, the bank request borrowers to fulfill all the necessary documents, it is difficult for
borrowers to submit all the required documents. But sometimes borrowers complain that there
are unimportant documents requested by the bank. As shown in table 3.23, 1 (16.67%) of
borrowers believed that banks request unnecessary documents. On the contrary 5 (83.33%) of the
respondents believed that the bank’s request of documents was appropriate. But as a government
institution, the bank uses all its effort to be good for customers to increase construction, provide
job opportunity on the construction area and to increase the number of qualified houses.
Documents are significant when the loan transferred to legal cases. The court primarily
determines considering the document and other obligations that the borrower was willing to be
guided at the time of the loan contract insured by his signature. Therefore, as proved by the
customer’s bank’s strictness in document is reasonable.
33
No 4 66.67
Total 6 100%
As shown in table 3.24, 2 (33.33%) of the respondents responds that the bank’s lending
procedures have problems. Their main reasons are long processing time, limited loan amount,
repetition of documents during renewal, time taking and high interest rate and complain about
salary deduction etc. Their suggestions and comments about the lending procedures of the banks
have to revise lending procedures, set minimum interest rate and improve deduction of their
salary. Thus, the CBE must prepare box for customers to give their compliance and appreciation
about the banks service and made continuous follow up to satisfy the customers need.
- Reasonable and faire interest rate from the market on loans product
- The respondent also says there is no unique services get from CBE.
- The customers clearly reveal that the follow-up made by CBE is acceptable and
reasonable. This is supported by about 80% of the customers. But some customers write
the follow-up made by CBE is sometimes may face difficulty and the bank must consider
this occasions.
34
CHAPTER FOUR: CONCLUSIONS AND RECOMMENDATIONS
4.1. Conclusions
35
The following conclusions are raised based on the primary data findings only.
Banks credit policy is not related with current situation. This can make
borrowers to choose other banks which is more flexible
Inadequate training of the staffs makes long loan processing and non-
performing loans.
The deposit mobilization of the bank is not well trading. This will lead the
bank to loss paying high interest rate for the saver.
4.2. Recommendations
36
Based on result of the research on the subject, the researcher believes that the key to analyzing
and assessing credit lies in the ability of the bank’s management. Some of the suggestions, which
are proposed to CBE’s Management and concerned parties for analyzing and assessing credit
includes-
The bank must try to develop a department comprising Loan Officers, Branch Managers,
and others who have good technical skill to finish the loan with one department. This helps
the loan to be granted quickly and to minimize mistake made.
To minimize the credit processing time the bank staffs specially involved in credit should
get adequate training to update the staff knowledge with the current information like
technological change computation mechanisms of other bank and customer need in
response. The training should also be based on their experience on loan processing and it
should be in a continuous base.
The bank should develop different types of credit facilities to borrowers and should have
proper customer handling.
The bank should also Net work the branches to collect payment from anywhere for
customers comfort.
Bibliography
37
Linder S.Wayne, 1993: Total Quality of Loan Management, Bankers Publishing Co.,
Cambridge
D-Muraleedlazan, 2009; Modern Banking theory and practice, India
Mayer Paul L., 1975: Introductory Probability and Statistical Application, Probes
Publishing Co.,
Shekhar, 1961; Banking theory and practice
Ayalew Fikru, 2002: Ethiopian Institute of Banking & Insurance, Addis Ababa
Beherens Robert H., 1974: Commercial Problem Loans, Boston, Bankers Publishing Co.
Tefera Seifu 2002: Lending Procedures Security and Insurance, EIBI
Kumer N, 2002; Banking low and practice
Rose, 1990: Commercial Bank Management, 4thed, McGraw-will Book Co. Inc
Shoakher, 1993: Total Quality of Loan Management, Bankers Publishing Co
www. nbe. Gov. et/History
HARAMAYA UNIVERISTY
38
DEPARTMENT OF ACCOUNTING and FINANCE
Introduction
Dear Respondent
The purpose of this questionnaire is to collect primary data for conducting a study on the topic
“An Assessment of Credit Analysis and Processing-in case of Commercial Bank of Ethiopia,
Harar Branch.” as a partial fulfillment for the completion of bachelor degree in Accounting and
finance (BA) from Haramaya University. In this regard, I kindly request you to provide me
reliable information. I would like to extend me deep-heart thanks in advance for your corporation
to devote your valuable time in feeling this form.
Direction
No need to write your name
Kindly request you to answer by making a (X) make or in writing where ever
appropriate
PART-I: PERSONAL PROFILE
1. Sex Male Female
2. Educational background
High school complete Diploma
First degree Second degree and above
3. Year of experience
Less than 2 years 2-4 years 4 years and above
4. What is your position in CBE Harar branch?
Manager Loan officer
Joiner loan Officer Clerk
2. Does the Bank make financial analysis properly to assess the proposals of business
applicants?
Yes No
3. Do you use the banks standard criteria to make a credit analysis?
Yes No
39
4. If your answer to question 3 is “No, please state how you conduct the activity?
5. Do you think that the Bank’s standard credit analysis forms are adequate to make the
credit assessment?
Yes No
6. Do you use the same credit analysis form for all types of loans before granting the loan?
Yes No
7. How do you judge the payment capacity of a borrower?
12. If your answer to question 11 is “No”, please state other criteria used.
13. How often do you update the values of the collaterals pledged for a loan? (Please
describe in years).
One year’s Two years Three years
More than three years
14. Do you think that the Bank’s lending procedure had a problem?
Yes No
15. If your answer to question 14 is “Yes”, please list them?
16. How do you evaluate loan officer selection / assignment in your opinion?
Excellent Fair
40
Very good Poor
Good
17. Do loan officers get enough training before assignment?
Yes No
18. Do you think that there are problems on the credit assessment?
Yes No
19. If there is a problem, please state them.
HARAMAYA UNIVERISTY
41
COLLEGE OF BUSINESS AND ECONOMICS
Introduction
Dear Respondent
The purpose of this questionnaire is to collect primary data for conducting a study on the topic
“An Assessment of Credit Analysis and Processing-A case study of Commercial Bank of
Ethiopia-Harar Branch.” as a partial fulfillment for the completion of bachelor degree in
Accounting (BA) from Haramaya University. In this regard, I kindly request you to provide me
reliable information. I would like to extend me deep-heart thanks in advance for your corporation
to devote your valuable time in feeling this form.
Direction
No need to write your name
Kindly request you to answer by making a (X) make or in writing where ever
appropriate
PART-I: PERSONAL PROFILE
1. Sex Male Female
PART-II: SPECIFIC INFORMATION
1. What kind of services you got from CBE?
Saving Credit Both
2. Do you have relation with other Banks?
Yes No
4. Have you use any kind of credit facilities provided by the bank?
Yes No
10. What is your opinion regarding the follow-up made by the Bank?
11. How is your satisfaction in relation with the bank’s loan processing requirements?
43