CHAPTER ONE

Introduction
1.1 Back ground of the study
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 (SC) 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 segued 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 Enda Silase 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.

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1.2. Background of Commercial Bank of Ethiopia

The commercial bank of Ethiopia (s.c) was incorporated as Share Company on

December16, 1963 proclamation no.207-1955of October 1963 to take over the commercial
banking activities 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:-

1. To extend commercial banking service throughout the country;

2. To encourage the mobilization of saving by making the people aware of the use of
banking;
3. To extend loans, credits and all other banking facilities to any person for specific
purpose and periods;
4. To spread widely banking habits among the people.

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1.3. Statement of the problem
Lending is the heart of commercial banking business the right in the use of credit is to make
sure that it is utilized to increase the productive sector of the economy.

According to Ato Mulualem Birhae (loan officer), commercial bank of Ethiopia Enda Silasie
Branch faces the following problems such as loan processing and assessment of timely
decision-making, following and collection and problems of collateral assessment based on
this effort are made to seek loan-processing problems of the bank. The following questions
help in plan replay its existing situations.

1.4 Research questions

1. How is the bank performing to word finding solutions for problems
related with loan processing and credit analysis?
2. How does the bank evaluate the information supplied by clients
requesting loan?
3. How does the bank assess the existence of monitoring system
through strong and independent internal auditing?
4. How does the bank update and review existing loan provision
policies and procedures?
1.5 Objective of the study
In under developed counties life Ethiopia, financial institutions play vital role in the study
are as follows.

1.5.1 General objectives

The general objective of the study is to assess credit analysis and processing of commercial
bank of Ethiopia Enda Silase branch.

1.5.2 Specific objectives

1. To assess efforts exerted by the bank to find solutions for possible problem related
with loan processing.
2. To identify the proper selection of loan official and credit analysis at appropriate
place
3. To assess the existence of monitoring system through strong and independent
internal auditing
4. To provide summary of major findings and relevant recommendations

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1.6 Significance of the study
Though some research were made by credit and market research department of
commercial Bank of Ethiopia Enda Silase 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.

Especially this study help:-

 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 Enda Silase branch has different branches. However, because
of time, place, and cost constraint, the study is concerned on commercial bank of Ethiopia
Enda Silase branch. In addition to this, the study focuses on 2000-2004 E.C due to the
nature of the branch. (I.e. it gives special loan only, which are industries, agricultures,
impart expert and other investors).

1.8 Limitation of the study

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

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1.9 Research methodology
1.9.1 Data gathering method
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).

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 42 population, questioner is
distributed to 7 of them employees on the bank by using judgmental sampling techniques.
Whereas for debtors, 5 questioners is distributed by using simple random sampling
technique.

1.9.3 Data processing & analysis plan

After the data required for the study is collected, statistical measures like percentage, ratios
and tables were used for data presentation analysis.

1.10 Organization of the study

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
2. RELATED LITRATURE REVLEW
2.1. Evolution of banking institutions
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).

2.2. The history of banking in Ethiopia

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/).

2.3. Low Documentation

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.

Documenting proper compliance is a primary focus of regulators. They seek documentation

of timely compliance with disclosure requirements of the variations customer regulations.
Compliance examinations customers are being enfaced with much stricter penalties
(Linder, 1993, p.167)

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 of each loan with the borrower in such a manner that the loan is both
satisfactory to the borrower. (Behrens, 1974, P.H).

2.4. Phase of the lending process

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:

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  Interview and application phase.
 Information-gathering phase
 Analysis phase
 Recommendation for approval /count-offer/ denial
 Documentation preparing phase
 Booking phase
 Monitoring phase

2.4.1. Interview and application phase.

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 the would be 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:

 The purpose of the loan

 The applicant’s commitments elsewhere
 The applicant’s deposit account at other branches,
 The applicant’s business experience
 How he intends to pay off the loan etc.

The interview should not be stricted 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, 1993, p-167).

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For every loan request, the following information should be determined:

 Know precisely the purpose of the loan.

 Ascertain the source of repayment.
 Identify a secondary source of repayment.
 Define and available collateral.
 Be sure that the loan complies with bank loan policy.

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.

 What application form to use

 What regulatory disclosure are required at the limes of application
 Information important to the structuring of the loan

Loan request

Every loan application should indicate whether the loan request is to be considered:

 As individual credit or joint credit

 The income and assets that can be used for determining credit worthiness.
 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).

2.4.2. Information gathering phase

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:-

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  Has the proper determination of the business entity been performed?
 If multiple entities are involved, has the loan officer determined the
relationship between those entities, including their ownership and the
nature of their affiliation:
 Has the business correct legal name been determined?

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).

2.4.3 Analysis phase

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.

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.

2.4.5. Documentation Preparation phase.

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)

“A security agreement is a written agreement between the debtor and the)

They requirements for a valid security agreement are:

 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.

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  It must contain a recital of the obligation secured by the collateral.

Credit file documentation

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 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)

2.4.6. Booking phase

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).

2.4.7. Monitoring phase

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.

2.6. Lending policies

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).

2.6.1 Loan objectives

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.

2.6.2 Volume of loans

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 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

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2.6.3 Geographical Distribution

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)

2.7. Evolutional of loan proposals

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.

2.7.1 Industry level credit analysis

It needs to be performed to study the prospects the industry, and it most importantly
includes a study of the:,

(i) industry cycle,

(ii) ii) threat from substitute
(iii) (iii) shifts in customer demands, and
(iv) (iv) regulatory environment.

2.7.2 Operational Efficiency

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.

2.7.3 Financial Efficiency

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.

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)

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2.8 Loan review systems

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.

2.9. Credit grading systems

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)

2.10. Credit collection system

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:

 If no payment is received after a specific time (usually 30 to 60 days), the

credit send a bile or statement thus usually flared in a polite reminder
stricter.
 If no payment is received after 60 to 90 days, the creditor then sends a
serious to two, three, or four letters of specific interval. Each letter is more
insistent in its demand for payment. In addition, the creditor may try to ask
the debtor by telephone.
 It those means fail, the debtor may be sued in count for the amount owed.

(Kumer N, 2002,).

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.

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  Poor selection of risk
 Over landing
 Fraudulent information
 Disappearance or Depreciation of collateral
 Failure to establish or enforce liquidation agreements
 Incomplete credit information
 Overemphasis on income
 Self- dealing
 Technical incompetence
 Lack of supervision
 Competition

(H.B. 1974, p-19)

2.12. Loan appraisal and classification

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).

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.

2.12.2. Loan Discussion

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.

2.12.3. Loan analysis

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.

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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).

2.13. Financial statement

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)

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

3. DATA ANALYSIS AND PRESENTATION

3.1. Overviews
The topic provides data analysis and assessment collected from questionnaire. The purpose
of data analysis is to assess the credit analysis and processing in commercial Bank of
Ethiopia. Credit analysis is the critical phase of the credit granting process. It is an area
where the loan officer needs document that he or she has actually performed proper
evaluations of the various risks involved with the particular credit request. Under this
analysis the officers can be covered the five credit analysis, that is, character, capital,
collateral, capacity and condition. Credit processing is a series of action or operations
performed by the bank in order to give a credit (loan) service for the customers. In other
word, lending process in phases occurs in every lending situation and it covers from the
application phase up to monitoring phase.

3.2. Presentation and Analysis of Primary Data

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 will try 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.

3.2.1. Presentation and Analysis of Bank Staffs Response

7 questionnaires were prepared and distributed to CBE bank staffs but only the 6 were
properly filled out and returned. All the 6 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

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total 6 respondents, 2 found to be female and the rest 4 are male. It is also show that, most
of the respondents are loan officers and loan clerks.

Table-1: Experience on Loan and Position of Respondents

Description Number Percentage (%)

Sex
 Male 4 66.67%
 Female 2 33.33%
Total 6 100%
Educational Level
 Diploma 2 33.33%
 Degree 4 66.67%
Total 6 100%
Experience
 < 2 years 2 33.33%
 2 – 4 years 0 0
 > 4 years 4 66.67%
Total 6 100%
Position
 Branch Manager 1 16.67%
 Loan Officer 1 16.67%
 Loan Clerks 4 66.67%
 Other Clerical Staff 0 0
Total 6 100%

Source: Primary Data

Out of the total questionnaires distributed to the bank’s staffs, responses obtained from
the loan clerks accounts for 66.67% of the total respondents. The rest were fill out and
returned by the branch manager. Thus, the researcher believes that, there is a strong
position to claim these responses.

The educational level and experience of the respondents was also inquired Table 1 shows
that out of the 6 respondents, 4 (66.67%) 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 (66.67%). From this, the researcher infers that most of the Bank’s credit employees
are qualified & experienced.

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Table-2: Responses on Time Taken in Interviewing, Document Collection and Credit
Analysis of Customers

How long will interview, document Number Percentage (%)

collection and credit analysis takes?
One month 5 83.33
Two month 0 0
Three month 1 16.67
> Three month 0 0
Total 6 100

Source: Primary Data

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 2, majority of the
respondents 5 (83.33%) confirmed that customer’s requests will be answered in one-
month period. The other 1 (16.67%) customers responded it take two months for loan
processing. Generally, the total time elapsed for interviewing, document collection and
credit analysis i.e. more than one month (16.67%) 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 lengthier in CBE’s current practice.

Table-3: Responses on Financial Analysis of Business Applicants

Does the bank make financial analysis Number Percentage (%)

properly to assess the proposals of a
business applicant?
Yes 5 83.33
No 1 16.67
Total 6 100

Source: Primary Data

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The response of the staff as shown in table 3 indicates that out of 6 respondents 5 (83.33%)
responded that the bank conducts financial analysis properly, while 1 (16.67%) of them
responded that the bank does not conduct financial analysis properly. From table 3 we can
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-4: Responses Regarding the Bank’s Standard Criteria & Forms to Make Credit
Analysis & Assessment

Do you think that the criteria adopted by the Number Percentage (%)
bank are adequate enough?
Yes 5 83.33
No 1 16.67
Total 6 100

Source: Primary Data

Generally, Banks are required to have a set of standard criteria’s and forms to make proper
credit analysis and assessment. This is also true for CBE, which is confirmed by 5
respondents (83.33%) of the respondents who agree with the question as depicted in table
4 and the rest 1 respondent, (16.67%) responded inadequate. This shows that there is a
need for little further work and revision required on the credit assessment of the bank.

Table-5: Responses given about the Credit Analysis form Used for Loans

Do you use the same credit analysis Number Percentage (%)

before granting the loan?
Yes 1 16.67
No 5 83.33
Total 6 100

Source: Primary Data

As shown in table 5, out of 6 respondents 5 (83.33%) responded 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,

20
personal loan etc. 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.

Table-6: Respondents Response Regarding the Loan Capacity Determination Criteria

Do you feel the loan capacity Number Percentage (%)

determination criteria is sufficient to
judge borrowing capacity?
Yes 4 66.67
No 2 33.33
Total 6 100

Source: Primary Data

Most of the time the loan capacity determination criteria are sufficient to judge, the
borrowers borrowing capacity. As can be seen from table 6, 4 (66.67%) of the respondents
indicate that, the bank’s criteria of determining borrower’s loan capacity are sufficient,
whereas 2 (33.33%) of these indicated to be insufficient. 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-7: Responses Given Regarding the Degree of Rejecting Loan by the Assessment
Result

How do you rate the degree of Number Percentage (%)

rejecting loan by the
assessment result?
Very high 1 16.67
High 0 0
Medium 3 50
Low 2 33.33
Very low 0 0
Total 6 100

Source: Primary Data

21
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 table 7 shows,
loans are rejected merely, as 83.33% (medium 50% and low 33.33%) of the respondent
shows. This makes sure that CBE’s customers mainly have capacity of borrowing and fulfill
the criteria. Whereas, 20% of the respondents indicate there is an opportunity that they
were rejected.

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.

Table-8: Responses on Customer Satisfaction in Relation with the Bank’s Loan

Processing Requirement

Do you think customers are satisfied in Number Percentage (%)

relation with the bank’s loan processing
requirement?
Yes 4 66.67
No 2 33.33
Total 6 100

Source: Primary Data

As shown in table 8, 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 66.67% indicated that customers are being satisfied with the loan
processing requirements of the bank. Hence, CBE’s prerequisites for credit processing are
deemed to be appropriate and necessary for which will result in a sound credit risk and
incapacitating non-performing loans.

22
Table-9: Responses on Collateral Criteria for Evaluation of Loan Request

Is collateral the primary Number Percentage (%)

criteria for evaluation of
loan request?
Yes 4 66.67
No 2 33.33
Total 6 100

Source: Primary Data

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 9, 33.33% of the respondents indicated that collateral
is not the primary criteria for evaluating loan request. Whereas, 66.67% 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.

Table-10: Responses about Appraisal of the Market Value of Collateral Held up on

Renewal of Credit Facility

How often do you update the Number Percentage (%)

values of the collaterals pledged
for a loan (in years)?
One year 2 33.33
Two years 3 50
Three years 1 16.67
Total 6 100

23
Source: Primary Data

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 10 also prove that 50% of
respondents believes that the collaterals held should be updated every two years, 33.33%
of the respondents replied that, the bank takes one year time laps for re-estimation of
collaterals and the rest 16.67% responded that collateral values should be updated every
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 50% of the respondents.

Table-11: Respondents Response on the Bank’s Problem of Lending Procedures

Do you think that the bank’s Number Percentage (%)

lending procedure has got a
problem?
Yes 2 33.33
No 4 66.67
Total 6 100

Source: Primary Data

Assessing the problems of lending procedures is the crucial task of the banks. As shown in
table 11, 33.33% of the respondents indicated that there is a problem. The rest 66.67%
indicated that there is no problem on the bank lending procedure. The interest and other
factors are not flexible with the market need.

24
According to the respondents who said the bank’s lending procedure has got a problem due
to:

 The loan procedures were not regularly updated

 Lack of adequate information about the re-payment of the borrowers

 Limited lending capacity of the bank

 Unavailability of connection with other banks result increasing risk of lending.

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 eagerly update and modify the bank’s lending strategy to
make it competitive in the banking industry.

Table-12: Responses about the Loan Officer’s Selection/Assignment

How do you evaluate loan officer Number Percentage (%)

selection/assignment in your
opinion?
Excellent 0 0
Very Good 0 0
Good 3 50
Fair 2 33.33
Poor 1 16.67
Total 6 100

Source: Primary Data

Attempt was also made to see if the loan staffs of the Bank are being properly evaluated
before assigned. As shown in table 12, 83.33% of the respondents assumed the loan officer
selection of the bank is good (50%) and fair (33.33%). The other 16.67% of the respondent
indicate 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 (16.67%) will have a
significant role on unavailability of good selection and assignment. This will lead to loss of
customers in today’s competitive market.

25
Table-13: Respondents Response Regarding Loan Officers Training Before Assignment

Do loan officers get Number Percentage (%)

enough training before
assignment?
Yes 2 33.33
No 4 66.67

Total 6 100

Source: Primary Data

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 13, 4
(66.67%) of the respondents show the officer’s does not get enough training before being
assigned. The rest 2 (33.33%) has answered yes. 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.

Table-14: Responses on the Problems of Credit Assessment in CBE

Do you think that there are Number Percentage (%)

problems on the credit
assessment in CBE?
Yes 2 33.33
No 4 66.67
Total 6 100

Source: Primary Data

 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 14, 4 (66.67%) of the
respondents feel there is no problem whereas 2 (33.33%) of them respondent
indicate there is problems in the bank’s credit assessment. Moreover, 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

26
 and also financial analysis relies on personal judgment. This all indicate that there
are problems on credit assessment in CBE.

 How much interest rate is giving for savings?

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).

 What type of loans providing by bank?

There are different types of loans providing by the bank to customer like-

 Domestic trade service

 Agriculture term loan

 Building and construction term loan

 Motor vehicle loan and so on

 How much interest rate is charging from the loan?

The CBEs charges from the loan is 9.5% interest rate.

3.2.2. Presentation and Analysis of Borrowers’ Response

5 questionnaires were prepared and distributed. And all are collected.

Table -15: Respondents response past relationship with CBE

What kind of service you got from Number Percentage (%)

commercial bank of Ethiopia?
Saving 0 0
Credit 3 60
Both 2 40
Total 5 100

27
 Source: Primary Data

As shown in table 15, 3(60%) of the respondent responded that there is credit kind of past
relationship they have with CBE and 2(40%) of respondent responded 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
respondents.

Table-16: Reasons for Choosing Other Banks Loan

Do you have relations with Number Percentage (%)

other bank?
Yes 1 20
No 4 80
Total 5 100

Source: Primary Data

This question presented to the sampled borrowers was to check whether borrowers
choose other banks loan or not. As indicated in table 16, 1 (20%) 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-17: Respondents response any kind of credit facilities provided by the bank?

Have you used any kind of Number Percentage (%)

credit facilities provided by
the bank?
Yes 2 40
No 3 60
Total 5 100

28
Source: Primary Data

From the above table17, 2(40%) of respondent replied that the customer have used credit
facilities provided by the bank and 3(60%) 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.

Table -18: Purpose of the Loan Borrowers Requested

Purpose of Loan Requested Number Percentage (%)

Residential Construction 3 60
Business Construction 0 0
Working Capital 0 0
Personal 1 20
Others 1 20
Total 5 100

Source: Primary Data

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 18, 60% of use for
residential construction. The other use for different purposes like personal loan 20% and
20% 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.

29
Table-19: Opinion of Borrowers on Time Taking From Date of Application to Date of
Approval

What is the time taken for processing Number Percentage (%)

your loan application?
1-2 weeks 3 60
3-4 weeks 1 20
5-7 weeks 1 20
Total 5 100

Source: Primary Data

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 19, almost 40% of the loan process takes long
time and 60% 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.

Table-20: Responses of Borrowers on Relevancy of All Documents

Do you think that all the Number Percentage (%)

required documents you are
asked to present are necessary?
Yes 4 80
No 1 20
Total 5 100

Source: Primary Data

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

30
20, 1 (20%) of borrowers believed that banks request unnecessary documents. On the
contrary 4 (80%) 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.

Table-21: Responses on Problems of the Bank’s Lending Procedures

Do you think that the bank’s Number Percentage (%)

lending procedure has got
problems?
Yes 2 40
No 3 60
Total 5 100

Source: Primary Data

As shown in table 21, 2 (40%) of the respondents indicated 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.

 The reason customers choose CBE

The researcher also tried to collect information about the reason why they choose this
bank using the question “what unique services in relation to loan service do you get from
CBE?” Then, the customers forwarded the following justifications:-

31
 - Reasonable and faire interest rate from the market on loans product

- Long-term construction loan up to 30 years of retirement

- It appreciates loans by taking different source of repayment.

- The respondent also says there is no unique services get from CBE.

What is your opinion regarding to the follow-up made by the 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.

- The follow-up is informative and good customer relation made by officers.

- Not take a force only communication.

- It allows skipping repayment formally.

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 CHAPTER FOUR

4. CONCLUSIONS AND RECOMMENDATIONS

4.1. Conclusions

The following conclusions are raised based on the primary data findings only.

- Lack of proper attention to borrowers at the time of interviewing, document collection

and credit analysis leads to loss prominent customers.

- Inadequate training of the staffs makes long loan processing and non-performing loans.

- Credit policy of the bank, lack of adequate collateral, limited repayment capacity is
leading the borrower to get insufficiency amount of loan. This can affect business
relation of the borrowers and bank

- Banks credit policy is not related with current situation. This can make borrowers to
choose other banks which is more flexible

- The deposit mobilization of the bank is not well trading. This will lead the bank to loss
paying high interest rate for the saver.

33
4.2. Recommendations

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-

 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.

 Each loan officer should have an authority to approve loans with close monitoring. In
order to reduce the time of dalliance in processing loans.

 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.

 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 mistakes made.

34