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"Performance Measurement with reference to Cooperative Bank of Oromia (

MASTER OF BUSINESS ADMINISTRATION (M.B.A.) UNDER ESTEEMED
GUIDANCE OF

Thesis · April 2011

DOI: 10.13140/RG.2.2.31382.37441

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 A
PROJECT REPORT
ON

"Performance Measurement with reference to

Cooperative Bank of Oromia (S.C.)"

TO

ANDHRA UNIVERSITY
IN PARTIAL FULFILLMENT FOR THE AWARD OF DEGREE OF
MASTER OF BUSINESS ADMINISTRATION (M.B.A.)
BY
Mr. GETACHEW GOBENA

UNDER ESTEEMED GUIDANCE OF

PROF. P. VENI M.COM., M.B.A., Ph.D
ANDHRA UNIVERSITY
DEPARTMENT OF COMMERCE AND MANAGEMENT STUDIES
VISAKHAPATNAM 530 003, A.P., INDIA
2009 - 2011
 CERTIFICATE

This is to certify that the project work entitled "Study on

Performance Analysis With reference to Cooperative Bank of Oromia

(S.C.)" is bonafied work done by Mr. GETACHEW GOBENA, under my

supervision, submitted to the Department of Commerce and management

Studies, ANDHRA UNIVERSITY- Visakhapatnam; in partial fulfillment

of the award of the degree of Master of Business Administration (M.B.A)

during the academic year 2010-11.

Date: ___________________
__________________
Prof. P. Veni (Ph.D)
(Finance and Taxation)

I
 DECLARATION

I, Mr. Getachew Gobena, a Full Time Student of M.B.A (Finance

and Marketing) 2009-11 studying at the Department of Commerce and

Management Studies, Andhra University, Visakhapatnam, 530 003;

declare that the project work entitled "Study on Performance Analysis

With reference to Cooperative Bank of Oromia (S.C.)" is a bonafied work

done by myself and it has not been submitted either in full or in partial to

any other University or to the award of any other degree.

Date: ___________________

Signature:
Getachew Gobena
109200202011
(Reg. No.)

II
 ACKNOWEDGEMENT

It gives me an immense pleasure to present this project report on Performance

Analysis carried out at Cooperative Bank of Oromia (S.C) in partial fulfillment of post-
graduate course M.B.A. No work can be done without the help and guidance of various
persons and institutions. I am happy to take this opportunity to express my gratitude to
those who have been helpful to me in completing this project report.
At the outset I would like to thank the Government of Federal Democratic
Republic Government of Ethiopia for granting me full financial sponsorship including
health Insurance; The Ministry of Education, Ethiopia Embassy to India, Ambo
University and Andhra University for the scholarship opportunity and their logistics
and material support so that I pursue M.B.A Post graduation.
I would also like to pass my sincere gratitude to Professor B. Appa Rao, Ph.D,
Prof. Satya Raju Ph.D former and current Head Department & Dean of DCMS,
respectively for granting a permission to conduct this project in Ethiopia and their
guardianship.
I would be failing in my duty if I do not express my deep sense of gratitude and
appreciation to my Faculty Guide Professor P. Veni M.com, M.B.A., Ph.D, without her
continuous guidance, valuable suggestions and material support it would not have been
possible for me to complete this project work.
I also wish to express my sincere thanks to all the staff members of
Cooperative Bank of Oromia particularly Mr. Dufera Moti, Head for Marketing and
Business development division and Mr. Demelash Getachew, the Manager Ambo
Branch for granting me a permission to undertake my project work, take their valuable
time to respond to interviews and their unreserved help in providing the available
information regarding the bank in order to make this project report a grand success.
Next I would like to categorically thank my parents Gobena and Desiftu,
specially my wife Mrs. Gelane Guyo, my son- Daniel and daughter- Efrata, Bothers-
Gemechu, Geleta and Tesfaye, Sister Alemitu, Sr. Beletech and their family members,
Endalkachew and Lalise for their enduring family hood, moral and material support.
Lastly, I am thankful to all staff members of Andhra University, the People of
India, A.P. Police Commission, friends and well wishers who directly or indirectly
contributed towards the successful accomplishment of this project Work Report.
Geatachew Gobena

III
 LIST OF TABLES
Table Description Page

Table 2.1 Names and Sectors of Banks in operation in Ethiopia………………….....…..19

Table 3.1 List of Branches of Cooperative Bank of Oromia…………………….……....30
Table 3.2 Shareholders of CBO and their stake……………………………...…..….…....31
Table 4.1 CAMELS Model KPI areas………………………………………….………......62
Table 4.2 Composite CAMELS and their Interpretation ……………………….……...….65
Table 4.3 Table Showing the Comparative Ratios under CAMEL and BSC………….....74
Table 5.1 Capital Adequacy Ratios of CBO ……………………………………………...81
Table 5.2 ROE of Cooperative Bank of Oromia from 2005/06-2009/10 ………….…....83
Table 5.3 Non-performing Loan to total Loan (% of classified Loan)..………….……...85
Table 5.4 Cost, CBO’s Earnings and deposit per Employee ……………………...……...87
Table 5.5 Operational efficiency of CBO during the last five years ……..…….…….…88
Table 5.6 ROI of Cooperative Bank of Oromia from 2005/06-2009/10 ………………..90
Table 5.7 EPS of Cooperative Bank of Oromia from 2005/06-2009/10……….………...91
Table 5.8 Growth Trends in Income, expenses and Profits …………………….…..…….92
Table 5.9 Trends of Human Resources Strength of CBO …………………….…..………98
Table 5.10 Loan Issued (disbursement) to Members by CBO ……………………..……100
Table 5.11 Growth Trends in Total Assets and capital …………………………………..101
Table 5.12 Deposit Mobilization by Cooperative Bank of Oromia ……………..………102
Table 5.13 Chart Showing the Different Savings Products of CBO………………..……103
Table 5.14 Major Loan products of Cooperative Bank of Oromia ………………….….104
Table 5.15 Growth Trends in Deposit mobilization and Loan disbursement ……..…….105
Table 5.16 Branch Expansion and Networking performance Trends ………………..….106
Table 5.17 Capital and Branch Network of Banking System …………………………….107
Table 5.18 Profit and Loss accounts of CBO for year 2005/06-2009/10..…………..…..109

IV
 LIST OF CHARTS
Charts Description page

Chart 3.1 Organization Structure of Cooperative Bank of Oromia S.C…….……….28

Chart 3.2 Organization Structure of CBO, Ambo Branch ………………….……….38

Chart 4.1 Balanced Score Card ……………………………………………………….72

Chart 4.1 Balanced score card strategic planning ………………………………..…..75

Chart 5.1 Income, Expenses and Profit/loss of CBO for last 5 years…………………96

Chart 5.2 Capital of 10 Commercial banks in Ethiopia at the end of 2002/09..……..108

V
 LIST OF FIGURES
Figures Description page

Figure: 2.1 Ethiopian Legal Paper Money (Birr Notes) currently in circulation………21

Figure 3.1 Geographical Map of Ethiopia and Oromia Region ……………………….35

VI
 ABBREVIATIONS AND ACRONYMS
AIDB: Agricultural and Industrial Development Bank
BEA: Break Even Analysis
BSC: Balanced Scorecard
CAMELS: Capita, Asset Quality, Management quality, Earning,
Liquidity and Systems
CBO: Cooperative Bank of Oromia
CBE: Commercial Bank of Ethiopia
CEO: Chief executive Officer
DCMS: Department of Commerce and management Studies
EBIT: Earnings before interest and Tax
EPS: Earning Per Share
ETB: Ethiopian Birr (Ethiopian Currency)
ESM: Executive strategy Manager
EVA Economic Value Added
FCA: Federal Cooperative Agency
GMD: General Managing Director
ICA: International Cooperative Alliance
ICBA: International Cooperative Banks Association).
ILO: International Labour Organization
LC: Letter of Credit
MFIs: Micro Finance Institutions
NBE: national Bank of Ethiopia
RBI: Reserve Bank of India
ROI: Return on Investment
ROE: Return on Equity
S.C.: Share Company
SWOT: Strength, weakness, opportunity and threat
WOCCU: World Cooperative Credit Union

VII
 ABSTRACT
Performance of financial institutions is generally measured by applying
quantitative techniques of financial measurement. It is a post-mortem examination
technique of achievement of a bank. Nevertheless, to know about the existence of
performance drivers in an institution, both quantitative and qualitative aspects of
performance measurement are to be considered. CAMELS rating system, basically a
quantitative technique is widely used for measuring performance of banks in in all over
the world. Concepts of Balanced Scorecard (BSC), which covers both quantitative and
qualitative aspects of performance measurement, may be used to measure the long-term
prospect of performance. The ultimate objective of this study is to measure the
performance of Cooperative bank of Oromia (S.C) from both quantitative and
qualitative point of view.

As to the methodology this study both quantitative and qualitative approaches

in the form of triangulation with the intention of backing numerical information with
qualitative aspects from the managers’ and customers perspectives. Even though both
primary and secondary data’s were used the study depends heavily on secondary data
both financial and non financial data’s of Cooperative Bank of Oromia (CBO), for a
period of 2005 -2009 fiscal years were used. Established in 2005, the CBO began its
operations with 7 branches and present the bank has a total of 39 branches in operation.

The findings of the study shows that almost all the ratios of the traditional
measures of performances and new measures of balanced scorecard results both
qualitative and quantitative analysis results revealed that the performances of
Cooperative banks of Oromia (S.C.) is up to the mark when compared to the existing
banking business standard in Ethiopia. Based on the findings of the research
conclusions were arrived at and valuable suggestions were also given for better
performances of the bank in future.

Keywords:
CAMELS, Balanced Scorecard (BSC); Quantitative and Qualitative; Cooperative Banks;
Performance Measurement; CBO; Ethiopia

VIII
 CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND

Performance measurement is a regular and traditional accounting and

financial management activity. To measure the output of any economic activity,

different techniques of performance measurement are used. Different economic

decisions are taken on the basis of performance of an organization. So a

continuous effort is going on to devise a flawless and dependable system of

banks’ performance measurement. The need for a sound system of performance

measurement for financial institutions cannot be over-emphasized. As these

organizations are run by shareholders money, both their accountability and

general trading concerns are equally important. So, special attention is required

to be given to this aspect of financial institutions mainly commercial banks.

Banking system is vital for the development of every nation’s economy. It

may not be an exaggeration to assert that without the evolution of commercial

banks in the 18th and 19th centuries, industrial revolution would not have

occurred in Europe. It is equally true that without the development of sound

commercial and Cooperative banking, underdeveloped and developing countries

cannot hope to join the group of advanced countries. Strong banking system

enhances business activities and the national economy becomes sound one.

Banks contribute by inspiring confidences in people, making them willing

to save their surplus money with them instead of buying gold and investing on

old traditional valueless things. Banks also provide not only funds, the basic fuel

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for economic growth but also canalize into productive avenues. A developing

economy requires continuous process of investment and this intern requires

aggregate rise in money-cash, credit supply. Banks divert and employ funds in

such avenues which are aimed to develop the country’s economy and add to

national wealth. They also create credit and add to the supply of money. Credit

provides more funds to entrepreneurs that lead to more investment and more

production both for agriculture and industry. High production leads to self

sufficiency hence increase of export items that gains foreign earnings for the

country leading to development.

In Ethiopia, before 1992 (during the Derg period) the financial sector was

highly repressed; characterized by restricted entry, constrained banks’ role on

interest rates, credit limits and others. Moreover, the then existing government

owned banks were under pressure by regulation from the central government as

the country was governed by command economy. This institutional framework

led to a situation of virtually no competition in the banking sector, with total

concentration of banking activities in government owned banks. In fact, the

government stance was to minimize the extent of competition between the

commercial banks and existing specialized banks.

However, after the change of the government different reforms including

in the financial sector were undertaken which enabled the banks to set lending

interest rate by their own. Moreover, the ban on entry of private banks, owned

by domestic businessmen was abandoned. Currently, fifteen commercial banks

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and one publicly owned specialized bank are operating in Ethiopia as compared

to one government owned commercial bank and two specialized banks before

the reform measures took place. These all ranges of reforms were arisen from a

significant change in the regulatory framework of the banking system after the

1992 economic reform. Despite these changes, currently, the banking industry in

Ethiopia is characterized by little and insufficient competition and perhaps can

be distinguished by its market concentration towards the big government

commercial banks and having undiversified ownership structure.

Ethiopia’s financial sector remains closed to foreigners and is much less

developed than its neighbors. Ethiopia has no capital market so far and very

limited informal investing in shares of private companies. A series of financial

sector reforms has been introduced since 1994, when private banks were allowed

to be re-established. But the three large state owned banks continue to dominate

the market in terms of capital, deposits and assets. The current government is

committed to alleviating poverty through private sector development and

through integrating Ethiopia into the global economy.

Cooperative Bank of Oromia (S.C.) is the first cooperative bank in the

country established in October 2004. The shareholders of this bank were

predominantly Cooperatives; Viz., Farmer’s Multi-purpose primary cooperative

societies and cooperatives unions. Cooperative banks are one among the poor

managed enterprises particularly in developing countries of the world. Therefore

it is necessary to study the performances of this immature cooperative bank in

-3-
the country so that its past performances will be known to the stakeholders and

important recommendations have to be found out for better performances in

future so that the banks will face completion and sustain in business without any

forms of financial crisis or turbulences.

A proper study on banks financial performance enables the management

to evaluate its past and current performances and learning from such he/she will

plan for better performances in which the interests of all stakeholders of the bank

are maintained. It also gives feedback on the financial performances of the bank

to the stakeholders. Similarly, it indicates deviations from the plan of the bank

and enables the management to correct such deviations so as to curb the problem

on time. Therefore, the aim of this paper is to analyze the performances of

Cooperative bank of Oromia (S.C) in particular by using key performance

indicators, specifically ratio analysis, CAMELS rating and balanced scorecard

(BSC) performance measurement. Therefore, this project study was purposefully

initiated to measure the performances of Cooperative bank of Oromia (S.C)

during the last five fiscal years, with a base year 2005/06.

1.2 STATEMENT OF THE PROBLEM

During Derg period (from 1974-1991), cooperatives were made a state

machinery in the socialist economy. The farmer’s lands were grabbed by

farmers’ producers’ cooperative societies in almost all over the country and

collective farming was practiced. All farmers’ resources were also taken over by

these collective framings. After the fall of the Derg regime, as cooperatives were

-4-
considered to be the state machinery, they were hated together with the fallen

regime. As a result of the negative image created on cooperatives in the minds of

the people, most Ethiopians are still happen to be suspicious of cooperatives

The performances of banks in general & Cooperative bank of Oromia in

particular is directly or indirectly affected by the socio-cultural, economic, and

political and global factors in general and other external and internal factors like

lack of awareness among the general public on Cooperative businesses, Not for

profit-service objectives of the Cooperatives, lack of competent and qualified

and well-experienced man power, lack of fuller share capital subscription, lack

of latest technological facilities such as automated offices and office equipments,

vehicles, ATM facilities, Internet facilities, lack of clear working policies and

guidelines for cooperative banks in the country, the high rates of inflation in the

country which affects savings rate, Customer relationship management (CRM)

and direct or indirect competition from commercial banks and MFIs

respectively, to the infant cooperative bank are some of the major factors

affecting the performances of Cooperative banks of Oromia.

1.3 OBJECTIVES OF THE STUDY

The ultimate objective of this study is to analyze the performances of

Cooperative bank of Oromia (S.C) from both quantitative and qualitative point

of view by using traditional measure of performances like ROA, ROE, EPS,

CAMELS and the new method called Balanced Scorecard (BSC).

-5-
Specifically the study will address the following objectives:

1. To elaborate and apply both the traditional financial measures and new

Balanced Score Card techniques of performance measurement.

2. To study the impact of the independent variables on profitability

measured by ROE, and interest income.

3. To measure the performances of the bank’s based on key performance

indicators like CAMELS, balanced scorecard, and ratio analysis

4. To provide recommendations based up on the findings of the study for

improved performances in future.

1.4. METHODOLOGY

This study is based on mainly the secondary sources of information; the

secondary data were collected from the annual reports of Cooperative bank of

Oromia (S.C) for the period of 2005 -2009 fiscal years, and other sources.

However, the research approaches that were employed in this project are both

quantitative and qualitative approaches in the form triangulation with the

intention of backing numerical information with qualitative aspects from the

managers’ perspectives and vice-versa. Quantitative methodology was used in

order to produce statistical data (the ratio analysis) relating to the study.

Eventually structured/semi – structured schedules were developed to collect

quantitative data. Qualitative approaches were also used to explore the attitude

and experience of managers toward their Cooperative bank from their

perspectives and other non-numerical factors that influence the performances

banking business operations.

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 1.4.1 Descriptions of the Study Area

The study area would be in Oromia Regional state particularly at Ambo,

which is the capital city of West Shoa Zone and Addis Ababa, the capital city of

Oromia, Ethiopia, and Africa, which is located in central part of Ethiopia. In the

region there is a relatively advanced Cooperative movement and better

management practices of cooperative businesses. Oromia is the leading regional

government in terms of diversification and establishment of secondary level

cooperatives including Cooperative Banks. According to the FCA, currently

there are 152 cooperative unions and about 19,876 Primary Cooperative

societies, one Cooperative Bank and one Cooperative Federation, and more than

6.2 million members in Ethiopia (FCA 2009).

1.4.2 Sampling

For this study purposive sampling method was adopted. Accordingly 25

customers of Cooperative banks of Oromia S.C) Ambo Branch selected

purposefully in order to respond to the questionnaire of the author. They were

selected based on their accessibility, proximity, willingness to respond and

convenience. Therefore, the researcher used convenient sampling method in

order to select the respondents. However, since there was only a single

cooperative bank in Ethiopia, it is difficult to undertake peer group performance

analysis and it is also not possible to compare with commercial banks.

1.4.3 Methods of Data Collection

For this project work both primary and secondary data were used and

collected by using different tools of data collection. However, the analysis

-7-
heavily depends on the secondary data sources of the bank. Primary data was

collected through interviews based on semi-structured schedules and personal

observation methods. The form of data collection followed an interview (face to

face) with the bank's main office division heads, and experts of the head offices

and branch managers. The other forms of primary data collection were personal

observation and questionnaire. By using these tools, the researcher observed the

participation and internal business process and gathered customers’ opinions.

Secondary data was also gathered from the books of accounts of the bank both

from the Ambo branch and the head office, from annual reports, pamphlets,

business plan and performance measurement documents, audit reports,

government offices mainly the Central Bank of Ethiopia, FCA and websites.

1.4.3 Methods of Data Analysis

The study uses the major banking profitability ratios also called

traditional measures of performance like ROA, ROE, EPS, CAMELS rating and

the new Balanced Scorecard (BSC) method and SWOT analysis were

employed. Also this study explores the equity size, asset size and deposit size, its

growth and average. After the relevant data were collected, descriptive analysis

was carried out which was preferred for assessment purposes. Hence for all data

interpretations were made by tabulation, percentage, and growth percentage have

been used to support discussions related to findings, finally conclusion were

made accordingly. The primary data collected were further analyzed by using the

SPSS computer program statistical software. .

-8-
 1.5 HYPOTHESIS OF THE STUDY

It is hypothesized that there is a direct relationship between the dependent

variable in this case performance and the independent variables like internal and

external factors like performance of the economy, industry, economy customer

satisfaction, and internal factors like financial aspects of asset quality, risk

management and efficiency; internal business process, Innovative and growth

and commitment of employees and management capacity of the bank.

1.6 SCOPE OF THE STUDY

The scope of the study was confined to Cooperative Bank of Oromia

(S.C) in general and Ambo Branch in particular. This study was based on the

five year data starting from the base year 2005 up to 2009. Few existing

customers of the bank, shareholders, employees and managers of the bank were

participated in the study. While undertaking this research project the researcher

was constrained by Lack of sufficient time, financial and logistic support and

lack of sufficient literatures. Therefore shortage of finance, time and lack of

related literatures were the limitations of the study.

1.7 LIMITATIONS OF THE STUDY

This project report is not without limitations and shortcomings. As

resources scarce including time, the report was suffered from certain limitation.

The main limitation was lack of sufficient finance, which is resulted in logistic

and facility problems. The other limitation was lack of time to undertake a

thorough study within eight weeks. The last limitation was lack of related

literatures as cooperative in general and cooperative bank in particular.

-9-
 1.8 NEED AND SIGNIFICANCE OF THE STUDY

The outcome of the research subsequently will be further helpful to serve

as an input to develop and to guide strategies intended toward promoting

members and non members’ participation and conquering banking barriers in

cooperatives. More over the study will provide a descriptive diagnostic analysis

of major bottlenecks in the cooperative Banking system and will evaluate the

financial performance Cooperative Bank of Oromia. Thus, the research is

believed to benefit the bank itself, cooperative stakeholders which include

members, management committee, promoters and cooperative employees;

researchers; students, teachers, policy makers; cooperatives training institutions,

colleges and universities; and cooperatives promotion bureaus from lower to

Federal levels as a source of information in organization and promotion areas

and the general public at large.

1.9 ORGANIZATION OF THE STUDY

The project report has five chapters. The first chapter deals with the

Introduction of the project. The second chapter deals with the Industry profile.

Here the Ethiopian Banking Industry towards which the company belongs was

discussed in depth. The third chapter is all about Company profile. The fourth

chapter is all about the Review of Related Literatures. The fifth chapter is about

presentation and analysis of data. The last chapter deals with the summary of the

report. It includes findings, recommendations and conclusions. The tools used in

process of data collection and reference materials were also annexed at the end.

- 10 -
 CHAPTER TWO
INDUSTRY PROFILE

The beginning of banking in Ethiopia as in most other countries of the

world, were non institutional. Banking operations were based on the private

initiative of merchant or other possessing or in urgent need of money. Early

banking activity in the specific case of Ethiopia was however curtailed by

traditional religious opposition to usury, i.e., the lending of money for profit.

This practice was condemned in both the Holy Bible and Qoran, and also found

expression in the Fetha Negest (traditional Ethiopian Code of law) (NBE, 2009).

Generally, in its short period of existence, Bank of Abyssinia had been

carrying out limited business such as keeping government accounts, some export

financing and undertaking various tasks for the government. Moreover, the Bank

faced enormous pressure for being inefficient and purely profit motivated and

reached an agreement to abandon its operation and be liquidated in order to

disengage banking from foreign

Banking in Ethiopia started in 1905, with the establishment of the Bank

of Abyssinia that was owned by the Ethiopian government in partnership with

the National Bank of Egypt then under British rule. But a well structure banking

system started to evolve starting the 1940s-after the Italian departure. A

government owned bank-the State Bank of Ethiopia-was established in 1942,

and a number of foreign bank branches and a private bank were operating in

competition with the government owned commercial bank until they were

nationalized and merged into one government owned mono-bank in 1976. The
- 11 -
competitive banking situation that started to flourish during the 1960s and 1974s

was nipped in the bud by the command system that reign over the 1974-1991

periods (NBE, 2009).

Following the change of government in 1991, and the subsequent

measures taken to liberalize and reorient the economy towards a system of

economy based on commercial considerations, the financial market was

deregulated. A proclamation number 84/94 was issued out to effect the

deregulation and liberalization of the financial sector, and a number of private

banks and insurance companies were established following the proclamation.

Directives issued in subsequent years further deepen the liberalization mainly

including the gradual liberalizations of the interest rate, foreign exchange

determination, money market operation, etc. Currently, there are six private

banks operating along with three public banks, namely the Commercial Bank of

Ethiopia, the Construction and Business Bank, and the Development Bank of

Ethiopia. Other financial institutions operating in the economy includes nine

insurance companies, one pension fund and about 26 Micro Finance Institutions

with a business focus mainly in the rural areas. There is also one cooperative

bank, the Cooperative Bank of Oromia, that has recently been established and

making rapid progresses including in the major towns. The Development Bank

of Ethiopia (DBE) is a specialized bank in project financing (NBE, 2009).

Generally, public banks dominate the financial industry in Ethiopia. The

Commercial Bank of Ethiopia (CBE) -the largest bank in the industry accounts

for nearly half of the branch networks, over 60% of the outstanding loans and

- 12 -
about 70% of the deposits of the commercial banks. However, the progress

observed by the private banks in the last ten years appears commendable. In

terms of the fresh loans annually disbursed, the share of the private bank is at par

with the public commercial banks. Private banks also managed to capture more

than half of the private sector commercial banks’ loan customers (Neway, 2006).

2.1.1 Banking during Emperor Haile Selassie I Period

By 1931 Bank of Abyssinia was legally replaced by Bank of Ethiopia

shortly after Emperor Haile Selassie came to power to disengage from foreign

control. The new bank, Bank of Ethiopia was a purely Ethiopian institution and

was the first indigenous bank in Africa and established by an official decree on

August 29, 1931 with the capital of ₤750,000. Ethiopian government owned

60% of the total shares of the bank and all transactions were subject to scrutiny

by its Minister of Finance. Finally Bank of Ethiopia took over the commercial

activities of the Bank of Abyssinia and was authorized to issue notes and coins.

It operated successfully until the Italian Invasion in 1935. During the invasion

the Italians established branches of their main Banks namely Banco d’Italia,

Banco di Roma, Banco di Napoli, and Banca Nazionale del lavoro and started

operation in the main towns of Ethiopia. However, they all ceased operation

soon after liberation except Banco di Roma and Banco di Napoli which

remained in Asmara.

The new Bank, Bank of Ethiopia, was a purely Ethiopian institution and

was the first indigenous bank in Africa and established by an official decree on

August 29, 1931 with capital of £750,000. Bank of Egypt was willing to

- 13 -
abandon it's on cessionary rights in return for a payment of Pound Sterling 40,

000 and the transfer of ownership took place very smoothly and the offices and

personnel of the Bank of Abyssinia including its manager, Mr. Collier, being

retained by the new Bank. Ethiopian government owned 60% of the total shares

of the Bank and all transactions were subject to scrutiny by Minister of Finance.

2.1.1.1 Bank of Ethiopia (Both Commercial & Central Bank)

Bank of Ethiopia took over the commercial activities of the Bank of

Abyssinia and was authorized to issue notes and coins. The Bank with branches

in Dire Dawa, Gore, Dessie, Debre Tabor, Harar, agency in Gambella and a

transit office in Djibouti continued successfully until the Italian invasion in

1935. During the invasion, the Italians established branches of their main Banks

namely Banco d’Italia, Banco di Roma, Bancodi Napoli and Banco National del

labor and started operation in the main towns of Ethiopia. However, they all

ceased operation soon after liberation except Banco di Roma and Banco di

Napoli which remained in Asmara. In1941 another foreign bank, Barclays Bank,

came to Ethiopia with the British troops and organized banking services in Addis

Ababa, until its withdrawal in 1943. Then on 15th April 1943, the State Bank of

Ethiopia commenced full operation after 8 months of preparatory activities. It

acted as the central Bank of Ethiopia and had a power to issue bank notes and

coins as the agent of the Ministry of Finance. In 1945 and 1949 the Bank was

granted the sole right of issuing currency and deal in foreign currency. The Bank

also functioned as the principal commercial bank in the country and engaged in

all commercial banking activities.

- 14 -
 The State Bank of Ethiopia had established 21 branches including a

branch in Khartoum, Sudan and a transit office on Djibouti until it ceased to

exist by bank proclamation issued on December, 1963. Then the Ethiopian

Monetary and Banking law that came into force in 1963 separated the function

of commercial and central banking creating National Bank of Ethiopia and

commercial Bank of Ethiopia. Moreover it allowed foreign banks to operate in

Ethiopia limiting their maximum ownership to be 49 percent while remaining

balance should be owned by Ethiopians.

2.1.1.2 The National Bank of Ethiopia

Later on the National Bank of Ethiopia with more power and duties was

established in 1963 by proclamation No 206/1963 and began operation in

January 1964. Prior to this proclamation, the bank used to carry out dual

activities, i.e., commercial banking and central banking. The proclamation raised

the bank’s capital to Ethiopian dollars 10 million and granted broad

administrative authority and juridical personality.

2.1.1.3 Commercial Bank of Ethiopia

After the National Bank of Ethiopia with more power and duties started

its operation in January 1964, another bank, Commercial bank of Ethiopia was

incorporated as a share company on December 16, 1963 as per proclamation No

207/1955 of October 1963. It then took over the commercial banking activities

of the former state bank of Ethiopia. It started its operation on January 1, 1964

with a capital of Eth. Birr 20 million. In the new commercial bank of Ethiopia,

all employees were Ethiopians. There were two other banks in operation namely

- 15 -
Banco di Roma and Banco di Napoli S.C., that later reapplied for license as per

the new proclamation each having a paid-up capital of Eth. Birr 2 million.

2.1.1.4 Private Banks

The first privately owned bank, Addis Ababa Bank Share Company, was

established on Ethiopians initiative and started operation in 1964 with capital of

2 million in association with National and Grind lay Bank, London which had 40

percent of the total share. In 1968, the original capital of the Bank rose to 5.0

million and until it ceased operation, it had 300 staff at 26 branches.

2.1.2 Banking during Derg Period (1974-1991)

Following the declaration of socialism in 1974 the government extended

its control over the whole economy and nationalized all large corporations.

Organizational setups were taken in order to create stronger institutions by

merging those that perform similar functions. Accordingly, the three private

owned banks, Addis Ababa Bank, Banco di Roma and Banco di Napoli Merged

in 1976 to form the second largest Bank in Ethiopia called Addis Bank with a

capital of Eth. birr 20 million and had a staff of 480 and 34branches. Before the

merger, the foreign participation of these banks was first nationalized in early

1975. Then Addis Bank and Commercial Bank of Ethiopia S.C. were merged by

proclamation No.184 of August 2, 1980 to form the sole commercial bank in the

country till the establishment of private commercial banks in 1994.

The Commercial Bank of Ethiopia commenced its operation with a

capital of Birr 65 million, 128 branches and 3,633employees. The Savings and

Mortgage Corporation S.C. and Imperial Saving and Home Ownership Public
- 16 -
Association were also merged to form the Housing and Saving Bank with

working capital of Birr 6.0 million and all rights, privileges, assets and liabilities

were transferred by proclamationNo.60, 1975 to the new bank.

Proclamation No.99 of 1976 brought into existence the Agricultural and

Industrial Bank, which was formed in 1970 as a 100 percent state ownership,

was brought under the umbrella of the National Bank of Ethiopia. Then it was

reestablished by proclamation No. 158 of 1979 as a public finance agency

possessing judicial personality and named Agricultural and Industrial

Development Bank (AIDB). It was entrusted with the financing of the economic

development of the agricultural, industrial and other sectors of the national

economy extending credits of medium and long-term nature as well as short-

term agricultural production loans. The socialist oriented government left behind

constituted only 3 banks and each enjoying monopoly in its respective market.

1. The National Bank of Ethiopia (NBE)

2. The Commercial Bank of Ethiopia (CBE)
3. Agricultural and Industrial Development Bank (AIDB)

2.1.3 Banking services in Post 1991 Political and Economic Reform

National Bank of Ethiopia: The National Bank of Ethiopia (NBE) was

established in 1963 by proclamation 206 of 1963 and began operation in January

1964. Prior to this proclamation, the Bank used to carry out dual activities, i.e.

commercial banking and central banking. The proclamation raised the Bank's

capital to Ethiopian dollars 10.0 million and granted broad administrative

- 17 -
autonomy and juridical personality. Following the proclamation the National

Bank of Ethiopia was entrusted with the following responsibilities.

➢ To regulate the supply, availability and cost of money and credit.

➢ To manage and administer the country's international reserves.

➢ To license and supervise banks and hold commercial banks reserves and

lend money to them.

➢ To supervise loans of commercial banks and regulate interest rates.

➢ To issue paper money and coins.

➢ To act as an agent of the Government

➢ To act as an agent of the Government

➢ To fix and control the foreign exchange rate

Mission, Vision, Values

The vision, mission and goals of the National Bank of Ethiopia has

emanated from the overall vision of the government which is "to see a country,

wherein democracy and good governance are prevailed upon the mutual consent

and involvement of its people, wherein social justice is reigned, and wherein

poverty reduced and income of the citizens reach to a middle economic level"

Vision of the bank

To be one of the strongest and most reputable central banks in Africa.

Mission of the bank

To maintain price and exchange rate stability, to foster a sound financial

system and undertake such other functions as are conducive to the economic
growth of Ethiopia.
- 18 -
 Values of the bank

Core value: Promoting financial and monetary discipline

Individual Values

1. Integrity

2. Neatness and good appearance

3. Punctuality

4. Team work sprit

Operational Values
1. Commitment to Excellence Service

2. Confidentiality

3. Continuous Improvement

4. Transparency

5. Accountability

Organizational Strategic Values

• Pursuit of Excellence and Professionalism

NBE, as a central bank, does provide loan to the government and banks,

not to individuals and business entities. NBE has set the minimum saving and

time deposit rates at 4%. But banks may pay higher than this rate. The lending

rate is fully liberalized, and hence there is no lower/upper lending limit rate in

the country. Each bank determines the lending rates. According to the existing

proclamation, Only Ethiopians are trust worthy to deal, own and operate

financial institutions like commercial bank, insurance company or MFIs.

- 19 -
 Following the change in the economic policy, financial sector reform also

took place. Monetary and Banking Proclamation of 1994 established the

National Bank of Ethiopia as a judicial entity, separated from the government

and outlined its main functions. Currently there are 10 private 1 Cooperative and

3 government-owned banks, 9 private and 1 government owned insurance

companies, and 28 MFIs (as of October 2009.)

Monetary and Banking proclamation No.83/1994 and the Licensing and

Supervision of Banking Business No.84/1994 laid down the legal basis for

investment in the banking sector. Consequently shortly after the proclamation

the first private bank, Awash International Bank was established in 1994 by 486

shareholders and by 1998 the authorized capital of the Bank reached Birr 50.0

million. Dashen Bank was established on September 20, 1995 as a share

company with an authorized and subscribed capital of Birr 50.0 million. Bank of

Abyssinia, another private bank was founded by 131 shareholders with

subscribed and authorized capital of 25.0million and 50 million, respectively.

Wegagen Bank with an authorized capital of Birr 60.0 million started operation

in 1997. The fifth private bank, United Bank was established on 10th September

1998 by 335 shareholders and now has four branches. The last bank to be

established to date is Nib International Bank that started operation on May 26,

1999 with an authorized capital of Birr 150.0 million. Very recently, Abay Bank

was also established and started operating during 2009.

- 20 -
Table 2.1Names and Sectors of Banks in operation in Ethiopia

S. Name of the Bank Year of No of Sector in

No Establishment Branches Ownership
1 Commercial Bank of Ethiopia 1963 209 Public
2 Development Bank of Ethiopia 1970 32 Public
3 Construction and Business 1975 32 Public
Bank
4 Awash International Bank 1994 60 Private
5 Dashen Bank 1995 55 "
6 Wegagen Bank 1997 50 "
7 Bank of Abyssinia 1996 47 "
8 United Bank 1998 41 "
9 Nib International Bank 1999 45 "
10 Cooperative Bank of Oromia 2004 39 Coop
11 Lion International Bank 2006 20 Private
12 Zemen Bank 2008 1 "
13 Oromia International Bank 2008 25 "
14 Buna International Bank 2009 1 "
15 Berhan International Bank 2009 - "
16 Abay Bank 2009 - "
Source: National Bank of Ethiopia Annual Report, 2008/09

2.1.4 Bank Notes

In contrast to the metallic or commodity money used in Ethiopia in the past, a

new kind of money was now introduced. This was the bank note or paper

money, which appeared for the first time in Addis Ababa in-1914 – 1915, issued

by the Bank of Abyssinia. It was used as legal tender and was freely

exchangeable against gold or silver cover. This paper money, in 5, 10, 100 and

500 birr denominations was printed in London.

- 21 -
 2.1.5 Currency Denominations

Ethiopia has 1, 5, 10, 50 and 100 birr notes and a 1, 5, 10, 25, 50 cents

coins. The 100 Birr Note is bright green in its color while the 50 Birr Note is

orange its color. On the other hand the 10 Birr Note is reddish, 5 Birr Note is

light blue and the 1 Birr Note is Gray in its color. In order to avoid forgery the

100 and 50 Birr Notes contain shinny undercover stripe up on which the

acronym of the NBE was written in both English and Amharic letters.

2.1.6 Bank Interest Rate

When the government introduced economic reforms during late 1990’s,

reduced the banks’ lending rate from 7% to 6% and from 6 to 3% on saving

deposits and time deposits to 4.08%. This was revised during the year 2007 just

to reduce the inflationary conditions through the National Bank of Ethiopia In

response to NBE’s upward revision of the minimum interest rate on savings and

time deposits from 3 to 4 percent effective from July 4, 2007, commercial banks

revised their minimum deposit interest rates on saving and time deposits upward

by one percentage point. The minimum and maximum lending rates of

commercial banks also increased by the same percentage point. Accordingly,

average interest rate on savings deposit rate rose to 4.08 percent from 3.08

percent in the preceding year. The weighted annual average interest rate on time

deposits also increased to 5.16 percent from 4.08 percent while that of demand

deposit fall to 0.041 percent from 0.062 percent. The average lending rate of

commercial banks reached 11.5 percent from 10.5 percent a year earlier 2008/9.

- 22 -
 CHAPTER THREE
COMPANY PROFILE

PROFILE OF COOPERATIVE BANK OF OROMIA (S.C.)

Company Name : Cooperative Bank of Oromia

Company Logo : 7 birds with 7 colors and CBO (see above)

Year of Establishment : 29 October 2004

Registration No : IBB/008/2004

Commencement of operation: 8th March 2005

Subscribed Capital : 300 Million Ethiopian Birr

Paid up Capital : 112 Million Birr (establishment)

Current Capital : Over 140 Million Birr

Name of the President : Mr. Assefa Dibaba (Current)

SWIFT BIC : CBORETAA

Location; Head office : Near Hilton Hotel, DBE Building 2nd Tower,

1st and 2nd Floor, Finfinne/ Addis Ababa,

Branches : Addis Ababa and Oromia Regional State

No. of Branches : 39

No. of Employees : 848

Contact Person : Mr. Deginet Hailu

P. O. BOX : 16936, Adds Ababa

Telephone : +251- 011- (5510037/4672412/13)

E-mail : coopbank@telecom.net.et

Website : http://www.coopbankoromia.com.et/en/home.htm

- 23 -
 3.1 INTRODUCTION

Cooperative Bank of Oromia S.C (CBO) is established to provide all

banking service and products. It was registered on 29 October 2004 in

accordance with Article 304 of the commercial code of Ethiopia and was

licensed by National Bank of Ethiopia as per proclamation No. 84/1994 that

provides for licensing and supervision of banking businesses, with Registration

No. IBB/008/2004. The bank commenced operation on 8th March 2005 with 7

branches. CBO is established with 300Million Eth Birr issued share and paid up

capital of 112 Million. Currently the paid up capital reached more than 140

Million Eth. Birr.

CBO provides banking services for cooperative societies in Oromia,

(Ethiopia) other entities and individuals with special emphasis to agricultural and

agro-based business financing. The main objective of the bank is to stimulate the

economic and social development of Oromia through mobilizing financial

resources from cooperates, private business and public institutions and financing

them. Specifically, Objectives of CBO are: Mobilize deposit and promote the

culture of saving that encourage the supply of funds, create access to loans and

advances and other banking services for broad portions of population.

The head quarter of Cooperative Bank of Oromia is located at Addis

Ababa, which is the capital city of Oromia state, Ethiopia and Africa Union.

Currently, it has 39 branches operating as a network in most commercial cities

and towns of Oromia regional state including the capital city Addis Ababa. The

- 24 -
bank's major shareholders were primary cooperative societies (up to 75%) with

the objective to pool their scarce resources and alleviate the problems of working

capital and to increase their bargaining power with the ultimate objectives of

improving the living standards of their grass root members. At the head quarter

there are four divisions; Viz., Business development and Marketing division,

Finance division, Planning division and Credit (Loan appraisal) divisions.

Within those divisions a lot of experts with reach experience and cooperative

spirit are working.

3.2 Vision

We aspire to be the competent and reputable Bank in Africa that can play

a paramount role in the socio-economic transformation of Oromia.

3.3 Mission Statement

The mission of CBO is to provide full-fledged and customer responsive

Banking services for cooperative societies in Oromia, other entities and

individuals with special emphasis to agricultural and agro-based business

financing. We use competent and disciplined employees. We believe integrity is

the base of public confidence.

3.4. Objectives

The main objective of the bank is to stimulate the economic and social

development of Oromia through mobilizing financial resources from cooperates,

private business and public institutions and financing them. Specifically, CBO

has the following objectives: Mobilize deposit and promote the culture of saving

- 25 -
that encourage the supply of funds, Create access to loans and advances and

other banking services for broad portions of population, and of course, The

commercial objective of the bank is to maximize shareholders value.

3.5 Values and Principles of CBO

• Committed staff

• Community spirited action

• Anti corruption stand

• Customer oriented and Quality Oriented service provision

• We promote integrity, team sprit, transparency and accountability

• We must develop and maintain a results oriented Organization

• We watch our words and actions

• We always look for ways of improving our services

3.6 Salient Features of CBO

CBO has broad ownership base and diversified ownership structure:

The rural area in Oromia hosts about 85% of the people of the

region. The rural economic actors that consist of individuals,

cooperatives and other entities are all constrained by lack of access

to financial services. CBO, where cooperative societies take the

lion's share in ownership, exists to address the financial service

constraints of these rural economic actors. Development

- 26 -
organizations, civic organizations/NGOs, PLCs, associations and

individuals stand second to cooperatives in bank ownership

CBO is the first bank of its kind in the banking industry of our

country: CBO is the first cooperative bank in Ethiopia established to

stimulate economic growth and transformation by activating the

idle or unproductively held resources, the bank engaged in

financing those businesses through cooperative system.

It is the first private bank established with big paid up share capital:

CBO commenced operation with paid up capital of birr. 112 million

(49% in excess of requirement for foundation), which is about 37%

of authorized share capital of birr. 300,000,000.

Socio-cultural values oriented services: It is dedicated to respect and

adhere to the socio-cultural values and norms of the people in its

work area-the regional state of Oromia. In addition to English

language, the bank uses Afan Oromo to ease communication with

its customers and to name its branches using terms that reflect

historical and cultural conditions of the area. By doing so, it is

striving to develop sense of ownership and belongingness of the

people. Moreover, representative and community accepted

historical names are tagged to branches that are located at different

towns of the Oromia region. Customers can access CBO bank from

different Oromia regions where branches are there.

- 27 -
 3.7 Capital and Shareholders

The authorized capital of CBO is 3 million shares worth of Birr 300

million. Its paid up capital was Birr 112 million when established. Currently the

paid up capital of the bank reached more than Birr 140 million. Shareholders of

CBO are: Cooperatives, Development Organizations, Board of Directors, Top

Managers, Individuals/residents and Pvt. Ltd. Companies. Regarding the

composition of shareholders, 73.57% was held by Cooperatives, among which

69.18 % is primary cooperatives and 4.39 was by Cooperative Unions. The

remaining Birr 26.44% shares were held by non-cooperative members.

Table 3.2 Shareholders of CBO and their stake

S. No Shareholders Share Capital (%)

1 Cooperatives 73.57
1.1 Primary Cooperatives 69.18
1.2 Cooperative Union 4.39
2 Non Cooperatives 26.44
Total 100.00
Source: Broacher of the CBO, 2009

3.8 Organizational Structure

The apex body of the Cooperative Bank of Oromia is the General body of

shareholders/owners of the bank who have the basic right to decide the

objectives, existence and operations of the bank. The General Assembly elected

representatives, the Board of Directors, to whom all the powers to run the Bank

are bestowed upon. Board of directors hired the president of the Bank who is

entrusted to perform the functions relating to policy matters, implementation and

supervision.

- 28 -
Chart 3.1 Organization Structure of Cooperative Bank of Oromia S.C.

General Assembly

Control Department

Board of Directors

President

Vice President - Vice President -

Service Operation

Legal Business Human Finance

Service Development Resources Department
& Corporate Mag't and
planning Dep't Admn. dep't

Branch Internation Information Credit &

Operation al Banking Technology Risk
Dep't Dep't Dep't Management
Dep't
Branches

Source: The Articles of Association of Cooperative Bank of Oromia

- 29 -
 3.9 Branch Networks

CBO started operation with 7 branches in 2005. Since then it has been

working dedicatedly to provide its services to all customers all over the country.

At present the bank has a total of 39 branches in operation.

CBO provides fast and efficient services. The Bank mainly focus at:-

• customer satisfaction

• Capital mobilization.

• Loan disbursement.

• Efficient local money transfer services.

The branches of the bank were all managed by Branch managers and

deputy branch managers. Accordingly, the Ambo branch where I undertaken

field training has a total 23 employees. The branch was well managed,

employees are time conscious and have a customer orientation. They have a

respect to their customers and are dedicated to the objective of their bank.

Financial transaction is very fast and customers are satisfied out of the services

of this branch and the bank as it saves their time which otherwise they have to

waste it if the goes to other banks. The farmers and non members are all proud

of this bank as it uses Afan Oromo which is the mother tongue of Oromo people.

Currently the CBO is operating in 39 branches. The following table

shows the names of the branch and the city they are located. The following table

shows the lists of the branches of CBO:

- 30 -
Table 3.1 List of Branches of Cooperative Bank of Oromia
S.No Branch Name City/Town Branch Manager's Name
1 Adama Adama/Nazareth Abdul Jewad
2 Afran Qallo Awaday Mohammed Abdo
3 Ambo Ambo Demelash Getachew
4 Angar Gute Angar Gute Ibsa Abera
5 Arsi Nagele Arsi Nagele Tsegaye Legese
6 Asala Asala/Arsi Tesfaye Degefa
7 Bokoji Bokoji Teshome Zena
8 Bole Nura-Era Bole /Finfinne Seifu Gizaw
9 Bule Hora Bule Hora/Borena Hussen Hajiya
10 Burrayu Burrayu Degnet Hailu
11 Dambi Dollo Dambi Dollo Mezgebu Negasa
12 Dire Dewa Dire Dewa Birhanu W/semayat
13 Eteya Eteya Dereje Legsse
14 Finfinne Finfinne Alemayehu Bekele
15 Gimbi Gimbi Gudeta Terfasa
16 Gineer Gineer/Bale Birhanu Aduggn
17 Gulele Gulele/ finfinne Jembere Hambisa
18 Hasasa Hasasa Beshir
19 Hawas Adama Gezmu Deribe
20 Hora Arsadii Bushoftu Yilma Bayisa
21 Hundene Harar Legese Iticha
22 Kuyyu Garba Gurracha Getachew Desta
23 Meqi Meqi Seifu Tefera
24 Markato Finfinne/Mesalemya Shimekit
25 Modjo Modjo Sisay Zewde
26 Nakemte Nakemte Dibisa Weyesa
27 Qarsa Arsi Qarsa Arsii Mengistu Bayu
28 Qarsa Branch Finfinne Daniel Geleta
29 Robe Robe/ Bale Kebede Balcha
30 Robe Didea Arsi Robe Worku Gemechu
31 Sabata Ayyo Sabata Tasew Geleta
32 Saglan Illu Mattu Tadese Assefa
33 Sendafa Bake Sendafa Kebede Yilma
34 Shagar Finfinne /Raguel Muluneh Guta
35 Shashemene Shashemene Ahmed Kedir
36 Shenen Ghibe Jimma Asrat Ayeru
37 Sulultaa Sululta Melaku Saboqa
38 Torban Oboo Adama/ Nazareth Mengistu Temesgen
39 Waliso Waliso Tola Qanani
Source: COB’s Annual Report, 2009-10

- 31 -
 3.10 Management of Oromia Cooperative Bank

As to the management of the bank, the supreme authority is the General

Body also called- the General Assembly (GA). This GA has the authority to

govern the overall business guidelines and policies as to the objectives and

activities. This governing body will select 11 members of Board of Directors

(BOD) and delegate the authority to the board. The Members of board of

directors have the duties and responsibilities of drafting the business policies and

strategies, and other guidelines and observe their implementation with greater

commitment. The Board of Directors will conduct both regular and special

meetings/assembly. The regular board meeting is conducted monthly and the

special meeting is conducted whenever need arises and/ or whenever urgent

issues need to be resolved.

The Board of directors for implementation and execution of the policies,

strategies and procedures laid-down by the board, it employs and delegate power

to the President, two Vice presidents (operation and Services) 5 directors and 2

other supporting staff. The president is in charge of day to day activities of the

bank. There are other divisions which were managed by division head known

and directors. They have other employees under respective managing directors.

The lists of Board members and Management committee members were annexed

(Annexure I) at the end of this report.

3.11 Current Activities of CBO

Mobilize deposit and promote the culture of saving whereby guarantees

the supply of funds; create access to loans and advances and similar banking

- 32 -
services for broad portions of populations, and to earn a profit. CBO is

currently undertaking the following specific Banking services:

I. Accept Demand, Saving and Time Deposits

Concerning saving deposits CBO provides three different types of accounts.
a. Demand Deposit/ Current account: The account holder can
access the money saved in this account at any time. But the bank
will not calculate interest on current accounts.
b. Saving Deposit:- It is open for all persons &/or organizations
with the initial deposit of Birr 50. On this account the bank will
calculate interest on monthly basis.
c. Time Deposit/ Fixed deposit: Time Deposit account is fixed for
certain period of time based on the agreement reached between
the customer and the bank. If the amount is deposited up to the
due date, attractive interest is paid for it.
II. Credit Services:
CBO is providing different types of credit services. This are:
a. Agricultural development credit- this type of credit is meant
for purchase of inputs like fertilizers, insecticides, improved
seed, Combine harvester, Tractor, etc.
b. Domestic Trade Loan- This type of loan is given for micro
trades, retail stores, wholesalers, hotels and etc sectors.
c. Industrial Production Loan- Such type of loan is earmarked for
the purchase of small scale industries and working capital of such
enterprises.
d. Construction Loan - It is a type of credit for maintenance,
building finishing of constructions.
e. International Trade Loan - It is meant for import and export
trades.

- 33 -
 f. Vehicles Loan- this loan is provided for the purchase of
transport and passenger cars, road construction machineries and
vehicles and etc.
III. Domestic Money Transfer-
CBO is also rendering inland domestic money transfer through its
networks at 39 cities. This service is the fastest money transfer in the
country and trustworthy.
IV. International Banking Service -
The following services are rendered here:
a. Provision of Letter of Credit (LC) for export and import trades
b. Money Transfer: this includes receiving money from abroad and
transferring the same to the drawee through the following
Worldwide money transfer organizations like Dahabshi, X press
money and GFX
c. Money exchange (Foreign exchange) services at certain branches
like Qarsa, Shagar, Adama, and Dire Dawa branches
V. Custodian services: This service includes the acceptance and safe
keeping of precious metals like gold, etc and lump sums of money. The
purpose of such services is to protect them from potential thefts,
misappropriations &/0r damages.
VI. Other Banking Services:
It also provides other banking services such ad domestic money
exchange, guidance and counseling, Consultancy, etc

3.12 Geographical Location of Oromia

Oromia is the biggest state among nine regional states of Ethiopia. It is

located towards central, west and southern part of the country.

- 34 -
Figure 3.1: Geographical Map of Ethiopia and Oromia Region

Flag of Ethiopia and the Oromia Region, Respectively

Map of Ethiopia highlighting the Oromia Region

Key: Oromia Region

Addis Ababa (Capital City of Ethiopia)

Key:

Tigray Oromia State SNNP State

Afar State Benishangul Gumz Somalia State

Amhara Gambella State Harari State

Source: Ethiopia, Country Profile

- 35 -
COOPERATIVE BANK OF OROMIA, AMBO BRANCH PROFILE

Branch Name : Cooperative Bank of Oromia, Ambo Branch

Year of Establishment : May 7, 2005

Registration No : IBB/008/2004

Commencement of Operation : May 7, 2005

Name of Branch Manager : Mr. Demelash Getachew (Current)

Location, Head office : Ambo, West Shoa, Ethiopia

No. of Employees : 23

Branch Manager : Mr. Demelash Getachew

P. O. BOX : 16936, Ambo

Telephone : 251-11-236 21 67

Fax : 251-11-236 21 66

E-mail : demelashgetachew@yahoo.com

Website : http://www.coopbankoromia.com.et/en/

36
 3.13 Cooperative Bank of Oromia, Ambo Branch

Cooperative Bank of Oromia Ambo branch was established on May 7, 2005 at

Ambo Town. Ambo (also known as Hagere Hiwot) is a spa town in

central Ethiopia. Located in the Mirab Shewa Zone of the Oromia Region, west of Addis

Ababa, this town has a latitude and longitude of 8°59′N 37°51′E and an elevation of 2101

meters. It is both the largest town and the administrative center of Ambo woreda and

West Shoa Administrative Zone.

Ambo is known for its mineral water, which is bottled outside of town at a

particular place called Sankale around 3KM West from Ambo besides the Main Wollega-

Nekemte Highway; Ambo Mineral Water called "Ambo Woha" is reportedly the most

popular brand in Ethiopia. Nearby attractions include Mount Wench to the south with its

crater lake and eco-tourism destinations with amazing landscape and natural forests, and

the Guder and Huluka river Falls.

Ambo is also the location of a research station of the Ethiopian Institute of

Agricultural Research; initiated in 1977, this station hosts research in protecting major

crops in Ethiopia. The town's market day is Saturday and it’s an open Market situated at

the Arada (06) district of the Town. Ambo is also a place where the first higher Education

in Ethiopia was established in 1939 as Institute of Forestry and later called junior college

of Agriculture and the Ambo College of Agriculture. This college has now upgraded to

the full-fledged university level and so called Ambo University in 2009. Currently, FIFA

Goal Project was also under massive construction process at Ambo town.

37
 3.14.1 Objectives of Ambo Branch

The objective of this branch is the same with that of the objectives of the Bank

except area specificity. That is the area of operation of this branch was confined to West

Shoa Zone of Oromia region. Accordingly its objective is to mobilize deposit and

promote the thrift and saving culture, stimulate economic growth of the area by

stimulating the supply of funds to Ambo and surrounding through providing different

types of loan portfolios' and offer other banking services to the people of West Shoa

Zones of Oromia regional states.

In general its main objective is to stimulate the economic and social development

of the people of West Shoa Zone though mobilizing funds through savings from

Cooperatives, private businesses, public sector organizations and individuals and

canalizing the same to productive avenues such as viable investment projects, input

supply and entrepreneurship development in West Shoa Zone.

3.14.2 Organization structure of Ambo Branch

The Branch Manager is the top most decision maker and responsible person for

the activities of the branch bank. The assistant Branch manager replaces the Branch

manager in his absence and undertakes other activities interested to him.

38
 Chart 3.2 Organization Structure of CBO, Ambo Branch

Branch Manager

Assistant Branch Manger

Secretary Secretary

Loan officer Accountant/ Tellers/

Account Cashers/
Officer Cash
Officer

Branch Share Local Saving Current

Guard officer Transfer Account Account
Head Clerk Clerk Clerk

Messengers

Source: The Articles of Association of the Branch

39
 3.14.3 Loan Appraisal

Loan appraisal is one of the most critical elements of the banking business. As a

result maximum precautions have to be made in order to assess the credit worthiness of

the borrower and the purpose for which he/she is using the loan. This is to avoid ill

appraised loans which results in loan over-dues and bad debts. Therefore the banks are

expected to thoroughly appraise the lean before rendering it. All CBO branches provide

efficient and satisfactory services. They extend loans products of various kinds at

competitive lending rates to cooperatives and other entities in many sector of the

economy. Credit worthiness and financial soundness are the key decision criteria in

extending loans to any sector of the economy to enhance those businesses.

Cooperative Bank of Oromia is doing rigorous activities and loan appraisal

procedures in order to ascertain the credit worthiness of the borrower and the purpose of

the loan. For this purpose they have clearly stated criteria fro loan appraisal mechanisms.

These are Checking the borrowers Business License, TIN (Tax Identification Number),

feasibility study report to ascertain whether the project is feasible or not, personal

application letter for seeking loan and amount he/she wants to borrow, Financial and

business status of the applicant, Audit statements for Cooperative societies and

supportive letter from the concerned government organ; if individual the marriage

certificate is also required by the bank and also its branches. Loan will be lent based on

the recommendation given by the loan officer after thoroughly appraising the loan.

40
 3.14.4 Credit Administration

Credit administration is also an important activity of the banking business. Here

credit administration refers to the banks follow-up of the progress of the project and

ascertaining that the amount sanctioned by the bank in the form of loan is fully utilized

for the purpose for which the loan is lent. Accordingly, Cooperative Bank of Oromia has

a set-up mechanism to follow up the progress of the loan lent to its borrowers. Some of

these mechanisms were obtaining progress reports from the borrower periodically, field

visit to the project site and collecting first hand information from the project site,

meetings undertaken between the borrower and the bank experts, advisory services given

to the borrowers how to utilize their fund more economically and how to become

profitable by implementing the budgetary control mechanisms such as cost control.

3.15 Tips about Oromia State

Oromia is the largest and populous region in Ethiopia constituting about 30 percent of the

county’s population. According to the population Census report by Central statistical

Authority (2007), the regional population is 26,993,933 million divided in about equal

proportion between males and females i.e., 13,595,006 males and 13,398,927 females.

The rural population comprises about 89% 23,676,473 million and the rest 11% or

3,317,460 million. The economically active population is estimated at 81 percent of the

15 to 64 age group.

41
 CHAPTER FOUR
LITERATURE REVIEW

The review of related literature was divided in to two sections. The first category

of literature reviews for this study were originated from different related research outputs

gathered and presented in order to see the research gap and the necessity of initiating this

research topic. For this purpose empirical literatures were thoroughly reviewed in the first

section of the literature review. The second section of the literature review is all about the

theoretical background of Cooperatives, history of banking in the world and Ethiopia, and

salient features of Cooperative banking and commercial banking. The sources of the

reviewed literatures were appropriately cited immediately just after each statement

according to the American Psychologists Association (APA) recommendations.

4.1 SECTION I – EMPIRICAL REVIEWS

Performance as defined by Robert N. Lussier (1996) is means of evaluating how

effectively and efficiently organizations use resources to achieve objectives. Shelagh

Hefternan (1996,P.91) insisted , was that the banking world is changing rapidly, the

strategic priority has shifted away from growth and size alone towards a greater emphasis

on profitability, performance and value creation within the banking firm. The

performance of the banks decides the economy of nation. If the banks perform

successfully, the economy of nation must be sound, growing and sustainable one. The

performance of macro economy of a country has got a direct and an immediate impact on

banks, may be, more than anything else in the economy, the concepts supported by

42
Greuning and Bratanovic (2000, P.19) from their words, unstable macroeconomic

environment is a principle cause of instability in the financial system.

Johnson (2006) underlined that, If one “gets” performance measurement right, the

data generated will tell the user where the business is, how it is doing, and where it is

going. In short, it is a report card for a business that provides users with information on

what is working well and what is not. Johnson also argued that a performance

measurement system enables an enterprise to plan, measure, and control its performance

according to a pre-defined strategy.. In short, it enables a business to achieve desired

results and to create shareholder value.

David Cole (1972) introduced a procedure for evaluating bank performance via

ratio analysis. Timothy, W. Koach and S. Scott Macdonald (2003, P.112) insisted, the

aggregate bank profitability is measured and compared in terms of return on equity

(ROE) and return on assets (ROA). Return on assets (ROA) is the ratio of earnings to

total assets and Return on Equity (ROE) in the ratio of earnings to total equity. The

Banker (July) has published data on the world’s largest banks since 1969.It ranked the

world’s ;largest 300 banks from 1969 to 1979, the world’s largest 500 banks from 1980

to 1988 and the world’s largest 1000 banks from 1989.Currently, the annual ranking

appear in the July issue. The current ranking in based on “strength”, measured by “tier

one”, capital, defined as common stock, declared reserves, and perpetual, irredeemable

and non-cumulative preference shares, expressed in US dollars. Since July 1991, The

Banker reports three other measures of Bank performance: profit on capital (%), return on

43
assets, and on F.T composite credit rating: compiled by The Financial Times newsletters

using 12 international ratings. An arithmetical average of numerical scores is given to

each agency’s investment grade ratings. The highest score is 10, the lowest is 1, prior to

1991, and The Banker reported real profits growth and profits on capital as measures of

performance. It indicated, there is virtually no correlation between asset size and

profitability.

Birritu (2006, P.7) magazine indicates, the performance of bank in terms of

balance sheet structure/trend, earnings and liquidity. David Cates (1996) suggest that one

way to circumvent the on versus off balance sheet comparison problem is to calculate

performance measures using total operating revenue as the denominator rather than

assets. Kaplan and Norton (1992) introduced the concept of the balanced score card,

many banks have recognized the importance of developing performance measures that

look beyond just financial measures. Timothy, W.Koach and S.Scott Macdonald (2003,

P.140) has some interesting aspects in their bank. They mentioned that the Federal and

State Regulatory regularly assess the financial condition of each bank and specific risk

faced via on site examinations and periodic reports. Federal regulators rate banks

according to the ‘Uniform Financial Institutions Rating system, which now encompass

six general categories of performance under the label CAMELS. Each letters refers to a

specific category including C= Capital adequacy; A= Asset quality; M= Management

quality; E= Earnings; L= Liquidity; S= Sensitivity to make risk.

44
 Business India (2004,P.73-90) magazine analyzed and ranked the banks in India

under the title of “Best Bank 2004”, on the basis of its financial statements for the year

2003-04.The analysis has taken 27 public sector banks, 16 private banks, and 27 foreign

banks. It analyzed all the banks in six different headings, it includes Capital adequacy,

and Resource deployed, Asset quality, Efficiency, Earning quality and Liquidity and

systems. Each heading includes different ratios. Capital adequacy includes debt-equity

ratio, government securities to investments and government securities to asset. The

resource deployed contains liquid assets, investments, advances, fixed assets, and other

assets ratio. The third category, Asset quality consists of advances to assets, advances to

growth, advances yield and investment to assets. The efficiency or management heading

comprises Credit-deposit ratio, return on net worth and employee efficiency ratio.

Earning quality of Banks is ranked by net profit growth, spread, other income to interest

income and net profit to – total average assets. The last category of Liquidity covers

liquid asset to total asset and approved securities to total assets.

Johnson (2006) the balanced scorecard (BSC) is the most widely applied

performance management system today. The BSC was originally developed as a

performance measurement system in 1992 by Dr. Robert Kaplan and Dr. David Norton at

the Harvard Business School. Unlike earlier performance measurement systems, the BSC

measures performance across a number of different perspectives—a financial perspective,

a customer perspective, an internal business process perspective, and an innovation and

learning perspective.

45
 Kaplan (1992) stated that Balanced Scorecard is an organization’s strategic

management system which translates the organization’s vision and long-term strategy

into short-term actions or operations and measures and links them with strategic goals

that are common throughout the organization. Balanced Scorecard as a performance

measurement system derives its strength from using multi dimensions of measures in a

form of four perspectives: Financial, Internal Business Processes, Customer, and

Learning and Growth. As a result, a BSC proposes a clear regulation for what should be

measured to balance and integrate both financial and operational (non financial) metrics.

According to Johnson (2006) Organizations have adapted the BSC to their

particular external and internal circumstances. Both commercial and not for-profit

organizations have successfully used the BSC framework. Since 1992, Drs. Kaplan and

Norton have studied the success of various applications of the BSC in different types of

organizations. Companies have used as few as four measures and as many as several

hundred measures when designing a BSC performance measurement system. Based on

this research, it has been found that a BSC framework using about 20–25 measures is the

usual recommended best practice. Smaller organizations might use fewer measures, but it

is generally not advisable to go beyond a total of 25 measures for any single organization,

holding company, or conglomerate group of holding companies.

African Business (2004) had taken 50 Sub-Saharan African Banks and it analyzed

and ranked on the basis of tier 1 capital, as defined by the Basel –based bank for

international Settlements (BIS). As per this ranking CBE with its core capital of $16

46
million on June 30,2003 commanded the 13th place proceeded by 6 South African , 2

Mauritius, 2 Nigerian and 2 Zimbabwean banks.

Almeyehu Geda (1999, P. 28-30) analyzed the performance of Ethiopia’s

Financial system in the pre/post return period ; he explained that, the pre-reform period

here refer to the period 1974-1991, which he noted as the Derge regime before. During

this period all private banks were nationalized. The national bank of Ethiopia (NBE) was

at the apex of the banking structure and was engaged in all the functions of a Central

Bank. One big Commercial Bank (CBE) and two specialized banks; Agricultural and

Industrial development Bank) (now renamed Development Bank of Ethiopia), Housing

and Saving Bank [Renamed the Construction and Business Bank established.

He further stated that, the deposit mobilized by CBE has been on the average 83%

in the pre-reform periods and picked up to 94% in the post reform period. In the pre-

reform period the average outstanding loans of the CBE was the highest in the import

sector (20%) followed by the export (17%), industrial (15.7%) and domestic trade (14%)

sectors. In the post reform period the outstanding loan with domestic trade sector grew

enormously (reaching the average more than 35%).This is followed by imports (17.4%)

exports (14.2%) and the industrial (11.8) sectors. Despite the expansion of the

construction sector in the post reform period, outstanding loan with this sector has shown

a market decline from 15% to nearly 4% on the average. In term of institutional

disaggregating, loan collection from the private sector was significant which constitutes

nearly 40% in the pre reform period and jumped to an average figure nearly 65% in the

47
post reform period. Loan collection from the public sector had been falling steadily in the

pre-reform period. This trend has also continued in the post reform period.

The researcher Habtamu Berhanu (2004) had taken the Commercial Banks

in Ethiopia for financial performance analysis. The banks include both public sector and

private sector banks. The periods of the research starts from 1991-92 (for CBE) and from

1996-97 (for the rest) to 2000-2001.The research showed that the ROEs of BOA, CBE,

DB and AIB have gone at 3.21, 1.8, 1.31 and -0.68 percentages respectively. When the

ROEs of CBE are observed individually, it is said that ROEs of the years before the

entrance of the private banks (1996-97) were better than the ROEs there after. The

possible reasons for the decline in the amount of the ROEs are stated as the increase in

the provision for loan loss (62.3% in 1996-97, 100% in 1998-99) and increase in capital

and reserve account balance. The researcher further disclosed that the decline in the

ROAs of CBE is explained as to be the effect of the increase in the total asset. Finally, the

research concluded that the private banks performed better than CBE in terms of the

profitability ratios.

Messeret (2006) had conducted the research titled as the financial performance of

Ethiopian Commercial Banks; he had taken two public sector Commercial banks (CBE

and CBB) and six private banks for the research purpose. He calculated the average

performance ratios of the private banks for each year and compared with the average.

And attempted to form a peer group and developed the average from the peer, then the

average figure compared with the banks in the peer group. The research showed that, four

of eight banks have got a positive growth rate in their ROEs while the rest four have

48
experienced a negative growth rate. Those banks that have got a positive growth rate are

NIB, WB, DB and CBE ranking in that same order from 1 to 4. The banks that have got

adverse growth rates in their ROEs are, BOA , UB share company , CBB and AIB

ranking from 5th to 8th in that same order. The findings of the research indicates that the

averaging out of the changes in the ROEs , CBE ,DB , NIB , WB, and BOA have got a

positive growth rates ranking from 1 to 5th in same order. The rest three, UB, CBB and

AIB, ranking from 6th to 8th respectively have experienced a negative growth rate.

The research finally concluded that the two government banks, CBE and CBB are

following form behind occupying the 7th and 8th positions respectively in all the four

aspects (annual growth, rate of asset, loan and advances, deposits and capital) of

aggregate item growth rates. Their loan and advance average annual growth rate is

negative. This shows that the private banks are performing better than the publicly held

government commercial banks.

However, when it comes to the Performance analysis of Cooperative banks in

Ethiopia, there was no scientific research undertaken so far and it is also difficult to

undertake peer grouch performance measurement as there is only a single cooperative

bank in operation in the country during the study periods (2005/06-2009/10). Therefore,

this research was initiated purposefully to analyze the performance of CBO’s operations.

49
 4.2 SECTION II-THEORETICAL BACKGROUND

4.2.1 Definitions

To define the term bank is not an easy task. Mostly the term banker has been

either defined in the negative or in such a manner as to lay itself pen to debate. For

example the Negotiable Instrument act 1881 (India), laid-down that the term includes

persons or a corporation or a company acting as a “bankers”. Article 2 sub article 1 of

the Ethiopian "Banking Business Proclamation No. 592/2008” defines the term “bank”

as a company licensed by the National Bank to undertake banking business or a bank

owned by the Government (NBE, 2009).

According to the Ethiopian Monitory and Banking proclamation No: 83/1994,

Banking is simply defined as accepting deposit from the public for the purpose of lending

bank create its own liability by accepting deposits, borrowings and commercial papers

from the public and other institutions. At the same time it forms its own assets by way of

loans and advances that it gives to its customers. This shows that the business of banking

is to mobilize savings and deposits and to provide credits and advances in order to

stimulate the country’s economic activities (NBE, 2009).

According to ICBA, a co-operative bank is a financial entity which belongs to its

members, who are at the same time the owners and the customers of their bank. Co-

operative banks are often created by persons belonging to the same local or professional

community or sharing a common interest. Co-operative banks generally provide their

members with a wide range of banking and financial services (loans, deposits, banking

50
accounts…). Co-operative banks differ from stockholder banks by their organization,

their goals, their values and their governance. In most countries, they are supervised and

controlled by banking authorities and have to respect prudential banking regulations,

which put them at a level playing field with stockholder banks. Depending on countries,

this control and supervision can be implemented directly by state entities or delegated to

a co-operative federation or central body.

4.2.2 Performance Measurement

The basic cornerstones of profitability analysis and economy, and industry

analysis, trend analysis and peer group comparison. The performance indicators of an

intermediary have little meaning unless seen in the context of economic and industrial

developments and benchmarked against a peer group or past performance. Therefore, a

detailed analysis of the Economy of the country, the Industry to which the company

belongs, the institution size for the benefits of scale of economies, the ownership and

corporate structure of the firm and the composition of the portfolio investment are the

background factors of performance analysis (Sharma, 2008).

4.2.2.1 Ratio Analysis for Banks and finance companies

Ratio analysis is an important tool available to a lender to judge the liquidity,

profitability and funds management capacity of the credit applicant. It is the process of

determining and presenting in arithmetical terms the relationship between figures and

groups of figures in financial statements. The ratio may be expressed in one of the three

forms:

51
 (i) As a pure ratio: e.g., 2:1

(ii) As a rate; e.g., Inventory turnover so many times a year;

(iii) As percentage; e.g., Return on the shareholders’ investment is 10%

The financial ratios become meaningful in an assessment of the financial strength

and other related aspects of the firm only when there is a comparison. In fact, an analysis

of the ratio involves two types of comparisons:

(i) A comparison of the present ratio with the past and expected future ratios for

the same firm; and,

(ii) A comparison of the ratios of the firm with those of similar firms or with the

industry averages (Srivastava and Nigam, Sharma, 2008)

A) Performance and Profitability:

Performance, as defined by Lusser (1996) is means of evaluating how effectively

and efficiently organizations use resources to achieve objectives. The performance of

commercial banks is judged by many factors. For the sustainability of commercial banks,

profitability very significant factor and that can be used to measure the performance of

commercial banks. Return on Equity (ROE), Return on Assets (ROA) and Return on

Deposits (ROD) are generally considered profitability measures.

I) Return on Equity (ROE):

This ratio establishes a relationship between Net income and Average totals equity. The

ROE is calculated by dividing net income by average total equity.

52
 Net Income
ROE = ------------------------ X 100
Average total Equity

Net income is calculated by deducting total operating expenses and taken from the

taxes from the total revenue. The total revenue is equals the sum of interest income, non-

interest income and securities gains. Total operating expenses equal the sum of interest

expense, non-interest expense, and provision for loan and lease losses. Equity is the sum

of share capital, preference shares, paid in surplus, retained earnings and revenues for

future contingencies. The higher the return the better, as banks can add more to retained

earnings and pay more in cash dividends when profit are higher. ROE indicates the rate

of return on equity capital and is particularly significant in the context of objective of

maximization of share value.

II) Return on Assets (ROA):

ROA measures the ability of management to utilize the real and financial

resources of the bank to generate income and is used to evaluate management. ROA

equals net income divided to average total assets.

Net income
ROA = -------------- X 100
Total Assets
ROA refers the bank management ability to generate profits by using the available

financial and real assets.

53
 III) Return on Deposit (ROD):

This ratio indicates the profitability performance of the bank. It is calculated by

dividing the net income by total deposits.

Net income
ROD = ----------------- X 100
Total Deposits
This ratio reflects the bank management ability to utilize the customers’ deposits in order

to generate profits.

B) Liquidity Ratios

Liquidity Ratios give standard to measure the ability of the company to cover its

short-term obligations out of its short term resources. It is used do ascertain whether the

company is having proper solvency and ability to remain solvent in times of adversities.

(I) Current ratio: The current ratio expresses the relationship between current

assets (cash, marketable securities, account receivables, and inventory turnover) and

current liabilities (accounts payable, short-term notes payable, current maturities of long

term debt, accrued income taxes and other secured expenses). It is computed by dividing

current assets bay current liabilities. A higher current ratio is a clue to the ability to the

company to pay its dates on maturity. On the other hand a low current ratio points to the

possibility that a firm may not be able to pay its short-term debts. However, from the

management’s point of view, a higher current ratio is indicative of poor planning, for an

excessive amount of funds lies idle. A low ratio would however, pin point the in

adequacy of working capital which may hamper the smooth functioning of the enterprise.

54
A current ratio of 2:1 was long considered to be the minimum in a sound (Srivastava and

Nigam, 2008).

ii) Quick Ratio: Current ratio is the same as quick ratio for banking business firm

as they do not have inventory management. Quick ratio is the relationship between

current assets (cash, marketable securities, account receivables; for banking business) and

current liabilities (account payable, short term notes payable, current maturities of long

term debts, accrued income taxes and other outstanding expenses). The data source to

calculate this ratio was the balance sheet of the bank.

Quick (or) Liquid assets

Quick ratio = -----------------------------
Current liabilities
Quick ratio of 1:1 was long considered to be reasonable for a sound business.

C) Leverage Ratios

Bank lending for medium and long-term periods is determined by the ability of the

borrower to pay his long-term loan in future. This is measured with the help of the

leverage ratios.

i) Debt to Equity Ratio: This ratio relates all the creditors’ claims on assets to the

owner’s funds. It is computed by dividing the total debt both current and long term by its

tangible net worth consisting of common stock and reserves and surpluses.

Debt
Debt to Equity Ratio = ---------
Equity

55
 From the owners point of view this ratio is desirable and it is also advisable. But

from the creditors point of view creditors prefer low debt to equity ratio. At the normal

time there is no concern but creditors may suffer at the times of distress than the owners.

i) Debt to total asset ratio: This ratio explains the proportion of total assets

credited through debt including short term liabilities. This ratio is computed by dividing

total debt with total assets.

Total Debt
--------------------------
Debt to Total Assets Ratio =
Total Assets

D) Profitability Ratios: The two ratios popularly used to measure overall

profitability are return on assets and return on equity ratios, as given in the following:

Return on Equity = Net Profit

Equity

Return on assets = Net Profit

Total Assets

Net profit is the profit after tax for a given year and the denominators are the

outstanding amounts of equity and assets at the end of the financial year. The average

outstanding amount over the year can be used instead of the outstanding amounts to give

a better estimate. Average equity and assets can be calculated using monthly, quarterly,

or annual outstanding amounts. Most publicly available data for bank ratios uses the

outstanding total assets or total equity amounts at the end of the year (Sharma, 2008).

56
 E) Asset Quality Ratios

Credit risk is the most important risk faced by a bank. This section describes ratios

that can be used to analyze the level of credit risk taken by a bank. The level of the

exiting bad loans of a bank can be accessed from the ratios of gross nonperforming assets

to total assets.

NPA = Gross non-performing assets

Total Assets

The ratio of net non-performing assets to total assets gives a picture of the level of

NPAs that have not been provided for (since net NPAs are gross NPAs less closing

provisions) and can be used along with gross NPAs to total assets ratio.

The total extent of coverage of provisions vis-à-vis the non-performing assets can

also be assessed during the ratio of outstanding (closing) loss provisions to gross non-

performing assets.

Outstanding loss provisions

Gross non-performing assets

4.2.2.2 CAMELS –Ratings as performance measurement

Regulators world over have adopted the CAMELS approach as an integral

approach to measuring bank and finance company performance. In India banks are rated

on the basis of their CAMELS scores as a part of RBI’s of site surveillance system for

banks. In the US, the uniform financial institution rating system recommended by the

Federal Reserve uses CAMELS to rate banks. Ratings on each component of CAMELS

57
are assigned on a 5 point scale by the regulators. A composite rating is also assigned on

the same scale (Sharma, 2009). Each letters CAMELS refers to a specific category:

C = Capital adequacy;
A = Asset quality;
M = Management quality;
E = Earnings;
L = Liquidity;
S = Sensitivity to make risk.

Genesis of CAMEL Rating System

The CAMEL methodology was originally adopted by North American bank

regulators to evaluate the financial and managerial soundness of U.S. commercial lending

institutions. The CAMEL reviews and rates five areas of financial and managerial

performance: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. To

date, ACCION has used its CAMEL primarily as an internal assessment tool, which has

contributed to setting performance standards both for the ACCION Network and for the

micro finance industry as a whole.

The Cooperative bank is required to gather the following information for a

CAMEL examination: (1) financial statements; (2) budgets and cash flow projections; (3)

portfolio aging schedules; (4) funding sources; (5) information about the board of

directors; (6) operations/staffing; and (7) macroeconomic information. Financial

statements form the basis of the CAMEL's quantitative analysis. Coop Banks are required

to present audited financial statements from the last three years and interim statements for

the most recent 12-month period. The other required materials provide programmatic
58
information and show the evolution of the institution. These documents demonstrate to

CAMEL analysts the level and structure of loan operations and the quality of the banks

infrastructure and staffing.

The ACCION CAMEL analyzes and rates 21 key indicators, with each indicator

given an individual weighting. Eight quantitative indicators account for 47 percent of the

rating, and 13 qualitative indicators make up the remaining 53 percent. The final CAMEL

composite rating is a number on a scale of zero to five, with five as the measure of

excellence. This numerical rating, in turn, corresponds to an alphabetical rating (AAA,

AA, A; BBB, BB, B; C; D; and not rated). Based on the results of the adjusted financial

statements and interviews with the MFI's management and staff, a rating of one to five is

assigned to each of the CAMEL's 21 indicators and weighted accordingly.

CAMELS Rating Framework

C= Capital Adequacy

Leverage: the relationship between the risk-weighted assets of the bank and its

equity. Ability to raise equity: assessment of a Bank’s ability to respond to a need to

replenish or increase equity at any given time. Adequacy of reserves: measure of the loan

loss reserve and the degree to which the institution can absorb potential loan losses.

A= Asset Quality

Portfolio Quality: Portfolio at risk: measures the portfolio past due over 30 days.

Write offs/ write off policy: measures adjusted write-offs on CAMEL criteria. Portfolio

classification system: review of portfolios aging schedules; assesses institution's policies

59
associated with assessing portfolio risk. Fixed Assets: Productivity of long-term assets:

evaluates banks policies for investing in fixed assets Infrastructure: -evaluation of

whether it meets the needs of both staff and clients.

M= Management Capacity

Governance: how well the institution's board of directors functions, including the

diversity of its technical expertise, its independence from management, and its ability to

make decisions flexibly and effectively. Human Resources: evaluates whether the

department of human resources provides clear guidance and support to operations staff,

including recruitment and training of new personnel, incentive systems for personnel, and

performance evaluation system. Processes, controls and audit: the degree to which the

banks has formalized key processes and the effectiveness with which it controls risk

throughout the organization, as measured by its control environment and the quality of its

internal and external audit. Information Technology System: assesses whether

computerized information systems are operating effectively and efficiently, and are

generating reports for management purposes in a timely and accurate manner. Strategic

planning and budgeting: whether the institution undertakes a comprehensive and

participatory process for generating short- and long-term financial projections and

whether the plan is updated as needed and used in the decision making process.

E= Earnings

Adjusted return on equity: measures the ability of the institution to maintain and

increase its net worth through earnings from operations. Operational Efficiency:

60
measures the efficiency of the institution and monitors its progress toward achieving a

cost structure that is closer to the level achieved by formal financial institutions. Adjusted

Return a Assets: measures how well the Coop bank assets are utilized, or the institution's

ability to generate earnings with a given asset base. Interest rate policy: assess the degree

to which management analyzes and adjusts the institution's interest rates on micro finance

loans (and deposits if applicable), based on the cost of funds, profitability targets, and

macroeconomic environment.

L= Liquidity

Liability structure: review of the composition of the institution's liabilities,

including their tenor, interest rate, payment terms, and sensitivity to changes in the

macroeconomic environment. Availability of funds to meet credit demand: measures the

degree to which the institution has delivered credit in a timely and agile manner. Cash

flow projections: evaluate the degree to which the institution is successful in projecting

its cash flow requirements. Productivity of other current assets: evaluates extent to which

the bank maximizes the use of its cash, bank accounts, and short-term investments by

investing timely and at the highest returns, commensurate with its liquidity needs.

S= Sensitivity to Market Risk

The sensitivity to market risk is assessed by the degree to which changes in market

prices, notably interest rates, exchange rates, commodity prices, and equity prices

adversely affect a bank’s earnings and capital. The following factors may be taken into

consideration to measure the sensitivity to market risk: The sensitivity of the bank’s

61
earnings or the economic value of its capital base or net equity value due to adverse effect

in the interest rates of the market (Sahajwala et al, 2000).

Table 4.1 CAMELS Model KPI areas

Capital Asset Managemen Earnings Liquidity Sensitivity

Adequacy Quality t Capacity to risk
i) Capital a) Non i) Cost per i)Return on i) Market
Adequacy performing Employee Assets Investment prices,
Ratio loan to ii) Earnings ii) net deposit interest rates,
ii) Leverage total Assets per investment ratio exchange
Ratio (% of Employee margin ii) current rates,
iii) Return on classified iii) deposit iii) ratio commodity
Equity loan) per employee Diversificati iii) quick prices, and
iv) Net worth on Ratio ratio equity prices
protection iv) Earnings
per share
Source: M.S. Hossain (2002), “Performance Evaluation of Commercia
Bank through CAMEL Rating,” Share Research, (December): 27-29.

Recently, CAMEL upgraded into CAMELS effective from June, 2006. After

inserting ‘S’ or ‘sensitivity to market risk’, it is presumed that this off-site supervision

technique of central bank would make it a more effective tool in rating banks. The

present system requires that a bank’s condition and performance be regularly appraised

according to predetermined stress testing on asset and liability and foreign exchange

exposures, procedures, rules and criteria and on the basis of the results obtained through

risk-based audits under core risk management guidelines. A single CAMEL rating for

each bank is the result of both off-site monitoring, which uses monthly financial

62
statement information, and an on-site examination, from which bank supervisors gather

further “private information” not reflected in the financial reports. These examinations

result in the development of "credit points" ranging from 0 to 100. As noted above, the

six key performance dimensions – capital adequacy, asset quality, management, earnings,

liquidity and sensitivity to market risk – are to be evaluated on a scale of 1 to 5 in

ascending order. Following is a description of the rating:

CAMEL Numerical Rating: Rating Description

1. STRONG: It is the highest rating and is indicative of performance that is

significantly higher than average.

2. SATISFACTORY: It reflects performance that is average or above; it includes

performance that adequately provides for the safe and sound operation of the banks.

3. FAIR: Performance that is flawed to some degree. It is neither satisfactory nor

unsatisfactory but is characterized by performance of below average quality.

4. MARGINAL: Performance is significantly at below average; if not changed,

such performance might evolve into weaknesses or conditions that could threaten the

viability of the bank.

5. UNSATISFACTORY: Is the lowest rating and indicative of performance that

is critically deficient and in need of immediate remedial attention. Such performance by

itself, or in combination with other weakness, threatens the viability of the institution.

63
 Rating Provisions

Each element is assigned a numerical rating based on five key components:

1. Strong performance, sound management, no cause for supervisory concern

2. Basically sound, compliance with regulations, stable, limited supervisory needs

3. Weaknesses in one or more components, unsatisfactory practices, weak

performance but limited concern for failure

4. Serious financial and managerial deficiencies and unsound practices. Need close

supervision and remedial action

5. Extremely unsafe practices and conditions, deficiencies beyond management

control. Failure is highly probable and outside financial assistance needed.

Based on the ratings of each element, a composite rating of 1 through 5 is assigned

to the bank. All the factors reflected in the key components ratings are considered in

assigning the composite rating.

CAMELS Composite Ratings

Each bank is accorded a composite rating that is predicated upon the evaluation of

the specific performance dimensions. The composite rating is also based upon a scale of

1 through 5 in ascending order of supervisory concern. The CAMELS rating components,

usually taken into consideration by the monetary authorities have the following weights:

capital adequacy 20%, asset quality 20%, management 25%, earnings 15%, liquidity 10%

and sensitivity to market risk 10%. The weightings are subjective and based on

regulators’ past experience. The numerical ratings assigned to the criteria are:

64
Table 4.2 Composite CAMELS and their Interpretation
Rating Rating Rating Analysis Rating Analysis interpretation
Scale Range
1 1.0-1.4 Strong Sound in every respect, no supervisory
responses required.
2 1.6-2.4 Satisfactory Fundamentally sound with modest
correctable weakness, supervisory
response limited.
3 2.6-3.4 Fair (watch Combination of weaknesses if not
category) redirected will become severe. Watch
category. Requires more supervision.
4 3.6-4.4 Marginal (some Immoderate weakness unless properly
risk of addressed could impair future viability
failure) of the bank. Needs close supervision.
5 4.6-5.0 Unsatisfactory High risk of failure in the near term.
(high degree of Under constant supervision/cease and
failure) desist order.
Source: Adapted from Performance Measurement of Banks: An Application of
Balanced Scorecard Kanchan and Bidhan, 2006,

The above table shows that the CAMELS rating scale, rating range and rating

analysis and interpretation. Accordingly A CAMELS rating 1 is the strong bank or best

performing bank and rating 5 shows unsatisfactory or high degree of failure.

4.2.2.3 Balanced Scorecard (BSC)

Balanced Score card is a control and executive corporate system that allows a

company to develop an effective method by using not only a good measurement system,

but by also paying attention to other aspects of business theory. It is part of the KPI based

Management and it was put together by Harvard Business School professor Dr. Robert S.

65
Kaplan, along with business consulting specialist David P. Norton in 1990. Perform

precise planning. According to Balanced Scorecard, the business needs to turn the

strategic planning process into one of the key functions. It needs a precise theory that

produces exact measured values which make it possible to create realistic forecasts.

Currently many business executives believe that the traditional measurement

criteria of performance are misleading in situations that require continuous improvement

and innovation in a competitive environment. In such a situation, achievement of short-

term financial soundness is not enough; rather emphasis should be given on the

achievement of long-term strategy. It requires a set of measures that give top managers a

vast but comprehensive view of the business. It includes financial measures that tell the

results of actions taken and operational measure on customers’ satisfaction, the internal

force and the organizational innovations and improvement activities, that is, the

operational measures that are the drivers of future financial performance. Because BSC

shows the cause and effect relationship (Garrison and Noreen, 2000:465).

Through the use of the various perspectives, the BSC captures both leading and

lagging performance measures, thereby providing a more “balanced” view of company

performance. Leading indicators include measures, such as customer satisfaction, new

product development, on-time delivery, employee competency development, etc.

Traditional lagging indicators include financial measures, such as revenue growth and

profitability. The BSC performance management systems have been widely adopted

66
globally, in part, because this approach enables organizations to align all levels of staff

around a single strategy so that it can be executed more successfully (Johnson, 2006).

The Four Pillars of BSC

Balanced scorecard performance analysis on four major pillars called

perspectives’. These are briefly discussed as follows:

1. Financial Perspective

Financial goals are not only to survive but it gives emphasis on success and

prosperity. So quantitative aspects relating to these areas are included in the

measurement. As financial measures are the carriers of the benefits of other measures like

measures of customers’ satisfactions, internal business performance and innovations and

improvements, measures of performance in these areas are very much essential to have an

idea about the long-term growth and performance.

2. Customer Perspective

It is now accepted by all the successful companies that customers are the king.

Satisfaction of their needs should be the main objective of a successful company. So to be

number one in delivering value to the customers is a typical mission statement. The BSC

demands that management should translate the above general mission statement on

customer service into specific measures which reflect the factors that really matter to the

customers. Customers concern tends to fall into four categories - time, quality,

performance, services and cost.

67
 3. Internal Business Perspective

This perspective of performance measurement is the logical extension of the

customers’ perspective. Here measurement should be made of what the company must do

internally to meet its customers’ expectation. Excellent customer performance derives

from process, decisions and actions occurring throughout an organization. Managers need

to focus on those critical internal operations that enable them to satisfy customer need. In

this area of performance measurement, a company should identify and measure the

company’s core competencies and the critical technologies needed to ensure continued

market leadership. Companies should decide what process and competencies they must

excel at and specify measures for each.

4. Innovation and Learning Perspective

The targets for success do not remain static but they keep changing. Intensive

global competition requires that companies make continual improvements to their

existing products and process and have the ability to introduce entirely new products with

expanded capabilities. A company’s ability to improve and learn ties indirectly to its

value. Value for customers can be created by launching new product. It can also be done

by a company by improving operating efficiency. By that, a company can penetrate new

markets and increase revenues and margins. From the above literature survey of ‘BSC’

technique of performance measurement, it is clear that this system is broad based and

covers areas beyond the financial and management aspects of performance.

68
Chart 4.1: Balanced Score Card

Financial Perspective
Goal Measure
To survive, ROI,
succeed and Cash flow,
prosper profitability How do we look to
the shareholders?

How do customers see us? What must we excel at?

Customers’ Perspective Internal Process Perspective

Goal Measure Goal Measure

To keep the Better service To ensure All measures
existing with flaw-less relating
customers lower cost, Company service by to efficient
satisfied expanding human delivery of
Vision and
and to Market share. resources goods and
Strategy
attract new (Manageme services.
Customers. nt
efficiency)

Can we continue to improve and to create value?

Innovative and Learning Perspective

Goal Measure
To update % of revenue from
technologically and new product,
to introduce new innovation of new
product product etc.

Source: R. S. Kaplan and D. P. Nortion (1993)

(Necessary changes were made to make it applicable for financial institutions.)
69
 The exhibited four questions can be answered if the goals of each area of

performance measurement are elaborated. Now a brief description of each area is given

as follows:

Financial Perspective

Goals Measure
To survive, succeed and prosper.
ROI, Cash flow, Profitability
How do we look to the shareholders?

Customers’ Perspective

• Goals Measure
• To keep the existing customers satisfied and to attract new customers.
• Better service with lower cost, expanding market share.

Internal Business Perspective

• Goals Measure
• To ensure flaw-less service by human resources (Management efficiency)
• All measures relating to efficient delivery of goods and services.

Innovation and learning perspective

• Goals Measure
• To update technologically and to introduce new Product, Percent age of revenue
from new product, innovation of new product etc.
• Can we continue to improve and to create value?
• What must we excel at?
• How do customers see us?

70
 Comparison of Camel and Balanced Scorecard (BSC)
Table 4.3: Table Showing the Comparative Ratios under CAMEL and BSC
Perspective of Performance Traditional Measures Measures under
Measurement including CAMELS BSC
Financial Perspective:
(a) Capital adequacy Yes Yes
(b) Leverage ratio Yes Yes
(c) Return on Equity Yes Yes
(d) Net worth protection Yes Yes
(e) Non-performing loan to total loan Yes Yes
(f) Cost per employee Yes Yes
(g) Earning per employee Yes Yes
(h) Deposit per employee Yes Yes
(i) Advance per employee Yes Yes
(j) After tax return on average asset Yes Yes
(k) Net profit margin Yes Yes
(l) Return on capital employed Yes Yes
(m) Net investment margin Yes Yes
(n) Earnings per share Yes Yes
(o) Diversification ratio Yes Yes
(p) Loan to deposit Yes Yes
(q) Earning asset to deposit Yes Yes
(r) Liquid asset to deposit Yes Yes
(s) Interest margin coverage ratio Yes Yes
Customers’ Perspective:
(t) Service time required No Yes
(u) successful cases to total enquiries No Yes
Internal Business Perspective:
(v) Implementation of credit policy No Yes
(w) Cost of fund No Yes
(x) Human resource development No Yes
(y) Technological capacity No Yes
Innovation and Learning
(z) Products that provide above No Yes
50% of revenue
(aa) Introduction of new product No Yes
(bb) New products to total revenue No Yes
(cc) Introduction of new technology No Yes
Source: Performance Measurement of Banks: An Application of BSC Kanchan
and Bidhan, 2006, pp-26
71
 CHAPTER FIVE
DATA PRESENTATION AND ANALYSIS

The data analysis followed the schedules and questionnaires prepared and used

while interviewing the Divisions heads and Branch Managers of CBO and customers

opinion. The secondary data collected from the books of accounts, bylaws, proclamations

and banking procedures were also presented serially and analyzed. The qualitative data

were converted in to quantitative data by coding method and analyzed by using

SPSS.16.0 software. Therefore both qualitative and quantitative data were put into tables,

graphs, and diagrams and analyzed by using percentage, comparatives analysis, trend

analysis were used. After each tables, figures, charts and diagrams sufficient descriptions

have been given in order to avoid the confusions and misunderstandings.

The data analysis has two parts viz.; Secondary and primary data Analysis.. The

first section deals with the analysis of the secondary data of the bank. Under this method

the traditional methods of performance measurement, which includes ratio analysis and

CAMELS Ratings performance measurement. These methods of analyses were mostly

quantitative and fail short of measuring the qualitative aspects of the bank. The second

part of the data analysis of primary data sources. Here the modern performance

measurement techniques called Balanced Scorecard (BSC) model will be used and for

this purpose the primary data’s were gathered from the customers of the bank,

management through in-depth interview and personal observation methods. This modern

technique measures both the qualitative and the quantitative aspects of the bank and is

more dependable and comprehensive methods of performance measurement.

72
 PART I – ANALYSIS OF SECONDARY DATA

5.1 Traditional measures, CAMELS and Balanced scorecard of CBO

Traditionally, some financial ratios (quantitative data) of the bank were considered

to be the measure of performances of banking business. The ratio analysis for banking

business are categorized generally under the CAMELS ratios and is used to rate the

performances of the banking business. For this purpose the financial ratios of

Cooperative bank of Oromia were collected for the study period (2005/06-2009/10) from

different books of accounts of the bank and analyzed in order to generate information

about the financial performances of the bank and arrive at final conclusions. Even

though, ratio analysis, including CAMELS fails to analyze the qualitative aspects of the

banking business, they are still considered as the litmus paper for the financial

performances of a financial institution.

Traditionally, some ratios are used to evaluate the banks performance. Among

those ratios, the important ones are ROA, ROE, EPS, EVA, etc., which have been

highlighted in this section. These all ratios come under the CAMELS model of banks

performance ratings. CAMELS model includes Capital Adequacy ratios, Asset quality,

management capacity, Earnings, Liquidity and Systems ratios. In addition to that other

profitability and efficiency ratios were also done systematically as follows:

Recently a well-judged technique named CAMELS rating is widely used for

evaluating performance of financial institutions, especially to banks. The Central Bank of

respective country as a regulatory body has been calculating this rating till to date. This

73
performance measurement technique is more equitable than the previous techniques

measuring the management capacity in addition to the financial measurement of

performance, which is qualitative in nature. Now the ratios covered by this system for

different areas of performance measurement are given in the chart below:

5.1.1 C - Capital Adequacy

Rating factors

Capital is rated based on the following considerations:

• relation to total capital and adequacy of LLR Nature and volume of problem

assets in and other reserves

• Balance sheet structure including off balance sheet items, market and

concentration risk

• Nature of business activities and risks to the bank

• Asset and capital growth experience and prospects

• Earnings performance and distribution of dividends

• Capital requirements and compliance with regulatory requirements

• Access to capital markets and sources of capital

• Ability of management to deal with above factors

(i) Capital-deposit ratio

The capital to deposit ratio was very frequently used in the past in the USA and

the UK to measure capital adequacy. The banking authorities in India have also

considered the adequacy of capital in relation to deposit liabilities. A high capital-deposit

74
ratio is indicative of the fact that the depositors will incur low risks. With the decline of

this ratio the risks of depositors tend to increase sharply (Srivastava and Nigam, 2008).

In the 1920s, a rule-of-thumb was developed in the USA that a bank should have a

capital fund which is equal to 10 per cent of its deposit liabilities. This ratio came to be

widely used and was frequently mentioned as a satisfactory measure for capital adequacy.

ii) Capital-Asset Ratio

This was conceived as a ratio of capital funds to total assets less cash and

investments in government securities. A ratio of 1:5 or a risk-asset ratio of 20 per cent

was originally considered to be sufficient. A study made by Illinois Banker’s Association

found that the required amount of capital depends upon (a) the amount of assets subjected

to risks and (a) the extent of risk.

The following table depicts the capital to deposit ratio and capital to asset ratios of

cooperative bank of Oromia during the year 2005/06-2009/10

Table 5.1 Capital Adequacy Ratios of CBO

Particulars 2005/06 2006/07 2007/08 2008/09 2009/10 Average

Asset 129.35 225.35 426 678.21 1,024.53
Capital 112.05 122.71 130.96 148.33 157.79
Deposit* 57.182 55.61 277.283 489.903 788.685
Capital to 1.95953272 2.20662 0.4723 0.30277 0.20007 1.03
deposit
Capital to 0.86625435 0.54453 0.30742 0.21871 0.15401 0.42
Asset
* Figures are rounded

Source: Authors schedule presented and analyzed

75
 Capital to deposit ratio of CBO during the study period shows that the bank has

more than 10 percent of capital to deposit ratios. The higher the ratio, the lower the risk

of depositors and vice versa. This shows that the depositors of the bank will not have a

risk of losing their money and there will not be any liquidity problem and as soon as they

want they can withdraw their money back whenever they need it. This shows that the

bank’s capital base is sound.

However, this ratio fails to measure the quality or amount of assets in which

deposits were invested. In view of the above and other methods based on relationship

between capital and assets of banks were evolved to measure the capital adequacy.

Regarding the Capital to asset ratio of the bank, even though during the first two years

(2005/06 and 2006/07 this ratio was up to the standard, during the remaining three study

periods the ratio is depleting as time goes on.

This may be attributed to the less increments of capital growth to the Asset of the bank.

iii) Leverage Ratio

a) Debt to Equity Ratio: This ratio relates all the creditors’ claims on assets to

the owner’s funds. It is computed by dividing the total debt both current and long term by

its tangible net worth consisting of common stock and reserves and surpluses.

Debt to Equity Ratio = Debt

Equity
= 291,141,160
130,958,428
= 2.2: 1
76
 From the owners point of view this ratio is desirable and it is also advisable. But

from the creditors point of view creditors prefer low debt to equity ratio. At the normal

time there is no concern but creditors may suffer at the times of distress than the owners.

b) Debt to total asset ratio: This ratio explains the proportion of total assets

borrowed through debt including short term liabilities. This ratio is computed by dividing

total debt with total assets.

Debt to Total Assets Ratio = Total Debt

Total Assets
= 291,141,160

422,099,588

= 0.69 ≈ 69%

From this ratio we can see that the Debt to Total Asset Ratio of Oromia

Cooperative Bank during the year 2007 was 69. In other words 69 per cent of the total

asset is constituted by debt financing. This shows that the creditor’s stake is higher than

the owners’ stake and creditors may suffer when there is liquidation, if any in future. But

for banking business the liability in the form of deposits must be 60-80% of the total

assets. Therefore the CBO’s deposit mobilization capacity which is around 70% of its

total assets is up to the standard and it is prudent as far as the leverage ratio is concerned.

C) Times interest earned (Coverage ratio): this ratio is used to indicate the

number of times interest charge has been earned and how much safety margin is available

to the share holders. It is computed by dividing Profit before Interest and Taxes (PBIT)

77
by interest charges. This ratio is obtained from profit or loss statement of the bank for the

year ending June 30, 2007.

Coverage Ratio = PBIT

Interest
= 4,213,133
1,690,876
= 2.492 times

From the above coverage ratio we can infer that the interest of the bank was fully

covered 2.492 times and there is no risk of interest payment by the bank to both creditors.

iv) Return on Equity (ROE): Another widely used measure of business

performance is the return on equity ratio which is calculated by dividing net income by

book value of shareholders equity. This measure of performance is sensitive to leverage.

Table 5.2 ROE of Cooperative Bank of Oromia from 2005/06-2009/10

Particulars 2005/05 2006/07 2007/08 2008/09 2009/10 Average

Net Income (1,343,206) (5,024,085) 2,643,986 15,120,039 5,543,874 190,594.4

Share 108,040,000 121,800,000 127,370,000 132,950,000 138,470,000 104,118,000

holders
Equity
ROE (1.24) (4.12) 2.1 11.37 4.0 2.42
(in Birr) Per share Per share Per share Per share Per share Per share
Source: The Annual report of the CBO for 2009/10, with author’s minor manipulation

Table 5.2 shows the POE of CBO during the last five years. Accordingly, during

the first two years of operation, the bank didn’t attained break-even point and no profit

78
was expected covering all costs. But during the remaining three years it has made a profit

and specially during 2008/09, the bank has registered maximum ROE (more than 10%)

per share and in 2007/08, minimum ROE that is 2.1% per share.

CBO’s Adequacy of Capital rating “2”

Capital rating “2” is characterized by similar criteria as “1”, like:

• Strong earnings performance

• Well managed and controlled growth

• Competent management able to analyze the risks associated with the activities in

determining appropriate capital levels

• Capital and solvency ratios exceed regulatory requirements, but experiences

weaknesses in one or more of the factors. For example:

• Problem assets relatively high

• Management inability to maintain sufficient capital to support risks

5.1.2 A - Asset Quality

Asset represents all the assets of the bank, current and fixed, loan portfolio,

investments and real estate owned as well as off balance sheet transactions.

The quality of Assets of the bank is crucial determinant of its credit risk levels.

Asset quality encompasses the existing and potential credit risk of the bank’s loan,

investment and off-balance sheet portfolio. The assessment of Asset quality involves an

assessment of the ability of the financial institution to identify measure, monitor and

79
control credit risk. An analysis of severity and trend of problem assets and adequacy of

loan loss provisions forms a part of Asset quality analysis.

Rating factors

Asset quality is based on the following considerations:

• Volume of problem of all assets

• Volume of overdue or rescheduled loans

• Ability of management to administer all the assets of the bank and to collect

problem a loans

• Large concentrations of loans and insiders loans, diversification of investments

• Loan portfolio management, written policies, procedures internal control,

• Management Information System

• Loan Loss Reserves in relation to problem credits and other assets

• Growth of loans volume in relation to the bank’s capacity

Table 5.3 Non-performing Loan to total Loan (% of classified Loan)

Particulars Year
2005/06 2006/07 2007/08 2008/09 2009/10
Loan (a) 3,000,000 201,216,846 365,492,144 293,641,525 601, 679, 367
NPA (b) - - 440,000 3,520,000 14,970,000
NPA to
Loan [b/a) - - 0.001203856 0.011987405 0.02488
% age - - 0.120385624 1.198740539 2.488

Source: The Annual report of the CBO for 2009/10, with author’s minor manipulation
Table 5.3 depicts the NPA of CBO during the study period. During the first two

years there were no bad debts and no NPA’s. However, starting from the year 2007/08

80
onwards, the bank is having small level of NPA’s. This shows that the bank’s loan

processing is credible and the advantages of government guaranteed loans. CBO provides

credit services to cooperative unions and societies based on government guarantee system

and zero collateral bases. Even this business is extremely risky, so far there were no

major bad debts were incurred as the government machineries are involved in recovery of

loan processes.

CBO’s Asset quality rating 1

Asset quality rating “1” is characterized by:

• Ratio of troubled assets to capital is less than 2% or 3%

• Past due and extended loans kept under control by a specific unit, in accordance

with the law

• Concentrations of credits and loans to insiders provide minimal risk

• Efficient loan portfolio management, close monitoring of problem loans

• Adequate Loan Loss Reserves in accordance with NBE’s regulations

• Non credit assets pose no loss threat

5.1.3 M - Management Capacity

Management includes all key managers and the Board of Directors

Rating factors

Management is the most important element for a successful operation of a bank. Rating is
based on the following factors:

81
 • Quality of the monitoring and support of the activities by the board and
management and their ability to understand and respond to the risks associated
with these activities in the present and to plan for the future
• Financial performance of the bank with regards to the other CAMELS ratings
• Development and implementation of written policies, procedures, MIS, risk
monitoring system, reporting, safeguarding of documents, contingency plan and
compliance with laws and regulations controlled by a compliance officer
• Availability of internal and external audit function
• Concentration or delegation of authority
• Compensations policies, job descriptions
• Response to CBI concerns and recommendations
• Overall performance of the bank and its risk profile

5.1.3.1 Cost per Employee

The ratio of Cost per Employee is obtained by dividing the total expenses to the

total number of employees of the Bank for respective years.

5.1.3.2 Earnings per Employee

The ratio of earnings per Employee is arrived at by dividing the total earnings of the

bank to total number of employees of the Bank for respective years.

5.1.3.3 Deposit per Employee

The ratio of deposit per Employee is arrived at by dividing the total deposits of the

bank to total number of employees of the Bank for respective years.

Table 5.4 depicts the cost per employee, earnings per employee and deposit per

employee of CBO, as part of the management capacity of the bank.

82
 Table 5.4 Cost, CBO’s Earnings and deposit per Employee

Key areas Managerial Capacity Ratios Average

2005/06 2006/07 2007/08 2008/09 2009/10
Deposit (a) 14.92 97.9 277.28 489.9 788.68 333.728
Income (b) 0.03 5.5 20.36 43.49 57.33 25.342
Expense (c) 1.37 10.5 17.78 28.37 51.78 21.964
No of 109 201 376 494 685 373
Employees
(d)
Cost per 0.012569 0.05 0.0473 0.057 0.075591 0.04904
employee
[e=c/d]
Earnings per 0.000275 0.03 0.0541 0.088 0.083693 0.0507
Employee
[f=b/d]
Deposit Per 0.136881 0.49 0.7374 0.992 1.151358 0.70085
Employee
[g=a/d]
Source: Annual Performance Report of CBO
During the first two years, the ratios were relatively small when compared to the

recent three years (2007/08-2009/10). Specifically, in 2008/09, the bank has achieved the

highest profit and its ratios for CPE, EPE, and DPE are all the highest of the period. This

shows that the management capacity during the year 2008/09 was performed better than

the remaining years of under study.

5.1.3.4 Management Efficiency

Since profitability is an index of efficiency of a banking enterprise, a profit

making bank can infuse confidence in public at large which is necessary for its survival

and growth. Profit constitutes the sinews of long term survival and growth of a bank and

contributes to its inner strength (Srivastava and Nigam, 2008).

83
 Thus to fulfill its economic and social goals a bank must lay focus on the efficient

utilization of all resources or factors of production. Sound financial health as reflected in

capital adequacy and asset quality, is a sine qua non for sustained competitive superiority

of a banking institution because it impacts its profitability.

Table 5.5 Operational efficiency of CBO during the last five years

Key areas Annual Growth (in millions of Birr) Average

2005/06 2006/07 2007/08 2008/09 2009/10
Income (a) 0.03 5.5 20.36 43.49 57.33
Growth 5.47 14.86 23.13 13.84
Change (%) 270.18 113.61 31.82
Expense (b) 1.37 10.52 17.78 28.37 51.78
Growth 9.15 7.26 10.59 23.41
Change (%) 667.88 69.01 59.56 82.52
Efficiency [b/a] 0.22 0.523 1.145 1.533 1.11 0.91
Source: The annual report of the bank, 2009/10, with minor adjustments

From the above table we can infer that during the first two fiscal years of ht e

study period (2005/06 and 2006/07), the bank sustained a loss and its operational

efficiency ratio was less than 1 or 0.22 and 0.523. I.e., because of the fact that income is

less and expenses are high.

This shows that the bank was not efficient during the first two years. However, as

to the reality when we see the profile of the bank, it was under establishment process

whereby costs are more and revenues are less. Therefore, these results only shows that

the bank did not arrived at breakeven point (BEP) as it was the newly established bank in

2004 and start to operate in 2005. The bank was diversifying its businesses and doing

broche networking and recruiting employees to fit in to these branches, which is costly in

84
nature. The customers’ awareness towards cooperative business was also another

limitation. However, the banks has managed to get out of loss and started to earn a

income of 20.36 million Birr, of which 0.873 is expenses and the remaining Birr 0.127

million net profit. Even though it tried to reduce expenses (cost) during the year 2007/08,

and made huge profits, due to branch networking, staffing and house rent expenses and

increasing allowances and benefits to board of directors the profit margin is ruined to Birr

0.10 million during the year 2009/10. In general analysis of the operational efficiency

trends of the CBO, the bank was operationally efficient during the recent three years,

starting from 2007/08-2009/10.

CBO’s Management rating “1”

Management rating “1” indicates a strong and committed management showing:

• A thorough understanding of the risks associated with the bank’s activities

• A strong financial performance in all areas

• Appropriate understanding and response to changing economy

• Planning, control, implementation of internal policies

• Appropriate audit function

• No evidence of self-dealing

• Strong cooperation and interaction between the Board of Directors and the

management and successful delegation of authority

• Competent and trained staff at all levels

• Management’s reaction to NBE concerns and recommendations

85
 5.1.4 E - Earnings
All income from operations, non-traditional sources, extraordinary items.
The earnings level, quality and stability of earnings and earnings potential are captured
by the letter E. An analysis of the level of expenses and exposure of earnings to risks
form a part of earnings analysis.
Rating factors
Earnings are rated according to the following factors:
• Sufficient earnings to cover potential losses, provide adequate capital and pay
reasonable dividends
• Composition of net income. Volume and stability of the components
• Level of expenses in relation to operations
• Reliance on extraordinary items, securities transactions, high risk activities
• Nontraditional or operational sources
• Adequacy of budgeting, forecasting, control MIS of income and expenses
• Adequacy of provisions
• Earnings exposure to market risks, such as interest rate variations, foreign
exchange fluctuations and price risk

5.1.4.1 ROA (Return on Asset): It is a very common and relatively very good
measure of performance which is calculated by dividing net income by total assets
invested in the business.

Table 5.6 ROA of Cooperative Bank of Oromia from 2005/06-2009/10

Particulars 2005/05 2006/07 2007/08 2008/09 2009/10 Average

Net (1,343,206) (5,024,085) 2,643,986 15,120,039 5,543,874 190,594.4

Income
Total Assets 129,350,000 225,350,000 426,000,000 678,210,000 1,024,530,000 496,688,000

ROA (1.04) (2.23) 0.62 2.23 0.54

(In Birr)

Source: The Annual report of the CBO for 2009/10, with author’s minor manipulation
86
 The above (Table 5.6) shows that the ROA of Cooperative bank of Oromia, during

the first two years was negative, which is the result of losses incurred by the bank during

those fiscal years. However, the bank has managed to turnaround the loss and started to

make profit after breakeven in the year 2007/08 onwards. A significant profit was earned

during the year 2008/09, in which the bank has got 2.23% ROA. Even though this is the

highest ROI for the study period, it shows still low ROA and the bank has to do more in

order to improve its ROA in futures to come.

5.1.4.2 EPS (Earning Per Share): It is another measure of performance. Here

earnings of the company are divided by the number of shares in order to calculate EPS.

The measures of performance can be magnified by issuing more debt for additional

capital if the rate of return of the invested capital is just above the cost of debt. Further

EPS will automatically rise if the company issues common stock at a very hefty

premium, because EPS is based on the number of shares issued and does not include

share premium.

Table 5.7 EPS of Cooperative Bank of Oromia from 2005/06-2009/10

Particulars 2005/05 2006/07 2007/08 2008/09 2009/10 Average

Net Income(a) (1,343,206) (5,024,085) 2,643,986 15,120,039 5,543,874 190,594.4

Share Holders
Equity (b) 108,040,000 121,800,000 127,370,000 132,950,000 138,470,000 104,118,000

Share value (C ) 100 100 100 100 100 100

Number of
Shares 1080400 1218000 1273700 1329500 1384700 1,257,260
[(d) = b/c]
EPS (1.2432) (4.1249) 2.0758 11.3727 4.0037 2.4168
[(e) = a/d] Birr Birr Birr Birr Birr Birr
Source: The Annual report of the CBO for 2009/10, with author’s minor manipulation
87
 When we look at the earnings per share of the owners in terms of the risk they

have taken they were earning less amount. In other words they deserve more than bankers

interest rate on deposit, as they can calculate this amount of interest depositing their

money in the bank. However as cooperative bank since membership is not considered as

investment in itself and rather seen as service organization to the benefit of members

maintaining the banks interest rates on deposits and the nominal amount if satisfactory. In

order to attract more shareholders to the bank, it has to do more and reduce operational

expenses in order to increase its EPS. Average EPS of study period was below bank rate.

5.1.4.3 Profitability - Income, Expenses and profit trends of the Bank

The main income source of CBO is the difference between borrowing rate and

lending rate or also called interest income. The others sources of income are foreign

exchanges, money transfer, from buying of government bonds etc.

Table 5.8 Growth Trends in Income, expenses and Profits

Key areas Annual Growth Performance (in millions of Birr) Average
2005/06 2006/07 2007/08 2008/09 2009/10
Income 0.03 5.5 20.36 43.49 57.33
Growth 5.47 14.86 23.13 13.84 21.17
Change (%) 270.18 113.61 31.82
Expense 1.37 10.52 17.78 28.37 51.78
Growth 9.15 7.26 10.59 23.41 16
Change (%) 667.88 69.01 59.56 82.52
Profit/Loss (1.34) (5.02) 2.58 15.12 5.55
Growth (3.68) 7.6 12.54 (9.57) 5.17
Change (%) 274.63 (153.39) 486.05 (63.29)
Source: Annual Performance Report of the CBO

88
 From the table 5.8 above we can observe the income, expenses and the profit

earned or loss incurred during the last five fiscal years. During the base year the bank

earned 0.03 million birr income and spent 1.37 million birr. As a result of it incurs a loss

amount of 1.34 million birr. During the next year (2006) the income was 5.5 million birr

showing 5.47 growth rate and it’s expense increased to 10.52 million showing growth

rate of 9.15 (667.88% change). The bank once again incurred a loss of birr 5.02 million.

However in 2007 the bank managed to earn profit of birr 2.58 million from the operating

income of birr 20.36 million and birr 17.78 million expenses. However the previous year

loss of birr 5.02 million overriding the profit earned during 2007 and as a result on

aggregate the bank was still making a loss for the last time.

Chart 5.1 Income, expenses and profit/loss of CBO from 2005/6-2009/10

57.33
60 51.78
Income
43.49
Expense
40 Profit
28.37
Birr 20.36
17.78
(in Millions) 20 10.52
15.12

5.5 5.55
1.37 2.58
0.03
0
-1.34
-5.02

-20
2005/06 2006/07 2007/08 2008/09 2009/10
Time ( In Years)

Source: Annual report of CBO 2009/10

89
 After that Cooperative Bank of Oromia is making huge profit out of its operations.

For instance in 2008 its income was birr 43.49 million and expenditure of birr 28.37

million and earned birr 15.12 million. However the profit reduced during the year 2009

and made only birr 5.55 million from birr 57.33 million income and spent birr 51.78

million. This huge expense was related to the branch network opening and financing.

CBO’s Earnings rating “2”

Rating “2” indicates that the bank generates sufficient income to meet reserve

requirements, provide capital growth and pay dividends. Nevertheless there may be some

negative trends such as:

• Relying somehow on nontraditional income

• Need to improve budget, planning and control process

• Management should be able to deal with the problems without regulatory

supervision.

5.1.5 L - Liquidity Ratios

The ability to generate cash or turn quickly short term assets into cash

Liquidity Ratios give standard to measure the ability of the company to cover its

short-term obligations out of its short term resources. It is used do ascertain whether the

company is having proper solvency and ability to remain solvent in times of adversities.

Rating factors

Liquidity is rated based on the following factors:

90
 • Sources and volume of liquid funds to meet short term obligations

• Volatility of deposits and loan demand

• Interest rates and maturities of assets and liabilities

• Access to money market and other sources of funds

• Diversification of funding sources

• Reliance on inter-bank market for short term funding

• Management ability to plan, control and measure liquidity process

5.1.5.1 Quick Ratio

Current ratio is the same as quick ratio for banking business firm as they do not

have inventory management. Quick ratio is the relationship between current assets (cash,

marketable securities, account receivables; for banking business) and current liabilities

(account payable, short term notes payable, current maturities of long term debts, accrued

income taxes and other outstanding expenses). The data source to calculate this ratio was

the balance sheet of the bank.

Quick ratio = Quick (or) Liquid assets

Current liabilities
= 392703790
266141160
= 1: 1.476
(Quick ratio of 1:1 was long considered to be reasonable for a sound business).
When we look at the CBO’s current asses for the fiscal year 2007, quick ratio of 1: 1.476

is much more than what is expected of it. Therefore from this we can conclude that CBO

91
as it is capable of paying all of its immediate obligations we can say that the bank is

solvent at any point in time.

CBO’s Liquidity rating 1

Liquidity rating “1” indicates a management having a thorough understanding of the

bank’s balance sheet. CBO has:

• Sufficient liquid assets to meet loan demand and deposit reduction z

• Little reliance on inter-bank market z

• Strong and sophisticated planning, control and monitoring z

• Existence of an contingency plan

5.1.6 S - Systems/Sensitivity to Market Risks

Market risk is based primarily on the following evaluation factors:

Sensitivity to adverse changes in interest rates, foreign exchange rates, commodity prices,

fixed assets

• Nature of the operations of the bank

• Trends in the foreign currencies exposure

• Changes in the value of the fixed assets of the bank

• Importance of real estate assets resulting from loans write off

• Ability to identify measure and control the bank exposure to risks.

CBO’s Sensitivity to Market Risks rating is “2”

92
 Cooperative Bank of Oromia – CAMELS Composite rating “1”

According to CAMELS Composite rating, Cooperative bank of Oromia has got a

composite rating of “1”. This shows that CBO is sound in all aspects, generally have

components rated 1 or 2 and are in substantial compliance with laws and regulations.

Any weaknesses can be handled routinely by the board of directors and management.

Banks are considered stable, well managed and capable of withstanding all but the most

severe economic downturns. Risk management practices are strong and minimal

supervisory oversight is required to ensure the continuation and validation of the bank’s

fundamental soundness. Banks rated “1” give no cause for concern.

However, this CAMEL(S) rating has not proved to be a comprehensive measure of

performance from the viewpoint of corporate strategy. Therefore, a constant effort is on

to develop a model to make a comprehensive measure of performance of a bank in the

light of corporate strategy. To satisfy this need, a holistic performance measurement

called BSC system has been developed.

SECTION-B: BALANCED SCORECARD - NEW MEASURES OF PERFORMANCE

The new measure of banks performance is otherwise called Balanced Scorecard

(BSC) techniques. BSC includes all the above quantitative analysis and other qualitative

analysis. In addition to the CAMELS ratios, it includes the qualitative analysis of the

Customer, internal business perspective and Learning and growth perspectives.

5.2.1 Human Resource: Well-diversified pool of human resources is the

prerequisite for achieving the high performance of a bank. People with high academic
93
background and professional training are essential to meet the challenges in the banking

industry and to adapt the changes in new working conditions. But this inevitable factor is

also set aside in measuring the performance of a bank. Table 5.9 shows the growth

performances of human resources development of CBO. The bank was endowed with the

former cooperative promotion bureau staffs with rich experiences in fields of organizing,

managing and running cooperative businesses.

Table 5.9 Trends of Human Resources Strength of CBO

No Key areas Annual HR Growth Performance (No of staff) Average
2005/06 2006/07 2007/08 2008/09 2009/10 2010
1 HR 109 201 376 494 685 848
Growth 92 175 118 191 163 148
Change (%) 84.40 87.06 31.38 38.66 23.80 53.06

Source: Annual Performance Report of the CBO

From the above table 5.8 we can infer that the human resources strength of

Cooperative bank of Oromia is showing an increasing trend and this shows that the

bank’s total asset is growing up to the standard. During the base year there were only 109

employees working in head office and 6 branches. By the year 2010 the number of its

employees grew to 848, i.e., by eight fold within five years of its establishment. The

average manpower requirements per year were 148 and the growth rate was 53.06%.

From this data we can understand that as the banks manpower was growing the bank is

also growing and on the other hand the bank is creating job opportunities to peoples of

the region those who can be more loyal to the bank and committed to the bank’s

94
successful accomplishment of its objectives. As we can see from the above table the

number of employees of the bank is increasing in geometric progressions.

5.2.2 Loans and Advances

Cooperative Bank of Oromia (CBO) is mobilizing members and non-members'

deposits in order to provide credit facilities to the needy Cooperatives, individuals,

entrepreneurs and business establishments. The basic motto of the cooperatives is "Loan

for purpose" and as a result this cooperative bank undertakes thorough loan appraisal

procedures so as to ascertain that the lent loan will be used for productive purposes.

Cooperative Bank of Oromia not only undertakes a thorough loan appraisal before

provision of credit but also undertakes rigorous follow-up procedures in order to assess

the progress of the project and strives for the successful accomplishment of project

works. This task made this bank unique from other commercial banks that provide loan

on the basis of collateral and not bother about the progress of the project.

Table 5.10 Loan Issued (disbursement) to Members by CBO

Year Loan Issued Loan Collected Loan Loan Overdue
(in Birr) on due-date outstanding (in Birr)
(Birr) (Receivables)
2005/06 3,000,000 - 3,000,000 -
2006/07 201,216,846 79,312,671 121,904,175 -
2007/08 365,492,144 248,011, 790 117,480,354 440,000
2008/09 293,641,525 339,993,284 100,000,383 3,520,000
2009/10 601, 679, 367 392,865,984 108,813,000 14,970,000
Grand Total 863,352,162.00 732,859,268.00 451197912 18,930,000.00
Source: Annual Performance Report of the Bank

95
 Table 5.9 reveals the amount of loan disbursed to customers, loan collection, loan

outstanding and loan over dues during the last five years. From this table we can see that

loan issued during the year 2005 were not collected in the same year and all remains

outstanding loan and no loan overdue in both 2005 and 2006. The total overdue loan

during the period when compared to the loan issued was insignificant, which it is below

the Cooperative banks standard 5% and it accounts for 3.82%. This shows that the banks

strength in loan appraisal, follow-ups and collection procedures.

Chart 5.6 Loan and advances of CBO during the last 5 years
18,930,000

732,859,268
863,352,162.00
Loan Issued
Collected
Outstanding
Over due

732,859,268

Source: Annual Report of CBO, 2010

5.2.3 Growth Performance Trends of CBO

The Company Assets growth trend shows that the company is performing well or

not. Every business organization strives to maximize profits. A profit is the function of

96
revenues and in order to generate maximum revenue, the assets of the company mainly

productive assets in the form of receivables have to increase year after year for the

banking company. Meanwhile, the deposit mobilization should also grow simultaneously

with loan disbursement. For a banking company the major sources of revenue are the

difference between lending rate and interest on deposits. The more the deposit

mobilization the more the loanable fund and the more the profit and vice versa. So in

order to maximize their profit the Cooperative Bank of Oromia have been working in this

regard and its growth performances in key functional areas of operations are shown by

the following tables.

Table 5.11 Growth Trends in Total Assets and capital

Key areas Annual Growth Performance (in millions of Birr) Average
2005/06 2006/07 2007/08 2008/09 2009/10 2010
Asset 129.35 225.35 426 678.21 1,024.53 1,637.32
Growth 95.97 200.68 252.21 346.32 612.79 301.59
Change (%) 74.19 89.06 59.20 51.06 59.81 66.67
Capital 112.05 122.71 130.96 148.33 157.79 182.02
Growth 100.3 8.25 17.37 9.46 24.25 31.926
Change (%) 89.51 6.72 13.26 6.38 15.37 26.25
Share 108.04 121.8 127.37 132.95 138.47 144.94
Capital
Growth 13.76 5.57 5.58 5.52 6.47 7.38
Change (%) 12.74 4.57 4.38 4.15 4.67 6.10
Source: Annual Performance Report of the CBO

The above table reveals the Total asset growth, the capital and share capital

growth of Cooperative Bank of Oromia during the last five years starting from the base

year 2005. The total Assets of the bank was showing the increasing trend during the

period. However the percentage change shows the opposite. When we look at the capital

97
of the bank starting from 112.05 Million it grew to 182.02 Million Birr. In other words

the capital growth of the bank shows that it experienced a positive trend during the

period. Meanwhile the share capital of the bank was also showing an increasing trend, in

which it grown from 108.04 of the base year to 144.94 milliohm Birr. From this data we

conclude that the bank’s Asset and capital management performance during the period

was sound and effective. However the data shows that the performance of the

management with regard to the share capital growth was not satisfactory. The bank

should have fully subscribed its issued capital during these periods. As a result the

average growth of share capital of the bank was 7.38 percent. Except this the overall

asset and capital management of CBO was prudent and sound.

Chart 5.4 Growth trends of Asset, Capital and share Capital of CBO during last 5
years

2000
Asset
1500 Capital
Share Capital
1000
Birr (In Millions)

500

0
2005/6 2006.7 2007/8 2008/9 2009/10 2010

Time (in Years)

Source: Annual Report of CBO, 2010

98
 From the above chart we can infer that even though the Assets of the CBO was

keep on growing from year to year, the capital and share capital of the bank were not

growing as it was expected. As a result the capital base of the bank when compared to its

activities and level of growth is not sufficient. This is attributed to lack of fuller

subscription of share capital of the bank.

5.2.4 Deposit Liabilities

The total resource mobilized by the Oromia Cooperative bank in the form of

deposits, Collection of loans and borrowings grew by 32.6 percent to Birr 28.1 billion by

the end of 2007/08. This was solely attributed to a 64.4 percent surge in loan collections

which more than offset the decline in net deposits and borrowings. The following table

(Table 5.1) depicts the Deposit mobilization by Cooperative Bank of Oromia during the

last 5 years.

Table 5.12 Deposit Mobilization by Cooperative Bank of Oromia

Year Members deposit - Non-member Total Deposits (in
Cooperatives (in Birr) Deposit (in Birr) Birr)
2005/06 3,886,000 53,296,088 57,182,088
2006/07 11,038,669 44,569,133 55,607,802
2007/08 112,205,315 165,078,000 277,283,315
2008/09 130,764,184 359,138,829 489,903,013
2009/10 177,635,686 611,048,999 788,684,685
Grand 435,529,854.00 1,233,131,049.00 1,668,660,903.00
total
Source: Account Records of The bank

Deposit liabilities of the bank shows an increasing trend except during the fiscal

year of 2006 during which the deposit mobilized 55,607,802 is even below the what was

99
mobilized during the base year 2005. The average deposit mobilization of the bank was

333,732,180.6 during the period and this shows that the bank has performed well during

the year 2008 and 2009 with regard to deposit mobilization. On top of that its branch

expansion strategy has enabled it to mobilize more saving by going close the potential

target customers. Since the bank’s branch has increased to 39 during the year 2009

almost it mobilized around two folds of the previous year. The other contributing factor is

that as time goes on the banks reputability and image will be boosted and it becomes

trusted by customers. This shows that this bank is winning the willingness of its

customers and satisfying customer needs.

Chart 5.5 Members, Nen-members and Total Deposits of CBO for

last 5 years

800,000,000
700,000,000
600,000,000
500,000,000
Birr400,000,000 Members

300,000,000 Non-Members

200,000,000 Total deposit

100,000,000
0
2005/06 2006/07 2007/08 2008/09 2009/10
Time (In Years)

Source: Annual Report of CBO, 2010

Deposits that the bank managed to mobilize amounted to 788.6 million Birr in

2008/09, while loans amounted to 587.8 million Birr, up from 318.3 million Birr the

100
previous year. Domestic trade and services claimed 74.7pc of total loans, followed by

agriculture which took the second largest share at 8.3pc. The export sector accounted for

only 7.5per cent. Deposit liabilities of the banking system rose to Birr 62.9 billion at the

end of June 2008, showing an annual growth rate of 16.9 percent compared to Birr 53.9

billion a year earlier. Component wise, savings deposits registered a significant increase

of 24.3 percent followed by demand deposits (13.2 percent) while time deposits

moderately declined by 3.8 percent. Demand deposits accounted for the lion’s share of

total deposits (47.2 percent) followed by savings deposits or 46.8 percent and time

deposit or 6.0 percent.

5.2.4.1 Different Savings Products of Cooperative Bank of Oromia

1) Demand Deposit (Current Account):

o Checking account safe and convenient for our customers.

o A minimum balance of 500 birr required to open this account.

o Noninterest bearing

o The interest is calculated and capitalized every month.

Interest bearing account opened for customers using a cheque. By this you can easily

withdraw money or send it to a payee from your account.

o Statement of the account is provided every month

2) Saving deposit:

o Accounts natures -

o Individual, Joint, corporate

o Legalized Cooperatives, privates

101
 o Organizations

o a minimum of 50 birr is required to open this account, Interest rate is 4%,

which is paid on monthly basis.

o Operated using a passbook and no interest on balance less than birr 50.

o CBO has both interest and non-interest bearing saving deposit facilities to meet

customer's need.

3) Fixed Time deposits:

o To open this account a minimum of birr 5,000 required.

Attractive interest rate on negotiation with a minimum of six months duration agreed

maturity dates, mainly on large deposited funds with longer maturity.

Table 5.13 Savings Products of Cooperative bank of Oromia

Type of Saving Maturity Date Rate of Interest Minimum balance

scheme to open account
Demand Deposit Up on demand Nil/ No Birr 500
(Current Account
Saving deposit: Upon demand 4% Birr 50
Fixed Time deposits: Minimum 6 month Negotiable – pay Birr 5000
period more interest for
large & longer
maturity
Source: from the official Website of CBO

CBO has been accepting demand (current) deposit, saving deposit and term (fixed)

deposits since its establishment. These deposits are then used as a major source of fund

for loan disbursement. The difference between borrowing rate and lending rate is

considered as the profit margin of the bank. The following table shows the total deposit

received and loan issued during the last five years.

102
Table 5.14 Growth Trends in Deposit mobilization and Loan disbursement
No Key areas Annual Growth Performance (in millions of Birr) Average
2005/06 2006/07 2007/08 2008/09 2009/10
1 Deposit 14.92 97.86 277.28 489.9 788.68
Growth 82.94 179.42 212.62 298.78 193.44
Change (%) 555.90 183.34 76.68 60.99 219.23
2 Loan 3.03 5.5 20.36 43.49 57.33
Growth 124.11 113.12 82.02 274.55 148.45
Change (%) 181.52 88.97 34.14 85.19 97.455
Source: Annual Performance Report of CBO

From the above table, we can infer that both the deposit and loan disbursement

shows an increasing trend continuously from the base year 2005 in which 14.92 (in

Million) birr was saved and only 3.03 million birr loan was issued. By the year 2006 both

deposit and loan issued had shown high growth rate of 82.94 (555.9%) and 124.11

(4096.04%), respectively. Securing growth in such a manner in the year 2009 the bank

has received 788.68 million Birr deposit (60% of the previous year) and issued loan

amount of 57.33 million birr (85.2% of the previous year). In general, till 2009 the

average deposit growth trend is 193.44 or 219.23% and loan disbursement growth on

average is 148.45 or 97.455%.

As shown, all borrowers realized an increase in loan size. Collateral requirements

have changed little or not at all, with the exception of Ambo and Becho-Wolisso, which

receive loans collateral-free from CBO. Loan tenors have not varied and interest rates

have increased.

103
 5.2.5 Branch Expansion and Networking performance Trends

Branch expansion and networking is one of the growth strategies of Cooperative

bank of Oromia S.C. It is spending huge expenses in opening new branches in Oromia

regional states in order to increase the accessibility of banking business to the people of

the region and stimulate the regional and national economic growth. The bank started its

operation with 7 branches including the head office and currently it has 39 branches in

operation. The following table shows the branch growth trends of the bank

Table 5.15 Branch Expansion and Networking performance Trends of CBO

Key areas Annual Branch Growth Performance ( No of Branches) Average
2005/06 2006/07 2007/08 2008/09 2009/10 2010
Branches 6 12 17 21 28 39
Growth 6 5 4 7 11 7
Change (%) 100.00 41.67 23.53 33.33 39.29 47.56
Source: Annual Performance Report of the CBO
As we can see from the above table 5.7 in 2007 the numbers of branches were

only 6. In 2006 the bank opened 6 other branches showing a growth rate of 100%. In

2007 the bank opened 5 new branches with 41.67% of growth rate, which increased its

total branches to 17. During the year 2008 4 new braches opened and in 2009 7 new

branches were opened and showing 23.53% and 33.33% growth rate and number of

branches grew to 28. In 2010, when this data was gathered the number of branches of

CBO increased to 39 of which 11 new branches were newly opened showing 39.29%

increase. The average branch increase per year for period was 7 and the average growth

rate was 47.56%.

104
 Chart 5.7 Number of Branches growth trends of CBO during
last 5 and half years
45
39
40
35
30 28
25 21
20 17
15 12
10 6
5
0
200 5/6 2006/7 2007/8 2008/9 2009/10 2010

Time (In Years)

Source: Annual Report of CBO, 2010

5.2.6 Profit and Loss statement of Cooperative Bank of Oromia

In this part of the analysis an attempt have been made to assess the profit and loss

position of the bank during the last five years. Profit and loss account reveals whether the

company is obtaining profit from its operations or not. Profit and loss account is the part

of the final accounts that shows that the company is making profit from its operations or

incurring losses. The following table shows CBO’s Profit or Loss statement for 5 years.

Table 5.16 Profit and Loss accounts of CBO

Year Total Revenue/ Gross Total Expenses on Net Operating Profit/
Profit/ (in Birr) due date (in Birr) Loss(in Birr)
2005/06 30,770 1,374,206 (1,343,206)
2006/07 5,497,932 10,522,017 (5,024,085)
2007/08 20,357,673 17,713,687 2,643,986
2008/09 43,490,519 25,370,474 15,120,039
2009/10 57,326,870 51,782,996 5,543,874
Total 126,703,764.00 106,763,380.00 19,940,384.00
Source: Annual Report of the Bank

105
 Table 5.16 Exhibits the total revenues, expenses including tax and profit or loss

account of Cooperative bank of Oromia. It incurred a loss amount of Birr 1,343,206

during the year 2005 and Birr 5,024,085 during the next fiscal year 2006. The Bank also

improved its services and rendering prompt services and delighted customers and enabled

it to make profit later starting from the year 2007.

Chart 5.8 Income, Expenses and Net profit/loss of CBO during

the last 5 years
70,000,000

60,000,000

50,000,000

40,000,000
Income
30,000,000
Expenses
20,000,000

10,000,000 Net profit

0
2005/6 2006/7 2007/8 2008/9 2009/10
-10,000,000

Source: Annual Report of CBO, 2010

As we can see from the above chart, starting from the year 2008 CBO started to earn

profit. In 2008 it exceptionally earned exceptionally very high profit which is Birr

15,120,039. This happened as the bank is getting customers to its products and the

number of branches was limited. However during the year 2009 its profit was reduced to

Birr 5,543,874 that is only 36.67% of the previous year. Although the income of CBO

shows an increasing trend overtime thought the study period, due to the ever increasing

expenses the profit of the bank exhibits a decreasing trend except during the year 2008/9,

when the bank has got the highest profit during the study period. This was attributed to

the reduction in cost during that year and increase in an income of the bank.
106
 PART II - ANALYSIS OF PRIMARY DATA

I. Demographical background of respondents

Table 5.17 Sex of the respondents

Sex Number Percentage
Male 16 64%
Female 9 36%
Total 25 100%

Source: Authors questionnaire

Table 5.17 depicts the sex of the respondents of the questionnaire. Accordingly 16

of them or 64% of them were male and the remaining 9 or 36% of the respondents were

women customers. The total numbers of the respondents was 25 and were selected as a

respondent purposefully.

Table 5.18 Age Group of the respondents

Age group Number Percentage
18-30 15 60%
30-50 10 40%
Above 50 - -
Total 25 100%
Source: Authors questionnaire

Table 5.18 shows the age group of the respondents. Most of the respondents 15 of

them or 60% were within the young age people ranging from 18-30 and the remaining 10

of them or 40 % of the respondents were within the age group of 30-50 and respondents

above 50 and below 18 were not included.

107
 Table 5.19 Income level of the Respondents
Income Level Number Percentage
(in Birr)
Less than 500 3 12%
501-1000 7 28%
1001-2000 9 36%
2001-3000 4 16%
Above 3000 2 8%
Total 25 100%
Source: Authors questionnaire

Table 5.19 shows the income level of the respondents per month. Accordingly,

most of the respondents 9 of them or 36% were earning income range between 1001-

2000 and 7 of them or 28% were between 501-1000. A few of them, 2 or 8% were

earning income above 3000 and still few respondents 3 or 12 % earn a monthly income of

less than 500. The remaining 4 or 16% of them were earning between 2001-3000 Birr.

II. BALANCED SCORECARD VARIABLE SCORES

a. Financial Perspective

Regarding the time taken for encashing a cheques, almost all the respondents 24

respondents or 96% of them replied that the bank is providing swift services and the

remaining 1 respondent (4%) responded that at a time less than expected time. From this

we can infer that the bank is encashing cheques swiftly.

Regarding the Co-operation given by the bank in opening account, receiving and

transferring remittance, depositing the money etc, all the respondents 5 0f them or 20%

responded that it is expected, 9 of them 36% responded that More than expected and the

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remaining 11 of them or 44% of the respondents responded that it is excellent. However

none of the respondents responded that it was less than required or frustration. From this

we can infer that the CBO’s cooperation is more than expected and or mostly excellent

according to the clients’ opinion.

Table 5.20 Customers opinion on Evaluation time of loan application by CBO

Particulars – Balanced scorecard – Variable Scores

Financial 1 2 3 4 5
Perspective
Evaluation time of More than Expected Less Very Express
loan application expected than timely
expected
Number of - 5 7 10 3
Respondents
Percentage 20 28 40 12
Source: Authors questionnaire

From the above table we can infer that according to most of the respondents (10 or

40%), the time taken for loan application by CBO was very timely and 7 of them

responded that it was less than expected. The remaining 5 (20%) and 3 (12%)

respondents rated that it was processed at expected time and it is express respectively.

This shows that o average the bank loan processing time was very timely and takes less

than the expected time, which impressed the clients of the bank.

Regarding the time taken for issuance of bank guarantee, L/C etc. most 14 or 56%

of respondents opined the bank will process it within short period of time or promptly.

The remaining 5 and 6 respondents responded that the time of process is expected and

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less than expected respectively. However none of the respondents opined that the time

taken by the bank to for processing was frustrating or more than their expectation. From

this we can infer that the time taken for processing issuance of guarantee, L/C etc was

very much prompt to more than customers’ expectations.

b. Customer Perspective

Table 5.21 Response of the clients on key areas of customer perspective

S. Particulars – Balanced scorecard – Variable Scores
No Customer Perspective 1 2 3 4 5
1 Customer’s reaction on Poor, fair good very Excellent
bank’s activities good
Number of respondents 2 4 9 10
Percentage 8 16 36 40
2 Customer’s satisfaction Highly Dissatisfied poorly fairly Highly
and delight Dissatisfied satisfied satisfied satisfied
Number of respondents - - - 11 14
Percentage - - 44 56
3 CRM effort of the bank Poor, fair good very Excellent
good
Number of respondents - 3 4 7 11
Percentage - 12 16 28 44
4 Range of banking Very few few Moderate fair many
services to its customers services, services range of range of
and clients services services
Number of respondents 3 6 6 10 -
Percentage 12 24 24 40 -
Source: Authors questionnaire

According to the opinions of customers of the bank, the customer reaction on the

CBO’s activity was very much positive. Accordingly 40% of the respondents or 10 of

them opined that its activity was excellent, 36% or 9 of them responded its very god and

the remaining 16% or 4 of them responded that it is very good.

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 Regarding Customer’s satisfaction and delight, most customers opined that they are

highly satisfied out of the services of the bank and delighted because of the fact that the

bank provides most services in less than the expected time or swiftly. Specifically, 14

respondents or 56% opined that they were highly satisfied and the remaining 11 or 44%

of them responded that they were fairly satisfied.

CRM effort of the bank was also one of the key areas in order to create customer

loyalty. Accordingly the bank is exercising customer relationship management and it was

opined by the customers as follows. As a result 11 of them or 44% of customers

responded that the banks CRM effort was excellent, 7 or 28% responded very good, 4 or

16% responded that it was good and the remaining 3 or 12% opined as it was fair.

Lastly, the range of banking services to its customers and clients was assessed and

the following results were obtained. Accordingly 10 of them or 40% opined that it has

been offering fair ranges of services, 6 of them or 24% responded as moderate, another 6

or 24% responded that its proving few services and the remaining 3 respondents or 12%

opined that very few services.

c. Internal process perspective

Regarding the internal process perspective of the bank, Implementation of credit

policy, management of fund, human resources of the bank and the level of technology.

Regarding implementation of credit policy generally the bank is strictly following

credit policies and guidelines given by the NBE and all customers rated the bank is

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strictly adhering to it. The managements view also obtained by the researcher and it was

evident that the bank is strictly following the guidelines of the central bank of Ethiopia-

NBE. Accordingly, 10 of the respondents or 40% of them responded that the CBO’s

credit policy implementation was very good, 8 of them or 32% of them opined it was

very good and the remaining 7 opined that it was good. However none of the respondents

opined that it was poor.

As regard to Fund management, most respondents 11 of them or 44% rated the bank

as very good, and 6% of them responded that it was good and 5 of them responded as fair

and the remaining 3 of them opined that it was excellent. Here also none of them

responded that the banks fund management was poor.

Regarding Human resources of CBO in general and Well-diversified pool of human

resources in particular most of the respondents responded positively that 13 of them 52%

of them responded excellent, 8 of them, very good, 3 of them good and 1 person

responded fair. No one respondent opined the banks human resource pool was poor.

From this we can infer that the bank has well diversified pool of human resources.

When we look at its human resources academic background and professional

training, most of the customers’ 9 of them or 36% opined it was excellent, 5 of them

responded that it was very good, 4 of them opined good, and the other 4 responded as fair

and the remaining three of the respondents responded poor. In general, from this we can

infer that the CBO’s human resource pool academic background was very good.

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 When we look at the level of Adoption of state-of-the-art technology, most of the

banks clients, 11 of them rated CBO as fair, 8 of them responded that it was good, 4 of

them opined very good and the remaining 2 of them responded as it was poor. However

none of the respondents opined that the banks level of technology was excellent.

d. Innovation and growth perspective

The last pillar of BSC to be analyzed was Innovation and Learning Perspective.

Here eight key performance areas were assessed and presented as follows.

The organization of the staff of the Bank was rated in the first instance.

Accordingly, most customers 12 of them or 48% rated the bank as if it was well

organized, 7 of them or 28 opined as fairly organized, and the remaining 3 each rated

bank as excellent and poor. On an average most customers seen the bank as a well

organized bank.

Regarding the Credit record of the Bank, few customers, 3 or 12% of them rated

the bank as have had poor record. However most of the customers 13 of them or 52%

rated the bank as if it has good record and 9 of them or 36% very good record. The

management of the bank also believes that the bank is having a very good credit record.

When we look at the banker-client relationship, almost all of the respondents

opined that CBO has very good and excellent banker-customer relationship. From among

the total 25 customers 16 or 64% of them responded that the relation was very good, 6 or

24% opined excellent and the remaining 4 or 16% responded good relationship.

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 Regarding Introduction of new technology like different computer software, MIS,

International, Trade Finance System, Payroll System, the management and most

customers believe that the banks achievement in these regard was very good and the bank

has been striving so as to fulfill the sate-of –the-arts technology to the process of bank.

Most customers 15 of them or 60% of them believed that the banks introduction of new

technology including new products was very good.

When we look at the Loan Classification System and portfolio’s ability to

minimize risks, 14 0f the respondents or 56% opined it was very good and 7 of them

excellent, and 3 of them good and 1 of them fair. However none of them opined it was

poor. This also shows the banks better performances.

Regarding Introduction of new products including on-line banking system, internet

banking and tele-banking system, most customers rated the bank as fair and poor and few

customers rated it as good. None of them responded excellent. Therefore, this shows that

the bank has to do much more on the Introduction of on-line banking system, internet

banking and tele-banking system.

The last key performance indicator was Micro credit financing. Regarding micro

financing performances of the bank almost all, 20 of the respondents or 80% of them

opined that the bank is providing very good and excellent services. The remaining four

responded that it was good and one of the respondent opined fair. However none of the

respondents opined poor. This shows that CBO is doing in micro financing areas and

stimulating them by providing them all banking services.

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 CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS
This last chapter of the report was composed of three parts. These are the

summary or findings of the study, major conclusions and valuable suggestions or

recommendations. They were presented as follows:

FINDINGS:
From the data presented and thoroughly analyzed in previous chapter, in order to

measure the financial performances of CBO S.C., the following findings of the research

were generated and are presented as follows:

Cooperative Bank of Oromia S.C (CBO) is stimulating the economy specially by

providing up to the art and efficient and effective banking services for agro-based foreign

trade and playing a major role in countries socio economic development and the country

in general and Oromia region in particular. In this regard, the bank is providing FOREX

services, opening letter of credits, Guarantor services, project guidance and consultancy

services, domestic and foreign trade loans and advances.

A-FINDINGS FROM TRADITIONAL RATIOS AND CAMELS ANALYSIS

The author has analyzed all the quantitative data’s of the ban for a period of five years

basing from 2005/06 to 2009/10. Accordingly the traditional measures of performances

of the bank such as ROA, ROE, EPS were thoroughly analyzed during the last five fiscal

years. As a result, even though the bank incurred losses during the first two years and as a

result of it its ROA, ROE and EPS were negative, starting from the year 2007/08 they

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were all positive and shows more or less an increasing trends. Both Quick and coverage

ratio were above the expected ratio, however as leverage ratio was 68% (debt to equity)

the bank’s capital was not adequate when compared to its level of risk.

The CAMELS Composite rating was also thoroughly and systematically

undertaken and the Cooperative bank of Oromia has got a composite rating of “1”. This

shows that CBO is sound in all aspects, generally have components rated 1 or 2 and are in

substantial compliance with laws and regulations. Any weaknesses can be handled

routinely by the board of directors and management. Banks are considered stable, well

managed and capable of withstanding all but the most severe economic downturns. Risk

management practices are strong and minimal supervisory oversight is required to ensure

the continuation and validation of the bank’s fundamental soundness. Banks rated “1”

give no cause for concern. The composite rating assigned is not an arithmetic average of

the component ratings, but is based on a qualitative analysis of the factors comprising

each component, the interrelationship between components, and the overall level of

supervisory concern about the bank.

BSC model was also used in order to overcome the drawbacks of CAMELS

ratings, i.e., to make use of both qualitative and quantitative analysis of the bank’s

performance. The qualitative data for BSC perspectives analysis were generated though

collecting client’s opinion, personal observation and interviewing the managers of the

bank managers and specially Ambo Branch. Accordingly, the bank’s performance for the

study period can be considered as one of best performing bank in the country.

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 B-FINDINGS FROM BALANCED SCORECARD ANALYSIS

Financial prospective: Regarding the financial prospective of BSC, the

profitability and earnings of the bank is improving from time to time since the year

2007/08. As a result the banks ROI, ROE, EPS and EVA are all gradually improving.

Regarding the capital adequacy, even though the bank has currently more than Birr 155

million capitals which is 51.67% of the subscribed capital, therefore the capital of the

bank when compared to its diversified activities and broad objectives it was not adequate.

Customer perspective: As to the Customer perspective of BSC, CBO works

according to the principle that “Customer is king” and working towards the goal of

customer satisfaction so as to will customer loyalty. For this purpose the CBO is

implementing CRM and is trying to provide, swift, efficient and diversified banking

services to its esteemed customers. When we look at the opinion of the 25 clients

customers/clients of Ambo branch towards the services of this bank was found to be

positive and majority of customers were highly satisfied out of the services of the bank

and delighted because of the fact that the bank provides most services in less than the

expected time or swiftly. Specifically, 14 respondents or 56% of them opined that they

were highly satisfied and the remaining 11 or 44% of them responded fairly satisfied.

CRM effort of the bank was also one of the key areas in order to create customer

loyalty. Accordingly the bank is exercising customer relationship management and it was

opined by the customers as follows. As a result 11 or 44% of the customers responded

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that the banks CRM effort was excellent, 7 or 28% responded very good, 4 of them or

16% responded that it was good and the remaining 3 or 12% opined as it was fair.

Internal business perspective: When we look at the internal business

perspective, there are different areas to be assessed and measured here. These are the

consistency of the services, integrity of the staff, time for loan application and processing,

Implementation of banking provisions like risk management, credit policy, reserve

requirement, fund management, provisions to bad debts and doubtful dates (non

performing loans) and the capacity of management and quality of its employees,

introduction of state of the arts technology and new products development were

thoroughly assessed and the CBO has been implementing the internal business

perspectives and getting good results from it.

Implementation of Credit Policy: In quantitative measure of performance of a

bank there is no option for taking the credit policy as a factor of measurement, rather total

volume of credit/Loan is considered. The implementation of credit policies by

Cooperative banks of Oromia is according to the directives and guidelines given by the

banking supervision directorate, 2010 of the National bank of Ethiopia. As a result, CBO

is effectively implementing the risk management practices, through sound and effective

loan appraisal policies, control and monitoring of the credit and other credit

administration measures.

Fund Management: Managing fund with minimum cost facilitates an institution

to ensure the higher profitability. Therefore the CBO’s Strong and capable management

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are the major factors for the banks internal strength. Funds have to be mobilized from

different sources and the finance manager of the bank in consultation with the banks

officials have to assess the cost benefit analysis of each of the following sources of

finance. In this regard the major objective of fund mobilization is through attracting

deposits to the bank as deposit is less costly to the bank. The CBO is exercising prudent

fund management practices like preparation of daily, weekly and monthly cash flows.

Human Resource: Well-trained, diversified pool of human resources is the

prerequisite for achieving the high performance of a bank. People with high academic

background and professional training and rich experiences in banking business are

essential to meet the challenges in the banking industry and to adapt the changes in new

working conditions. But this inevitable factor is also set aside in measuring the

performance of a bank. In this regard the CBO is endowed with well experienced and

committed managers who were the former cooperative promotion bureau staffs with rich

experiences in fields of organizing, managing and running cooperative businesses.

Cooperative bank of Oromia is endowed with dedicated, enthusiastic and committed man

power both at managerial and non managerial positions. This is due to the induction

training given to the employees of the bank mainly on the ethical values of the bank and

customer relationship management.

Technology: Banks have no other alternative but to adopt state-of-the-art

technology for survival, improving working condition and to increase the performance as

a whole. All multinational banks and most of the local commercial banks are miles ahead

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of the nationalized commercial banks in terms of technology. In BSC technology is

considered the main part as it is a key factor of competition. In this regard, even though

the bank has introduced different software programs after this study was concluded in

2010, up to the end of 2009/10 fiscal year the bank did not introduced new technologies

and mostly the activities of the bank were manually done. The branches of the bank

depend only on telephone and postal services, but they were not networked through

internet facilities.

Innovation and Learning Perspective: Regarding the last pillar of BSC the

author assessed disciplinary factors like well organized staff, good credit record, good

banker-client relationship etc.; It is pertinent to mention here that in the modern

technological advancement, commencement of on-line banking is very much in need to

improve the performance of the bank in the years ahead. CBO is introducing new

products and making its customers fully satisfied and become profitable bank in the

country without financial turbulence within short span of time.

C-FINDINGS FROM SWOT ANALYSIS

The next findings were the results of the Comprehensive SWOT analysis of the

data presented in the preceding chapter collected from both primary and secondary and

analyzed in order to ascertain the financial and managerial operations of Cooperative

Bank of Oromia S.C. Accordingly, the strengths, the weaknesses (problems),

Opportunities and threats were identified as a result of the data analysis as follows.

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 STRENGTHS

Even though Cooperative Bank of Oromia is an immature back, which lived only

6 years, it has managed to become one of the competent banks in the country. This is

because of the fact that it has had visionary, hardworking and dedicated leaders

particularly at the head office and board members. Its experts and branch managers are

also highly dedicated and committed to the successful accomplishment of the banks goal.

All the employees of the bank are also working hard and always delight their customers'.

All the management and the employees of the bank follow the shared values and

customs. Almost all of them speak Afan Oromo, the official language of the Regional

Government.

Ethiopia is an Agrarian country and agriculture is the back bone of the economy.

Oromia Cooperative bank is enhancing the growth and development of the region and the

country as well in mobilizing funds and providing input loan services to the Cooperative

Unions so as to improve Agricultural production and productivity. By providing

marketing credit at cheaper rates of interest the bank has been stimulating the

marketability of the farmers produce and it acts as a guarantor of cooperative member

farmers for their market price. Such intervention activities stimulate economic growth

and improve the living standards of the people- Grass root members.

The bank has increased its branch networks from 7 to 39 within 6 years. Such an

expansion program is costly and poses different challenges to the bank. The bank

managed to undertake expansion and earning exorbitant profit simultaneously. It

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improved it’s paid up capital base from 112 million to 110 Million Birr. CBO undertakes

diversification of business and running almost all banking activities. Such diversification

of service portfolios is essential for risk minimization and profit maximization. The

Banks loan overdue is also under 5% in all the fiscal years and it is below the

recommended percentage. So this shows that the Cooperative Bank of Oromia is

following a thorough loan appraisal methods and loan follow-ups and provides

guaranteed loans. This contributed to the increase in profitability of the bank.

Cooperative Bank of Oromia has cordial relationships with its stakeholders such

as Oromia Regional states, Zonal administrators, Addis Ababa City Administration,

National Bank of Ethiopia, Tax Authorities, Cooperative Unions, primary Cooperative

societies and the general public. According to some respondents, CBO has become the

pride of the Oromo People, as a bank which promotes Oromo cultures and values.

CBO started operation with 7 branches in 2005. Since then it has been working

dedicatedly to provide its services to all customers all over the country. At present the

bank has a total of 39 branches in operation. This shows that the bank is working its level

best in branch networking and increasing its accessibility and market share which will

have a direct effect on the socio-economic impact of the bank.

Cooperative bank of Oromia Ambo Branch was a well managed branch with

highly committed and dedicated branch manager and assistant branch manager whom

were providing selfless services to the accomplishment of the objectives of the bank. In

addition to that all the remaining staff of the branch including experts, tellers, clerks and

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Guards, secretary were all dedicated workers and the customer is satisfied and even

delighted of their services. Currently the Ambo Branch of Oromia Cooperative bank has

a total of 23 employees among which 22 of them were permanent.

Concerning the profitability of the bank, the Cooperative Bank of Oromia S.C.

(CBO) started to earn profit after break-even in the year 2006/08. During this year it has

made Birr 2,643,986 net profit. Its profits plunge to 3.6 million Br before tax in 2008/09,

down from 15 million the previous year, the audit report confirmed. The report revealed

the bank as the only private bank to report a decline from the previous year. Dashen,

Lion, Nib, United and Abyssinia banks all enjoyed increased profits. Dashen Bank is

leading the pack with a 250 million Br profit. This is because of the fact that the volatility

of the foreign exchange trade, poor capital basis of the CBO and the increase of costs due

to the increase of benefits for board members and employees of the bank and costs

related to opening new branches for networking purpose. The Cooperative Bank of

Oromia (CBO) registered an unprecedented gross profit of 36.7 million Br (unaudited) in

the 2009/10 fiscal year, up from 3.6 million Br in the preceding

The bank grossed 56.3 million Br from its operations 2009/10 with only five

million Birr in revenue contributed by international banking, while in 2007/08 its gross

revenue was 43.4 million Br, with 6.3 million Br coming from international banking. As

a result, the reduction in income is mainly due to the foreign currency trade according to

the officials of the bank. The officials of the bank associated this decline with the global

economic crisis; however, other banks have enjoyed a hefty increase in revenues from

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international banking, with Nib bank, for instance, reporting 22.2 million Br more in

revenue than the previous year's 55 million Birr.

Regarding the CBO's expenses, the banks expenses have also jumped from 28.4

million Br in 2007/08, to 52.7 million Br, with its salaries and benefits expense and

interest expense accounting for larger shares of 15.4 million and 12 million Br,

respectively. Salaries and benefits expenses were only 9.3 million Br in the preceding

year, according to the report. The bank increased the benefits of our employees from

covering their educational costs to their medical costs and paying for housing and

transport allowances.

Deposits of the fact that the bank managed to mobilize a deposit of 788.6 million

Br in 2008/09, while loans amounted to 587.8 million Br, up from 318.3 million Br the

previous year. Domestic trade and services claimed 74.7pc of total loans, followed by

agriculture which took the second largest share at 8.3pc. The export sector accounted for

only 7.5 percent

Loan appraisal is one of the most critical elements of the banking business. As a

result maximum precautions have to be made in order to assess the credit worthiness of

the borrower and the purpose for which he/she is using the loan. This is to avoid ill

appraised loans which results in loan over-dues and bad debts. Therefore the banks are

expected to thoroughly appraise the lean before rendering it. All CBO branches provide

efficient and satisfactory services. They extend loans products of various kinds at

competitive lending rates to cooperatives and other entities in many sector of the

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economy. Credit worthiness and financial soundness are the key decision criteria in

extending loans to any sector of the economy to enhance those businesses.

It’s found out that all the operations of the Cooperative Bank of Oromia is

according to the banking regulation provisions 1994, banks risk management (revised)

guide lines (2010) of the National Banks of Ethiopia, and it’s also observed that all the

accounting and reporting of the bank, credit policies and administrations, risk

management practices, provisions for loan losses, reserves and surpluses and managerial

set up of the bank is according to the banking provisions of the country supervised and

regulated by the Central bank of the Country-the National Bank of Ethiopia.

PROBLEMS

Cooperative Bank of Oromia has been facing lots of problems both before and

after its establishments. Before its establishment it faced problems like lack of awareness

of the public about cooperatives, the bad history of cooperatives recorded during the past

socialist government that resulted in luck of trust of cooperative business, lack of

cooperative banking legislation in place and reluctance showed by the National Bank of

Ethiopia to register and issue commercial license and lack of experienced man power in

cooperative banking as it is the first cooperative bank in the history of the country.

Since its establishment the bank has been facing problems which may or may not

be within the control of the management. The limitations within the control of the bank

can be considered as weaknesses of the bank and the researcher advises the management

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to devise strategic mechanisms how to tackle those problems. The factors which are

beyond its control requires the stakeholders participation and the management committee

(Board) and the president have to work in collaboration with the diversified stakeholders

like Cooperative Promotion offices, NBE, Members of the bank, and the general public.

Loan access has improved somewhat over the last 10 years, especially in the last 5,

mainly because of the efforts of the government banks and the CBO, which provide

collateral-free loans to agricultural exporters and cooperatives. Other private banks lower

collateral requirements for some exporters to increase their foreign currency holdings.

Some agriculture sector borrowers have increased their capital and are able to qualify for

larger loans with their own collateral. Government tax breaks and other concessions to

export-oriented sectors and agro-processors are likely responsible for the growth of

coffee cooperatives, especially.

Problems of under subscription of Share Capital

Cooperative bank of Oromia was established with a subscribed capital of Birr 300

Million. However the actual paid up capital till the end of 2009/10 was Birr 155 Million

which shows that that bank sold only 51.67% of its subscribed capital. As a result the

banks operations will be limited due to insufficient funds or it is forced to depend on

external debts beyond the recommended leverage ratio which will result in increased cost

of production due to high rate of interest payments on borrowings. As a result the

financial risk will be very high. The under subscription of the shares of the bank is the

result of so many socio-economic, political and legal factors. For one thing most

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cooperative members are not financially sound as their grass root members were poor

farmers. On top of this the suspicion that the people have on cooperatives due to its past

history in the country. The other reasons may be cooperative shares have no market value

and the one-man-one-vote principles of Cooperatives. The other reason may be due to

bad history the cooperatives recorded during the past socialist Derg regime. Since the

cooperatives were seen as a machinery of the government by that time.

Problems of Land for building

Cooperative Bank of Oromia including its head Office is rent house. Almost all

branches of the bank were also undertaking their banking business in rent apartments and

flats. The main reason was lack of land for constriction of branches and head offices. In

most of the cases the Municipalities were not come forward to allocate land for

cooperative businesses or they simply complain that they do not have land. As a result

most of the operational revenues are sieved by the exorbitant house rents and the profit

will be diminished or even loss may be incurred. Therefore, the management of the bank

has to set strategies to curb problems so that the bank could achieve its set objectives.

Problems of Loan collections

The main incomes of the banking business are receivables which are composed of

interest and principal amount. But receivables are also associated with loan over-dues,

and become doubtful debt and finally called bad debts if the chance of their recovery is

close to zero. Non-performing assets are costlier to the company and have to be

minimized through a thorough loan appraisal, follow-up and 100% Guaranty or Surety.

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 OPPORTUNITIES

The favorable policy and legal ground given to cooperative sector development in

a country is really a good opportunity for Oromia Cooperative Bank. The government of

Ethiopia had already paved the way for better cooperative development in the country

through creating legal basis and expansion of human resource development at higher

institution level .Therefore, it is high time to the cooperative bureaus, cooperative

experts, higher institutions, Cooperative banks and cooperative staff to maximize the

existing policy environment to the advantage of cooperative development so that

members will benefit from it and cooperatives.

Oromia is the major producer of grain and coffee and region high production and

productivity will be an opportunity for the banking business. The population size of

Oromia region is estimated to be more than 30 million and Addis Ababa 3 million,

targeting such huge population is also another opportunity. Basing on the values and

cultures of the Oromo people made the Bank of choice to the people of the region and it

has enormous opportunities.

The geographical location of the region surrounding the capital and commercial

city of Addis Ababa, where trained, qualified and skilled man power can easily be

available and the Ethio-Djiboute railway that crosses the rejoin and the confidence and

interest of the Oromo and other people of the region to become the customer of the bank

and saving their money in the bank as the banker of the grass root farmers of the region.

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 THREATS

We are in the era of liberalization, privatization and globalization where

government protections are kept at minimal so that the banking sector is expected to face

a cut throat competition from both well organized government banks and multinational

corporate banks. As a result the big fish will swallow the small fish and hinders its

growth and development. Although Cooperative businesses in general and Cooperative

banks in particular has two contradicting objectives of providing service at cost as a

cooperative and earning high profit as private sector for survival and growth of the

business, CBO is yet to face stiff competition.

The major threats are the booming of domestic private banks, government banks

in operation, and branches of international banks recently allowed by government to

invest in the country. As Oromia is geographically located towards the central part of the

country and cash crop producing area most banks are also located in Oromia region.

Mainly banks using the name of Oromia such as Oromia international bank, are directly

creating tough competition to the bank due to imitation of the brand name of the bank.

Indirectly the bank faces competition from agencies like micro financial

institutions, such as Oromia saving and credit etc, insurance companies like Oromia

Insurance company etc and money transfer establishments are also considered as the

threats of this infant but promising bank. Therefore, it is time to think strategically how to

face competition and survive in the banking business.

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 CONCLUSIONS
Cooperative bank of Oromia (S.C.) is one among the 16 Private Banks currently in

operations in Ethiopia. It is the only Cooperative bank in Ethiopia established in 2004 by

primary Cooperatives and Cooperative Unions operating in Oromia regional states. The

bank has a great vision in order to benefit the grass-root members of the cooperatives and

enhancing their social and cultural values. The bank aspires to be the competent and

reputable Bank in Africa that can play a paramount role in the socio-economic

transformation of Oromia.

According to CAMELS Composite ratings, Cooperative bank of Oromia’s was

rated as “1”. This shows that CBO is sound in all aspects, generally have components

rated 1 or 2 and are in substantial compliance with laws and regulations. Any

weaknesses can be handled routinely by the board of directors and management. Banks

are considered stable, well managed and capable of withstanding all but the most severe

economic downturns. Risk management practices are strong and minimal supervisory

oversight is required to ensure the continuation and validation of the bank’s fundamental

soundness. Banks rated “1” give no cause for concern.

The balanced scorecard card performance measurement analysis was also applied.

The four pillars of the BSC, VIZ., Financial, customer, internal business process and

Learning and growth perspectives were analyzed both qualitatively and quantitatively.

The qualitative data for BSC perspectives analysis were generated though collecting

client’s opinion, personal observation of the author and interviewing the managers of the
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bank and specially Ambo Branch. Such data were summarized and analyzed

systematically by using SPSS computer software. Accordingly, in terms of both

qualitative and quantitative data’s analyzed, the bank’s performance for the study period

was overwhelmingly remarkable and shows the banks is performing well as compared do

the retail banks in operation in the country.

Loan access in Ethiopia, has improved somewhat over the last 10 years, especially

in the last 5, mainly because of the efforts of the government banks and the CBO, which

provide collateral-free loans to agricultural exporters and cooperatives. Other private

banks lower collateral requirements for some exporters to increase their foreign currency

holdings. Some agriculture sector borrowers have increased their capital and are able to

qualify for larger loans with their own collateral. Government tax breaks and other

concessions to export-oriented sectors and agro-processors are likely responsible for the

growth of coffee cooperatives, especially. Collateral requirements have lessened for some

exporters and borrowers from banks with guarantees of some kind but remain too high

for most new borrowers. On the other hand, recent growth of Savings and Credit

Cooperatives suggests that more new borrowers at the farmer level are gaining access to

credit.

Currently CBO provides almost all banking services in Addis Ababa and the entire

Oromia Region, Hara and Dire Dawa cities. In particular it provides the following

banking services to individuals, business entities and cooperatives.

• Accessible and diversified credit facilities,

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 • Efficient and swift money transfer, in collaboration with Birritu, Western Union

• Opening Letter of Credit (LC) facilities,

• Reliable foreign exchange and remittance service.

CBO has broad ownership base and diversified ownership structure. The rural area

in Oromia hosts about 85% of the people of the region. The rural economic actors that

consist of individuals, cooperatives and other entities are all constrained by lack of access

to financial services. CBO, where cooperative societies take the lion's share in ownership,

exists to address the financial service constraints of these rural economic actors.

Development organizations, civic organizations/NGOs, PLCs, associations and

individuals stand second to cooperatives in bank ownership, i.e. in shareholding. These

non-cooperative shareholders are also potential depositors.

CBO is the first bank of its kind in the banking industry in Ethiopia. CBO is the first

cooperative bank in Ethiopia established to stimulate economic growth and

transformation by activating the idle or unproductively held resources (both financial and

non-financial), the bank engaged in financing those businesses through cooperative

system. It is the first private bank established with the highest paid up share capital of its

kind: CBO commenced its operation with paid up capital of birr. 112 million (49% in

excess of requirement for foundation of Birr 75 Million), which is about 37% of

authorized share capital of birr. 300,000,000.

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 With the activities of Cooperative Bank of Oromia, that the farmers in Oromia

region are getting agricultural input loans on timely basis at affordable rate of interest and

they were guaranteed the market prices for their outputs as the bank facilitates the

purchase of members produce at (remunerative price) a price higher than market price

through cooperative unions and primary cooperatives called multi-purpose cooperative

societies. As a result of it the regional agricultural production and productivity was

drastically improved and the grass-root members were benefited and their standard of

living was improved out of the intervention of the bank and Cooperative unions.

The Bank has been working in mobilizing deposits and promoting the habits of

savings. Its management believes these activities boost the supply of funds and maximize

shareholders’ value; thus creating access to loans and other banking services for broad

portions of the population.

Finally, the Cooperative bank of Oromia is stimulating the economic and social

development in Oromia region and the country in general by mobilizing financial

resources from cooperative entities, private businesses and public institutions and by

financing them. CBO provides banking services for the cooperative societies in Oromia

Regional State, other entities and individuals with special emphasis to agricultural and

agro-based businesses.

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 RECOMMENDATIONS
After a detailed examination of the CBO’s current and past performances the

following recommendations were given so that the bank will achieve its objectives of

profit maximization, rendering optimum financial services and shareholders wealth

maximization. The CBO should put a maximum effort to mobilize capital in general and

working capital in particular in order to meet the working capital requirements effectively

and optimally. For the betterment of Cooperative banking business in Ethiopia the

researcher suggests the following points.

1. Financial leverages have to be strictly followed in order that the Capital structure

will strike a balance between liquidity and profitability position whereby financial

risks will be minimized and profits will be maximized.

2. More funds have to be mobilized from internal sources such as share capital,

deposits, reserves and surpluses than external debts in order to reduce financial

risks and retain control

3. The unsubscribed shares of the CBO have to be fully subscribed so that the bank’s

financial base will be strengthened and risks will be minimized. Therefore

maximum effort should be put in place in order to fully subscribe the issued shares

4. Branch expansion will have its adverse effect on the short-run profitability of the

bank. Therefore, the bank has to limit its branch networking and it has to work in

collaboration with other private and public commercial banks through business

alliance methods

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5. CBO has to automate its services as technology is a core strategy for facing

competition from public and other private banks in the country. It has to introduce

ATM services, Branch networking and automation of other books of accounts so

as to face competition effectively. Therefore, the bank has to invest more to

acquire the state-of-the-art-technology, so as to keep up pace with swiftly

changing banking business.

6. Training and development have to be given to the managers and workers

respectively in a continuous manner mainly on current situations like automation,

communication skills and strategies in meeting competitions

7. The bank has to acquire land and construct its own buildings after leasing the plots

from respective municipalities for both head offices and branches of the bank and

get-rid off the exorbitant house rent payments, which could have been contribute

to the revenues of the bank

8. New product development has to be given emphases as one of the strategic issues

and research and development department has to be created and budget and

manpower has to be allocated to this department

9. Effective credit administration measures have to be put in place so that there will

be prudent loan appraisal mechanisms, loan follow-ups, loan collection and hence

the bad debts and doubtful debts will be minimized.

10. The bank has to participate more and more in community services as per the

principles of cooperative given by ICA 1995, called “Concern for Community”.

The bank has to allocate separate fund for discharging its social responsibility.

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11. There should be a link between Federal Cooperative agency, Oromia Cooperative

Agency and the Zonal and Woreda level Cooperative promotion offices. Currently

the bank has no direct relationship with these offices. As it is expected

Cooperative banks have double accountability, where one is the National Bank

and the other FCA.

12. Cooperative Bank of Oromia should observe the Cooperative Societies

proclamation No 147/98 in general and the Principles Cooperatives 1995 fully.

Currently the bank being a cooperative bank it is neither observing the

Cooperative Societies proclamation No 147/98 and nor the seven principles of

Cooperatives in order to maintain the Cooperative character.

13. Government has to continue the cooperative sector development and the

concession to cooperative business like free legal and audit services, provision of

land and tax exemptions. Currently CBO is paying tax to the Government as equal

as private banks.

14. Awareness creation programs have to be conducted in a continuous manner so that

the general public will have trust on cooperative business in general and

cooperative banking in particular

15. The Central bank of Ethiopia or the regulatory and supervisory authorities should

develop appropriate legal framework for controlling, guiding and supervising the

Cooperative banking system. It is not sufficient to insert words or sentences on

Cooperative banking in the Bank companies Act.

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 Website References
I. http://www.coopbankoromia.com.et/en/home.htm

II. www.nbebank.com/

III. http://www.nbe.gov.et/financial/banks.htm

IV. www.workingcapitalmanagement.com

V. coopbank@telecom.net.et

VI. http://www.ica.coop/coop/principles.html

VII. http://www.addischamber.com/aaccsa/countryinfo/countryall.php?id=2

VIII. http://allafrica.com/stories/200912281431.html

http://www.dashen Basel Committee on Banking Supervision

X. - Principles for the Management of Credit Risk (September 2000)

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XI. http://www.executivestrategymanager.com

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