RIFT VALLEY UNIVERSITY

CHIRO COMPUS
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF MANAGEMENT

ASSESSMENT OF CREDIT FACILITY AND ITS EFFECT ON

BORROWER
(CASE STUDY IN COOP BANK, CHIRO BRANCH)

A RESEARCH PAPER SUBMITTED FOR THE PARTIAL

FULFILLMENT OF THE REQUIREMENT OF BA DEGREE IN
MANAGEMENT

BY: ZEYEDE NIGUSIE ID NO 0009/18

ADVISOR: BEDASA HUNDE

JAN, 2021
CHIRO, ETHIOPIA

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 Abstract

The study will asses credit facility and its effect on borrower of commercial bank of Ethiopia,
Chiro branch. To achieve what is aimed for both primary and secondary data will be use.
Primary data will collect through questionnaires and structured interview. Source of secondary
data will be bank annual report, bank document and other published material. The researcher
will use judgmental sampling (type of non probability technique for the manger and employee.
And convenience sampling for the bank customer. The researcher will take 40 (10%0 as a
sample from 400 of the total population of the employees and customer. In order to obtain the
desired information. The data will analyze and interpret by using descriptive data analyzing
methods.

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 Acknowledgement
Nothing concrete can be achieved without the help of God. No work can be accompanied
without taken the guidance of experts. It is only critics from ingenious that help transform a
product in to a quality product. For this, I am grateful to Bedasa Hunde for his timely advice,
encouragement and invaluable critical suggestions given during proposal preparation.

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 Table of content
Acknowledgment.............................................................................................................................I
Abstract..........................................................................................................................................II
Table of content............................................................................................................................III
Chapter One...................................................................................................................................1
1. Introduction................................................................................................................................1
1.1. Back ground of the study.........................................................................................................1
1.2. Statement of the problem.......................................................................................................2
1.3. Objective of the study..............................................................................................................3
1.3.1. General objective……………………………………………………………………………………………………………….3
1.3.2. Specific objective…………………………………………………………………..3
1.4. Significance of the study..........................................................................................................3
1.5 Scope of the study................................................................................................................3
Chapter Two...................................................................................................................................4
2. Literature review........................................................................................................................4
2.1 Types of loans ………………………………………………………………………………….4
2.2 Establishing a good written loan policy....................................................................................5
2.3 Steps in the lending process …………………………………………………………6
2.4 Types of credit …………………………………………………………………………………7
2.5 Role of credit facility ………………………………………………………………………….8
2.6 Securities for bank advance……………………………………………………………………9
Chapter Three...............................................................................................................................15
3. Research Design and Methodology..........................................................................................15
3.1 Types of data ………………………………………………………………………………….17
3.2 Sources of data...................................................................................................................15
3.3 Method of data collection..................................................................................................15
3.4 Sample and sampling Technique........................................................................................15
3.5 Method of Data Analysis.....................................................................................................16
Chapter Four.................................................................................................................................17
4. Result analysis and discussion..................................................................................................17
4.1 Analysis of staff members……………………………………………………………………..17
4.2 Deposing method of commercial bank of Ethiopia…………………………………………..19

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4.3 The types of credit that highly demanded by customers……………………………………..20
4.4. Interview analysis…………………………………………………………………………….. 20
4.5. Commercial bank of Ethiopia………………………………………………………………….21
4.6. Collateral that affect the credit facility………………………………………………………..24
4.7 Types of credit system in commercial bank of Ethiopia………………………………………24
Chapter Five..................................................................................................................................28
5. Conclusion and recommendation.........................................................................................28
5.1. Conclusion.....................................................................................................................28
5.2. Recommendation...........................................................................................................29
Reference.....................................................................................................................................30
Appendix.......................................................................................................................................31

IV
 Chapter One
Introduction
1.1 Background of the study
Many institution especially financial institutions 90 under general terms directed by the national
banks. These institutions provide credit facility and other type of activities to their customer an
the same is true for commercial bank of Ethiopia. In this research paper, the researcher focuses
on credit facilities and its effect on borrower of commercial bank of Ethiopia. (www.NBE.com).

Credit facility is loan taken by Businesses Corporation which might taxes the form of revolving
credit, letter of credit, short medium and long-term. Loa, retail credit card association and the
like. This credit allows the company to take out on umbrella loan to generate capital over on
extended time from. Their credit thus increases the flexibility with which company can handle
the relationship between its debt and equity (Bafah, 2011).

The primary function of credit facility is to allow business to maintain back up sources of
income. Basically making use of their credit option ensures that company can remain liquid latter
it has sold a number of stock of share companies frequently implement credit facility in
conjunction with closing around of equity financiering. The scholarly contributions of Kumar,
(2002) reveals as the key consideration for any company is looking its capital structures as a
whole for determining how much capital it needs immediately and eventually and how they will
use the combination of equality and debt to fulfill those requirements.

Banking business is rapidly growing in the world in which Ethiopia is not exception and
correctly there are 3 state owned and 14 private commercial bank in Ethiopia (kapur and Gulau,
2012). Banks are structuralizing and delivering sophisticated credit individual and for intuitions
that is applicable financial solution so, credit facility have great role in economic development of
any country. Because, without adequate credit facility, every country cannot increase the
production of various sector.

Today we are using modern technology like tractors, criticizers and other necessary seeds that
can improve our products. In these cases, the farmer should have to get adequate credit facility to
fulfill the above material which enables them to form land so the banks provide credit facility for

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this sector. Hence the credit facility is very important in any of business sectors as the credit
enables the individual and firms to purchase the important inputs for the production (Bafah,
2011)

Generally, credit facility is important for economic growth due to the reason that without
adequate credit facility we cannot increase the production of various sectors. So, to encourage
economic growth bank and other financial institution can provide loan which enables individuals
or associations to play their own role in the economy of one country in general (Howod,2013)

1.2 Statement of the problem

Bank lending or credit facility provided by banks are one of the most common and traditional
function but the most important, it properly used, may play a vital role in a country’s economic
development making loans to fund consumption and investment spending is the principal
economic function of banks and their closest competitors. How well a lender performs in
fulfilling the lending function has a great deal to do with the economic health of its region,
because loans support the growth of new business and jobs within the lenders market area.

The bank under all case must assess the credit worthiness by studying the business and financial
position of the customer, has credit history and finally by requiring a security or collateral lint
form of mortgage or pledge. A bank may require a potential borrower to mortgage building, a
motor vehicle, a business or his right to use urban land acquired by lose it the amount of
guarantee does not exceed the lease price paid by the holder. The main target of this study is to
assess the credit facility and its effect on borrower of COOP in Chiro branch.

1. How many types of credit facility currently offered by COOP?

2. What are the criteria that the bank uses in selecting credit applicant?
3. What is the source of funds that COOP uses to give loan for customers?
4. What are the problems related to credit facility?

1.3. Objective of het study

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 1.3.1 General objective

The main objective of this study is to assess the credit facility and its effect o borrower of
commercial bank of Ethiopia.

1.3.2 Specific objective

 To identify the type of credit facility offered by COOP.

 To investigate the criteria that the bank use in selecting credit applicant.
 To assess the source of funds that COOP uses to give loan for customer.
 To evaluate the problem related to credit facility.

1.4 Significance of the study

Generally the significance of the study will be the following:

 It will suggest some possible solution about eh problem concerning to credit facility.
 It will provide information to customer and banker about problem which a r related to
credit facility concerning to COOP it necessary.
 It many serve as reference for other researcher who will interest to conduct one elated
topic and it adds knowledge and experience for the researcher.

1.5 Scope of the study

This research focuses on problem with credit facilities and its effect on borrower of COOP and
conducted on Chiro branch only.

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 Chapter Two
2. Review of related literatures
Loan is the amount of money provided by the bank to the firm or individual investors in a credit
basis to be repaid in the future including the interest churched for the use of that money plus the
principal amount. (Rose and Hudgins, 2013).
2.1 Types of loans

Loans may be divided in to seven broad categories delineated by their purposes.

1. Real estate loans: are secured by the property land buildings and other structures and
include short term loans for construction and land development and longer term loans to
finance the purchase of farmland, homes apartment’s commercial structures, and foreign
properties.
2. Financial institution loans
It includes credit to banks insurance companies finance companies and other financial
institution.
3. Agricultural loans
Are extended to farms and ranches to assist I planting and harvesting crops and
supporting the feeding and care of livestock.
4. Commercial and industrial loans
Are granted to business to cave purchasing inventories paying takes, and meeting
payrolls.
5. Loans to individual
I include credit to finance the purchase of automobiles mobile homes appliance and other
retail goods, to repair and modernize home, and to cover the cost of medical care and
other personal expenses, and either extended directly to individuals or indirectly through
retail deicers.
6. Miscellaneous
It includes all loans not listed above including securities loans.

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 7. Lease financing receivables

Where the lender buys equipment or vehicles and leases them to its customers.

2.2 Establishing a good written loan policy

One of the most important ways a lending institution can make its loans meet regulators
standards and are profitable is to establish a written loan policy. Such a policy gives loan officers
and management specific guidelines in making individual loan decisions and in shaping the over
all loan portfolio. The actual makes up of a lender’s loan portfolio should reflect what is loan
policy says. Otherwise, the loan policy is not functioning effectively and should be either revised
or more strongly enforced. (Rose and Hudgins, 2013)

What should a written loan policy contain? The examinations manual which the federal deposit
insurance corporation gives to new examiners suggests the most important elements of a well
written loan policy.

1. A goal statement for the entire loan portfolio (i.e statement of the characteristics of a
good loan portfolio in terms of types maturates, size and quality of loans).
2. Specification of the lending authority given the each loan officer and loan committee
(measuring the maximum amount and types of loan that each employee and committee
can approve and what signatures of approval are required).
3. Lines of responsibility in making assignments and reporting information.
4. Operating procedures for soliciting .evaluating and making decisions on customer loan
applications.
5. The required documentation that is to accompany each loan application and what must be
kept in the lenders flies (financial statements, security agreements, etc)
6. Lines of authority detailing who is responsible for maintaining and reviewing the
institutions credit files.
7. Guidelines for taking evaluating and perfecting loan collateral.
8. Procedures for setting loan rates and faces and the term for repayment of loans.
9. A statement of quality standards applicable to all loans
10. A statement of the refereed upper limit for total loans outstanding (i.e. the maximum ratio
of total loans to total asset allowed)

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 11. A description of the lending institutions principal trade area, from which most loans
should come, and how well the lender is serving its area.
12. Procedures for detecting and working out problem loan situations (Rose and Huding,
2013)

2.3 Steps in the lending process

1. Finding prospective loan customers

Most loans to individuals arise from a direct request from customer who approaches a member of
the lenders staff and asks to fill out a loan application. Business loan requests on the other hand
often arise from contacts the loan officers and sales representatives make as they society new
accounts from firms operating on the lenders market area (Rose and Hudgins, 2013)

2. Evaluating a prospective customer’s character and sincerity of purpose.

Once a customer decides to request a loan, an interview with a loan officer usually follows,
giving the customer the opportunity to explain his or her credit needs. That interview is
particularly important because it provide an opportunity for the loan officer to assess the
customer’s character and sincerity of purpose. If the customer appears to lack sincerity in a
known lending the need to adhere to the terms of a loan this must be recorded as weighing
against approval of the loan request.

3. Making site visits and evaluating a prospective customers credit record

If a business or montage loan is applied for, a loan officer often make a site cist to assess the
customer’s location and the condition of the property and to ask clarifying questions. The loan
officer may contact other creditors who have previously loaned money to this customer to see
what their experience has been. Did the customer fully advise to previous loan a agreements and
where required keep satisfactory deposit balance a previous payment record often reveals much
about the customers character sincerely of purpose and sense of responsibility in making use of
credit extended by a lending institution.

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4. Evaluating a prospective customers financial condition

If all is favorable to this point the customer is asked to submit several crucial documents the
lender needs in order to fully evaluate the loan request, including complete financial statement
and in the case of corporation board of directors resolution authorizing the negotiation of a loan
with the lender once all documents are on file the lenders credit analysis division conducts a
thorough financial analysis of the appliance aimed at determining whether the customer has
sufficient cash flow and backup assets to repay the loan. The credit analysis division then
prepares a brief summary and recommendation which goes to the appropriate loan committee for
approval on largely loans, members of the credit analysis division may give and oral presentation
and discussion will ensure between staff analysis and the loan committee over the strong and
weak points of a loan request.

5. Assessing possible loan collateral and signing the loan agreement

If the loan committee approves the customer’s request the loan officer or the credit committee
will usually check on the property or other assets to be pledged as collateral in order to ensure
the lending institution has immediate access to the collateral or can acquire title to the property
involved is the loan agreement is defaulted. This is often referee as perfecting the lender’s claim
to collateral. Once the loan officer and loan committee are satisfied that both the loan and the
proposed collateral are sound, the note and other documents that make up a loan agreement are
prepared and signed by all parties to the agreement.

6. Monitoring compliance with the loan agreement and other customer service needs

Is this the end of the process? Can the loan officer put the signed loan agreement on the shelf and
forget about it? Hadley/ the new agreement must be Montour continuously to ensure the terms of
the loan are being followed and all a required payment of principal and inters tar being made as
promised.

2.4 Types of credit

There are there types of credit those are the following

a. Short term credit

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It is the type of credit that grated up to one year

b. Medium term credit

It is the loan on intermediary’s class between the short term and long term credit ranging from of
to 10 years.

c. Long term credit

It is type of credit that would be granted for the period above ten 910) years and it is usually loan
granted for building of house, buying of machinery and etc.

2.5 Role of credit facility

Credit is the sale of goods and service and money claim in the present exchange for a promise to
pay in the future. In other words we can say that its debt or simply promise to pay in the future
on account of immediate transfer of good. Hence credits have different role of all individuals and
business ad some of its role may be specified as of below. (Shekhar and shekhar, 2003)

2.5.1 Important for business

Credit enables the individuals and forms to purchase the important inputs for the production.
Generally one business men has not sufficient amount for the business. So, credit facility is very
useful for business.

2.5.2 Important for economic growth

Without adequate credit facility we cannot increases the production of vacuous sector. In the
developing countries rate of out puts is loan since the rate of capital formation is low due to non-
viability of credit facility.

2.5.3 Important for agriculture

Like any other sectors, credit require for the agriculture sector today we are suing modern
technology, like tractors tube well and fertilizer our forms is very poor and unable to use this
things keeping in view the importance of credit facility for this sector very essentials. The term
of repayment of such advances is normally short-term and its is expected to tube settled in one

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crop season. To be eligible for working capital financing the borrowers should least lest have one
year experience in this line of business.

2.6 Securities for bank advance

The role of banker as a borrower has already been outlined. Equally important the role f banker
as a lend while lending money bankers frequently secures the loan on the personal security of the
borrower or on the personal security coupled with the guarantee of another person. However,
often he/she insists on collateral securities against loans. So, there is some form of securities as
follows. A banker may secure his advances’ by means of lien, a pledge or mortgage (shekhar and
shekhar, 2003)

Banker’s lien

Alien is the right to retain the properties belonging to the debtor in until he has discharge a debt
due to retainer of the property. A part from a loan which arises from deposits o any specific
security to cover advance banker can obtain legal claim to any specific security deposited with
him to cover advances. This claim arises from pledge and mortgages (shekhar and shekhar,
2003)

Pledge

A pledge is a contract where by any article is deposited with lender or a promises as security for
the repayment of loan or performance of promise. To complete the contract or pledge, he
delivery of goods the bankers is necessary. Delivery of the documents of title relating to the
goods may be sufficient to create valid pledge. There are there essentials features of pledge.

 There must be bail men of goods:- i.e., delivery of goods

 The bailment must be by way of security
 The security must be for repayment of debtor or performance of promise

Mortgage

A mortgagee is the transfer of on interest in a specific immovable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan an existing future

9
debt or the performance of an engagement which may give to pecuniary liability. In terms of the
above definition the essentials of mortgagee are:-

 There must be transfer of interest in an immovable property.

 The immovable property must be a specific one.
 The consideration of mortgage may be either advanced or to be advanced by way of loan,
or performance of a contract.

The person who transfers an interest in specific immovable property is known as the shortage
and the shortage to when the interest is transferred is called the shortage.

Types of risk

Credit risk

Credit risk is the risk that an asset or loan becomes irrecoverable in the case of outright default or
the risk of an expected delay in the serving of loan. Since bank and borrower usually sign loan
contract, credit risk can be considered a form of counter party risk. However the term counter
party risk is traditionally used in the context of traded financial instruments (for example counter
party in future agreement or swap) where credit risk refer to the probability of default on a loan
agreement.

The bank would avoid credit risk by choosing assets with very low default risk low return but
one bank profits from taking risk credit rises it’s a bank has many medium to low quality loan in
its banks but one return will be higher. So, banks will options for portfolio of assets with varying
degree of irks, always taking in to account that a higher default risk is accompanied by higher
expected return. Since much of default risk arises from moral hazard and information problem,
the bank most monitor their borrowers to increase their return from the loan portfolio. Good
credit risk management has always been a key component to the success of the bank, even bank
has move in to other areas. The cause of the majority of bank failures can be traded back to weak
loan books. For instances, Franklin national bank announced large asses on foreign became
dealings. But it also has money unsound loans likewise, many of the theft and commercial bank
failures in the USA during the 1980s were party cawed by mismatch in terms between assets and
liabilities and problems of the loans. The scholarly contributions of varshency, (1974) shows as

10
Japan faced such problem and it was failure of mortgage banks in 1445 that signaled major
problems with the balance sheets of virtually all bank.

Liquidity or funding risk

These terms are really synonyms the risk of insufficient liquidity for normal operating
requirements, that is the ability of the bank to meet its liabilities when they fall due. A shortage
of liquid assets is often the source of the problems, because the bank is unable to realize funds in
the retailer or whole sale markets. Funding risk usually refers to the banks inability to found its
day to day operations customers place their deposits with bank confident there can withdraw
their funds before the term is up. It there is the bank’s ability pay out on demand and most
depositors race to the bank to withdraw deposit it will soon become liquid in the obedience of
liquidity infection by the central bank if could quickly become insolent since it can do nothing to
reduce overhead costs during sale short period.

The liquidity of n asset is the case with which it can be converted to cash. A bank can reduce its
liquidity risk by keeping its assets liquid (investing in short term assets). But it it’s excessively
liquid, its return will be lower. All banks make the money by having a gap between their
maturities, that is more short-term deposits and more long-term loans “funding short-term” they
can do this because of transactional reserve lending only a fraction or deposits are held in reserve
and the rest are loaned out liquidity can be costly interims of higher interest that might have been
earned all funds that have been lacked away for a specified time.

Maturity matching (o getting rid of all maturity gaps) will guarantee sufficient liquidity and
eliminate liquidity risk. Because all deposit are invested in asset of identical maturities and than
every deposit repaid from the cash inflow of monitoring assets assuming this assets are also risk
free. But such policy will never be adopted became the bank on intermediaries engaged in asset
transformation to make profits.

Interest rate risk

Refers to the potential liability in banks interest on income and market value of quality due to
change in the level of market interest rate. If comprises the total portfolio composition focusing

11
on mismatched assets and liability maturation and duration as well as potential changes in the
interest rates.

Operational risk

Refers to the possibility that operating expense might vary significantly from what is expected
producing decline in net income and firm value a banks operating is there closely, related to its
border number of division or sub division and number of employees. Because operation
performance is sufficient and function.

Capital or solvency risk

It’s the possibility that to bank may become insolvent a firm is technically insolvent when it has
negative net work or share equity.

Other risk

The most important of the exchange risk and country risk refers to the potential loss of interest
and principal on international loan sue to a country requiring making timely payment as per loan
agreement in essence forcing government borrow default on their loan thus country risk is a form
of default risk.

Method of controlling credit risk

The loan rate should include a market rate risk premium and administration cost. The riskier the
borrower, the higher premium should the risk profile of the loan be altered the rate should
change accordingly though it increased in should be come in mind that the potential for adverse
or adverse incentives is greater.

Credit limits

Another method for controlling credit risk given the potential for advise selection most bank do
no rely socially on loans rate when taking a lending decision. Instead the availability of certain
type of loan may be restricted to a selected class of borrowers especially in retail market. Branch
managers are given well defined credit constraints and check lists and borrowers usually
discover they may not borrow above some ceiling. In retail market, banks normally quit one loan

12
rate and then restrict the amount individual or small firms can borrow according to criteria such
as wealth or collateral.

Collateral or securities

Bank also use collateral to reduce credit risk exposure. However it the price of the collateral (for
instance house, stock market prices) becomes more violate then for unchanged loan rate, banks
have to demand more collateral to affect the increased provability of loss on the credit. Another
problem that can arise is if the price of collateral is negatively, congealed with the ability of the
borrower to repay that is as the probability of default among borrower cash increases the price of
collateral declines.

Diversification

Additional volatility created from an increased in the number of risk loans can be offset either by
new injection of capital in to the bank or by the diversification. New market should allow the
bank to diversity and so reduce the overall riskiness of the loan portfolio provide it seeks out
assets which yield return that are negatively correlated. In this way banks are able to diversity
way all non- systematic risk bank should correlated analyses to decide how portfolio should be
diversified. Regulation required high percentage of their assets to be invested in home mortgage
related securities. Banks can help to ensure they are property diversified by setting connection
limits the bank sets a limit on the amount of exposure in relation to a certain individual or sector.

Credit derivations and asset securitization

Credit derivatives and asset securitization is a method of reducing credit risk exposure provided a
third party assumes responsibility for the credit risk of the secured asset. As, discussed earlier in
the credit risk derivatives can be used to ensure against loan default.

Assessing the default risk

Most banks have a separated credit risk analysis department and their aim is to maximize share
holder value added through cordite risk management managerial judgment always prays acritical
role but a good credit risk team will use qualitative and quantitative method to assess credit risk.
The sue of different method will be determine by the information gathered by the bank on the

13
individual. If bank is unable to obtain information on a potential borrower (using for example
annual report), it’s likely to adopt a qualitative approach to evaluate credit risk which involves
using a check list to take in to account factors specific to each other such as

 Past5 credit history

 The borrower leverage ratio how much loan applicant has a credit borrowed relative to
his/her assets.

 The wealth of the borrowers and employment history

 Length of times as customer at a bank and others.

In general, as the concept of credit affects every individual and businesses regardless of their
status, country and nationality, its impact must be considered decisively and that is why the
researcher consider its facility and services existed in COOP specifically in Chiro branch to
identify the gap presented and to recommend for future implications.

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 Chapter Three
3. Research Design and Methodology
3.1 Types of data
3.1.1 Primary data
Are that information collects by research himself and are collected for the first time, from
original source. The sources of such information are individuals and incidence around there.

3.1.2 Secondary data

Information which has already been collected by someone else for other purpose. It is
information, which are gathered or obtained indirectly.

3.2. Source of data

The necessary data for the stated objectives will be obtained through primary data and secondary
data. The primary data will be collect from the bank and the customers by using questionnaire
and interview. The secondary data will be collected from annual reports of the bank, other
related book and journals.

3.3 Method of data collection

As the sources are identified above, both primary and secondary source of data will be use to
collect realistic information from respondents. In collecting primary data, questionnaires and
structured interview will be use the respondents will express their idea through limit way,
because questionnaires have open ended and close needed to provide neutralize question. In
order to collect secondary data, bank annual report, bank document and other published
document will be use.

3.4 Sampling techniques

The researchers will use judgmental sampling (types of non probability technique) for the
employees and convenience sampling for the bank customer. Judgmental sampling is selected
because it enables to get accurate and sufficient information by using this technique individual
who are believed to have sufficient knowledge expertise and familiarity with the subject matter

15
will be selected, convenience sampling is selected because it is easy to choose the nearest
persons as respondents.

3.5 Sample size

To make the study more appropriate and easy to handle the necessary information, the
researchers will take 35 (10%) as a sample from 350 of the total population of employees and
customers.

3.6 Method of data analysis

After the required source of data will be collected, descriptive method wile b se by the researcher
in order to analysis the collected data by using tables and percentage and hence the result will be
interpret appropriately and accordingly asked on the objectives of the study.

16
 Chapter Four
4. Data analysis and Presentation
This chapter provides analysis and presentation of the collected information through
questionnaires and interview data gathering tools. After relevant data was collected then analysis
must be made in the form of meaning –full manner. So, in its section, the finding concerning the
credit facilities and its effect on borrower of commercial bank of Ethiopia, Chiro branch were
presented. The researcher has tried to analysis available data in the form of table and percentage.
4.1 Analysis of staff members

Table 4.1 Sex distribution of respondents

Sex Frequency Percentage Valid Cumulative

percentage

Male 21 63.63% 63.63% 63.63%

Female 12 36.36% 36.36% 36.36%

Total 33 100% 100% 100%

Source: Survey result

The table 4.1 indicates the sex distribution of staff members respondents and one can infer from
the above table that the majority of the respondents are male that accounts 21(63.63%) and the
remaining are 12(36.36%) of them are females this implies that the participation of females is
less than that of male. So, in order to increase their participation the government must encourage
their job opportunity in that bank.

Table 4.2 Age distribution of the respondents

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Age (intervals in Frequency Percentage Valid Cumulative
years) percentage

20-30 21 63.63% 63.63% 63.63%

31-40 7 21.21% 21.21% 21.21%

Above 47 5 15.15% 15.15%

Total 33 100% 100% 100%

Source: Survey result

The table 4.2 depicts the distribution of respondents age. Accordingly 21(63.36%) of the
respondents fund image interval of 30-30 while 7(21.21%) of them were between age interval of
31-36. The remaining respondents of them were above 47(15.15%) years.

Therefore, one can understand from above table that the majority of the respondent were in the
age interval of 20-30 years which represents 63.63% of the respondent followed by these within
age interval of 31-46 which represent 21.21%. Relatively, the least proportion of the respondents
age intervals was those who were above of 47 years, which accounts (15.15%) of the
respondents.

Table 4.3 Educational level of staff members

Educational level Frequency Percentage Cumulative percentage

High school complete - - -

Certificate 3 9.09% 9.09

Diploma 10 30.30% 39.39

Degree 20 60.60% 100

Total 33 100%

Source: Survey result

Table 4.3 above depicts the educational level of staff member. Accordingly, there are no
employees who only complete high school and the above table reveals as about 3(9.09%) of

18
employee are having certificate followed 10(30.30%) of employee were having diploma and the
remaining 20(60.60%) are degree holder.

Therefore, one can infer from table that the majority of respondents (60.60%) are degree holders
followed by diploma (30.30%) and 9.09% of them are certificate respectively according to their
level.

4.2 Deposing method of COOP

Comerica bank of Ethiopia has many depositing methods or deposit mobilization. However,
recently it has tree depositing methods and those are as follows.

Demand deposit (current deposit) which is the type of deposit that repayable by the bank on
demand account from which deposit found depositary institutions. This account allows to
demanding your money of nay time.

Saving deposit has its own interest rate unlike demand deposit but it is not frequently demand at
any time. However the tie of demand or repayable is not very long. Finally, fixed deposit has not
cash reserve ratio, and it can be depend on affixed period of time when we compare to other, it
have high amount of interest rate because people keep their money for fixed period of time. So
bank gives account to other an generate income from it.

Tables 4.4 show the staff members of responses of the deposit method as follows.

Item Frequency Percentage Cumulative percentage

Which deposit method is highly

demanded by customers?

a. Demand deposit 7 21.21% 21.21%

b. Fixed deposit 11 33.33% 54.54%

c. Saving deposit 15 45.45% 100

Total 33 100%

Source: Authors computations based on primary data

As shows in the table 4.4, 15(45.45%) of respondents said that saving deposit is highly popular
for customer. However the remaining 11 (33.33%) and 7(21.21%) of respondents indicates that

19
the customers fixed deposits and demand deposits respectively was highly demanded by the
customers. So the finding shows that saving deposit is the most popular in commercial bank of
Ethiopia, Chiro branch followed by fixed deposit and demand deposits respectively.

4.3 The types of credit that highly demanded by customers

Table 4.5 Credit that are highly demand by customers

Item Frequency Percentage Cumulative percentage

Which type of the following

method of credit is highly
demanded by customers?

a. Short term credit 17 51.51% 51.51%

b. Medium term cordite 10 30.30% 81.81%

c. long term cordite 6 18.18% 100%

Total 33 100%

Source: Authors computations based on primary data

As shown in the above table 4.5, the majority of respondents 17(51.51%) replied that among
variety of credit short term credit is least demanded by customers. In addition to that,
10(30.30%) and 6(18.18%) are medium and long term credit demanded respectively. The last
one (long-term credit is least demanded type if loan because customer has no awareness of long-
term credit and also the bank lack of giving or explaining detailed information about the
importance of long-term credit to customer.

4.4. Interview analysis

4.6.1 Problems that hinder the lending facilities of commercial bank of Ethiopia, Chiro branch.
Analysis of the interview with the manger of commercial bank of Ethiopia, Chiro branch provide
the following problems related to the factors that hinder lending facilities

 Government policy

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  Lack of collateral in the customer side

 Lack of being legal in the customer side

 Lack of knowledge about lending

 Lack of qualification in the customer side

4.5. COOP

4.5.1 Over draft

It s a form of credit facility by which customers are allowed to draw cash beyond the deposits of
their current accounts for the day today oerpational needs of business.

The facility is availed to customers up to a maximum period of one year and it ca be renewed
very based on the request of customers.

4.5.2 Merchandise loan facility

It is a short term credit facility extended to customers against merchandise or its documentary
guidance like real way receipts warehouse receipts, airway bus.

Merchandise loan facility is extended to customers for a maximum period of one year and its
maximum advance rate is 80% of the amount of the merchandise.

4.5.3 Pre shipment export credit facility

It is short term loan extended to customers engaged in export business for purchase of raw
material processing, warehousing packing, transporting he finished goods to shipment.

The facility can be granted to customers engaged in export sector and able to present receipts of
export proceeds at least USD 300,000 or equivalent currencies, or engaged in viable business at
least for two years or offer collateral.

The advance rate ranges from 70% to 90% depending on type of goods to be exported.

The facility is availed to the maximum of one year and the lending interest rate is 7.5%.

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4.5.4 Revolving export credit facility

If is an advance extended to exporters up on presentation of acceptable export documents except

bill of loading. It is to solve working capital problems of exporters with continuous export
transaction emanating for money tied up in goods in transit of shipment.

Customer should submit export documents indicating the goods are in transit of shipment to port
like irrevocable L/C way bill, insurance contract, and other documents specified in L/C.

The maximum advance rare is up to 80% of the value of the document.

The facility is availed to the maximum of one year and the lending interest rate is 7.5%.

4.5.5 Special truck loan financing

It is a term loan granted to coffee and /or sesame exporter mainly to overcome problems of
transportation service prevailed in the export business.

To be eligible, exporters must have at least earned USD 4,000,000.00 or equipment of other
currencies during the last twelve months preceding the application data from the pertinent export
business.

The vehicle has to be a dry cargo truck and trailer with minimum loading capacity of 300
quintals.

4.5.6 Short term loan

It is a loan granted to customers to fiancé their working capital needs and /or other short term
financial constraints.

A short term loan is granted for a maximum period of their years and the repayment can be in
lump sum or in periodic installments i.e monthly, quarterly or semi-annually.

4.5.7 Medium and long term loans

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These loans are extended to customers to practically finance acquisition or leasing of fixed
business assets, establishment of new projects and expansion of an existing business.

A medium-term loan has a maturity period longer than there years and not exceeding a maxim
period of seven years, Long-term loan has a maturity period longer than seven years. Long term
loan has a maturity period longer than seven years but not exceeding a maximum period of
fifteen years.

Applicants for medium or long-term loan must submit detailed project feasibility study or
business plan and must contribute at least 30% of the total project cost.

4.5.8 Agricultural investment loan

It is a short to long term loan ranted to customers egad in commercial farms or agro-processing
industries for working capital as well as purchase of agro-processing machineries r equipment
for plant, crop and animal production in small medium or large scale farming.

The applicants have to present detailed feasibilities study and must commit at least 40% of the
total estimated project cost.

4.5.9 Coffee farming term loan financing

It is one form of credit facility gated to customers engaged in commercial coffee forming with
minimum 30 heetares of lad to fiancé working capital needs, or new and expansion of existing
projects.

The applicants have to present detailed feasibility study and must commit at least 40% of the
total estimated project cost.

4.5.10 Micro – finance institutions loan

It is a short to medium term loan granted to micro fiancé institution to alleviate their financial
constraints while providing credit to micro entrepreneurs.

The bank may negotiate the lending interest rate on micro finance intuitions loan.

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A forging bank guarantee that covers 75% of the principal loan shall be accepted as collateral.

4.6. Collateral that affect the credit facility

The collateral that have risk (that affect credit facility) are summarized as follows

 If valid collateral are not properly registered

 If the collateral are not properly insured

 If the collateral are not properly estimated

 If the collateral values is less than the given loan and etc so all above are the factor that
affect the credit facility in commercial bank of Ethiopia.

4.7 Types of credit system in commercial bank of Ethiopia.

The following credit system are given by commercial bank of Ethiopia.

A. Cash credit system: the cash credit account is active and cash credit when he/she need
funds.

B. Over draft: when current account hinders in permitted by banker to draw more than what
stand to credit it is only allowed for current account it’s also given by a bank on the base
of written application and promissory note signed by customers.

C. L:oan system: here funds are requited for sign non repetitive transaction and withdrawn
only once.

D. The requirements that should fulfilled by the customers /borrowers/ to get loan.

In order to get loan from the bank the borrowers must fulfill the following criteria to get loan.

 Permission of legal documents

 Amount of money

 Verification of why he/she need money

 The customer should open account

24
  Capacity of borrower should be assessed

 Trade permission paper

Collateral requirement

When the bank provides loan it secures its loan by mortgage or fixed assets. This could be
building machinery equipment and vehicles depending up on the specific nature of the project.
The requirement of collateral by the bank is fair for some en and unfair for other customers.

Collaterally requirement fir or unfair

Table 4.6

Collateral requirement Number of respondent Percentage

Yes 27 81.81%

No 6 18.18%

Total 33 100%

Source: Primary data

As it can be seen from the above tale 4.6, 27 respondents which is 81.81% is said that fair and
the reaming 6 respondent which is 18.18% of said that unfair. So the finding shows that the
collateral required by the bank is fair.

Interest rate charged by the bank is fair or unfair

Table 4.7

Interest rate fair or unfair Number of respondent Percentage

Yes 10 30.30%

No 23 69.69%

Total 33 100%

Source: Primary data

As indicated from the table, the majority of respondent 23(69.69%) shows the interest rate
charged by the bank is un fair and in addition to this as the above table shows the least

25
10(30.30%) of respondents shows the interest rate is fair. To that extent before providing loan for
borrower the bank should gives more information and explanation to the customer about the
interest rate based on the current economic condition.

Credit period

Collateral requirement Number of respondent Percentage

Yes 13 39.39%

No 20 60.60%

Total 33 100%

Source: Primary data

The above table, indicate that 13(39.39%) of respondent is sad that the credit period is enough.
However 20 (60.60%) of respondent is said that the credit period is not enough for repaying the
loan. In such case the bank provides counseling and technical service related to the timing of
their credit (loan) request and expected items of income.

Follow up service

Since follow up of debtors, who succeeded in obtaining the funds is important for later safe
repayments, the bank tries to follow up each and every debtor. As per the sample respondents
80% of them disclosed that the follow up activities of bank performed effectively. This fact is
shown below the pie chart diagram. The branch personals have a regular monthly follow up with
borrowers inside the town and quarterly follow up visits borrowers outside the town. this is done
by evaluating the current activities of all clients whether they are using the funds for the
proposed business activities or not and analysis the utilization of fund and corresponding profit
earned or loss incurred.

Percentages of respondents who disclosed that the follow up activities of the bank be effective or
not.

Source: Primary data

The effective follow up (80%) amount is increased due to the fact that majority of the customer
of the bank is found in the town or close to the town. This fact enables the bank to follow up

26
there activity closely. The remaining 20% is due to the fact that their location is far from the
location of the bank.

Loan collection

Since he objectives of the bank is supporting of different sectors which contribute some value for
the development of country, it recollects that disbursed amount to finance other sector. This is
due to the facts that the type of fund that bank owns and provides to client is periodically
circulating fund. Since the amount of funds to be allocated to the branch for circulation is fixed,
the client should return it on time (on regular basis). This enables the bank to fiancé different
organization as it wants collection of loan from borrower has been the main and critical activity
of the branch. To fulfill this responsibility, it tries to collect the loan on time.

The procedure used unfulfilling this objective includes imposing of legal measure on late
repayment (like monetary penalty). As the manager disclosed, the main problem of the branch is
late repayment of the loan. The main reason for the late payment is price fluctuation, which case
instability of the borrows income which means it the price of something increases, the
purchasing power of that clients money decrease. This lead the late repayment or the borrowers
face the shortage of money to pay the loan. To facilitate the collection the bank provides
discount opportunity for early payers.

CHAPTER FIVE

27
 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1.Summary of the Major Findings
Majority, i.e. 70% of the respondents indicated that the bank performance in processing business
development and loan analysis as below medium. In addition, the respondents evaluated the
practice of the bank in executing and administering loan appropriateness to be below medium.
Furthermore, the respondents (borrowers) indicated that the bank operates below medium as far
as business development and loan analysis were concerned.
The data indicates that majority 70% of the respondents evaluated the modifying credit terms,
obtaining additional capital, collateral and guarantees and call loan performance of the credit
process of the bank in instituting corrective action as poor.
The practice of the bank in reviewing loan were rated as above medium by the majority of the
respondents and also the credit analyst generates a list of factors in order to consider the
borrower’s ability to repay their loan as implicated by 80% of the respondents. In addition, it is
indicated that the execution and administration of loan appropriateness were below medium.
Majority 65% of the respondents indicated a high and very high extent of spreading financial
statements and analysis by the bank. In contrast, the respondents (borrower’s) indicated that bank
in Spreading financial statements; that is financial statement analysis were below medium. The
respondents (borrowers) 60% believe that the bank evaluates collaterals or the secondary source
of repayment as above moderate.
70% of the respondents rated as medium as far as the projection of the bank on borrower’s cash
flow and their ability to service that debt is concerned and also the bank evaluation of collaterals
and secondary source of repayment was rated to be below medium by the majority of the
respondents. But as per most of the respondents (borrowers), they don’t believe that the credit
analyst performs to generate a list of factors that considers their ability to repay their loan.
Market research is conducted with the credit process of the bank in developing business and
analyzing credit.
The respondents evaluated the credit process of the bank in advertizing and public relation as
moderate and above.

28
The practice of the bank in Projecting the borrower’s cash flow and thus their ability to service
that debt were medium and below as indicated by borrower’s.

5.2. Conclusions
The bank performances in processing business development and loan analysis in addition to the
practice of the bank in executing and administering loan appropriateness are low. Furthermore, it
can be concluded that the bank operation below medium as far as business development and loan
analysis were concerned.
The practice of the bank in reviewing loan and also the credit analyst generates a list of factors in
order to consider the borrower’s ability to repay their loan as implicated by the respondents. In
addition, it is indicated that the execution and administration of loan appropriateness were below
medium.
There is a good extent of spreading financial statements and analysis by the bank. In contrast, the
respondents(borrower’s) indicated that bank in Spreading financial statements; that is financial
statement analysis were below medium.
The bank conducts projection on borrower’s cash flow and their ability to service that debt and
also the bank evaluation of collaterals and secondary source of repayment was rated to be below
medium. But as per most of the respondents(borrowers), they don’t believe that the credit analyst
performs to generate a list of factors that considers their ability to repay their loan. Market
research is conducted with the credit process of the bank in developing business and analyzing
credit.
The credit process of the bank in advertizing and public relation are moderate and below.
Modifying credit terms, obtaining additional capital, collateral and guarantees and call loan
performance of the credit process of the bank in instituting corrective action was poor.

29
 Reference

BhaFah, M 92011) money, Banking and public finance. New Delhi crania publications.
Peters. Rose and Syivia C. Hudgins, (2013) Bank management and financial services. 9 th
edition.
Shekhar and shaker, (2003) Baking theory and practice New Delhi, New age international
publisher.
Solomon Alemu (PhD), Research methods in Business and social science.

30
 Appendix A

RIFT VALLEY University

College of Business and Economics

Department of Banking and Finance

Questionnaires for Employees of the Bank

Dear respondent, the objective of this questionnaire is to gather data and feedback from the
manager and employee that are working COOP, Chiro branch to assess the credit facilities and
its effect on borrowers.

Put a tick mark () in the box of you choice

1. Personal information
Sex: a. Male  b. Female
Age a. 20-30  b. 31-46  c.47 above
Educational background a. High school complete b. Certificate
c. Diploma  d. Degree and above 
2. Which of the following method of credit type is highly demanded by the customers?
a. Shorty term credit b. Medium term credit c. long term credit
3. Is there government regulation that affects bank’s credit facilities? a. Yes  b. No
If yes, what are these regulations and how they affect………….
4. Are there any problem that hinder the lending facilities of COOP a. Yes b. No
If yes,
1. What type of credit facilities are given by COOP, what are they?

2. What are the source of fund that COOP; use to give credit for customer?

3. What are the collateral that affect the credit facility of COOP? List some of them?

31
4. What types of credit are given by COOP?

5. What are the requirement of characteristics that fulfilled by the borrowers to get loan
from your ?

6. What is the problem relating to credit facility?

7. What is your final recommendation?

Appendix A

Jimma University

32
 College of Business and Economics

Department of Banking and Finance

Questionnaires for Customers

Dear respondents the objectives of this questionnaire is to gather data and feedback from
customer of COOP, Chiro branch to assess the credit facility and its effect on borrower of
COOP, Chiro branch.

1. Are you satisfied with the overall credit facility of the bank?
a. Yes  b. No 
2. Is the collateral required by bank fair?
a. Yes b. No
3. Is the interest rate charged by the bank is fair?
a. Yes b. No
4. Have you get the right amount of fund you request?
a. Yes  b. No 
5. If no why? Specify

6. Is the credit period enough for paying the credit?

a. Yes  b. No 
7. For what purpose you went to borrow fund?
A. To start new business
b. To expand the existing business
c. Other

8. Do you make a regular repayment of loan?

A. yes b. No
9. If No, specify

33
10. What measures are taken by the bank to facilitate easily repayment?
a. Over payment 
b. Pose penalty
c. Cut customer relationship
d. Other

11. What is your final recommendation?

34