YARDSTICK INTERNATIONALCOLLEGE

DEPARTMENT OF MBA
Financial Management (MBA612)
Financial Management practice in Ethiopia
Group Assignment
Prepared By:
 Elizabeth Assegid MBA(1)/109/13B
 Emawaysh Tekele MBA(1)150/13B
 Nathnael Solomon MBA(1)052/13B
 Rekik Solomon MBA(1)/059/13B
 Tadelu Mekonen MBA(1) 065/13B
 Tigist Seyoum MBA(1) 067/13B
 Yalemzerf Assefa MBA(1)070/13B

Section: B
Date January 2022
Submitted to: Kasu Birbirsa (Asst.Prof.)
 Introduction
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise. The concept of financial
management is widely known over a period of time in Ethiopia. So that we try to compare
financial management practice of Ethiopian widely known financial institutions Berehan bank
and Zemen bank
Objective and scope of financial management
Generally speaking, financial management’s objective is to manage and disperse all budgeting and
revenue for a business. This objective supports a number of goals and procedures necessary to run a
business, including:

 Wealth maximization:  It means shareholders’ value maximization. Wealth maximization

means earning maximum wealth for shareholders. So, the finance manager tries to give
maximum dividends to shareholders. The dividend declaration and payout policy are
decided by financial management. Dividend decisions include a proper dividend policy
regarding the distribution or retaining of company profits.
 Proper mobilization: Mobilization of finance is an important objective of financial
management. It means utilizing effectively the sources of finance. The finance manager
can manage various sources of funds such as shares, debentures, after estimating the
financial requirements, the finance manager must decide about the sources of finance.

 Increase efficiency: Financial management tries to increase the efficiency of all sections
of the company. Proper distribution of finance to all departments increases the efficiency
of the entire company.

 Proper estimation of total financial requirements: This means that the finance manager
would be able to estimate the financial requirements of the company. He should be able
to compute how much financing is required to start and run the business/ He shall
estimate the fixed and working capital requirements of the company.
 Proper utilization of finance: The finance manager must make optimum utilization of
finance. This can be done by using various financial tools as managing receivables,
effective payment policy in hand, and better inventory management.
 Maintaining proper cash flow: The financial manager shall ensure that there is a regular
supply of liquidity in the company monitoring closely all the cash inflows and outflows
reducing the instances of underflow and overflow of cash. The finance manager is
entrusted with the responsibility to maintain an optimum level of liquidity. Healthy cash
flow improves the chances of survival and success of the company.
 Survival of company: The Company must survive in this competitive business world.
Hence, the finance manager shall take all the decisions intuitively. The big decisions shall
be taken with proper due diligence and consultancy with consultants.
 Creating reserves: The higher the reserves, the better it will be for the company to
overcome uncertainty. The company shall have an optimal dividend payout policy that
will help itself to create reserves over the year. It must also keep the profits as reserves.
 The reserves can be used for the expansion of the company and overcoming uncertainty.
It can also be used to face contingencies in the future.
 Reduce the cost of capital: This includes risk evaluation, measuring the cost of capital,
and estimating benefits out of a particular project. Managers are responsible for deciding
how available funds should be invested in fixed or current assets to get the best available
returns.
 Reduce operating risks: The Company goes through various risks and uncertainties. The
finance manager must take steps to reduce these risks. This can be done by avoiding
high-risk allocation of capital for expansion All the decisions shall be taken with proper
consultancy.
 Prepare capital structure: This means bringing a proper balance between the different
sources of capital. This balance is necessary for liquidity, economy, flexibility, and
stability.
Scoop of financial management
The things that are indicated above are objective of financial management .We try to see
Zemen and Berhan bank financial management practice .As we all know both are financial
institutes and both use scoops that are indicated above to evaluate their performance. Both
have good performance towards the objectives of financial management.
Financial planning practice
This is the process of calculating the amount of capital that is required by an organization and
then determining its allocation. A financial plan includes certain key objectives, which are:

 Calculating the capital required: The financial manager has to calculate the amount of
funds an organization requires. This depends upon the policies of the firm with regards to
expected expenses and profits. The amount required has to be estimated in such a way
that the earning capability of the organization increases.

Capital allocation practice of Zemen and Berhan bank

Berhan bank By the end of June 2015, the total capital of the Berhan Bank stood at Birr 726.8
million with a growth rate of 31.1percent from the previous year’s performance. The paid-up
capital has grown to Birr 573 million with a31.6 percent annual increment and the subscribed
capital to Birr 626 million with a 28.3 percent growth rate. The Bank has exceeded the paid-up
capital requirement of the National Bank of Ethiopia (500 million) before the end of 2016. The
total number of shareholders has also reached 9,039

Zemen bank The legal case that has warranted a special provision of Birr 9 million is related to
the Zemen Bank’s capital-raising exercise conducted at
the Shareholders Meeting of September 2011,when it was agreed to raise the paid-up capital
from Birr 149.576 million to Birr 249.576 million. Two
shareholders raised objections about the procedural methods following during the capital raising
exercise, including:

1. The decision to raise only Birr100 million in capitals for FY 2011/12 when a total
of Birr 300 million was approved;
2. The application of a 10 percent premium;
 3. The failure to get 100percent shareholder approval for raising the new
shares (instead 99.9 percent of shareholders’ vote was secured) and
4. The sale of shares remaining after shareholders had received allocations on a
proportional basis by use of a first-come first-served method.

 The above information gathered from the banks annual report the banks allocate their
capitals by planning. This shows that they have good practice towards capital planning.
Formation of capital structure: Once the amount of capital the firm requires has been estimated,
a capital structure needs to be formed. This involves debt equity analysis in the short-term and the
long-term. This depends upon the amount of the capital the firm owns, and the amount that needs
to be raised via external sources. Both banks make their own capital structures.

Birhan bank Performance Ratio the Bank’s loan to deposit ratio (LDR) at the end of 2019/20
financial year stood at 76.9 percent and return on asset (ROA) stood at 2.6 percent.
The Bank’s earnings per share positioned at 25.9percent while the non-performing loans ratio
(NPLs) stood at 2.2 percent at the end of the financial year

Zemen bank During the year, the Bank’s paid-up capital has registered a 25 Percent increase.
The net income yield is equivalent to Earnings per Share (EPS) of39.8 Percent. This year’s EPS
is 38 percent higher than the previous year. The last five years average record of EPS
performance shows that Zemen’s performance is above the private industry by 2.29
percentage point.
Financial decision issue

Investing the capital: Every organization or firm needs to invest money in order to raise more
capital and gain regular returns. Hence, the financial manager needs to invest the organization’s
funds in safe and profitable ventures.

Zemen bank provide services like Deposition, Branch and account services, Credit, International
banking so the bank invest on this areas .Berhan bank provide services like Deposition, Branch
and account services, Loan and advances, International banking .Berhan bank invest on this
areas.

 Both banks invest by studying the market analyze how to fill the gap then invest on the
above issues to get profit to eliminate society problems.

Allocation of profits: Once the organization has earned a good amount of net profit, it is the
financial manager’s duty to efficiently allocate it. This could involve keeping a part of the
net profit for contingency, innovation, or expansion purposes, while another part of the
profit can be used to provide dividends to the shareholders.

 Zemen bank Principal activities The Bank’s principal activity is commercial banking.
Results and dividends Proposal on dividend Payout After making appropriate deduction
of tax, legal reserve, board remuneration fee and other adjustments from the gross profit
earned during the fiscal year, a net profit of Birr 350 million has been
 The dividend is allocated based on the meeting of boarder of shareholders. Dividend
Payout Proposal. Based on the financial results of the fiscal year, Birr 114.9 million has
been transferred to retained earnings reflecting several notable deductions to the
Bank’s pre-tax profits. First, reflecting a 23.5 percent effective tax rate (due to several
tax-exempt earnings such as interest on NBE Bills), a tax deduction of Birr47.2 million
reduces the net profit after tax to Birr154 million. This figure, in turn, is subject to two
deductions on account of Legal Reserves (Birr 38.4million) and Directors allowance
(Birr 0.4 million).The remaining figure amounts to Birr 114.9 million and is the sum
transferred to retained earnings in FY 2014/15. The Board of Directors proposes that the
full amount of retained earnings be transferred to shareholders in the form of dividend
payments. Based on the year-average paid-up capital of the Bank, the proposed dividend
to shareholders amounts to near 24 percent per share

 Berhan bank Profit The Bank achieved a profit before tax of Birr 138.6 million by the
end of June 2015, with a growth rate of
13.9 percent from the preceding year’s performance. The relatively higher growth of
expenses resulting from the significant branch expansion activities during the captioned
period has affected growth of profit. The Bank's results for the year ended 30 June 2020
are set out on the Statement of profit or loss and other comprehensive income the profit
for the year has been transferred to retained earning

Financial analysis and control understanding

Effective management of money; This department is also responsible for effectively managing
the firm’s money. Money is required for various purposes in the firm such as payment of salaries
and bills, maintaining stock, meeting liabilities, and the purchase of any materials or equipment.
Financial analysis; The financial statements by themselves are complex documents involving a
whole bunch of numbers. One common method of benchmarking is to compare a firm’s current
performance against that of its own performance over a 3-5 year period (trend analysis), by
looking at the growth rate in various key items such as sales, costs, and profits.
Another useful way is to restate the income statement and the balance sheet into common
size statements, by expressing each income statement item as a percent of sales and each
balance sheet item as a percent of total asset. Both banks make financial analysis by using
financial ratio. Financial ratios allow for meaningful comparisons across time, between
competitors, and with industry averages.
 Liquidity ratios: Can the company meet its obligations over the short term?
 Solvency ratios: (also known as financial leverage ratios): Can the company meet its
obligations over the long term?
 Asset management ratios: How efficiently is the company managing its assets to generate
sales?
 Profitability ratios: How well has the company performed overall?
 Market value ratios: How does the market (investors) view the company’s financial
prospects?
 Du Pont analysis: which involves a breakdown of the return on equity into its three
components, i.e. profit margin, turnover, and leverage.
Liquidity Ratios: measure a company’s ability to cover its short-term debt obligations in a
timely manner:
 Three key liquidity ratios include the current ratio, quick ratio, and cash ratio.
Financial Leverage Ratios: measure a company’s ability to meet its long-term debt obligations
based on its overall debt level and earnings capacity.
 Failure to meet its interest obligation could put a firm into bankruptcy.
 Key financial leverage ratios are the debt ratio, times interest earned ratio, and cash coverage
ratio. Asset Management Ratios: measure how efficiently a firm is using its assets to generate
revenues or how much cash is being tied up in other assets such as receivables and inventory.
 Key asset management ratios are inventory turnover, accounts receivables turnover, average
collection period, and total asset turnover. Profitability Ratios: such as net profit margin, returns
on assets, and return on equity, measure a firm’s effectiveness in turning sales or assets into
profits
 Potential investors and analysts often use these ratios as part of their valuation analysis.
Market Value Ratios: are used to gauge how attractive a firm’s current price is relative to its
earnings, growth rate, and book value
 Typically if a firm has a high price to earnings and a high market to book value ratio, it is an
indication that investors have a good perception about the firm’s performance.
 If these ratios are very high it could also mean that a firm is over-valued.

 Both banks use the described financial management ratios to analyze their finances.
Financial control: Not only does the financial manager have to plan, organize, and
obtain funds, but he also has to control and analysis the firm’s finances in the short-term
and the long-term. This can be done using financial tools such as financial forecasting,
ratio analysis, risk management, and profit and cost control. Control is the task of
ensuring that activities are providing the desired results.

Tools of Control; Separation of Functions: person who authorizes the expenditure should not be
the person to process payment– notion of counter signatures – ensures checks and balances in the
system – notion that a person should not be left to control themselves – introduces elements of a
challenge function as well

 Berhan and Zemen bank use two kinds of controlling system Internal and external
controlling systems. The internal controllers are internal auditors and
administrators. The external controllers are external auditors.

Both financial institutions have a good financial manenegement practice that could be a lesson to
another company that works in different sectors. Financial management practice is a good
practice that makes the company profitable, make the company sustainable, help to easily control
company investment, to easily distribute dividend to shareholders, Make the company well
organized ,Make plan and strive to achieve it. The firms have efficient experts on financial
management.