Development Bank of Ethiopia

Adama Branch
Project Follow up for Operational SME Projects

Name of Project : Frehiwot Shimeles Manufacturing

Type of Project: - Manufacturing
Loan Number : - AA16361BNTY9
Follow-up No. 1 for operational year: 2021
Date of project Visit: 10/10/2021
Name of Branch Manager (s): GezahegnWorku
Position(s):- Branch Manager
Signature(s): ____________________
Reporting Date:3/11/2021

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I. Background

1.1. The Client (Contact Person)

1.1.1. Name: FrehiwotShimeles(Theo Socks)
1.1.2. Address:-
Region:Oromia
Sub-city/Zone: East Shoa
Town: AdamaKebeleBoku
House No._________
Tel. Office__________
Res._____________
Fax______________
P.O.Box___________
E-mail____________ Web site
Mobile number: 0922225122/0922226122
1.2. The Project
1.2.1. Name of the project: FrehiwotShimeles(Theo Socks)Manufacturing
1.2.2. Type of the project: -Manufacturing
1.2.3. Address
Region:OromiaSub-city/Zone: East Shoa
Town: AdamaKebele:Boku
House No._________
Tel. Office__________
Res._____________
Fax______________
P.O.Box___________
E-mail____________
Mobile number: 0922225122/0922226122

1.3. Form of Organization: Sole Proprietorship

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 1.4. License Registration and/or Renewal: Oromia Trade and Market Development Office
1.4.1 Date Issued/Renewed: 12/10/2012 E.C
1.4.2 Registration Number: OR//19/14/01/000000159/2006
1.4.3 Tax Identification Number (TIN):0040008217
1.4.4 VAT registration Number: ___________
 1.5. Objective of the project: The project is aimed producing quality sock production.
II. Equity and debt Information
2.1. Debt
2.1.1. Loan Amount Approved:11,277,007.94
2.2.2. Loan Amount Disbursed:11,277,007.94
2.2.3. Equity Contribution: 2,819,251.99
2.2. Investment and Working Capital Expenditure as at 28/10/2021
.

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Sr.   Planned Actual Variation
No. Description Equity Lease Total Equity Lease Total Equit Lease Total
y
1 Capital   11,277,007.94 11,277,007.94   11,277,007.94 11,277,007.94  
goods and
Generator
2 Equity 2,819,251.99   2,819,251.99 2,819,251.99   2,819,251.99 -

Total 2,819,251.99 11,277,007.94 14,096,259.93 2,819,251.99 11,277,007.94 14,096,259.93

Debt equity ratio 20% 80% 100% 20% 80% 100%      

Reason(s) for variation: - during the project approval cost of machinery and equipment’s was planned to be Birr 11,277,007.94 and the
total cost of machinery and equipment was planned to be covered by the bank. No variation is occurred because the plan and actual was
equal.
 2.3. Lease loan credit information as at (date):01/11/2021

Loan Outstanding
Loan Financing (Birr) Arrear balance (Birr) Commitment
Number Institution Balance
Principal Interest Principal Interest
(Birr)

AA20253 Machinery 10,776,766.52 13,581.68 434,222.67

MZR3M 3,830.68

Working capital 2,510,107.67 41,598.50 328,471.62 3,464.70

AA21043
P4RVX

Total
13,286,874.19 55,180.18 762,694.29 7,295.38
Source: T-24 data base of the Bank
When we see the credit status of the project, the lease capital good and working capital
balances till up to November01, 2021 shows that the project is in arrears balance of Birr
manual calculation made the lease exhibits arrears amount of principal Birr 769,989.67
both from main loan and SME working capital. However the repayment record of this
project is good since it start its repayment in early. But currently low status was there due
to lack of raw material input.

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 2.4. Working capital credit information as at (date):28/10/2021

1. Collection from working capital

Sr.
No. Description Date Principal Service Total
charge
1 Payment up to date 28/10/2021 309,144.32 173,244.46 482,388.78

Total Payment 28/10/2021 309,144.32 173,244.46 482,388.78

Planned collection to date 28/10/2021 637,615.94 176,709.16 814,325.10

Recovery rate 28/10/2021 48.48% 98.03% 59.24%

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Source: T-24 data base of the Bank
The bank has injected working capital loan of Birr 2,819,251.99 for smooth operation of
the project in line with the bank’s policy and procedures. Based on the repayment
schedule the promoter paid Birr 309,144.32 from principal and Birr 176,709.16from
interest. However, currently the operation of this project is not satisfactory due to
shortage of raw material. This is in fact creates the day to day activity being fluctuated.

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Sr.
No. Description Date Principal Service Total
charge

1 Payment up to date 28/10/2021 500,889.84 813,749.05 1,314,638.89

Total Payment 28/10/2021 500,889.84 813,749.05 1,314,638.89

Planned collection to date 28/10/2021

935,112.51 817,579.73 1,752,692.24
Recovery rate 28/10/2021
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54% 100% 75%
2. Collection from Machinery Lease

Comment on recovery rate: The total collection to date is fairly satisfactory given raw
material problem faced by the project. So the promoter paid a total amount Birr
1,314,638.89 from which Birr 500,889.84 is principal repayment and Birr 813,749.05
interest settlement with total 75% recovery rate.
The promoter has tried to meet payment obligation as per the schedule but the lack of raw
material hinders not to settle current due balance.
According to appraisal report the principal loan is planned to be repaid every month start
from January 2021, ending on December 2025. The repayment should be made every
month with equal installments of Birr 248,010.81 with service charge. But till now it was
not paid regularly according to the schedule because the repayment is not matched with
the production amount produced monthly so the bank needs to rearrange monthly
repayment amount by considering operational problems.

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2.5. Status of Insurance policy purchased/ renewal
Ser. Type of Insurance Sum Insured Period of Insurer
No List of capital Coverage Company
Goods
1 Knitting Machine Political violence 24,803.65 27/11/2020-
26/11/2021 EIC
2. Knitting Machine Fire & lighting 3539.05 27/11/2020 to
3 Generator Fire & lighting 26/011/2021 EIC

With regard to insurance coverage capital good that the Bank has bought by lease
modality and delivery to the promoter has been covered with appropriate insurance
policy as shown from the above table.

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III. Evaluation of Project Performance
3.1 Production and Sales
3.1.1. Quantity Produced (Tone) in Operational/production Year 2020-2021

Sr.No. Type of product Planned Actual Variance

1 Pair of Sock 3,200,000 0 -3,200,000

Reasons for Variation:-.We have request the promoter to submit production record but not
yet submit the data

3.12 Sales Revenue

Sr. Type Quantity in M2 Price per unit (Birr) Total revenue (Birr)
No. of
product
Planned Actual Variance Planned Actual Planned Actual Variance

Pair of 3,200,000 -3,200,000

1 socks

Total

Reasons for variation: We have requested the promoter to submit production record but
not yet submit the data therefore we do not able to compare actual with plan.

3.2. Market &Marketing Arrangement

3.2.1 Briefly discuss market & marketing arrangements in comparison to the plan Vs
actual.
The marketing strategy of the project is to create marketing links with the government,
private and non-government organization. The marketing strategy for the output of the
project is setting competitive price, production and distribution of quality product to the
market. Devising a marketing strategy, in light of the current status of the Ethiopian Socks
market is a relatively straight forward undertaking. Ideally, socks can be sold using direct
channels, retail networks backed by strong brand popularity, as white label commodity
product or online retailing.

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 3.3. Technical Status
3.3.2 Capacity Utilization
Year Description (machineries) Planed Actual Variation

1 Knitting Machine 40% 30% -10%

Production capacity

Reasons for variation: during the first years of its operation the project was
expected to utilize 40% of its capacity but the project is utilizing 50% of its capacity.
3.4. Availability and price of Utilities
Utilities Availability Price (tariff)
(Not/Available) Planned Actual variation

1 Electricity Available 10,000

2 Water Available 4520

3 Telephone Available 2,280

Reasons for variation: utility usage of the project is directly associated with its
operation level; high production leads to high cost of utility and low production
leads to low cost of utility. As per the appraisal study all required utilities are
confirmed by the technical team of the bank. However its actual utilization is not
reported to the branch.

3.5. Availability of Raw Material

Availability Price
Type of raw materials (Not/Available) Planned Actual variation
1 Cotton 7,319,057
Nylon 0
7,319,057
Pollster Not Available
Acrylic
Lycra

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Reasons for variation: -The project has depend on raw material procured from abroad
which is not available at all period of time due to shortage of foreign currency. The bank
has helped the promoter by opening LC for procurements of raw material.

3.6. Management and Human resource

W/ro Frehiwot Shimelis is the visionary behind THEO Socks. Born and raised in Adama
city, she is an entrepreneur with proven track record who has built a career from scratch on
her own in the shortest possible time. She is currently the founding member and Chief
Commercial Manager of FISON socks factory, which is established in collaboration with
her husband. With a B.A Degree in Management, from Addis Ababa University she has
gained experience at various companies prior to setting up her own business. He career
background is briefly described as follows.
- Human Resource Department Head in Mizan Teferi South Region Finance and
Economic Main Officer
- Personnel Officer and Human Department Head at Onset Engineering PLC
- As Local and Foreign Purchase Head, and Marketing Department Directorate for
three companies at the corporate level at Ethio-Japanese Synthetic Textiles S.C.
- And currently she is working at the General Management passion for Theo socks
and Chief Commercial Manager of Faison Socks (a family firm co-founded with her
husband)

Over all, she has more than eight years’ experience from a lower position to top
management position. She has now fully involved in socks production and marketing after
studying the presence of demand gap in the domestic market.
3.6.2. Human resource
As per our observation there is no problem related to human resource. Skilled and unskilled
labor force is available in the market. The project created job opportunity for various types
of skilled and unskilled labor force on permanent and temporary bases.

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 Sr. Benefits Plan Actual Variation

1 Employment creation 25 25 -

2 Tax settlement - -
3,771,367

IV. Financial Performance

4.1. Investment cost
Sr.
No Item Plan(Birr) Actual(Birr) Variance(Birr)

Lease Equity Lease Equity Lease Equity

amount amount amount
1 Sock 11,223,144 2,819,251.99 11,223,144 2,819,251.99 0
manufacturing
Machinery
Diesel
Generator
Total 11,223,144 2,819,251.99 11,223,144 2,819,251.99

The variation: capital good has procured from bank source and promoter equity
contribution with 80% and 20% share respectively. Accordingly all knitting machine
incorporated in appraisal study was fully delivered to the project site

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 4.2. Financial Results
4.2.1. Profitability (Income Statement)
Sr. Description Projected Actual Variation
No (Birr) (Birr) (Birr)
1 Sales Revenue 83,980,800 -83,980,800

2 Operating Cost 70,703,681 - 70,703,681

3 Profit before 13,277,119 -13,277,119

Depreciation
4 Total expense 83,980,800 -83,980,800

5 PBIT* 10,775,333 -10,775,333

6 Tax payable 3,771,367 -3,771,367
7 withholding
Net profit/loss 7,003,967 -7,003,967
* stands for profit before interest and tax
** stands for profit before tax
Reasons for Variation: -No variation is observed because the promoter is not
submitted audit report.
4.2.2. Liquidity (Cash flow)
Sr. Description Projected Actual Variation
No (Bi (Birr) (Birr)
rr)
1 Cash inflows 8,545,994 -8,545,994

2 Cash outflows 3,510,964 -3,510,964

Net cash in/out flow 5,035,030 -5,035,030

Cumulative cash balance 5,035,030 -5,035,030

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 4.2.3. Asset and Capital Structure (Balance Sheet)
Sr. No Description Projected Actual Variation

(Birr) (Birr) (Birr)

1 Assets   - -
  Current Assets 7,918,708 -7,918,708
       
  Total Current 7,918,708 -7,918,708
Assets
  Fixed Assets 11,223,144 -11,223,144

       
  Total Net fixed 11,223,144 -11,223,144
Assets
  Total Assets 19,480,633 - 19,480,633
  Liabilities And    
Capital

  Liabilities 8,978,516 -8,978,516

       
  Total Liabilities 8,978,516 -8,978,516
  Capital 10,502,118 -10,502,118
  Total Liabilities 19,480,633 -19,480,633
and Capital

Reasons for Variation -No variation is observed because the promoter is not submitted audit
report. In addition to this the project is not evaluated by technical.

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V. Project Impact Assessment
5.1. Impacts
5.1.1.Socio-Economic Benefits
Sr. Plan Actual Variation
Benefits

1 Employment creation 25 25
2 Tax settlement 3,771,367 22,500 -
Reasons for variation: the project has created employment opportunity for 20 permanent
and 5 daily laborers. The employment opportunity created by the project will increase even
above the planned employment creation.
5.1.2 Briefly discuss on the negative impact brought about by the project & mitigation
measures taken (if any)
Economic: -Production of Sock is manufacturing activity. Encouraging of these industries
will contribute and value adds to economic growth of the country. The project is generating
profit, income to the government in the form tax.
5.1.3. Environmental:- The project have no chemical or any hazardous waste to the
surrounding environment the project has no negative impact on environment in general.
5.1.4. Social: - This factory can creates employment opportunity to the surrounding society
and improve their live standard by value creation with sustainable development. The project
will generate significant value economically, socially and environmentally and also the
project created employment opportunities for more than 25 including management and
supervision personnel and skilled and semi-skilled workers on permanent and temporary
basis.

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 SWOT Analysis
Strength
 Committed management there.
 Created employment opportunity
 Good record keeping
 Adequate knowledge on socks markets
Opportunities
 Availability of cheap labor.
 Supportive government policy
 Availability of basic infrastructural
facilities around the project area.
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Weakness
 Shortage of own fund to cover unexpected
cost increases in raw material
 The project is dependent on foreign market to
fulfill its major raw material requirement due
to lack of reliable supplier locally
 Current fluctuation of raw material prices.
Threats
 Raw material dependency
 Frequent power interruption
 Clarification and Justification for loan rescheduling proposal
As we discussed in parts of this follow-up report, this project has faced different problems
not to produce and made payments as per the schedule. Accordingly we try’s to justifies and
list those problems in the following statements.

 This project mainly depends on raw material procured from abroad which is not
available domestically.
 The financial capacity of the project is downed since it starts its repayment in early
period of its establishment the promoter compiled that adequate grace period was
not given to the project.
 Shortage of own fund to cover unexpected cost increases in raw material
 Lack of raw material occurred during production and current fluctuation raw
material due to shortage of hard currency in Ethiopia.
 Therefore the promoter has cited that the current monthly of installment Birr
248,010.81 is not matched with income generating capacity of the factory. During
appraisal the project was envisioned to generate sufficient cash to meet its monthly
debt repayment obligation. However as per observation made on the project site, the
factory`s actual revenue being registered is not as anticipated. Accordingly, the
promoter has been paying her debts with too much struggle. And hence, the
repayment should at least be rearranged to the level of actual cash flow of the
factory.
The promoter has requested our branch for lease rescheduling of principal machinery and
equipment. And she has affirmed her readiness in written to properly contribute to pay
based on rescheduling of principal lease for machinery and equipment’s. The amount of
principal arrears should be added on loan amount to be rescheduled.

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 VII. Advice provided to the customer (written action plan agreed and signed by both
the Bank and the customer)
The promoter has good commitment to the project if the current lease loan rescheduling will be
done and if the promoter gets grace period to solve the problem encountered with its loan
repayment on rescheduled terms in short period of time. We advised the promoter to retain his
effort and commitment for the achievement of the projects objective. So the branch has done follow
up report based on current market price of machinery and equipment with mechanical engineers of
the district evaluation to take option to rehabilitate the project to made consistent production and
lease loan repayment for the bank. Finally, the branch virtual case team recommended undertaking
lease loan rescheduling follow up and request the concerned body to make a healthy action for the
project and the bank.

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VIII. CONCLUSIONS AND RECOMMENDATIONS
8.1 Conclusions
The team in charge has try’s to touch every concepts of the follow up to came up with full
fledge and all inclusive report. Accordingly, the main business objective of the firm is to
produce high quality socks and substitute import and save hard earned foreign currency.
Currently the Ethiopian socks market is flooded with cheap and low quality Chinese
products which should be substituted by local production.
 Looking at the technology employed we can safety argue that this project would be
one of the most successful projects financed by the bank under lease finance
modality. Moreover, the experience that promoter gained in managing similar socks
factory will also an important asset for the project
 The target market for the product would be the local market. However, the socks
factory under consideration is equipped with the state-the-art socks knitting
machines which can be used for production of high quality socks for export market
as well.

However, currently the operation of this project is not satisfactory due to high price of raw
material and obligation shortage of working capital. Because of this she cannot meet the
repayment therefore; currently the lease is in arrears. To solve such problem the promoter
has requested the Branch for lease rescheduling and the team has also review the project
profile with all success criteria and recommends rescheduling of the lease payment.

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 8.2 Recommendations (including actions to be taken with time table)
Based on the above given justification we recommended lease rescheduling or postponement of overdue
principal on condition that the promoter clean interest arrears. Accordingly, the lease payment is
expected to start on March 28, 2022 and ending on February 28/02/2029 with an equal monthly
installment of Birr 177,265.

Branch Credit Team II

Name Position Date Signature

1. Daniel Daba Sr. Loan Officer ___________

2. Abreham Fantaye Sr. Loan Officer ____________

3. Rahel H/Woine Loan Officer ___________

4. Tewodros Moges Loan Officer ____________

Authorized by Branch Manager

__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________
Name Date Signature
Gezahegn Worku __________

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