ASSESSEMENT OF LOAN AND ADVANCE MANAGEMENT SYSTEM

(A CASE STUDY OF COMMERCIAL BANK OF ETHIOPIA AT ADAMA BRANCH)

A RESEARCH PROPOSAL SUBMITTED TO THE DEPART0EMENT OF ACCOUNTING

AND FINANCE INPARTIAL FULFILLEMENT OF THE REQUIREMENTS FOR BA
DEGREE IN ACCOUNTING

PREPARDY BY;
1. Bizualem Lemma
2. Burtukan Abebe
3. Damile Borishe
4.Mestawet Gudeta
5.Bekele Getachew
6. Mestawet Gophtiru
Advisor: Ins. Talila Sida (MBA)

HARAMBEE UNIVERSITY ADAMA MAIN CAMPUS

FACULTY OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

Febrary, 20223 G.C

Adama, Ethiopia.
 Table of Content page

Acknowledgment………………………………………………………………………………………….……..i
ACRONOMY.........................................................................................................................................................ii
CHAPTER ONE......................................................................................................................................................1
1. INTRODUCATION.............................................................................................................................................1
1.1. Back ground of the study..............................................................................................................................1
1.2. Statement of the problem............................................................................................................................3
1.2.1. Major research question........................................................................................................................4
1.3. Objective of the study...................................................................................................................................4
1.3.1. General objective...................................................................................................................................4
1.3.2. Specific objectives..................................................................................................................................5
1.4. Significance of the study...............................................................................................................................5
1.5. Scope of the study........................................................................................................................................5
1.6. Limitation of the study..................................................................................................................................6
CHAPTER TWO.....................................................................................................................................................7
2. REVIEW OF THE LITERATURE...........................................................................................................................7
2.1. Theoretical Literature...................................................................................................................................7
2.1.1. Meaning of commercial Banks...............................................................................................................7
2.1.2. Functions of commercial Banks.............................................................................................................7
A. Accepting Deposit.....................................................................................................................................7
B. Advancing Loans.......................................................................................................................................8
2.1.3. Loan and Advance Management System...............................................................................................8
2.1.3.1. The Loan.............................................................................................................................................8
2.1.3.2. The Loan Management System...........................................................................................................8
2.1.3.3. Advances.............................................................................................................................................8
2.1.4. Types of Loans and Advances................................................................................................................8
2.1.5. Over Draft Facility..................................................................................................................................9
2.1.6. Advance on Import Bills.........................................................................................................................9
2.1.7. Advance against Export..........................................................................................................................9
2.1.8. Non-performing Loan.............................................................................................................................9
2.1.9. Loan policy and Approval process........................................................................................................10
2.1.9.1. Loan Evaluation.................................................................................................................................10
2.1.9.2. Loan Arrangement............................................................................................................................10
2.1.10. Risks faced in Lending........................................................................................................................10
2.1.11. Factors that affect Loan processing and collection............................................................................11
 2.1.12. Loan Repayment................................................................................................................................11
2.2. Empirical Literature....................................................................................................................................13
CHAPTER THREE.................................................................................................................................................14
3. RESEARCH METHODOLOGY...........................................................................................................................14
3.1. Research design..........................................................................................................................................14
3.2. Type and source of data..............................................................................................................................14
3.3. Data collection method..............................................................................................................................14
3.4. Target population.......................................................................................................................................14
3.5. Sampling techniques and sample size.........................................................................................................14
3.6. Data analysis and presentation...................................................................................................................16
TIME SECHEDULE AND BUDGET SECHEDULE....................................................................................................17
TIME SCHEDULE.................................................................................................................................................17
Table1. Work plan (action plan).....................................................................................................................17
Table2. Budget schedule................................................................................................................................18
Reference.......................................................................................................................................................20
 Acknowledgment
First of all pay our whole hearted gratitude to Almighty God that endowed us with an innate ability to recognize
and acknowledge his existence. We won’t be here where we are now and obviously this work can’t be
accomplished successfully. May God send his praise upon the holy and beloved Christ Jesus who brought the
message of peace and happiness to all creatures? After that we would like to expand our heartfelt gratitude to
ours advisor Ins. Talila Sida (MBA).By his constructive criticism, guidance and countless fruitful discussion, he
used to bring our back to the track, recharge, and stimulate our enthusiasm for pressing on further. Besides to him
thanks to our family for their necessary support.

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 ACRONOMY
CBE - Commercial Bank of Ethiopia
NPL - Non-performing Loan
L\C - Letter of Credit

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 CHAPTER ONE

1. INTRODUCATION
1.1. Back ground of the study
Commercial banks are useful to economic development through the financial service they
provide. The extent to which a bank extends community for productive activates speed up the
pace of a nation economic growth and its long term sustainability. The operation of private banks
are roughly similar throughout the world. In all countries banks are financial intermeddler in the
business of earning profit. Banks play such important role in changing funds to borrowers with
the productive investment opportunity by mobilizing deposit and they also play an important role
in ensuring that the economy runs smoothly and efficient .credit creation is the main income
generating activates of commercial banks (kalberg and udel,2003)however ,it expose the banks
to credit risk. Between other risks faced by commercial bank, credit risk plays an important role
on banks profitability since a large portion of banks should provide strapping credit policy and
manual for the framework of their entire credit management process and set of
objectives ,standards and parameters to guide a credit personnel the overall credit processing.
Lending is not task for banks because of its crates a big problem that is called default loans.
failure to manage loans, which make up the largest share of bank asset, would likely lead to the
incident of high level of nonperforming loans .loan management means the total posses of
lending starting from inquiring potential borrowers up to recovering the amount granted. in
banking sector loan management is concerned with activities such as accepting application, loan
appraisal, loan approval, monitoring recover of nonperforming loans (Harries, 2003).according
to (Sinkey, 2002) loan management is extremely important as getting loan is considered to be the
equivalent of investing in customer .however, payment of the debt should not be postponed for
slong as delayed payments and bad debt are the cost to company. Efficiency and effectiveness in
performing each steps of loan and advance processing using various parameters has significant
effect on performance of loan and advance management. (Chorales, 2003) stressed the
importance of credit management credit management process deserves special emphasis because
proper credit management greatly influence the success of failure of financial institution. This
indicates that credit provision should accompanied by appropriate and attractive credit policy.

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 1.2. Statement of the problem
One of the main objective of commercial bank is profit earning. Commercial banks get their
profit loan and advance despite the other service. Profit is mainly function of both the volume
and quality loan and advance management system in the bank. Among other a good quality of
credit consider as good source of profit. Loan management is a system on the performance of
income generating asset i.e. loan and advances, offer comprehensive management information. It
is specifically design to meet the unique requirement of organization for the final payment of the
loan. In efficient loan and advance management system may create non-performing loan. Loan
and advances as a result of;

 Not using proper policy and procedure

 The time period of repayment

 Lending choice and customer handling

So our research will try to show the assessment of loan and advance management system in the
commercial bank of Ethiopia, Adama branch.
According to the previous researcher Loan and advances are affected by the theft and it also one
problem of the study (ibid). But in this study the loan and advance should not be affected by the theft
and it is not the problem of the study.
The previous researcher would be used both primary and secondary data collection methods. Primary
data will be collected by using questionnaire and interview (ibid).
But this study used both primary and secondary data collection method but more focused on primary
data because the researcher collects the data by using only questionnaire.
The previous researcher was applied in the study convenience sampling method (ibid).
But in this study judgmental sampling method was applied in order to select the sample size.
The previous researcher described as most of customers borrow money, for the purpose of business
activity. Bank loans are the most traditional way to finance business, but as with any other type of loan,
borrowing from a bank has advantages and disadvantages, all of which should consider carefully before
making move (ibid)
In this study most of the customers would be borrow money, for all reasons except consumption. For
example; business expansion, industry, agriculture, construction and business. Bank loans are the most
traditional way to finance business, construction, business expansion, industry and agriculture.
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1.2.1. Major research question
 Is the CBE Adama, branch use appropriate police and procedures to the loans and
advance?
 Did a problem face among CBE Adama, branch and borrower?

 What efforts the credit departments of CBE extend to assure the repayment of the loans
and advances to minimize default loan?

1.3. Objective of the study

1.3.1. General objective

The general objective of the study is to evaluate loan and advance management system of
commercial bank in Adama.

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1.3.2. Specific objectives
 To identify the CBE Adama branch use appropriate policy and procedure to the loan and
advance.
 To investigate the face problem among CBE Adama branch and borrower.

 To evaluate efforts of the credit department of CBE extend to assure the repayment of the
loans and advance to minimize default loan.

1.4. Significance of the study

Loan and advance management system will carry out since the ongoing of commercial bank.
This paper will be established to weather loan and advance management of commercial bank.
The study will expect to have the following benefits. The commercial bank is effective and
efficient. Thus, the subject matter of this proposal and the resulting lessons drawn from the
analysis are likely to benefit different classes of people. This study is significant for its
contribution to: knowledge, Management Decision Making, Literature and Reference and Policy
forming. It can help the management of organization to achieve the organization objective and
goals in good manner the finding of this research.

 It draws their attention some points will corrective action should be taken.

 The study findings and recommendation will help the management of bank.

 Furthermore it will be used an additional reference material.

1.5. Scope of the study

This study will focus on assessing the loan and advance management system of commercial
bank. The bank have large number of customers, the researcher for the sake of manageability of
the study focus only on such customers who have long term loan and advance management
system. Methodological all literatures will not be reviewed because of lack of sufficient data like
reference book ,time and budget allowance for data collection will not be sufficient to gather all
necessary at required depth.

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 1.6. Limitation of the study

 Lack of experience of researcher and sufficient information about assessment of loan

and advance management system in case of CBE Bank Adama Branch.
 It is difficult to generalize the finding of the study because our research will be only
focus on CBE Bank Adama Branch.
 The occurrence of in the county is the big challenge for our study to collect data..
 Lack of enough budget and time to collect sufficient data needs to our research.

1.7. Organization of the study

The paper will organized in five chapters. The first chapter is introductory part that includes
background of the study, background of the organization, statement of the problem, objective of the
study, significance of the study, scope of the study and limitation of the study. The second chapter
concern with literature reviews. The Third chapter contains research design and methodology. The
fourth chapter consist data reperesentation analysis and interpretation and the and last chapter describe
about conclusion and recommendation.

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 CHAPTER TWO

2. REVIEW OF THE LITERATURE

2.1. Theoretical Literature
Banking and other financial service are available in Ethiopia which the National bank of Ethiopia
(NBE) serves as central bank. The commercial banking functions are performed by one state
owned commercial bank and a number of newly emerging private commercial banks
(Encyclopedia duluxe, 2004).
v
2.1.1. Meaning of commercial Banks
Commercial banks are organized as a joint stock company system for the purpose of earning
profit. Although the commercial banks attracted pastors of all kinds current saving and fixed
saving. Their resources are chiefly drawn from current depositors which are repayable on
demand (Shekhar and Shakhar, 1996).

2.1.2. Functions of commercial Banks

In the modern world, banks perform so many functions and such varied nature that it was even
difficult to imagine them. It’s not possible to prepare an exhaustible list of these function as the
service that the bank provides these day are so diverse and varied and responsibility are so great
and every expanding that its final stage can hardly be predicted. The following are some
functions of commercial Banks (K.C. Shekhar, 1974).

A. Accepting Deposit
The first important function of commercial bank is to accept deposits from those who can save
but not profitably utilize saving themselves. To attract savings from all sorts of individuals the
banks maintains different types of accounts.

Fixed/time/deposit accounts
Current/demand/deposit accounts
saving deposit account

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B. Advancing Loans
The second important function of a bank is advancing of loans to the public. After keeping
certain cash reserve, the banks lend their deposits to the needy borrowers. Before advancing
loans the banks satisfy themselves about the credit worthiness of the borrower. The commonly
types of loans granted by the banks are term loans, overdraft facility and others (ibid).

2.1.3. Loan and Advance Management System

The system is about on the premise that the manager of the organization must understand as the
various systems that compose the entire operation (http://chestofbooks.com/finance/,3/04/2010).

2.1.3.1. The Loan

It is an arrangement in which a lender gives money or property to a borrower and agrees to return
the property or repay the money usually along with interest at some future time. Usually it is
predetermined time for repaying of a loan and general the lender has bear risk that borrower may
not repay a loan (ibid). There is predetermined time for repaying a loan and general the lender
have bear the risk that the borrower may not repay a loan (although modern capital markets have
developed many ways of managing this risk) (http://chestofbooks.com/finance/,3/04/2010).

2.1.3.2. The Loan Management System

The loan management system is a complete a multi-user loan management system. The system
can be used by banking institution, micro-lenders, financers as well as retail institution sale type
transaction.

2.1.3.3. Advances
Advances are credit facilities in the form of written promises that should not necessarily be given
on physical money as in loans (ibid).

2.1.4. Types of Loans and Advances

Commercial banks usually the following three types of loans;
Term loans
Short term loans
Medium term loans

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 2.1.5. Over Draft Facility
Over draft is usually temporary arrangements and this facility is given to the customer having
current account under over-draft facility. The amount of over-draft the period for which the
accommodation is granted are settled between a loan and over draft is that, while in case of
former, the customer pays in interest on sum standing to the debt of his loan interest, in the latter
case he pays interest of customer, over draft is more favorable that a loan generally back charges
high rate of interest on over draft than on loan (Kumar and Mittal, 2002).An over draw is a
facility where by customers are allowed to draw temporarily funds to bridge temporary shortage
of fund overdraft is not a facilities that is allowed in the same way banks allows overdraft can be
approved by authorized officials of the when recovery of such overdraw is expected from
reliable substantiated remittance in transited export bill pending negotiations or any other source
repayment considered genuine.

2.1.6. Advance on Import Bills

Advance on import bill is a written promise that the bank gives to foreign banks on behalf of its
clients. This is designed to accommodate the non-withdrawal of import documents by the
importer and letter of credit (L/C) is used as an instrument.
Letter of credit (L/C) is a written promise from third party (usually a bank) for payment in the
event that certain conditions are met. It is frequently used to guarantee payment of obligation
(Ethiopian Institute of Banking and Insurance Training Manual, 2001).

2.1.7. Advance against Export

Advance against export are made available to customers against presentation of complete set of
export documents. Such requests for percentage advance must present to the lending branch
(Ethiopian Institute of Banking and Insurance Training Manual, 2001).

2.1.8. Non-performing Loan

Non-performing loan are loans and advances whose credit policy has deteriorated such that full
collection of principal and or interest in accordance with the contractual repayment terms of the
loan and advance is in question (ibid).

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 2.1.9. Loan policy and Approval process
The loan policy is the primary means by which senior management and the board guide lending
activities. Although the policy primary imposes standards, it also is a statement of the banks
basic credit philosophy. Loan policy states standards for policies compensation individual credit
decision fair lending and compliance management.
The loan approval is the first step towards good portfolio quality which individual credits are
under written with sound credit principles. The credit principle, the credit quality of portfolio is
more likely to sound although good loans go bad, that starts out bad is likely to stay that way.
The foremost means to control loan quality is a solid loan approval process
(http://chestofbooks.com/finance/,3/04/2010).

2.1.9.1. Loan Evaluation

The criteria for giving credit are most of the time subjective job it depends on the staffs personal
judgment is a very hard job to decide on dividing loans this to say that differentiating people who
pay back the loan from people who don’t a bit difficult.
Bank issue loans to those who are credit worthy. Credit worthiness may be seeing from different
angles. When the company asking for loan is profitable, if there is an acceptable debit equality
ration in the form of good managerial capability (National Bank of Ethiopia, 2002:8).
2.1.9.2. Loan Arrangement

A loan arrangement is a written agreement between lender and borrower which outlines the
obligation of each party makes certain warranties, and often places certain restriction on the
borrower.
Loan agreements originally were used primary by larger banks in connection with term loans.
But in recent years money lenders have recognized the benefits of a written agreement in connect
with various types of loans includes short terms working capital and agricultural loans.

2.1.10. Risks faced in Lending

At the magnitude of loan disbursed in the banking sector become greater and greater than the risk
associated with uncollectableness of it becomes higher and higher; above single digit ratios non-
performing loan to total loan is a system of poor credit analysis and follow-up in order to

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 Minimize the risk associated with credit (National Bank of Ethiopia’s Memorandum
ref.no50/290/04,dated October 26, 2004).

2.1.11. Factors that affect Loan processing and collection

Corporate planning development of Lion International Bank SC issue classified the causes in two
groups:

A. Internal factors: lack of continuous follow-up of repayment due to manpower

shortage, lack of consultation and communication with defaulter, overstating the
collateral value at the time of estimation, lack of credit information to be gathered
from other commercial bank and agency problem (i.e. branch manager focus merely
on increasing their loan portfolio by accepting loaners without making due analysis).
B. External factor: diversion of the borrowed fund to other purposes, unavailability of
demand and price fluctuation on both local and international market, countries
economic and political condition, impact of charge in fiscal and monetary policy,
insufficient credit awareness, and unwilling of customers to disclose the information
required, an ethical competition made between banks and willful default.

2.1.12. Loan Repayment

In the same respect of the disbursement of the loan the bank should also figures out the way they
collect their money. Lenders in general have two sources of loan repayment method:

 The cash flow ability of the firm to service the debt if it fails

 The collateral value of the security

Loan repayment may not be taken place due to the following causes:

 Loan size may be too large for cash need of business

 The extra funds may have been for personal use

 In efficient screening of clients

 Lack of effective supervision of clients and their business

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 Lack of in effective to credit officers and inefficient credit policies and
methodology. (ibid).

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 2.2. Empirical Literature
According to Njoku and Odii (1991) studied determinants of loan and advance management
system under the Social Emergency Loan Scheme. Their study showed that late release of loans,
complicated loan management, loan diversion to non- agricultural enterprise low enterprise
returns resulting from low adoption rate of improved agricultural technologies and emphasis on
political considerations in loan approvals contributed to poor loan and advance management
system of small holders. Loan volume, years of formal education, household size and interest
paid on loan were found to positively and significantly affect loan repayment; while years of
farming experience, loan period, farm size, farming as major occupation, farm output and value
of assets were found to negatively and significantly affect loan and advance management system.
According to Amidu (2006), bank credit channel has focused on two issues. The first issue
centered whether there are categories of borrowers who depend on bank lending in that any
change in banks’ willingness to lend immediately affects their investment and spending
decisions. The other issue is whether monetary policy changes directly constrain bank lending to
Borrowers. Both conditions are necessary for bank lending to play a special role in the monetary
transmission mechanism. Some recent research provides support for the view that certain
borrowers, especially small businesses, are very dependent on banks for financing (Abor, 2004).

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 CHAPTER THREE

3. RESEARCH METHODOLOGY
3.1. Research design
The proposed study will used a descriptive approach which is planned in such a way that
might provide for successful accomplishment in quantitative data sets. It also gives idea of
how and why researcher formulated and identifies question and choice of the specific case
studies which illustrate the topic. The study will first start with describing material and
methods. Finally there searchers would explain how the researcher chose and collect
quantitative data and analysis it.

3.2. Type and source of data

In the engagement the researchers will used both primary and secondary data. primary data is
recognized as data is gathered for a specific proposal in response to a particular problem
through interviews and questionnaires. Additional secondary data was obtained by
examining various documents, banks annual report on related information , local and
international news paper

3.3. Data collection method

Primary data will be collected by using questionnaire and interviews. The questionnaire, at most
effort, tries to motivate the respondents to cooperate with the survey and to provide the
information correctly. Secondary data will collected from internal reports such as quarterly and
annual reports of the bank, some other relate books and internet.

3.4. Target population

The total population is 67. From which representative samples will take comprises of (2)
managers, (4) credit analysts, (3) loan officer, (11) credit customer and customer service officer
of the bank who have more experience and professional. The area of the study will covered the
employees of Commercial bank of Ethiopia in Adama branch.

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 3.5. Sampling techniques and sample size
The total numbers of employees who are working in CBE branch are 67. Out of the total population are
67 employees, 20 will take for the study purpose Sample of 20 from 67 total sample technique to
acquire the primary data would be judgmental non probability sampling method. Non probability
sampling would help to reduce the sample size and to have non biased and accurate answers from the
volunteer respondents and due to cost constraint and time limitation.

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3.6. Data analysis and presentation
The gathered data will be arranged and grouped in to similar categories and generalize the data in
order to facilitate the study. The researcher’s uses a descriptive method of data analysis
technique that uses frequency count tables, percentage and textual description. The interpreted
data will be analyzed and summarized in to meaningful way and that can be present to interested
body.

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 TIME SECHEDULE AND BUDGET SECHEDULE
TIME SCHEDULE
Research time planning is very important to conduct any research paper and also any kind of
work the study expected to take four months.

Table1. Work plan (action plan)

Month FEBRARY MARCH APRIL

Week 1 2 3 4 1 2 3 4 1 2 3 4

Title selection
and gathering
information

Preparing
proposal

Preparing
review
literature

Data
collection

Data analysis

Editing and
preparing
final report

Paper
submitting

Final
presentation

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 BUDGET SCHEDULE

The cost budget which the researcher will be spent for the field of data collection pay for the
travel, and typist and other related exposes need to detailed I the researcher think that expresses
will be as following.

Table2. Budget schedule

No. Item Unit of Quantity in no. Cost unit Total cost

Measurement in birr in birr

Stationary
cost

1 Paper Ream 1 220 220

2 Pen Piece 5 10 50

3 Binding Piece 2 15 30

4 Exercise book Piece 1 18 18

5 Calculator Piece 1 190 190

6 Typing Birr 1 70 70

7 Printing Birr 2 65 130

8 Transportation Birr 200

9 Mobile card Birr 7 10 70

10 Flash disk Birr 1 250 250

11 Photo copy Birr 45 1.50 67.50

Total 1295.50

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 REFERENCE
[1].Kalberg and Udel, (2003), the value of third party credit information.

[2].Harries, (2003), Boyer Lecturer.

[3].Sinkey, (2002), Bank capital structure.

[4].Chorales, (2003).Probabilistic Inference.
[5].Encyclopedia duluxe, (2004),
[6].Shekhar and Shakhar, (1996),

[7].K.C.Shekhar, (1974), Banking Theory and Practice.

[8].http;//chest of books.com/finance /3/04/2010.

[9].Kumar and Mittal, (2002), Principle of Management.

[10]. Ethiopian Institute of Banking and Training manual, (2001).

[11]. National Bank of Ethiopian, (2002; 8).

[12].National Bank of Ethiopia’s Memorandum ref, no50/290/04, dated October 26,( 2004).
[13].Njouk and Odii, (1991), Determinant of Loan Repayment.
[14].Amidu, (2006), The Link between Monetary policy and banks lending.
[15].Abor, (2004), Technological innovation of banking.

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