Final Proposal
Final Proposal
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)
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;
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?
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.
It draws their attention some points will corrective action should be taken.
The study findings and recommendation will help the management of bank.
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1.6. Limitation of the study
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CHAPTER TWO
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).
2.1.3.3. Advances
Advances are credit facilities in the form of written promises that should not necessarily be given
on physical money as in loans (ibid).
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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.
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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).
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.
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).
Corporate planning development of Lion International Bank SC issue classified the causes in two
groups:
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
Loan repayment may not be taken place due to the following causes:
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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.
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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.
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.
Stationary
cost
2 Pen Piece 5 10 50
3 Binding Piece 2 15 30
6 Typing Birr 1 70 70
Total 1295.50
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REFERENCE
[1].Kalberg and Udel, (2003), the value of third party credit information.
[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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