ASSESSMENT OF LENDING PRACTICE IN CASE OF COMMERCIAL

BANK SECHA BRANCH

ARBA MINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENTS OF ACCOUNTING AND FINANCE

MINI PROJECT FOR PARTIAL FULFILMENT OF UNDER GRADUATE

SUBMITTED BY:-TSEGAYE GULILAT

ID :- RBE/1225/11

Submitted TO: Dr Jyotsna GB.

JULY,2021

Arba Minch, ETHIOPIA

 Table of Contents
Content Page
ASSESSMENT OF LENDING PRACTICE IN CASE OF COMMERCIAL BANK SECHA
BRANCH ............................................................................................................................................. 1
CHAPTER ONE ............................................................................................................................. 1
1. INTRODUCTION ...................................................................................................................... 1
1. 1 Background of the study .......................................................................................................... 1

Back ground of the organization ........................................................................................................... 2

1.2. Statement of the problem ....................................................................................................... 2

1.3 Research question ..................................................................................................................... 3

1.4 Objectives of the study ............................................................................................................. 3

1.5 Significant of the study ............................................................................................................. 4

1.6 Scope of the study ..................................................................................................................... 4

CHAPTER TWO ............................................................................................................................ 5

2. LITERATURE REVIEW ........................................................................................................... 5
2.1. The lending operation of banks ............................................................................................... 5

2.2. Empirical literature review ...................................................................................................... 6

2.3. Definition and concept of loan................................................................................................. 6

2.4. Loan ......................................................................................................................................... 7

2.5. Mode of creating charge .......................................................................................................... 7

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2.6. Credit execution and Administration ....................................................................................... 7

2.7 Lending Behavior ..................................................................................................................... 9

2.8 credit risk .................................................................................................................................. 9

2.9 Method of controlling credit risk ............................................................................................ 10

CHAPTER THREE ...................................................................................................................... 11

3. Research Methodology ............................................................................................................. 11

3.1. Research design .................................................................................................................... 11

3.2 Sample size and sampling technique ................................................................................... 11

3.3 Data source and type........................................................................................................... 11

Data collection method ..................................................................................................................... 11

3.4 Methods of data analysis ...................................................................................................... 12

3.2. COST BUDGET SCHEDULE .............................................................................................. 12

3.2.1 TIME BUDGET .................................................................................................................. 12

References ..................................................................................................................................... 13

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 CHAPTER ONE

1. INTRODUCTION

1. 1 Background of the study

In our world of competition business companies should be head of their competitors to become
successful in their business. Many institution of under the general term banks such as
commercial banks saving banks, investment banks, industrial banks. Generally, banks are
now structuring and delivering the sophisticated financial solution. In real world the bank plays
a key role in financial sector by providing reliable and efficient banking service to the public its
operation. It is the back bone economic development of the countries. The making of loan and
advance has always been permanent profitable function by banks (Fewleealie, 1999).

The function of the entire modern bank lending is by itself the most important. it is evident that
substantial proportion of the total revenue of all bank of Ethiopia comes from interest loan
and advances which comprise a very large proportion a bank’s total assets and they also
comes from one of the most essential operations (Tekle, 2005).

Loans are the most dominate asset in most bank portfolio representing an average 50 to 75
percent of total assets position various greatly among banks depending on size location
trade area and lending expertise. Also lending practice can do vary significantly for similar
sized banks (Donald and Koch, 2006).

Several characteristics stand out. first the ratio of net loans to asset is greatest at 66.4% for
banks with 100 million to 1 billion in asset and for saving institution the largest bank have an
average reduced their dependence on loans related to the smaller banks this indicates that
many of largest have began to focus on non credit products and services that generate non
interesting as the primary source of revenue. Second, real estate loans represent the largest
simple loan category for all banks and are hiphst for salving banks. Third, residential 1-4 family
loans (mostly mortgage loan product) contribute the largest amount of real estate loans. for
almost for all commercial banks , but commercial real estate is largest for banks with 100
million to 1 billion in asset four second heiphst concentration of loans at bank, fith , loans

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to individuals are greatest for banks with more than 1 billion in asset , but contribute to
proportionally less elsewhere (Donald and Koch, 2006)

Commercial banks of Ethiopia gives the following credit facilities to its esteemed customers
ever draft mechanism or merchandise loan of facilities per shipment export credit facilities,
special truck loan financing medium and loans term loan, agriculture investment and micro
finance institution loans(CBE Annual report, 2011). There for the main objective of the study
will to assess the lending practice of commercial bank of Ethiopia in secha Branch.

Back ground of the organization

The history of the commercial bank of Ethiopia dates back to the establishment of state bank
Ethiopia in 1942 CBE was legal established as a share company in 1963. In 1974, CBE merged
with the privately owned Addis Ababa bank experience since the net has been plying significant
roles in the development of the country currently CBE has more than 27.5 million account
holders and the numberof mobile land internet banking users also reached more than 4.6
million as of Dec. 31st 2020 active ATM cared holders reached more than 6.4 million . CBE
combines a wide capital base with more than 40,000 talented and committed permanent
employees and more than 22,000 out sourced jobs as of June 30 2020 it has strong
correspondent relationship with more than renowned foreign bank like Commerz bank A.G,
Royal bank of Canada, city bank, HSBC bank .it has a SWIFT be lateral arrangement more than
700 others banks across the world for foreign remittance worldwide .

Vision

To become a world class commercial bank by the year 2025

Mission

We are committed to realized stock holders value through enhanced financial intermediation by
deploying the best professionals and technology.

1.2. Statement of the problem

Lending provides the bulk of bank income it is equally true that bank loan as they are profitable
equally risky. Bank loans fluctuate and influenced by changes economic policy and the economy
in general. There for it is very important for the bank to formulate their loan polices associated

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with them (CBE Annual report, 2012). Lending money is easy it is ensuring that loans are
prepaid that skill is required when asked to make loan , the first concern of a bank will be
extract as much as information as possible about the proposition so as to able to assess the
probability of repayment in coming to decision you must check how well the proposition
measures up a number of criteria. Some of the questions to be asked are vital others less, but all
help the lending officer to obtain an overall view of the proposals (palferman, 1989).

Banks act as a financial intermediaries accepting money on deposit and lending it to other people
for a period of time up to several years, the bank function then is to convert short run deposit into
long run loans ( palferman, 1998).

The more money they can lend, the more profit banks can earn. However, a bank can not lend
out all the funds. It must retain enough money in liquid form to be able to meet depositors
request for repayment (mishkin, 1989).

Hable A (2018) conducted a study on poor credit management reduce the bank lending capacity.
It also denies new applicants access to credit as the banks cash flow management problem
augment in direct proportion to increasing default problem.

1.3 Research question

This study is expected to address the following questions.

 What types of collateral use by the bank during lending?

 What are the steps and procedures that the bank followed to deal with loan?

 What is the awareness of society in banking operation?

 What is the problem faced in lending practices?

1.4 Objectives of the study

General objectives of the study

The general objective of the study is to assess the lending practice in commercial bank of
Ethiopia the case of secha branch

Specific objective of the study

Specific objective includes

 To assess the types of collateral used in bank during lending.

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  To examine the steps and procedures that follows the bank to study with loan.
 To assess the awareness of society in banking operation.
 To assess the problems related to lending practice
 To recommend the possible solution of challenge faced by the bank

1.5 Significant of the study

This study will help to society and to that, the study draw and recommendation for stake holder
of Commercial bank of Ethiopia in secha branch. And It serves as a base for other researchers
in the future atria fulfillment for the requirement of the bachelor of art (BA) degree in
accounting and finance . In addition, This study will help the bank to take as an input in
identifying major problems related with loan procedure and also this study will be give
knowledge for researchers who is performed the research. Finally this study will be developing
the researcher ability and attitude toward, research for doing better way and clearly with clear
understanding.

1.6 Scope of the study

To study the assessment of lending practice in all commercial bank of Ethiopia is difficult. So
that the study is focus on the assessment of lending practice in commercial bank of Ethiopia the
case of secha branch. This study is evaluat the effectiveness of the bank lending practice, its
compliance with policies and procedures.

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 CHAPTER TWO

2. LITERATURE REVIEW

2.1. The lending operation of banks

Lending of fund to the constituent mainly traders business and industrial enterprise
constituents the business of banking company. The major portion of banks fund is employed by
way of loan and advance which is the most profitable employment of its funds. The major parts
of bank income are earned from interest and discount on the fund so lent (Dr. GopalSwaroop,
2004).

Principle of sound lending

There are three cardinals principles of bank lending that have been followed by commercial
banks since long. These are the principle of safety, liquidity and profitable. Banks are essentially
intermediating short funds. They lend funds for short periods and mainly for working capital
purposes. The loans are fore largely payable on demand. The bank must ensure that the
borrowers are able to repay the loan demands, with short period. This depends up on the nature
of assets owned by the pledge to the bankers (Dr. Gopalswaroop, 2004).

Types of loan
Loans are grated or given for short term up to one of three years, medium loan from 4 to 7
years, long term loan from 7 to 15 years when loan is grated for buying equipment and for
working capital purpose , especially in care small borrowers , it’s said to be composite loan
other classification of loans and advance, loans and advance grated by bank(Kc. Shekhar,
2003). Loan is an arrangement in which lender gives money or property to a borrower and the

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borrower agrees to return the property or repay the money. Usually there is a predetermined time
for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay
a loan [Ambilikile, 2008].

2.2. Empirical literature review

Donald (1976) did a study and conducted that for credit programs to be successful more than
money is needed. There must be a new technology , markets that can be supply additional inputs
and absorb additional out puts, institution willing to lend to small farmers on terms they
consider attractive and most important, the farmer willing to burrow to invest and to repay
loans .

Loan and morgan(2006) conducted a survey study to find out how bank lending standard
related with lending innovation in commercial bank of Ethiopia. In the study standards
refereed to any of the various non price lending terms specified in the typical bank business
loan or line of credit . Collateral covenants , loan limits etc, the study revealed that shocks
to lending standards were significantly correlated with innovation in commercial loan at
banks and in real output.

Maddaloni and scope (2008) conducted another study, to establish whether monetary policy
affected bank credit standards. The study was a comprehensive bank lending survey in
commercial bank. There are time and cross country variations of standard of monetary. The
study found robust evidence that lower overnight rates softened bank credit standards for both
average and riskier loans. The softened credit standard was over and above an important of the
quality of borrows industry and collateral banks especially soften their credit standards by
reducing spreads an average loans, but also by reducing collateral requirement and
covenants and by increasing loan amount and maturity .

2.3. Definition and concept of loan

Loan is the sale of goods, services and money claims in the present in exchange for a promise to
pay in the future that means debtor and creditor agrees to settle their transaction (Garry, 1995).

When loans is grated for buying equipment and for working capital purpose especially in
care small borrowers, is said to be composite loan, other classification of loans advance
loans and advance grated by bank can be divided in to two based on securities. These are

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secured and unsecured loan secured loan is a type of loan which is based on security or which
have securities. Unsecured loan it type of loan which is not secured mean that which have no
collateral securities. (Thomas, 2000).

2.4. Loan
Loan is the thing that is lent especially a sum of money. The action of lending something state
of being lent for each lender the loan comparable to bonds, stocks or other asset on the other
hand for each borrower a loan is debt , an obligation to repay the borrowed money plus
interest (Garry, 2004).

2.5. Mode of creating charge

A. Basic principle of sound banking is to ensure safety of lend by banker to his customer
banker lends ways. The following are some of creating charges A lien: the bankers is
employed to retain all securities of the customer in respect of the general balance due
from him. The ownership of securities is not transferred from customer to banker
(Kc.Shekhar, 2003).
B. Pledge :- as a bailment of good a security for payment of good a security for payment
of debt or performance of promise .
C. Hypothecation: - is case of this movable asset are used. Here neither ownership nor
possession of good is not transferred to the creditor example if the hypothecation
vehicle is involved in an accident and the passenger of the other vehicle are injured the
bank will not be liable for the compensation to the victims .
D. Mortgage: is the transfer of on interest in specific immovable property for the purpose
of the payment or advance or to be advanced in way of loan of transfer called mortgage
money or instrument (Kc. She Khar, 2003).

2.6. Credit execution and Administration

The process which formal credit decisions are made by various banks. It depends on many
factors such as the banks organizational structure, banks size, number of employee and length of
experience, and the type of loan made. The formal decision can be made individually by an
independent underwriting department by a loan committee or a combination of these methods.
(Donald and Koch, 2006).

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Formally a bank’s board of Director has the final say over which loans are approved. Typically,
however, each lending offer has independent authority to approve loans up to the same fixed
dollar amount. A loan commit reviews each step of the credit analysis as presented by the loan
offer and supporting analysis and make a collection decision. Once a loan has been approved ,
the offer notifies the borrower and prepares a loan agreement formalize the purpose of the
loan.

The term Repayment schedule collateral required any loan convents and finally what conditions
bring out default by the borrower. Conditions of default may include events such as late
principal and interest payments , the sale of substantial assets , a declaration of bankruptcy,
and the breaking of any respective loan convenient . The office then checks that all loan
documentation is present and in order to the borrower signs the agreement along with other
guarantors, returns over the collateral it necessary (Donald and Koch, 2006) .

In this context for big corporate and other bank a bank will often use haircuts an extra mount of
collateral (in the form of margin) applied to loan that means collateral plus a margin. Even with
an over right loan there is a chance the value of the collateral will decline. A haircut amount by
which the collateral exceeds the principal of a loan for example for an over right loan the bank
may ask for collateral. The value of which is 15% greater than the amount loaned. Most banks
have a separate credit risk analysis department their aim is to maximize shareholder value added
through credit risk management. Managerial judgment always plays a critical role, but good
credit risk teams will determine by the information the bank can gather on the individual. It a
bank unable to obtain information on a potential borrower (Using for example annual reports) it
is likely to adopt a qualitative approached to quilting credit risk (C. Artrur William etal, 1991).

A part from micro economic variables , there is abundant empirical evidence that suggest
that several bank specific points on factions’ (such as size of situation profit margins efficiency
, the term of credit such as size maturity and interest rate ). Risk profitable of banks measured
by service prefixes including total capital to asset rate and loans to asset ratio and loans to asset
ratio are important determinant of lending practice (Khemraj, 2004).

In a developing economy as that of our shortage of capital has always been as tumbling block on
the road industrial progress. The role of commercial banks in overcoming this difficulty by

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extending Large credit facilities is abundantly clear. However this does not mean that they
should be given a free hand in the creation of credit. The recent monetary policy of the reserve
bank shows that it has taken a serious view of the rising price levels the key note of the policy
has been to exercise both a general and selective restraint on credit and pruning down of the
less essential demands through a combination of measures quantitative , qualitative, and
selective. The bank has been careful to implement the various methods of credit control in a
flexible and judicious manner (Suekhr, 1987).

In respect of banks meaning credit means lending or granting money to those who are in need
get(investors) who fulfill the bank requirement. It is a liability for the individual or corporation
received it, but an investment comparable to bond stock or other asset. For each borrowers a loan
money plus interest (Garry smith, 1995)

2.7 Lending Behavior

Lending behavior in this study defined as the total of all processes which are under taken in order
to make two main decision : (1) the credit availability decision that means whether to lend
money or not and (2) the loan contract term decisions that means what terms to include in a
specific credit contract. When elaborating on the second decision category, typically discusses
five specific contract terms which are debtmaturity, debtamount, interestrate, collateral
requirements and covenants (Thakor, 2002).

Lending behavior is generally be discussed in regards to those two main decision category it has
to clear that those two types of decisions cannot be separated in reality as they inevitably affect
each other. The decision whether to lend money or not always depends on the specific loan
contract terms. (Sinkey 2002).

2.8 credit risk

Credit risk that an asset or loan becomes irrecoverable in the case of outright default or the risk
of an expected delay in the servicing of loan. The bank would avoid credit risk by choosing
assets with very low default risk but low return, but the bank profits from taking risk credit rise if
a bank has many medium to low quality loans on its but the return would be higher so bank
would portfolio of asset with varying default of risk(James ,2005).

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2.9 Method of controlling credit risk
Thus the loan rate should include a market rate risk premium and administration cost be altered
the rate change accordingly.1. Credit limit: another method for controlling credit risk. Given the
potential for adverse selection. Most banks do not rely solely on loan rates when taking a lending
decision. 2. Collateral or security : bank also use collateral to reduce credit risk exposure
however, if the price of the volatile, then for unchanged loan rate, banks have to demand
collateral to offset the increased probability of less on the credit. 3. Diversification: additional
volatility created from an increase on the number of risky loans can be offset either by new
injections of capital in to the bank or by diversification bank can be help to ensure they are
properly diversified by setting concentration limits the bank sets a limit on the amount of
exposure in relation to a certain individual or sector (Williams, 1981).

GAP ANALYSSIS

The study made by previous researcher tried to see only poor credit management and cash flow
management (didn’t see collateral related problem) that affect the bank lending practice So I
want to see collateral related problem during lending and credit facilities.

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 CHAPTER THREE

3. Research Methodology
3.1. Research design
The researcher is Apply descriptive form of research design, because the objective of this study
is to assess and describe the lending practices in commercial bank of Ethiopia Secha branch. To
obtain the require data the researcher is use mixed research approach, which includes both
qualitative and quantitative research approach. Qualitative research approach help the researcher
to get more detail information about the area of the study and quantitative helps the researcher to
get data that is related to the numerical aspects and it helps to collect objective questions.

3.2 Sample size and sampling technique

The total population of the research area under which most of the research data is collect for
analysis is from the secha branch. The bank has 25 employees, the researcher decide to use the
respondents who have direct relationship with lending operation has 25 employees and take a
census sampling technique.

3.3 Data source and type

To conduct this study, the researcher is use both primary and secondary source of data. Primary
data collected from manager and employs of commercial bank of Ethiopia. Secondary source of
data collect from annual reports, documents, and guidelines of commercial bank of Ethiopia in
Secha branch.

Data collection method

The researcher is collect primary data through questionnaires, which include both close-ended
and open-ended question and interview which is in structure form data collection technique.
Questionnaires is distribut to purposefully selected employees of the commercial bank of
Ethiopia in Secha branch in lending area who have different education level and experience with
many responsibilities and varying job grades. Through interview the researcher collect
information from the manager. Secondary data is collect from manual, guide lines, document and
annual report of commercial bank of Ethiopia Secha branch.

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 3.4 Methods of data analysis
A mixed survey approach involving both approaches quantitative and qualitative method is use.
The quantitative approach is involved the generation of data in quantity from and the researcher
is analyze using descriptive statistical tools, frequency and percentage.
Qualitative data is collect and presented by using narration method. It is summariz and presented
in table and percentage for those data is collect in order to facilitate the analysis and to make of
understandable for readers.

3.2. COST BUDGET SCHEDULE

Item Quantity Unit cost total

Paper 60 0.50 cent 30

Miscelanious expenses 100

Transport 50

3.2.1 TIME BUDGET

June July August september

Proposal 

Data collection 

Data analyses 

Submitt 

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References
 Catcher Williams (1982), Risk management and insurance 4th edition.
 Dr.Gopalswaroop (2004), Low and povcillicies relate to banking.
 Donald and Koch (2006), Management of banking 6th edition.
 Feweelaie (1999), Banking theory and practice 12th edition.
 Garry Smith (1991), Money banking and finance intimidation.
 Garry Smith (1995), Banking and financial intermediation.
 Mish kin (2004), Lending process of the bank 4th edition.
 Palfreman (1998), The business of banking in elements of banking 2nd edition.
 Shekhar and Shedder(1992), Banking theory and practice 18th edition.
 Shekhar (2003), Banking theory and practice 12th edition.
 Suekuar (1987), Banking theory and practice13th edition.
 Thomas P.ftch(20000, Dictionary of banking term(4th edition) eastern low house
printed California

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