ASSESSEMENT OF LOAN ADVANSING PROCEDURE AND PRACTICE A CASE STUDY ON LOAN SECTOR IN WEGAGEN BANK S.C HAWASSA BRANCH

                                

                       

SCHOOL OF MANAGEMENT AND ACCOUNTING

DEPARTMENT OF ACCOUNTING

ASSESSEMENT OF LOAN ADVANSING PROCEDURE AND PRACTICE

A  CASE STUDY ON LOAN SECTOR IN WEGAGEN BANK S.C HAWASSA BRANCH

     PREPARED BY:-

                                NURU TSEGAW …………..384/02

                                               AND

                               ALEME SAMUAL.………..0093/01

                              SUBMETED TO INSTRUCTOR: TAMIRATE

                                            SUBMETED DATE:  JULY 03 /2012

                                       Acknowledgment

First and Most I would like to praise almighty lord for his forgiveness and charity he has given to my life.

  Next I would like to thank my advisor Ato Tamirat for the invaluable advice and unreserved comment from the inception to the completion of this paper. With out his dedication and experience, this paper would not be possible.

Moreover I extend my special thanks to my family and friends (i.e. Seble and Aberash) for their moral support for the successful completion of this paper.

Lastly, my appreciation goes to …..My colleagues …my friends ……and all staff of Wegagen Bank for their cooperation and unquantifiable support. Thank you all.   

        

                                                 Table of Content

Content                                                                          Page

               CHAPTER ONE                     

1.1  INTRODUCTION…………………………………………………………………….1

           1.2. BACKGROUND OF THE ORGANIZATION……………………………………….1

          1.2.1 EVALUTION OF BANKING INSTITUTIONS……………………………………..1

                1.1 Background of the study……………………………………………………………2

                1.2 Statement of the problem…………………………………………………………...3

               1.3 objective of the study………………………………………………………………..3

1.3.1       General objective………………………………………………………………..3

               1.3.3 Specific objectives………………………………………………………………...4

        1.4 Research Methodology and Duta collection…………………………………………4

                        1.4.1 Data type and source………………………………………………………...4

                       1.4.2 Survey study Design…………………………………………………………4

                       1.4.3 Data collection……………………………………………………………….5

                      1.4.4   Data presentation and analysis………………………………………………5

         1.5 Significance of the study………………………………………………………...5

                     1.6 Scope of the study……………………………………………………………….5

   CHAPTER TWO

  2. Literature Review……………………………………………………………………………...6

         2.1 lone advancing procedures………………………………………………………………6

        2.1.1 Definitions and concepts of loan……………………………………………………….6

2.1.2       The business of banking……………………………………………………………...6

 2.2 Profitability and Liquidity…………………………………………………………………….7

         2.2. Lending procedure……………………………………………………………………...8

         2.2.1 The principle of lending……………………………………………………………….8

         2.2.3 Credit Term……………………………………………………………………………9

        2.2.4 Control of credit………………………………………………………………………10

        2.3 Interest Rate…………………………………………………………………………….10

            2.3.1 Definition of interest rate…………………………………………………………..10

2.3.2       The Theory And Structure of Interest Rate………………………………………11

            2.3.3 Security for the advantage…………………………………………………………13

           2.3.4 Source of Repayment……………………………………………………………….13

2.4            Loan advancing laws and regulation In Ethiopia………………………………………...14

                       CHAPTER THERE

3. Data Presentation, Analysis and Discussion…………………………………………………..15

                3.1 Introduction………………………………………………………………………..15

                3.1.2 Loan Advancing Procedures…………………………………………………….15

              3.1.3 Letter of Application……………………………………………………………...16

                   3.1.4 Opening of Account…………………………………………………………...16

                  3.1.5 Submission of Necessary Documents………………………………………….17

            3.1.6 Preliminary Interview………………………………………………………….18

            3.1.7 Credit Information……………………………………………………………..18

            3.1.8 The Business Visit……………………………………………………………..19

            3.1.9 Property Estimations…………………………………………………………...19

            3.2.1 Source of Repayment………………………………………………………………20

          3.2.2 Loan Approval………………………………………………………………21

          3.2.3 Loan Contract………………………………………………………………..21

         3.2.4 Security Contracts……………………………………………………………22

         3.2.5 Insurance converge for the collateral………………………………………...22

        3.2.6 Loan disbursement……………………………………………………………23

                     3.2.7 Interest calculation…………………………………………………………...24

                   3.2.8 Follow up and Collection Procedure…………………………………………..25

3.3 Primary Data Analysis and Discussion………………………………………………………25

                 3.3.1 Background of the Respondents………………………………………………..26

                  3.3.2 Clients opinion on time elapsed to obtain loan………………………………...27

                 3.3.2 Customers satisfaction………………………………………………………….27

           3.3.3 Other comments………………………………………………………………...28

          3.3.4 Data presentation and analysis that obtained from

                          The bank’s employees………………………………………………………29

           CHAPTER FOUR

 4.  CONCLUSION AND RECOMANDATION………………………………………………..31

        4.1 CONCLUSION……………………………………………………………………..31

  4.2 Recommendations…………………………………………………………………..32

     Bibliography

                              CHAPTER ONE 

1.2  INTRODUCTION

            1.2. BACKGROUND OF THE ORGANIZATION

           1.2.1 EVALUTION OF BANKING INSTITUTIONS

It may be said that banking in its mot simple form is also as authentic history. As early as 2000 B.C Babylonians had developed a system of banks. In ancient Greece and Rome the practice of granting credit was widely prevalent.

“Traces of credit by compensation and by transfer orders are found in ASSYRIA, PHONENICIAN AND EGYPT before the system attained full development in Greece and Rome. In Rome, the bankers were called Argentarii mensarii or callybistoe. The Bank was called Tabernoe Argentario. Some of the banks carried business on their own account and others were appointed by the government to receive the taxes.

During the early period, also the banking business was mostly done by private individuals, many countries established public banks either for the purpose of facilitating commerce or to serve the government. The banks of Venice, established in 1157. Is supposed to be the most ancient bank.

As we know banking industry is one of the major sectors they play a great role in our economy to day this key sector has been subjected to considerable restructuring to recedes. Even though it has been stayed long banking in Ethiopia was not widely spread and developed. As a result untie the down full the derg-regime its role was in significant.

As a result of these back grand and reforms, Wegagen Bank has established and become a good competitor in the 1997 as private commercial bank by seven corporate shareholders with subscribed capital of 30,000,000. The bank’s board of directors has decided to raise its paid up capital to birr 180,000,000 and subscribed capital to birr 140,000,000. Wegagen bank is a very competitive bank and delivers its quality services through its 33 bank ones out of which 13 are located in Addis Ababa. 3 are sub branches.

The remaining 17 are operating at the regional administrative town of the country. Wegagen bank in its function as a financial institution has drawn numerous objectives and the bank comates itself to operate on a clearly defined statements mission, policy and procedures. This policy is formulated on matters of describing the domestic banking activates and offer full fledged international banking serves.

The main objective of the banks were the following,

1.     To increase the level of capital in order to rise the lending limit of the bank and obtain a high in come.

2.     To give deferent kinds of banking services and loans for specific propose

3.     To increase market share.

4.     To encourage people to deposit money at the bank by understanding its use

5.     To promote a habit of depositing money at the bank.

Wegagen Bank Share Company was the following duties and responsibilities,

-        Opening of saving account and which are payable on request and time specific

-        Providing different kind of loans.

-        Transfer of money through telegram, mail transfer foreign money transfer.

-        Opening of current account.

                1.1 Background of the study

When we decide to conduct research over loan advancing procedure and practice in the case of Wegagen bank S.C we had sufficient reasons. The major reason is that loan advancing to thos who request and fulfill the bank’s criteria and the commercial law of the country. There are different types of loans provided by Wegagen bank to its customers. And the second reason is that way the researcher was engaged in the research is the attitude

  of the customers to wards the loan provided by the bank. Here, loan is essential to both leaders and borrowers. The lender benefit from issuing the loan to generate profit in the form of interest income. Borrowers on the other hand, benefits from getting loans in order to expand their investments on business.

The research is very important for any bank businesses that create and provide loans to their customers. as we known one of the major activity of the bank is provide loans to those who are a temporary deficit of money for investment.

The different types of loans provide by Wegagen bank Domestic trade service /DTS/ term loan, manufacturing production and over draft, agricultural production and over draft, transport services, construction loan moorage loans, consumer loons and other type of loan is provided by the bank.

                     1.2 Statement of the problem

In modern world economic savings and investments are usually carried out by different groups. The banking system channels the transfer of funds from savers to borrowers. Loans are assets of the bank that represent the majority of earning and make profit by granting loans to their customers who fulfill the bank’s and countries rule and regulations,

Here, the researcher conducted the research on loan practice and procedure on Wegagen bank due to the following reasons;

-        To examine the loan procedure and activity of the bank.

-        To investigate the profitability of the bank by providing loan to their customer.

-        To asses the applicable banks as well as countries law to wards the loan provision.

-        Here, also the research is needed to asses the loan practice activates of the bank in relation to the other financial institution loan provision.

            1.3 objective of the study

       The study of loan advancing procedure in Wegagen bank S.C has the following objectives,

1.3.2  General objective

-        To assess the lending policies and procedures by giving emphasis to the following specific objectives

           1.3.2 Specific objectives

-        To examine the organizational structure of Wegagen bank.

-        To assess how loan is provided to customers

-        To assess the problem of customers faced at lending procedure

-        To analyze and interpreting the credit procedure of the bank.

-        To identify the type of loan provided by Wegagen bank to its customers

                 1.4 Research Methodology and Duta collection

 1.4.1 Data type and source

-        Data type, the type of data that was used by the researcher is bother qualitative and quantitative type of data.

-        Data source, the necessary information for the study was gathered using primary and secondary data sources.

-        Primary data was gathered by;  Questionnaires and Direct observation

-        Secondary data was gathered from

-        Wegagen bank’s credit manual, procedures, circulars and reports

-        Wegagen bank’s organizational chart

-        Publicized annual reports and other related books.

1.4.2 Survey study Design

 Since, the writer has no enough time to fill each and every questionnaire; it will be distributed through a systematic random sampling method by taking 25 samples out of the total of 135 prominent credit customers found in Hawassa city only.

 1.4.3 Data collection

In case of data collection method, the study was conducted through.

-        Questionnaires- the questionnaire was distributed through a random sampling method to fill by 25 customers of the bank. This method benefits the research to have more accurate and representative data, since customers can get privacy and confidence to fill the questionnaire.

-        Direct observation; direct observation in loan advancing activates. Since the researcher of this study is the near contact with banking activates.

                         1.4.4   Data presentation and analysis

In the data processing and presentation the researcher was used manually and edited filled.

               1.5 Significance of the study

The research is important as it will provide reliable data on which there is strong need for investigation and it helps for further study. This study can be serve as input for the organization to make necessary adjustments on how to increase its performance and to analyze the problem.

1.6         Scope of the study

The S.C Hawassa branch by focusing on loan advancing procedures and practice of the branch.

Because of the broad of the nature of the loan the study was caring out short and medium term credit procedure and practices of the bank with the customer’s point of view.

                     

                       CHAPTER TWO

      2. Literature Review

            2.1 lone advancing procedures

           2.1.1 Definitions and concepts 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 the debtor and the creditor agrees to settle their transactions.

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

We live in a world of credit. Every day in every way we become more and more involved in various aspects of this credit world. Credit contributes to the development of the country and to high standard of living. The major participants in the credit world are banks. This is because most credits directly or     indirectly originated from financial institutions, and credit granting is one of the major activates of banks. It is through this credit granting activates that they made up large portion of their earnings.

2.1.3  The business of banking

Banks act as financial intermediaries accepting money on deposit and lending it to other people for periods of time up to several years.

The bank’s function then is to convert short run deposit in to longer- run loans.

(Palfreman D. Ford F (1998).

                                                         

                   2.2 Profitability and Liquidity

Like any other financial institutions, the banks, objective in providing services to borrowers and depositors in the generation of profit.

Banks principally make their profit by issuing loans. Banks make profit by selling liability which one set of characteristics and using the proceeds to buy assets with a deferent set of characteristics. Thus banks provide a service to the public by transferring one type of assets in an other. (Mishkin, Frederic s. (1989))

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 depositor’s requests for repayment. In this regard we find the root cause of the banker dilemma because generally speaking, the more liquid the form in which funds are held, he less the rate of return. Cash holdings for instance, being the most liquid form of asset, generate no profit at all.

It is true that successful banking requires successful management of both assets and liability. Safety and liquidity must be carefully balanced against asset earnings. And profitability requires care full controlee of the cost of the bank source of funds.

The banks there fore affect a careful balance between the maximization of lending and the maximization of liquidity to the lowest level consistent with safety.

To some extent this task is taken out of the bank’s hands by official controls but nevertheless, there is still considerable room for maneuver. The conflicting requirements of profitability and liquidity can be viewed as resulting directly from the conflicting desires of the two groups who have provided the bank’s financial resources, we share holders and depositors.

Loans are typically less liquid than other assets because they can not be turned in to cash until the loan matures. If the bank makes a one year loan for example it can not get its fund back until the loan come due in one year. A loan also has a higher profitability of default was other assets. Because of the lack of liquidity and higher default, risks the bank earn its higher return on loans.

-        (Mishkin, Frederic S.(1989).

2.2. Lending procedure

               2.2.1 The principle of lending

Lending money is easy, it is ensuring that loan are repaid that skill is required when asked to make a loan, the first concern of a bank will be to extract as much information as possible about the proposition so as to be able assess the probability of repayment

Some loans will become bad debts and cannot be recovered but this should never happen as the result a risk which could have been foreseen form the out set. In coming to a decision you must check how well the proposition measures up to a number of criteria. Some of the questions to be asked are vital other less so but all help the lending officer to obtain an over all view of the proposals ( Palferman D. Ford F.(1989)

In one sense these criteria can be looked on as a series of hurdles. Which would be borrowers must clear, they fail to completely satisfy the bank on one of the important principles than the application will probably not be pursued all the way through the rest of the decision making process. On the other hand it has to recognize that few proposals for advance are perfectly satisfactory in all respects. In most cases the baker must use skill judgment and experience in balancing the good points and the bank points of the proposition to judge the probability of the out come.

Each bank should immediately under take a sample of the information and data sought for examination of loan proposal from clients in the priority sectors for ascertain whether the demands made by the bank are excessive and or unrealistic, with a view to initiating corrective action. Banks must enjoy on their operating start to call for information data, etc for examination of loan applications, as far as possible in two or more installments.

In considering loan applications loan officers should be encouraged to adopt flexible approach here what is important is an over all appraisal backed by a good knowledge of laical market prices applicant and his /her back ground and familiarity with the nature of operations of applicant ;

Loan officers should be able to comprehend the total situation and determine whether,

-        applicant seems honest

-        applicants proposal seems reasonable

-        the information give by the applicant makes sense

-        Applicants can accomplish the purpose of the loan.

-        Purpose of the loan of the loan is legitimate and productive

-        Applicants with having with the capacity to repay the loan according to schedule under normal circumstance and

-        There is margin of safety, if things just do not go right.

Bank staff should perform an additional duty of consulting these applicants where ever required, with a view to converting seemingly imprecise and in attractive proposals in to reasonably bank able proportions.

Controlling offices of bank’s should advise their branches detailed reasons for  rejection of loan proposals wherever this is not already being done this will enable branch staff to understand the core lending policy and in turn do counseling to applicants in appropriate  cases.

It would be desirable to advise loan applicants, in each case, the reason for rejection of there applications but this may not be possible always. Banks would be justified in refusing to make known the reason for rejection. But, wherever possible, customers should be advised of the reason backed by counseling in appropriate manner.

-        (Gray Smithe, 1991)

2.2.3 Credit Term

How long is the advance required for although this will depend to all large degree on the proposals for repayment, it is important because the longer the loan is outstanding the more chance there is of something unforeseen happening to prevent the customer from adhering to the agreed schedule.

2.2.4 Control of credit

In a developing economy as that of ours shortage of capital has always been as tumbling block on the road to industrial progress. The role of commercial banks in overcoming this difficulty by extending large credit facility 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.( Suekhar;1987).

2.3 Interest Rate

2.3.1 Definition of interest rate

Interest rate is of course the priced charge a borrower for the loan of money. This price is unique because it is really a ratio of two quantities; the total required fee that a borrower must pay a lender to obtain the use of credit for a stipulated period divided by the amount of credit actually made available to the borrower.

Rate of interest =       fee required by the lender in order for the borrower to obtain credit

(in annualized%)         amount of credit made available to the borrower

By convention, the interest rate is usually expressed in percent per annum

For example, interest rate on overnight loan of reserves in Federal funds market are expressed in percent per annual although the loan is going to be paid the next day in addition, some  interest rates measures use a 360 days year and others a 365 day year. Some employ compound rate of return, with interest income earned on accumulated interest and some do not use compounding.

2.4.2  The Theory And Structure of Interest Rate

There are several theories of interest rates and their implications in financial system among this theory, the following four are the common and as well poplar as believed by economists and financial analysis

1.     Classical theory of interest rate

2.     The liquidity preference theory of interest rate

3.     The loan able founds interest rate

4.     The rational expectation theory of interest rate

1. The Classical Theory of Interest Rate

It is one of the oldest theories concerning the determinant of the interest rate

The classical theory argues that the rate of interest is determined by two forces

a.      The supply of saving derived from household and

b.     The demand for investment capital

2. The liquidity preference theory

During the 1930’s the British economists John Maynard Keynes developed a short run theory of interest rate which he argued was most relevant for policy makers and explaining near- term changes in interest rate.

-        (Richard. A and Really (1996)

This theory is known as the liquidity preference theory of interest rate.

3. The loan able fund theory

This view argues that the risk free interest rate is determined by the interplay of two forces

I, the demand for loan able funds consist of credit demands from domestic business consumers and units of government and borrowing in the domestic market by foreigners

II, the supply of loan able funds stem from;

-        Domestic savings

-        Hording demand for money either positive hording or dishoarding which increase volume of loan able funds.

-        Money creation by banking system and

-        Lending in the domestic market by foreign individuals and institutions

4.     The Rational Expectations Theory of Interest Rate

The rational expectation theory builds up on a growing body of research evidence that the money and capital markets are highly efficient institution digesting and reacting to new information attesting interest rates (Mishkin and Frederic S. (1989)

We have already mentioned that banks pay interest on deposits and charge interest on loans. Before we more on to look at how these activities express themselves on the banks balance sheet, we should ask our selves what we understand by term interest rate. As defined earlier the simplest definition of interest is that it is a payment made for the use of some one eagle’s money. When we speak of a rate of interest we should be aware that are a multitude of different rates in operation at any one time. The particular rate of interest charged by a lender or paid to a depositor depends on a number or interrelated factors the principle of which is the risk element and the time factor.

Any other form of loan will curry an appreciably greater level of risk that the funds will not be recoverable and the rate of interest charged will increase accordingly. Eventually, the point will be reached where a proposed loan is so risk that a lender will not be found no matter know  high the offered rate return. Similarly the longer the period, over which the lender surrenders the liquidity of these funds the vaguer he will expect the rate of return to be.

The low the risk of default the more the attractive the loan and the lower the inters rate charge generally interest rates,

-        Send prince signals to borrowers, lenders savers and investors

-        Higher interest rates generally bring forth greater volume of savings and stimulate the lending of funds.

-        Lower rates on the other hand tend to dumps the flow of savings and reduce lending activities.

-        Higher interest rates tend to reduce the volume of borrowing and capital investment will lower rates stimulate borrowing and investment spending.

-        (Gary Smitu,(1995)

                        2.3.3 Security for the advantage

Once the proposition and its likely success have been assessed you then move on the consider what assets the customer can pledges as security for the advance. It must be proposition as supported by the security and not against the security alone.

It the proposition does not seem viable in its own right and he or she was a defaulter or no more good credit relation with other banks then is will almost certainly have to be relied on as the source of repayment. In other word you should have decided that you want to make loan before you look at the availability of security.

                      2.3.4 Source of Repayment

The source of re payment must always be clarified before the advance is taken generally this will come either out income or from realization of capital assets. Your objective will be to check that the proposals for repayment are feasible in the circumstance of the particular case. Repayment instilments should be fixed invariably not in relation the size of loan or on the basis of willingness of applicant, but strictly in relation to applicants paying in to also the minimum basic necessities of applicant and his dependent family members. It may at time be necessary to relax the maximum repayment period generally stipulated in various schemes formulated by bank concerned.

2.5         Loan advancing laws and regulation

                               In Ethiopia

  Central bank in Ethiopia it is also called national bank of Ethiopia (NBE)

This bank acts as a elder of the money market supervising, controlling and regulating the activities of the commercial banks and other financial institutions. The NBE functions in close touch with the government and assist in implementation of its economic policies. It serves as banker agent and advisor to the government.

-        Discussion under the compulsion

1.     Under NBE, the house of people representative /HPR/ has categorically established the baker’s right to capitalize inters 6% up on loan, if un paid by the borrower on yearly or half yearly basis irrespective of the fact whether it is secured or un secured loan.

2.     It was held that the payment made by a debtor is in the first instance to applied to wards interest and there after to wards the principal, unless there 95 an agreement to the contrary.

3.     Under the NBE the reserve bank is expound to collect credit information from banking companies relating to their customers.

4.     Borrowing from other commercial bank, a bank may create addition liability by borrowing from other banks having excess reserves. But such borrowings are only for every short duration, for a day or week at the most.  The interest rate of such borrowings depends up on the prevailing rate in the money market.

5.     Borrowing from the central bank (NBE); bankers also create

                      Liabilities on them selves by borrowing from the NBE.

6.     Safety: it means that the borrower should be able to repay the loan and interest in time at regular interval with out default.

-        The repayment of the loan depends up on the nature of the security, the character of the, borrower, his capacity to repay and his financial standing.

7.     Diversity: this principle also applies to the advancing of loan to varied types of firms, industries business and trades. It should spread it risks by giving loans to various trade and industries in different parts of the country.(Assefa Moges, 1998)

                            CHAPTER THERE

           3. Data Presentation, Analysis and Discussion

            3.1 Introduction

The objective of Wegagen bank S.C is to mobilize resource and organize them to viable economic activities such as that risk are maintained at an acceptable low level .To carry out the objective it provides various type of loan and advance as well as overdrafts.

Loan compost ion

The compositions of loan provided by the branch are as follows

-        Overdrafts

-        Time loans

-        Personal loans

-        letter of guarantee

-        Letter of credit

In order to make such an activity the bank accepts deposits from its customers at an interest rate less than the bank charges for its borrowers. This is because of the bank primarily engaged to make profit and it incurs various type of expenses to make such and activity. Thus the interest rate charged to the borrower should cover the expenses incurred and adds the borrower should cover the expenses incurred and adds the benefit margin of the bank.

                     3.1.2 Loan Advancing Procedures

The borrower will have a first contact with the banker this affords a chance to examine about the banker. This affords a chance to examine about the application. While interviewing. The banker should try to cover points like, the purpose of the loan, deposited account at other branches of the applicant if any business experience of the applicant, the applicants commitment else where, ways of paying loan and the business plan (Wegagen bank S.C June, 2012).

Once a potential customer indentifies the need of bank loan and approach a branch of the bank, the branch carries out an appraisal with the assistance of the potential customer to provide basis for decision.

Branch managers and lending officers have to carry out comprehensive and detailed analysis work in order to determine the business and the securely strength of the applicant.

To make credit decision Wegagen bank has its own guidelines and procedures for handling loan applicants to advance the loan.

There are steps in processing loans

                 3.1.3 Letter of Application

The loan application should specify every detail request of the loan clearly including;

·       The name of the applicant

·       The amount of loan requested birr

·       The purpose of the loan requested in birr

·       The purpose of the loan for  which it is use

·       The installment payment if monthly, quarterly semiannually orlume sump

·       Duration of the loan in which the borrower intends to pay the debt

·       Type of collateral to be offered (movable or immovable)

·       Full address

·       Signature

                                3.1.4 Opening of Account

The applicant is supposed to open either current or saving account if he or she is new to the branch and was no any account he or she is new to the branch and was no any account before. This is help ful to direct all his or her transactions through a bank account which will finally hint on the financial performance of the customer and the activity of the business. In addition it helps to disburse the approved loan and also to debt for the periodic installments and other charges like insurance and stump duty charges.

                   3.1.5 Submission of Necessary Documents.

For the review and comments as to who is authorized to conclude loan contract on be half of the enterprises and also whether he or she can mortgage the property of the company along with the application, the customer should summit the following;

-        Like appropriate and renewed original licenses with one copy which shows the beginning capital and year of establishment at least one year in business

-        Collateral documents. If the collateral is building the plan and ownership certificate (title deed if the collateral is vehicle need to present car book late)

-        Audited financial statements

-        Memorandum of association registration certificate and article of association and power of attorney where applicable must be presented (in case of plcs and S.C)

-        Any document relevant to the business such as contract made with other organizations and any feasibility study connected with new investment proposal

-        Based on the above documents the bank makes further investigation

-        Confirms the geniality of the documents presented by the applicants

-        Interview  the applicants way she or he needs the money, how she or he has planned to return it and other

-        credit information from NBE central data center in order to know the applicant is a defaulter or was good customer in other bank

-        In relation to the amount of money that the customer requested, the bank was different hierarchies that scrutinize and approve the loan to be granted.

This is as described below;

Up to birr 200,000 the branch loan committee can approve and above birr 200,000.00 approved by the head office credit committees.

                    3.1.6 Preliminary Interview

Before starting the paper work for the actual processing a loan the loan officer makes further investigation. The respective loan officer must interview borrowers in order to confirm the genuinely the documents presented by the applicant the questions raised and the response made must be recorded on CCR and attached to the respective file for reference.

Questions declared are like;

·       Address

·       Name of his /her wife or husband (for credit purpose )

·       Year established

·       Initial capital & present capita in birr

·       Facility applied birr

·       Purpose

·       security offered

·       relation with this bank and other such as depositor, borrower or mortgage

·       other liability such as payable, bank loans , tax payable and third party liability

·       assets  such as cash in bank, cash on hand, goods in stock, advance payment on merchandise in transit etc

·       income such as : sales other income etc

·       expense such as salaries and wages, insurance ,utility and other

                       3.1.7 Credit Information

Before deciding on financing of the business it should be obtain both internal and external sources before making a decision on the financing of the business it should be a decision on the financing of the applicant.

Internal source of information are the customer’s account in the bank. The business activity and credit worthiness of the applicant can be obtained by the reputation and magnitudes of the transactions as well as the checked balances for lack of funds.

Other means

Of information may be past records of settled loans to confirm his agreement habit. As an additional source NBE central data will also provide inform if there is belief that the customer was bee doing his other credit or deposit with other banks. The NBE specifies the applicant’s credit relationship with other borrowers past and present performance on credit activity. After this the next step is to review the borrower’s business activities.

                            3.1.8 The Business Visit

The branch management and the loan officer sound visit the applicant’s business site as well as the personal guarantor if any. The purpose of this visit is,

-        To confirm the announced financial position by checking physically the amount of cash on hand, receivable document, buildings. Goods in stock etc.

-        Access whether the applicants is actually operation a business that they are licensed to

-        Have an over all view that the business of the applicant by observing as regards demands of the area the numbers of employee and machineries.

-        Determine the address of the borrower or this guarantor for subsequent visit also to identify the security pledged.

                        3.1.9 Property Estimations

This is done only after being satisfied with the activities of the business. The property must be fixed in its nurture, have already marketable value not characterized by wide fluctuation and movable like motor vehicle. Bank engineer or loan officer with the branch manager must estimate all properties offered as security on fee paid. It is estimated by loan officers or hired professional evaluators who are experienced in market value of all kinds of properties.

Collaterals typically vehicles must be re estimated every request of loan due to a rapid deprecation. While building must be re estimated other every three years or after extension is made.

In relation to amount of loan that the customer requested the bank has different hierarchies, up 200,000 birr and if the collateral is vehicle an engine from head office estimates the collateral.

Assessment of property must contain,

1.     Basic data:

This include location of the property, type of property(Agricultural land, industrial land, residential property, business property, work ship etc.) market value of similar properties in area any factor that may affect the value of the property, and other factors which may influence the valuation.

2.     Assessment;

The assessment must control all relevant data needed for assessment and should, not make reference to source that are not easily accessible to the client or the bank. And the assessment must make allowance for price increase or decrease depending on on anticipated make conditions. After the property offered was assessed the loan officer should think about the loan amount to be granted for the applicant as compared with his or her value of the collateral, financial strength of the business activity and credit worthiness. It is granted less than or equal to the value assessed. The next step is about source of repayment.

                      3.2.1 Source of Repayment

Before proposing loan for a person or an organization it should be known that from which the loan give to the borrower is expected to be repaid. It is suppose to repay from the proceeds of the business activities from his /her sales volume in which generates income with in reasonable period of time not from the liquidation of the collateral. And also thinks  about repayment schedule such as monetary quarterly , semi-annually, at maturity etc. this is observed from the borrowers financial analysis of income statement and balance sheet which includes cash on hand available during visiting, cash in bank as at date, account receivable and not receivable as per his /her book register during visiting, goods in stock at visiting shipment in transit as per the receipts, building held as collateral and other additional assets, networking capital, current ratio, sales to receivables ration, sales to current asset ratio income for tax as percentage of current asset, and total debt to net worth ratio. After all this done the loan officer prepares the LAF to approve or reject.

                     3.2.2 Loan Approval

After all the above activities are completed the loan officer should prepare the loan approval format. The LAF is a format which includes all the necessary information about the borrower such as name of the borrower, types of loan, required amount, purpose of the loan, collateral offered, value of collateral, liabilities outstanding (including the bank) balance sheet summary (including net working capital this year and last year capital and reserve net profit loss). And all other activities of the borrower like back ground source of repayment financial performance, managerial capability and all other activities that was in the above step are summarized and displaying in the way that easily to understand for the loan committee. And then the loan officer recommends granting the request; then the final part of the LAF is recommendation. In this part should specify, amount recommended duration of loan period, interest rate, and amount of repayment, repayment schedule, blue and collateral offered, conditions should be fulfilled before disbursement is effective. After that the loan proposal that meets all the criteria has to be submitted to the branch loan committee for approval. The branch loan committee has the power to accept, or to reject the loan proposals, which is submitted to it, if he loan amount is above the branch limit, which is above 200,000 birr it is recommended to approve or decline by the head office credit committee.

                 3.2.3 Loan Contract

After the loan committee approves the proposal of loan the loan contract is to be prepared immediately in all proposed formats and copies as needed in order to register.

Loan contracts are contracts of which the borrower owns or acknowledges the loan forwarded to vim, undertakes to pay the periodic installments, agree to pay the indicated interest rate. Loan contracts are witnessed (stat of the bank) by the person and must be signed by the branch manager and the borrower. After this signing of the contract, the borrower will be identified and will also get a copy.

                3.2.4 Security Contracts

Securities are pledges or collaterals for the loan advance and fasten the guarantor equally and he borrower himself in case of default.

Similar to loan contracts, security contracts are also signed the contracts by the branch manager and the guarantor for and with the witness ( Saff of the bank) of three persons. Besides to this the spouses of the guarantors should join in signing the contracts incase of married person.

In general other relevant appends to the contract, like variable interest rate append, defect clause append, insurance appends etc. should be fulfilled in and signed by contract witnessed.

After signing all the contracts, they should be sent to the respective offices for registration of debt against the property. For instance for buildings, the contracts are sent to the municipality who will register the loan, retain a copy of the contract return the rest to the branch. For vehicles the ministry of transport and communication register he loan on the respective files of the vehicle. As per the writer opinion this task should be handling by the bank messenger order to not create insolvency to customers.

The main aim of registering the loan at these office is to safe guard he lender interest against transferring of the title of he collateral to the third party with out the awareness  of the bank.

3.2.5 Insurance converge for the collateral

Insurance can be briefly defined as the coverage by contracts was by one alliance under takes to identify of guarantee another against loss by a specified contingency.

All properties considered as guarantee while granting loans should be covered and authorized by insurance companies against relevant risks in the name of the bank and the property holder. For instance a building its values of location fences compound and are not included in the insurance rather the year naturally covered against lightening and fire.

In all cases, the insurance policies should be confirmed in the application or name of the lender so that the gain or proceeds will be directed to the lender for the settlement of the debit in the case of the determinate of the property

              3.2.6 Loan disbursement

After accomplishing all the duties mentioned in the report body, then approving of the loan, the contract registered and confirmed insurance policies submitted, disbursement could bade nevertheless, prior to forwarding the loan, the following points should notice.

-        For the purpose of management of end use of the loans they should  paid directly to the concerned seller or supplier gains written consent of the borrower it the loan approved is for the purpose of purchasing truck etc. but if the loan is for working capital, disbursed to is or her saving or chequing account

-        All conditions stated by the loan committee should be fulfilled

-        The borrower should give as theorization to the lender wages such as periodic loan repayments, revenue stamps, estimation facing other charges pertaining the credit.

All the information and entries should be immediately posted in computer only since, it is computerized of open in the name of the borrower.

Accounting treatment

Accounting treatment during disbursement of the money to the debtor ( assme Mrx is a debtor) will be as follows;

·       For the approval of the loan debit loan number and credit account number of Mr.X

·       For the estimation fee debit accounts number of Mr.X and credit other income (estimation fee).

·       For the stamp duty a verges debit account number of Mr.X and credit head office account

·       For the revenue stamp, debit account number MV.X and credit suhndry debtors (miscellaneous)

                                3.2.7 Interest calculation

At the end of the month always interest should be calculated and credited to related categories of the different term loans. During calculating the monthly interest the bank uses simple interest rate.

At present, the interest rate for lending in 9.25% for one year, 9.75% for year and halt, 10.25% for two year and above but this is not fixed. It may changes from time to time in line with the economic condition of the country, which included cleared by the demand and supply of the economy. Which include eared by the demand and supply of the economy. The bank uses 365 days as a basis for calculating interest rate. Since Wegagen bank use computerized system, interest is calculated and posted at the end of every month. The practical calculation of interest is done as follows,

Monthly interest = principle * 30(31) days

                                                  365 days

The following entry is passed to debit the interest average to the perspective loan account at the end of every month: debit loan number of Mr.X and credit income.

When costumers are non- performing in making heir repayments there is an additional interest rate added to the minimum rate specifically 3.00% a loans categorized as anon- performing loan when repayment delays for three- months or more. The interest is calculated as follows,

Monthly interest + principle * (interest rate + 3%) * 30(31) days

                                                                    365 days

The penalty rate was applied in accordance to the contract made between the bank and the debtor.

Monthly interest rate is capitalized and each loan account of a customer unless other wises the loan accounts are non- performing. It a loans nonperforming, the interest is kept underrate adduct (single entry)

                       3.2.8 Follow up and Collection Procedure

 Loan advancing involves processing a loan application, approval disbursement and follow up has made to see that the loan is used for the purpose it was intended and the borrowers complying with the terns of the loan agreement. Diverting the purpose of loan after approval is not allowed.

Follow- up starts after the loan disbursement has been effective. There should no relaxation in the follow-up of loans. Keeping truck of loan repayment schedule in the case of term loons. Credit follow-up is one of the main tasks of manager and loan officers as well ass the credit and risk management department. Nevertheless, it is also the most espial source of potentials. In May ways the most difficult function of lending is the collection of disbursed loans. It any loan falls arrears of is over due (loans and advances which are not repaid in full at the agreed period as per contract) in spite of regular follow up the lending branch shall contract borrowers by telephone and visit them

The entry involved for treatment of loan repayment has debit account number Mr. X and credit loan number Mr.X

              3.3 Primary Data Analysis and Discussion

      Data Presentation and Analysis That Obtained from the Bank’s Customer;

In this section the data collected has been analyzed and interpreted from the answers, comments and suggestions of respondents pertaining to the loan advancing procedures and practices in Wegagen Bank S.C Hawassa branch;

  In distributing the questionnaire the researcher used simple random sampling of 25(18.52) of the prominent loan customers of the branch of which 18(90%)are male and remaining 7(10%) are females. At first the respondent’s sex and educational background was identified. Moreover direct observation, personal experience and secondary data collected are used. When questionnaires were distributed to the customer of the bank, 25 questionnaires were filled and returned.

                 3.3.1 Background of the Respondents

Table 1 respondents back ground

No	Items	Respond’s
		male		Female
		No.	%	No	%
1	sex	18	90%	7	10%
2	Educational background -        Less than grade 4 -        Grade 4-8 -        Grade 9-10 -        TVET -        Grade 11-12 -        Diploma & Above	5 8 0 0 0 5	28% 44% - - - 28%	0 3 2 0 0 2	- 42.86 28.57 - - 28.57%
3	Length of time as borrower of Wegagen bank -        Below 2 year -        2-5 years -        Above 5 year	8 10 0	44.4% 55.6%	3 4 0	43% 57%

Accounting to the questionnaires conducted in the above table item number one demonstrates, among 25 prominent responded customers of the bank 18(72% ) are males while the numbers of female are 7(28%). From the above quantitative data, it is possible to understand that majority of the branch credit customers are males.

Item two in the above e table is related to the educational back ground of the respondents. It shows 5(28%) are less than Grade 4. 8(44%) are grade 4-8, 5(28%) are diploma and above.

While the female respondents are 3(42.86%) are grade 4-8, 2(28.57) are grade 9-10,2(28.57%are Diploma and above item 3 in the above table respondents the length of time that customers stay s a borrower of the branch. The analysis shows for male respondents. 8(44.4%) are below 2 and 10(55.6%) are between 2-5 years and 4(57%) are between 2-5 years.

               3.3.2 Clients opinion on time elapsed to obtain loan

 Customers are very aware with regarding to the time takes to advance the loan they requested. Therefore, the following table summarizes the time elapsed from the data of application to data of disbursement.

No	Item	Respondents
		Male		Female
		No	%	No	%
1	How long it permit the loan requested? -        Below 5 days -        5-10 days -        From 15-30 days -        Greater than 30 days	7 4 5 2	39% 22% 28% 11%	3 0 3 1	43% - 43% 14%
2	How do you evaluate the advancing procedure as compute to other bank? -        Long period -        Short period -        Medium period -        Similar period	0 2 11 4	- 28% 6% 32%	0 3 1 3	- 43% 14% 43%

 Foe the above table 2 similar interpretation is applied as the previous table-1.

                  3.3.2 Customers satisfaction

In this part the researcher tries to gather information about the customer satisfaction to w adds the loan advancing procedure of the branch. The following table illustrates thereupon of the customers.

Table 3 Degree of customer’s satisfaction

No	Item	Respondents
		Male		Female
		No	%	No	%
1	Are you satisfied with the existing loan advancing procedure? Yes No Different	13 2 3	272% 11% 17%	6 0 1	86% - 14%
2	-        Did you ever intended to shift from Wegagen bank to other bank ? Yes No Different	0 15 3	- 83% 17%	2 5 0	29% 71% -

-        Source:  survey stdy,2012

-        From the above table analysis for item one shows males, 13(72%) side yes, they are satiating with the existing procedures. 2(11%) said no, thy are not satisfied with the loan advancing procedure, but they are still customers of the loan advancing procedure, but they are still customers of the branch since the stag members are very attractive and they are polite in handing customer. And 3(17%) said that nether neither satisfied nor unsatisfied.

-        From the item two often above table from male, 15(83%) said no. they are not shifting to other bank, 3(17%) are nether shifted nor exist as customer in the future.

                    3.3.3 Other comments

The respondent replied that the bank should revise the loan processing procedure as soon as possible to weintan its prominent customers. Also said that the main reason for following important customer to other bank is the length of loan processing procedure of the bank. They replied that there is a carry in security estimation since the bank engineer used to come from head office. so in order to quacilitate the advancing produce the bank should reprise such dalliance.

                3.3.4 Data presentation and analysis that obtained from

                          The bank’s employees:  

In this section the data collected was been analyzed and general prated according to the answers, comments and suggestions of the respondent’s employees of Wegagen bank. S.C Hawassa branch. In distributing the questionnaire the researcher used simple random sampling of 8(61%) of the employee of loan sector Wegagen bank S.C of the respondents 3(37.5%) are makes and the premising 62 %(5) are females 5.

           3.3.4 Background of the respondent and working experience;

no		Respondent
	I tem	male	%	female	%
1	Sex	3	37.5%	5	62.5%
2	Age 25-30 31-40 Above 40	2 1 -	66.7% 33.3% -	3 2 -	60% 40%
3	Education Diploma 1st Degree Above 1st degree	1 2 -	33.3% 66.7% -	1 4 -	20% 80%
4	Work experience in the organization -        Below 1 year -        1-3 year -        Above 3year	1 2 -	33.3% 66.7% -	1 4 -	20% 80% -

According to the above table analysis result 62.5% of the respondents are females and the remaining are males. And similarly the age distribution of the respondent male 66.7% lie 25-30 and the main 33.3% lie 31-40. In case of female

 60% lie,25-30, and 40% lie 31-40. The other item 3 & 4 are also analyst similarly.

Table-2- the respondents answer in the questionnaire

No	Item	Respondents
		Male	%	female	%
1	Do you have an experience regarding the loan procedure -        Yes -        No	3 -	100%	5 -	100%
2	Do you believe that the loan is a source of revenue? Yes No	3 -	100% -	5 -	100%
3	How loan is disbursed to the customer -        By individual customer sufficient collateral -        By cooperative organization. Of customer -        By applying both of	3	100%	5	100%
4	What are the type of loan that the bank provide -        long term loan -         Short term loan -        Bothe of the above	- 3 -	100%	1 4 -	20% 80%
5	Problem that face the customer Yes No.	3	100%	5	100%

                                 

                          CHAPTER FOUR

         4.  CONCLUSION AND RECOMANDATION

                 4.1 CONCLUSION

Generally, this chapter gives a conclusion in relationship with the loan advancing procedure of Wegagen bank S.C Hawassa branch. To this end, credit related issues are discussed and relevant data are analyzed.

The researcher concludes that loan is beneficial both to the bank as well as to the borrower, banks have to give a peculiar focus on it.

The current loan advanci9ng procedure of Wegagen bank  Hawassa branch are too long and complex, thus it does not encourage customers to make loan rather it is causing customer to leave the bank and going to other banks

-        The main participants of the branch in loan customers are domestic trade and service. The other sectors comprise and insignificant portion of the loan

-        Most of the loan clients of the Wegagen bank S.C are elementary school level so they lack to understand the banking system

-        To grant a loan, applicants for loan to present a written application, trade license of me corundum of association and registration certificate if the applicant is a cooperative or association. In addition, interview the applicants various questions to get high light about the borrower.

-        According to the respondents the customers are living with the branch as a borrower for more than five years

-        Practically the concerned bank staffs used to visit the business according to the manual.

-        The researcher replied that the time taken for granting a loan is very lengthy.

-        In my understanding the reason for length  is not only the procedure, but also the borrower, some of the borrowers did not provide the appropriate documents at a right time

-        Most of the clients are neither satisfied nor dissatisfied with the loan processing procedure, but they exist till now because they are satisfied with the staff members of the loan office in handing them.

-        Therefore, the bank has to give special attention for the alleviation of encountered problems in lending.

                        4.2 Recommendations

-        Based on the findings of the available data and personal observation, the following recommendations are forwarded with the belief that is will be helpful for the betterment of the bank performance in loan advancing procedure

-        On the basis of the assessment, Wegagen bank S.C Hawassa branch should take the following measures to improve its credit activity and to maintain its customer from feeing to other banks.

-        The bank should decide on lending of money to customers as much as possible with a maximum of ten (10) days after receiving and application and necessary documents.

-        Wegagen bank S.C should review its loan advancing procedures and made further investigation why borrowers are following to other banks

-        The bank should communicate openly with the customers and give suggestion with respect to the banking procedures and practice, so they can able to help in facilitating the procedure by giving the necessary information band documents on time

-        The bank should give training to loan officers and managers on how to handing customers.

                  QUESTIONNAIRE- I

THIS QUESTIONNAIRE PREPARED FOR CLIENTS/ CUSTOMERS OF

                                  WEGAGEN BANK S.C

                                HAWASSA BRANCH.

The questionnaires will try to identity some problems that will be improved for loan advancing procedure of Wegagen bank Share Company. So that, your response kept very confidential and you don’t required to mention you name

And finally thank you in advance for your cooperation

1.     Sex:     A. male           B. female

2.     Educational back ground,

A.    Less than grade 4

B.    Grade 4-8

C.    GRADE 9-10

D.    GRADE 11-12

E.     TVT

F.     Diploma & above

3.     How long did you stay as a borrower in Wegagen bank Hawassa branch

a.      Below 2 year

b.     2-5 year

c.      Above 5 years

4.     How long did you take to permit the loan your request?

A.     below 5 days

B.    5-10 days

C.    15-30days

D.    Above 30 day

5.     Did you get loan service from other bank before?

a.      Yes

b.     no

6.     If your answer for question no5 is yes how did you evaluate the advancing procedure as compared to other banks?

a.      Takes long period

b.     Takes short period

c.      Takes similar

d.     takes medium period

7.     Are you satisfied with the existing loan advancing procedure and practice?

a.      Yes

b.     No

c.      Different

8.     Did you ever intended to shift from Wegagen bank to other bank?

a.      Yes

b.     No

c.      different

9.     other cements that is important for the long run success of the bank

                           QUESTIONNAIRE - II

-        The purpose of this question is to collect primary data on the loan practice & procedure of Wegagen bank S.C Hawassa branch

-        This question is answered by only the employees of loan sector Wegagen bank S.C Hawassa branch

1.     Sex: male                                Female

2.     Age: 25-30                              30-40

3.     Education :Diploma               1^st Degree

4.     Working experience in the organization (WBS.C)

Below 1 year

13- years

Above 3years

5.     Do you have an experience of oldgardin the loan practice and procedure  industry

Yes

You

6.     Do you believe that the loan service that is given to the customer is an important source of revenue for the bank

Yes

No

7.     How loan is disbursed to the customer

-        By applying individual customer with

-        By applying cooperative of customers

-        By applying both of the above

8.     What are type of loan that the bank provide to their customer

-        Providing long term loan

-        Providing short term loan

-        Providing both  of the above

9.     Do you think that there a problem that face the customer during the lending procedures

Yes

No

10.  If your answer an question no. g is “yes “what are the problems that face the customers

-        Failure to provide sutticient collateral

-        Failure to fuller legal requirement

-        Failure to the repayment of the loan the combination of the above

11. Another option on loan advising practice & procedure of your bank---------------

                  

                     BIBLOGRAPHY

ü  Gray Smith, (1991), Money Banking and finance intimidation Lxion lexingtion, Health

             and co. Washinhton D.C

ü  Palfreman D., Ford F, (1998), The Business of Banking: in elements of Banking, 2^nd edition, pitman, Great Britain, 10- 20

ü  Raymon P. Neveu , (1985), Fundamentals of Managerial Finance, 2^nd edition South main

ü  Richard, A . Realey and Stewart, C. Myers, (1996), Principle of corporate finance, 5^th edition.

ü  Soldofsky and Olive, (1974) financial management, clininat Ohio.

ü  Mishkin, Frederic S., (1989), the economics of Money banking and financial markets, 2^nd edition, Glenview Scott, Foresman

ü  Wegagen Bank S.C. (2012) Domestic Manual, International Banking procedure, and polices and procedures.

ü  Asseffa Moges (1998) Money, Banking & insurance In Ethiopia, Birhan & Selam, Addis Ababa.

ü  Suekuar; 1987 banking theory and practice in India, 8^th edition 

                                       On line source

                              WWW. Wegagen Bank. Com