Eshetie Mekonene Amare

1. DEBRE MARKOS UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
ASSESSEMENT OF LOAN AND ADVANCE PROCESSING PRACTICE A CASE
STUDY ON ABAY BANK DEBRE MARKOS BRANCH
RESEARCH PAPER SUBMITTED FOR THE PARITAL FULFILLMENT OF THE
RE QUREMENT OF BA DEGREE IN ACCOUNTING AND FINANCE
BY:
ESHETIE MEKONENE
ADVISOR:
TADESSE YITBARK (MSC)
JUNE, 2016
DEBRE MARKOAS, ETHIOPIA

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Abstract
This research was conducted on the assessment of loan and advance processing practice in Abay
Bank Debre Markos branch. The objective of the study was to assess the loan and advance
processing practice Abay Bank in Debre Markos branch. The researcher used descriptive data
analysis method. This study was used census of data of data collection technique to obtain
primary and secondary data. The data analysis are carried out based on tabulation and
percentage method and interpreted accordingly. The primary data have been collected through
interview and questionnaires. The effectiveness of Abay Bank in loan processing and follow up
activities are medium. And the bank shall work more for the effectiveness of loan processing and
follow up activities. Finally, the researcher believes that the study are helps to improving the
loan and advance processing practice of Abay Bank.

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ACKNOWLEGEMENT
First of all I would like to thanks God and his mother St. Merry for helping me in every aspect
of my life. Next I would like to thanks my advisor instructor Tadesse .Y (MSC) for his
encouragement, constructive comments, suggestions, and guidance that made this work as much
as possible. Thirdly I am gladly full thanking to my parents for their financial and moral support
throughout my objective. Fourthly I would like to thank Abay Bank officials (managers and
employees) in Debre Markos branch who give me valuable information. Finally I would like to
thank all of my friends who contribute kindly advice and suggestions.

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TABLE OF CONTENTS
Title page
Chapter one
Introduction
1.1 Back ground of study…………………………………………………………………………………...1
1.2 Back ground of the organization………………………………………………………………………..2
1.3 Statement of the problem……………………………………………………………………................3
1.4 Objective of the study………………………………………………………………………………….4
1.4.1General objective……………………………………………………………………………………..4
1.4.2Specific objective of the study…………………………………………………………………….….4
1.5 Significance the study……………………………………………………..……………………………4
1.6 scope the study………………………………………………………………………………………....4
1.7 limitation of the study…………………………………………………………………………………..5
Chapter two
2.Review related literature…………………………………………………………………………..……...6
2.1 History of banking………………………………………………………………………..…………....6
2.2 types of banks………………………………………………………………….…………………….....6
2.3 function of Abay bank……………………………………………………………………….................6
2.4 loan account……………………………………………………………………………………............7
2.4.1 Diaspora banking…………………………………………………………………………...………..8
2.4.2 Diaspora mortgage loan………………………………………………………………………….…..8
2.4.3 Loan and advance………………………………………………………………………….................8
2.4.4 Loan processing……………………………………………………………….……………………..9
2.4.5 Types of loan………………………………………………………………………………………...10
2.4.6 Loan based on purpose……………………………………………………………………………...10
2.4.7 Over drawl…………………………………………………………………………………………..11
2.4.8 Loan approval form ………………………………………………………………………………...12
2.4.9 Loan settlement ……………………………………………………………………………..………12
2.4.10 over draft facility ………………………………………………………………………………….12
2.5 loan facilities …………………………………………………………………………........................12
2.6 Risk associated with lending…………………………………………………………….…………….14

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2.7 working capital financing and project financing loan ………………………………………………..14
2.8 credit analysis ………………………………………………………………………………………...15
2.9 loan commitments…………………………………………………………………………………….16
2.10 Establishing a written loan policy…………………………………………………………………..16
Chapter three
3.Research methodology…………………………………………………………………………………..18
3.1 research design…………………………………………………………...……………………………18
3.2 data source………………………………………………………………………………….................18
3.3 method of data collection……………………………………………………………………………...18
3.4 Target population and sample size…………………………………………………………………....18
3.5 method data analysis………………………………………………………………………………….18
18 Chapter four
4.Data analysis and interpretation…………………………………………………………………………19
Chapter five
5.Conclusion and recommendation………………………………………………………………………..32
5.1 conclusion ……………………………………………………………………..……………………..32
5.2 recommendation…………………………………………………………………………...................34
Reference…..……………………………………………………………………………….…………….35
Appendix ……………………………………………………………………………………………….....37
List of tables
Table 4.1 profile of the respondents…………………………………………………………..…………..19
Table 4.2 types of loan…………………………………………………………………………………….21
Table 4.3 credit committee of the bank approved credit facilities …………………………………….…22
Table 4.4 problems facing in loan processing………………………………………………………….…22
Table 4.5 willingness of the customers to disclose any information need for loan and advance processing
practice……………………………………………………………………………………..…………..….23
Table 4.6 loan facilities available in Abay bank…………………………………………………………..24
Table 4.7 collateral evaluation criteria……………………………………………………………….…..24
Table 4.8 assets used as a collateral…………………………………………………………….................25
Table 4.9 evaluate the effectiveness of the loan follow up activity……………………………………....25
Table 4.10 objectives of Abay bank in relation to loan processing…………………………….................26
Table 4.11 efforts to create customer awareness about loan…………………………………………...…26

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Table 4.12 loan agreement……………………………….……………………………………………….27
Table 4.13 types of non-performing loan………………………………………………………………... 27
Table 4.14 know your customer principle (kyc)………………………………………………………..…28
Table 4.15 loan to collateral ratio………………………………………………………………………...28
Table 4.16 loan to portfolio management…………………………………………………………….…..29
Table 4.17 working capital financing loan and project financing loan……………………………...……29
Table 4.18. Types term loan……………………………………………………………………………....30

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Chapter one
1. Introduction
1.1. Background of the study
Financial institutions are one of the most heavily regulated of all business in the world .Around
the globe the service firms face stringent government rule committing the service they can offer
the territories they can enter or not enter the makeup of their portfolios of assets, liabilities and
capital and even how they price and deliver the service to the public (Rose, 2010).
Banking occupies one of the most important positions in the modern economic world .Is
necessary for trade and industry .Hence it is one of the greatest agencies of commerce .Is the
financial institutions that accepts deposit of money from the public and keep the main its custody
for safely (kc shekar, 2005).
Loan: is an amount of money advanced to borrower to be repaid at the later date, usually with
interest. Legally a loan is a contract between borrower and lender, enforceable under commercial
code in most states. The terms and conditions for re- payment of a loan, specified in a loan may
be payable on demand or demand loan in equal monthly installments (lekshmy and shekhar,
2005).
It is generated for a definite period and borrower is given the facility to repay it in one lump sum
or installments. It also defined as when a lender gives money or property or repays the borrowed
money along with interest at agreement determined date in the future .According to the shaker
(2005) loan is do maintaining asset holdings and generates the largest share of operating income
at most banks .As far as Banks is concerned , the operating cost of a loan is lower as compared to
a cash credit or an overdraft ,this method of granting and advance has the advantage of
strengthening the financial discipline in the use of the Bank credit could be more effective in the
case of loan as compared to cash credit. In follow up and supervision or control of Bank loans,
the three basic types of loans are pure discount, interest only loan and amortized loan.

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1. Interest only loan: a types of loan repayment plan calls for the borrower to pay interest each
period and to repay the entire principal (original loan amount at some point in the future.
2. Amortized loan: with a pure discount loan or interest only loan, the principal is repaid all at
once.
3.pure discount loan: is the simplest of a loan with a such loan ,the borrower receives money
today ,and repay a single lump sum at some time in the future(Rose,2006).
1.2. Background of the organization
Abay Bank was founded in November 2009 and it was legally registered and obtained its license
from National Bank of Ethiopia to set up a Bank and was officially established on July 14,2010
and started fully fledged Banking operation on November 3,2010 with subscribed capital of
Ethiopian Birr 147.5million with 823 founding share holders and it has now 91 Branches in the
country .Currently the paid up capital of the bank is Birr 550 million as of June 30,2015 and the
number of share holder is over 3000.Since its establishment the Bank has achieved encouraging
achievements in all standards .Its sphere of operation has expanded all over the country and the
total number of branches 104 just with in less than five years of operation and it has more than
175,000 account holders. Abay Bank in Debre markos branch the total number of loonies are
103. Source: manual of Abay Bank.

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1.3 statement of the problem
Banking industry from its nature is a bit wide and modern which has various functions within its
structure such as lending, deposit and remittance. Therefore the profitability of the banks is
affected by the loan and advance system. Lending activities require Banks to make judgment
related the credit worthiness of borrowers .Because Banks face accredit risks when the borrowers
fails to meet the terms of a loan agreement (Jhingan, 2012).Abay Bank is one of the strong
private commercial Banks playing important role in the country’s Banking industry and
economic development .Among the services provided by the Bank loan extending would be one
of the principal activity in the Banking industry .Abay Bank has a better share in the financial
market .But many problems faced that the bank reasons to fail the single most important reasons
assed by the prior studies is non- performing loan(NPL) but this study primarily focused on
assessing both the non-performing loans and credit risks associated with lending problems in
loan and advance processing practice .The borrowers of Abay Bank may be either in default or
close to being default .Although has been working for the better position of non-performing
loans .It still needs great attention .This is because of two reasons .The first one is loan is the
ultimate source of profit for Banking and the second one is Banking in one country economy is
used as a channel for the conversion of saving in the capital market(Gary 1991). Due to this the
researcher will assess the loan and advance processing practice in Abay Bank Debre Markos
branch. This study will try to answers the following research questions
 What are the types of loan and advance Abay bank provide?
 What are the problems faced by the bank and borrowers with loan and advance?
 How the bank evaluate loan and advance process?
 Is there loan and advance processing practice contributed to non-performing loan?

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1.4. Objective of the study
1.4.1. General objective
The general objective of the study is to assess the loan and advance processing practice of Abay
Bank in Debre markos branch.
1.4.2 Specific objective of the study
✓ To identify the types of loan and advance practice of the Bank
✓ To examine the problem faced by the Bank and borrowers in loan and advance
✓ To assess the loan and advance evaluation practice of the Bank
✓ To assess whether the loan and advance processing practice contributed to non –performing loan
or not
1.5. Significance of the study
This study will be contributed to solve the problems that observed in the loan and advance
processing practice of Abay bank .And it gives a possible solution so as to how credit officers
should process potential healthy loans during loan and advance processing system .This research
will increase the knowledge and understanding of the researcher .And it will be helps to other
researchers as a source document who are interested deal with in loan and advance processing
practice .Generally it helps as a guideline to the concerned managers of banks with regard to how
they properly address the credit need of their customers.
1.6 .Scope of the study
Abay Bank is a huge company having 104 branches in all parts of the country .In this case this
study might be more attractive and important if it was conducted on country level Abay Banks
.However it might be quite difficult to have that information from all branches .Due to this the
researcher would be forced to delimit the scope of the study only to assess loan and advance
processing practice of Abay Bank in Debre Markos branch.

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1.7. Limitation of the study
The following problems was faced when the researcher conducted the study the major problems
that are hinder the smooth running of the study ,in adequate computer access, reference book,
and lack of depth knowledge and analytical ability for writing a research analysis part.

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Chapter two
2. Review related literature
2.1. History of Banking
As we seen the history of Bank the word” Bank” is derived from “Banc us’’ or” Banque or
Bane” all terms however mean branch up on which the medieval European money lenders or
money lenders or money changers used to carry on their monetary transactions. The term Bank
or” Banking” is generally used in every broad sense including the capitalist, the financiers, the
stock brokers, the corporations. Banking company which carries on as its principal business the
accepting of the deposit of money on current account or subject to withdrawal by cheque
(T.N.HAJELA, 2015).
2.2 Types of banks
Broadly speaking there are different types of Banks these are, Commercial Banks, Industrial
Banks, Agricultural Banks, and Foreign exchange Banks .The responsibility function of
commercial Banks generally advance short term loan to business men and traders, because their
deposits are only for short period. Generally these Banks give loans for a period extending from
six months to six months. Industrial Banks these are special types of as the name itself suggests.
They extended long term loans to industries. They also help industrial firms in selling and
purchasing debentures and shares. Agricultural Banks for meeting the requirements of
agricultural community, special types of Banks have been set up in predominantly agricultural
countries. The agriculturalists and peasants require short term loan to purchase various inputs
like seeds, fertilizers etc. Foreign exchange Banks these Banks specialize in financing foreign
trade by making international payments through the purchase and sale of foreign exchange bills
(T.N.HAJELA, 2015).
2.3. Function of Abay Bank
Function of Abay Bank has to perform variety of function which is common in either developed
and underdeveloped country or nation. Those are:

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A. Saving deposit account: saving deposit account is an interest bearing deposit which can be
opened with a minimum acceptable of Birr 25:00.
B. Special saving deposit account (SSDA): A special saving deposit account is a non interest
bearing account. The account is opened similar to that of a savings account. Source: manual of
Abay Bank.
C. Child trust account: The account is opened for under –aged individual (minor) by the
parents or guardians of the minor, or by a court order.
D. Provident fund account: This account is opened for administration of provident fund
accounts.
E. Zero-balance account: This account maintains a disbursing account at “zero” by transferring
funds from a saving account.
F. Demand or current account: A demand deposit account (current or chequing account) is a
non –interest bearing account. The minimum amount of money required for individual trade
operators is Birr250:00 while for private limited companies and other it is Birr 500:. The account
is operated by cheque.
G. Fixed time deposit account: It’s a deposit received for a certain period of time it provides an
attractive and higher interest rate. The minimum balance for a fixed time deposit is Birr
25000:00.
H. Foreign currency account: A foreign currency account is an account whose source of fund
is overseas and can be maintained in hard currency or in Birr. Major types of foreign currency
accounts: Non-resident Non -transferable foreign currency and Diaspora accounts. Source:
manual of Abay Bank.
2.4. Loan account
Abay Bank provides a range of credit services that are supposed to fit the existing and future
demands the customers .The Bank loan services include: overdraft, overdraw, merchandise loan,

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import letter of credit, import letter of credit settlement loan advance bills ,term loan for various
sectors etc. source: manual of Abay Bank.
2.4.1. Diaspora Banking
In line with our objective of “Banking “for all”, we have extended our service to Ethiopian
Diaspora that suits their Banking needs while they are living and working abroad. Using Abay
Bank Diaspora banking services, you are guaranteed to easily access; Diaspora accounts, credit
facilities, Diaspora mortgage loan, Diaspora investment loan etc. source: manual of Abay Bank.
2.4.2 Diaspora mortgage loan
This service is unique in its kind in the sector in which the Bank pays as a facilitator and
arranges the mortgage loan scheme to Diaspora customers to own their dream house by saving
50%of the cost in the foreign currency. Source: manual of Abay Bank.
2.4.3 Loan and advance
Loans and advances are financial instruments originated by the Bank by providing money to the
debtors. The loan and advance are stated at cost less impairment losses. Impairment losses
comprise specific provision against debits identified as bad and doubtful and general provisions
against losses when are likely to be presented in only loans and advance portfolio. The Bank
follows the national bank of Ethiopia supervision of banking business directive number
SSB43/2007 .In determining the extent of provision for impairment losses. The directive
classifies loans and advances in to the following.
1. Pass loan: loans and advances in this category are fully protected by the current financial and
paying capacity of the borrower and are not subject to criticism. In general loans and advances
which are fully secured both as to principal and interest by or cash substitutes are classified
under this category regardless of past due status or other adverse credit factor.
2. Special mention: any loan or advance past due 30 days or more but less than 90 days is
classified under this category

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Sub standard: Non-performing loan or advance past due 90 days or more but less than 180 days
is classified under this category.
3.Doubtful: Non –performing loans or advances past due 180 days or more but less than 360
days is classified as doubtful.
4. Loss: Non –performing loan or advance past due 360 days is classified a loss.
According to the National Bank of Ethiopia’s directives number SSB43/2008 and international
practice the Non-performing loan of any bank should be below 5%of its total loan. Source:
manual of Abay Bank.
2.4.4 Loan processing
Entire sequence of steps from the time a loan application is received (a loan offer is accepted) to
the time loan is closed. Steps involved in loan processing 1st
Borrowers must first contact the
clients’ guidance and advisory of loan division 2nd
for detailed discussions on loan application
the project idea background, equity contribution etc 3rd
the department may either accept or
reject the application at primafacie consideration based on policy or technical contents of
application form grounds 4th
appraisal work is carried out by the loan division, checked by the
general manager, commented on by loan committee and forwarded to the board of management
for approval (Christine peter,2004)
 Required loan processing document
For a loan application accepted based on the interview the customer relationship officer collect
all processing documents based on the check list. The statements may be actual and or projected
in the following manner.
A. All business established as share companies should submit audited financial statements
regardless of the requested loan type and amount.

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B. All business established a private limited companies sole proprietor ship that has been in
business for a year or above and whose total exposure exceeds Birr 5000,000 should submit
audited financial statements.
C. All business established as private limited companies whose total exposure is less than Birr
5000,000 must present provisional financial statements for at least three consecutive fiscal years.
Source: manual of Abay bank.
2.4.5 Types of loan
Banks make a wide variety of loans of loans to a wide variety of customers in order to address
the credit need of the business society. Bank divides their loan in to different groups for different
purpose. These are based on purpose and maturity (Rose, 2002).
2.4.6 Loan based on purpose
Bank loans can be classified according to the purpose for which is borrowed, for example:
 .Commercial loan : are provided to large or small companies who use the funds provided to
make purchases or make payroll and pay back to the lender over an agreed up on time ,
usually for a short term (from 30days to one year). Loan given for trading activities such as
purchasing inventories.
 Industrial loan : loans given for industrial activities
 Consumer loan: An amount of money lent to an individual, usually on a non secured basis
for personal family house hold purpose
 Mortgage loans: loans advanced for purchase of residential houses and commercial
buildings are classified under this category.
 Construction loan: is relatively short term credit that repaid when the builder obtains long
term credit are repaid (Rose, 2002).

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● Requirements to be considered for mortgage loan
1. The maximum term of the loan should not exceed 5 (five) years.
2. The source of repayment towards the loan could be either from monthly salary for employed
personnel or income from business for business people.
3.Disbursement should be effected directly to the supplier /seller after transfer of ownership (title
deeds) in the name of the borrower is completed and submitted to the bank and also up on
registration of the same with the appropriate government authority. Further written and signed
consent of the borrower should be obtained prior to disbursement.
4. Borrower should offer primarily the building to be purchased as collateral for the loan and /or
other acceptable collateral: source Abay Bank manual.
2.4.7 over drawl
a).An over drawl is a temporary facility that grants a customer the right to with draw a specified
amount of fund over and above the over draft limit in order to meet unexpected cash shortage.
b).In principle the Bank does not encourage an over drawl ,but in a certain circumstances.,
depending on the relationship with the customer ,over draw may be allowed for a maximum
period of two months (60days) and may be approved only once in a(12) twelve month period.
c).The over draw amount should not exceed 25% of the approved over draft limit or Birr five
million whichever is lower.
2.4.8 Loan approval form
Loan approval form: is the principal of credit decision document on which relevant information
the loan request, recommendations and the credit decision of the credit approving team
individuals are to record. The loan application form includes: amount of loan requested, loan
term, purpose of loan, sources of funds recover loan and types of collateral needed etc (Christine
peter, 2004).

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2.4.9 Loan settlement
Settlement document prepared by lending institution and presented to the borrower at the loan
time showing the amount and frequency of the settlements for the loan repayment.
(www.business dictionary.com).
2.4.10 over draft facility
 An overdraft is a form of credit facility by which a customer may be allowed to draw beyond
the deposits of its current accounts for the sole purpose of the day to day operational needs of
a viable an ongoing business. The outstanding balance of the over draft is re payable on
demand by the Bank. It is financed for a limited duration normally for six months and in
exceptional cases for one year.
 Based on strict and continuous follow up the Bank shall call back the outstanding over draft
loan balance at any time when its performance is un satisfactory unless considered
exceptionally.
 Over draft facility shall be reviewed every six months unless the Bank demands it to be
reviewed by the credit approving team for any remedial action when the performance of the
account is deteriorating.
 Interest is charged on the over draft facility’s outstanding balance on daily basis. Source:
credit manual of Abay Bank.
2.5. Loan facilities
Abay Bank currently offers services for diverse credit needs with flexible borrowing options. An
arrangement where a person or organization can borrow money up to a particular amount if and
when they need it.
1. Merchandise loan facility: merchandise refers to a specific product or group of products
goods manufactured or acquired by a trading business for purpose of sale. A merchandise loan is
a short term credit facility provided by the Bank against which the merchandise or document,

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evidence (railway receipt, ware house receipt and air way bills held as a pledged or collateral for
the loan). The purpose of merchandise loan facility is to relieve customer from cash flow
problems arising from money being up in the merchandise. Merchandise loan facility shall be
renewed every year. The amount of merchandise loan facility has to be up to maximum of 80%of
advance rate, depending on the type of merchandise, customer satisfaction and credit risk grade
level. Source: credit manual of Abay Bank.
2. Staff consumer loans: staff members can enjoy consumer credit facility, however details
governing this arrangement are provided separately in the human resource policy of the Bank.
3. Building construction loan: are loans to be advanced to individuals and enterprises to
partially cover construction or renovation cost of residential and non residential buildings
● Eligibility criteria
To obtain credit facilities from the Bank applicant should at least full fill the following criteria.
1) Applicants should be legally licensed and have been in the captioned business to be financed.
2) Applicants should be able to present any document required from them for the smooth
processing of the loan.
3) Applicants should not have any prior record of loan defaulting in any Banks.
4. Construction machinery loans: Construction machinery loan is a loan for the purchase of
construction machinery such as dozer, graders, loaders, excavators etc.
❖ Eligibility criteria.
A. Applicants should be legally licensed and have been in the captioned business to be financed.
B. Applicants should be able to present any document required from them for the smooth
processing of the loan.
C. Applicants should not have any prior record of loan defaulting in any Banks. Source: credit
manual of Abay Bank.

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2.6 Risks associated with lending
Banks accept risk in order to earn profit. They must balance alternative strategies in terms of
their risk / return characteristics with the goal of maximizing share holders wealth .the office of
comptroller of the country. Lists nine risk for purposes of Bank supervision, some of them
1) Financial risk: Does intern comprise two types of risk.
Pure risk: includes liquidity credit and solvency risks which can be result in losses for a Bank if
they are properly managed. (Peter, s rose, 1999). Speculative risk: are based on financial
arbitrage and can result in a profit if the arbitrage is correct or loss if it is in correct. The main
categories of speculative risk are interest rate risk, currency risk, and market price risk.
2) Operational risk: are related to a Banks over all business strategy, organization functioning
of internal systems including computer related and other technologies. Complain with Bank
policies and procedures.
3) Business risk: are associated with Banks business environment including macroeconomic and
legal regulatory factors.
4) Credit risk: the risk that a firm’s customer and the parties to which it has lent money will fail
to make promised payment is known as credit risk.
5) Default risk: is the probability that promised payment of interest and principal will not be
made on the time (peter, s rose, 1999).
2.7 General features of term (working capital and project financing loan)
 Working capital financing loan: provide business with short term credit, lasting from a few
days to about one year. Working capital loans are most often used to fund the purchase of
inventories or raw materials.
 Project financing loan: the most risky of all business loans are project loans-credit to
finance the construction of fixed assets designed to generate a flow of revenue in future

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periods. Prominent examples include oil refineries and power plants (Sylvia c, hundgins,
2010).
✓ A term loan: is a loan granted to customers to be repaid within a specific period of time with
interest. The Bank extends short, medium, and long term loan.
● Short term loan: is a loan extended by the Bank to finance the working capital needs,
and or to address other short term financial constraints of the borrowers business. The maturity
period of short term loan must not exceed one year from the date of signing the loan contract.
Repayment period is quarterly and semi-annually based on the cash flow generating capacity of
the business.
● Medium term loan: is a loan which has a maturity period exceeding one year but less
than or equal to five years from the date of signing the loan contract.
● Long term loan: is a loan which has a maturity period longer than five years but not
exceeding a maximum period of fifteen (15) years with periodic installment purpose of the loan
is to finance new projects and to meet working capital needs. Repayment period is quarterly,
semi-annually and yearly. Source: credit manual of Abay Bank.
2.8 credit analysis
Credit analysis: is the evaluation of borrower’s capacity of properly servicing the loan proper
credit analysis the core part of quality loan in a Bank in doing this. The five basic credit factors
(5C, s) to be evaluated; character, capacity, capital, collateral, and condition.
Character: refers to the borrowers’ reputation and the borrower’s willingness to meet credit
obligations. In evaluating character the borrower’s honesty, integrity, and trust worthiness are
assed.
Capacity: refers to the business ability to generate sufficient cash to repay the debt. The
customer’s ability to meet credit obligation out of operating cash flows.

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Capital: refers to the owner’s level of investment in the business. The customer’s financial
reserves.
Collateral: also called security is the assets that the borrower pledges to the Bank to mitigate the
Banks risk in event of default.
Condition: general economic conditions in the customers line of business. Are external
circumstances that could affect the borrower’s ability to repay the amount financed (timothy w.
Koch, 2006).
2.9 Loan commitments
These days most commercial and industrial loans are made by firms that take down (or borrower
against) p renegotiated line of credit or loan commitments rather than borrow spot loans. Spot
loans are made by the financial institutions and the borrower uses or takes down the entire loan
amount immediately. Loan commitments agreement is a contractual commitment by a financial
institution to lend to a firm a certain maximum amount at given interest rate (Anthony Saunders,
2010).
2.10 Establishing a written loan policy
One of the most important ways of a lending institution can make sure its loans meet regulatory
standards and are profitable is to establish a written loan policy. Such as a policy gives loan
officers and management specific guidelines in making individual loan decisions and in shaping
the overall loan portfolio. The actual makeup of lender's loan portfolio should reflect what its
loan policy says. Otherwise, the loan policy is not functioning effectively and should be either
revised or more strongly enforced. What should a loan policy contain? The most important
element of a will written loan policy. These elements include.
1. A loan statement for the loan portfolio (i.e. statement of the characteristics of a good loan
portfolio in terms of types, maturities, sizes, and quality of loans).

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2. Specification of the lending authority given to each loan officer and loan committee
(measuring the maximum amount and types of loan that each employee and committee can
approve and what signatures of approval are required).
3. Lines of responsibility in making assignments and reporting information.
4. Operating procedures for soliciting, evaluating, and making decisions on customer loan
applications.
5. The required documentation that is to accompany each loan application and what must be kept
in the lender's files (financial statements, security agreements etc.).
6. Guidelines for taking, evaluating, and perfecting loan collateral. ( Rose,2006).

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Chapter three
3. Research methodology
3. 1 Research design
The research design is descriptive types of research design. Because this study was describe and
summarizes the data about a particular events and helps to describe about what has happened or
what is happing.
3.2 Data source
To make the research reliable, the researcher used primary data sources. The primary data are
collected through questionnaires and personal interview, from bank manager.
3.3 Method of data collection
The data mainly collected from primary sources. Primary data was collected by way of
discussion with bank officials, mainly with bank manager and loan officer, and through
questionnaires.
3.4 Target population and sample size
The target population of the study was employees of Abay Bank, Debre Markos branch. In Abay
Bank Debre Markos branch there are 10 employees including manager that the researcher was
used a census method of data collection through questionnaires, because the size of the
population is small.
3.5 Data analysis
After collecting the necessary data the researcher was analyzed the data using through
appropriate tools. The data collected through structured interview and was analyzed by the
qualitative analysis method, and the data collected through questionnaires were analyzed and
interpreted by using qualitative techniques such as percentage and tabulation.

25. 25
CHAPTER FOUR
4. Data analysis and interpretation
This chapter deals with the interpretation of data, the data analysis tried to answer the assessment
of loan and advance processing practice of Abay Bank in Debre markos branch. To do the
analysis the researcher had distributed questionnaires to employees of Abay Bank Debre Markos
branch and conducted with the branch manager for interview. The analysis part has been
supported by percentage (%) and tables.
Table 4.1 personal information of the respondent
No Item Frequency %
1. Sex Male 8 80
Female 2 20
Total 10 100
2. Education level Certificate
Diploma 2 20
BA Degree 8 80
Above BA Degree - -
Total 10 100
3. Work experience 1-2 years 5 50
3-5 years 4 40
5-10 years 1 10
Above 10 years - -
Total 10 100
4. Current position in the branch Item Frequency %
Loan officer 1 10
Credit analyst - -
Section head (loan) - -
Cashier 1 10

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Assistant branch
manager
- -
Branch manager 1 10
Auditor 1 10
Division head(loan) - -
Accountant 1 10
Customer service
officer
1 10
Taller 4 40
Total 10 100
Source: compiled from primary data, 2016
As shown in the above table 80% of the respondents are male, and 20% of the respondents are
female. Interims of education level shown that 20% of the respondents are diploma holder, 80%
of the respondents are BA degree holder. Regarding to work experience 50% of the respondents
says that served the institution between 1-2years, 40% of the respondents served the institution
between 3-5 years, 10% of the respondents served in the bank between 5-10 years. In the case of
current position in the branch the data shows 10% of the respondents that the current position in
the branch are loan officer , cashier personnel ,branch manager, auditor, accountant, customer
service officer, and 40% the respondents are taller. Therefore in the above table most of the
respondents are male and their work experiences are between 1-2 years served in the bank loan
and advance processing practice it shows little experiences in loan and advance processing
practice of Abay Bank in Debre Markos branch.

27. 27
Table 4.2 loan provided by Abay Bank.
Which term loan provided by Abay bank? Frequency %
Construction loan
Agricultural loan
Consumer loan
Domestic trade and service
Transport
Import and export
Manufacturing
All 6 60
All except B 3 30
All except F 1 10
Total 10 100
Source: compiled from primary data, 2016
As shown in the above table 60% of the respondents respond that the types of loan are all. 30%
of the respondents respond that the types of loan are all except “B”,(agricultural loan) 10% of the
respondents are respond that the types of loan are all except “F”(import export). Generally most
of the respondents said that all types of loan are available in our branch based on the above
information which exerted from the bank employees as well as managers of the bank.
Table 4.3 credit committee of the bank approved credit facility in the prospective borrowers in
loan processing follow up activity.
Which credit committee of the bank approved credit facility
request by the prospective borrowers?
Frequency %
Branch credit committee 2 20

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Manager credit committee - -
Executive management credit committee 1 10
Board committee
All 2 20
All except D 5 50
Total 10 100
Source: compiled from primary data, 2016
The above table shows that 20% of the respondents respond that branch credit committee
approved the credit facility requested by the prospective borrowers, 10% of the respondents
respond that executive management credit committee approved the credit facility, 20% of the
respondents respond that all credit committee approve the credit facility, 50% of the respondents
respond that all except “D” (board committee) approves the credit facility of the borrowers.
Therefore most of the respondents respond that all of the credit committee approved credit
facility in the prospective borrowers except the executive management credit committee.
Table 4.4 Problems facing in loan processing practice.
What are the main problems that the bank currently facing in loan
processing activity?
Frequency %
Adverse economic condition 2 20
Lack of information about customer
Lack of qualified staff - -
Government regulation policy 4 40
Competitors entrance in the industry 1 10
All except Band C 2 20
All except C 1 10
Total 10 100
Source: compiled from primary data, 2016

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According to the above table 20% of the respondents respond that the problems facing in loan
processing activity are adverse economic condition, 40% of the respondents respond that that the
problems facing in loan processing activity of the bank are government regulation policy,10% of
the respondents respond that problems facing currently in the loan processing activity are
competitors entrance in the industry,20% of the respondents respond that problems currently
facing in the loan processing activity are all except “B “and “C “(lack of information about
customer and lack of qualified staff), 10% of the respondents respond that problems currently
facing in the loan processing activity of the bank are all except “C”(lack of qualified staff).
As per the respondent’s response Abay Bank currently facing the following problems. These
are: government regulation policy, adverse economic condition, competitor’s entrance in the
industry this also leads to affect the effectiveness of the bank in loan processing practice accord
ding to the finding.
Table 4.5 willingness of the customers to disclose any information need for loan and advance
processing practice.
Are the customers willing to disclose any information
that useful for loan and advance processing?
Frequency %
Yes 10 10
No -
Total 10 100
Source: compiled from primary data, 2016.
The above table shows that the bank respondents said that 100% of the respondents said yes
meaning that: there is no an information barrier between the customers and the staff employees
of Abay bank, because all customers disclose any information which is useful for the bank’s loan
and advance processing practice.

30. 30
Table 4.6 loan facilities available in Abay bank.
Which loan facilities available in Abay bank? Frequency %
Over draft
Guarantees
Term loan
Over drawl
All 3 30
All except D 7 70
Total 10 100
Source: compiled from primary data, 2016
As per the above table 70% of the respondents respond that loan facilities in Abay bank are all
except “D” (over drawl ),30% of the respondents respond that all(overdraft ,guarantees, term
loan, and over drawl). Therefore most of the respondents said that the loan facilities which are
available in Abay Bank are all types of credit facilities except overdraw credit facility.
Table 4.7 collateral evaluation criteria.
Does Abay bank have a collateral evaluation criterion? Frequency %
Yes 10 100
No - -
Total 10 100
[
Source: compiled from primary data, 2016.
The above table shows that 100% of the respondents said that Abay bank has collateral
evaluation criteria. As per the respondents of Abay bank are set and applies a collateral
evaluation criterion and other requirements to give any loan for the customers. As a result from
the data Bank has well performed the credit evaluation criteria which are helps to more
creditable in the smooth running of loan processing practice.

31. 31
Table 4.8 assets used as in collateral in loan processing practice.
What assets the bank would accept as a collateral? Frequency %
Building
Inventory
Vehicle
Machinery
All 6 60
All except B 4 40
Total 10 100
Source: compiled from primary data, 2016.
As per the above table 60% of the respondents respond that assets used as a collateral in loan
processing practice are all (building, inventory, vehicle, and machinery), 40% of the respondents
respond that are all except “B” (inventory).it can be concluded that the major assets used as a
collateral in Abay bank are building, vehicle, and machinery but inventories are less significant
according to the respondents response.
Table 4.9 evaluates the effectiveness of loan follow up activity in loan processing practice of
Abay Bank.
How do you evaluate the effectiveness of Abay bank loan
processing and follow up activity?
Frequency %
High 7 70
Medium 3 30
Low - -
Total 10 100
Source: compiled from primary data, 2016.

32. 32
The above table shows that 70% of the respondents respond that the effectiveness of loan
evaluation activity are high :it implies the bank applicable an effective loan evaluation follow up
activity in loan processing practice 30% of the respondents respond that in loan evaluation
follow up are medium. Generally which implies the loan follow up activity of the in loan
processing practice are excellent. Because most of the respondents give an answer in the form of
primary data.
Table 4.10 objectives of Abay bank in relation to loan processing.
Do you think Abay bank achieve its objectives in relation
to loan processing?
Frequency %
Yes 10 100
No - -
Total 10 100
Source: compiled by primary data, 2016.
According to the above table 100% of the respondents respond that the objectives of Abay bank
in relation to loan processing are yes, so that meet its objective in relation to loan processing. As
per the respondents Abay bank has well trend objective in relation to loan processing practice
and the bank has already meets its objective in loan processing practice.
Table 4.11 effort to create to customer awareness about loan.
Is there any effort exerted by Abay bank to create customer
awareness about loan?
Frequency %
Yes 10 100
No - -
Total 10 100
Source: compiled from primary data, 2016.
The above table shows that 100% of the respondents respond that there is an effort exerted by
Abay bank to create customer awareness about loan in order to for the smooth running of the

33. 33
loan processing practice. Therefore the has play a vital role by creating an awareness related with
loan processing practice.
Table 4.12 loan agreement properly documented.
Is the loan agreement properly documented? Frequency %
Yes 10 100
No - -
Total 10 100
Source: compiled from primary data, 2016
Based on the above table 100%of the respondents respond that the loan agreement can be
properly documented. This shows the loan agreement can be properly documented for the
smooth running of loan processing practice. It helps to reduce the banks credit risk as well as
operational risk in general and useful for the smooth running of the loan in particular.
Table 4.13 types of non-performing loan.
What types of non-performing loan does Abay bank faces? Frequency %
Subs standard 4 40
Doubtful - -
Loss - -
Substandard and doubtful 2 20
Doubtful and loss 1 10
All 3 30
Total 10 100
Source: compiled from primary data, 2016
The above table shows that 40% of the respondents respond that the types of non-performing
loans are sub-standard, 20%of the respondents respond that the types of non-performing loan are
doubtful and sub-standard 30% of the respondents are respond that the types of non-performing

34. 34
loan are all (sub-standard, doubtful, and loss), and 10% 0f the respondents are the types of non-
performing loan are doubtful and loss. Therefore nonperforming loan has a problem in the
bank’s loan and advance processing practice of the bank.
Table 4.14 know your customer principle (kyc)
Does Abay bank applies know your customer principle? Frequency %
Yes 10 100
No - -
Total 10 100
Source: compiled from primary data, 2016
The above table shows 100% of the respondents respond that know your customer principle
(kyc) is applicable in Abay bank because all respondents say yes. Which are helps to for banks
healthy loan processing practice by reducing default risk which can be created in related with
loan and advance processing practice.
Table 4.15 loan to collateral ratio
How much is loan to collateral ratio of the bank? Frequency %
40%
50%
60%
80% 5 50
All 4 40
All except A 1 10
Total 10 100
The above table shows that 50% of the respondents respond that the loan to collateral ratio of the
bank are 80%,and 40% of the respondents respond that loan to collateral ratio of the bank are

35. 35
all(40%,50%,60%,80%) when we say all the respondents said that it depends on the condition
but the maximum limit is 80%. And 10% of the respondents respond that are loan to collateral
ratio of the bank are except “A” (40%), but it depends on the condition. As per the respondents
respond that most of the respondents said that the loan to collateral ratio of the bank are 80%
which is the maximum limit of collateral that the bank which is received from the applicants or
borrowers.
Table 4.16 loan portfolio management
Does Abay bank apply loan portfolio management? Frequency %
Yes 10 100
No - -
Total 10 100
Source: compiled from primary data, 2016
The above table shows 100% of the respondents respond that Abay bank applies loan portfolio
management in loan processing. Therefore the bank already applies loan portfolio management
in good manner which is important to minimize a risk which is related with loan and advance
processing practice of the bank.
Table 4.17 working capital financing loan and project financing loan
Is there having the bank working capital financing loan and
project financing loan?
Frequency %
Yes 10 100
No - -
Total 10 100
Source: compiled from primary data, 2016

36. 36
The above table shows 100% of the respondents respond that in Abay bank they have a capital
financing loan and project financing loan in the loan processing practice of the bank. Generally
the bank allocates both project financing loan and working financing loan in their loan and
advance processing practice.
Table 4.18 term loan available in Abay bank
Which term loan available in Abay bank? Frequency %
Short 1 10
Short and medium 1 10
Medium and long 1 10
Medium - -
Long - -
All 7 70
Total 10 100
Source complied from primary data, 2016
The above table shows 30% of the respondents respond that term loan which is available in Abay
bank are short term, short and medium term, medium and long term, and 70% of the respondents
respond that the term loan which is available in Abay bank are all (short term, medium term, and
long term. Therefore the bank provide all most all types of term loan which are important to meet
the customers demand and also important for in their own loan and advance processing practice
of the bank.
 Analysis of interview question collected from bank manager. What are Requirements
expected from the applicant to get loan from the bank.
General documents required from customers during loan request:
 Written application that clearly indicates, among others, the amount
, and purpose of the loan requested

37. 37
 License as appropriate
 Financial statements (audited as necessary)
 A business plan
 An ownership certificate for assets or merchandise offered as
Collateral
 Memorandum and Articles of Association (for legally established
Companies)
 Name and address of the borrower; purchase plan; production plan;
 Projected income statement; projected balance sheet; projected cash flow
Statement.
 proper insurance coverage of all collaterals
2. The major problems facing the banks with regard to loan processing.
As per the responses of the manager, the major problems of Abay bank relating to loan
processing are:
 Liquidity problems that loan to deposit ratio restricted by the national bank and their
needs to reserve. Sometimes due to amount restricted it needs approval from head office
and regional offices, so there is a time gap between that the customer needs and
disbursed.
 Most of the customers forward a loan request to our bank without SWOT analysis, so
there is a problem in re-payment of loan.
 Operational risk: This is the risk of losses stemming from inadequate or failed internal
processes, people and systems or from external events.
 Competitor entrance in the banking industry.
3. The bank evaluates the credit worthiness of the customers.
 By assessing credit information of borrowers (applicants) from NBE , this enable to
know the pervious trends of the customer
 By assessing the applicants business in related to credit analysis by using 5 C’ s i.e.
collateral, condition , character, capacity, and capital.

38. 38
4. The impact of non-performing loan on loan processing practice.
As per the responses from Abay bank manager non- performing loan (NPL) has not a significant
effect on the bank financial, liquidity, operational, and in any other loan processing activity.
Chapter five
5. Conclusion and recommendation
5.1 conclusions
Generally this chapter gives a conclusion in relationship with the assessment of loan and advance
processing practice of Abay bank S.C Debre Markos branch. Based on the result of analysis and
discussion issue of the research in the previous chapter the following conclusion and
recommendation were given.
 Abay bank provides almost all types of loan based on the customers wants borrow the loan,
such as agricultural loan construction loan, consumer loan, domestic trade and services,
transport, manufacturing loan, and import and export, and the bank also gives all types of
term loan(short, medium, and long term loan).
 The major problems of Abay bank currently facing in loan and advance processing practices
are government regulation policy, adverse economic condition, and competitors’ entrance in
the banking industry.
 Abay bank set a collateral evaluation criterion to give any types of loan to customers; the
major assets that the bank accepted as collateral from borrowers are building and machinery.
But according to the situation the bank accept other assets such as, inventory and vehicle.
The effectiveness of Abay bank in loan processing and follow up activities are high, and
medium.

39. 39
 The bank achieves its objective relation to loan and advance processing practice, Abay bank
.In Abay bank the loan agreement are properly documented and excellent loan portfolio
management. The maximum loan to collateral ratio of the bank is 80% but depending on the
condition the loan to collateral ratio is less than 80%. Working capital financing project
financing and other credit facilities are available in the bank.
 The credit committee of the bank approved a credit facilities requested by the prospective
borrowers are branch credit committee and board committee. This indicates that 0-150,000
is approved by branch credit committee and 150,000 up to the maximum limit approved by
board committee.
 Abay bank create a customer awareness about loan, and the bank apply know your customer
principle. The bank evaluate the credit worthiness of the customers by assessing credit
information of borrowers (applicants) from national bank of Ethiopia this enables to know
the previous trends of the customer, by assessing the applicants business in related to credit
analysis by using 5c,s i.e. collateral, condition, character, capacity .and capital.
 The major problem of the bank with regard to loan processing, as per the responses of the
manager are: liquidity problem that loan to deposit ratio restricted by the national bank and
their needs to reserve. Sometimes due to the amount restricted it needs approval from head
office and regional offices, so there is a time gap the customer needs and disbursed. Most of
the customers forward a loan request to our bank without SOWT analysis, so there is a
problem in repayment of loan, and operational risk also another problem in the loan
processing practice, which is the risk of losses stemming from power interruption, through
internal process /system and the capacity of persons.

40. 40
5.2 Recommendation
Based on the finding of available data the following recommendations are forwarded to Abay
bank which will be helpful for the betterment the bank performance in loan and advance
processing practice.
 The bank should be use as much as possible latest /new soft ware application in order to
reduce operational risk related with the existing system.
 The bank should be always apply know your customer principle in order to solve the problem
related with default risk and also use an appropriate collateral evaluation criteria depending
on the situation.
 They should be improving its internal efficiency and effectiveness so as to attract potential
customers as well as encourage the existing once.
 The bank should be assess the credit worthiness of the customers in order to meet the
smooth running of the loan processing practice by reducing the probability of default risk.
 Abay bank should be providing different types of loans in order to meet the customers
demand, because loan is one source of revenue for the bank.
 They should be always apply good loan portfolio management and hiring well trained
personnel in order to create a favorable environment in loan and advance processing practice
.
 The bank should communicate openly with the customers and give suggestion with respect to
the banking loan processing practice, so they can help in facilitating the loan processing
practice.
 Financial position of the borrowers must be assessed properly, and proper documentation is
important in ensuring the safety of banks advances.

41. 41
Reference
Anthony Saunders, (2011) financial institution management, international edition, 7th
Edition
Christine peter, (2004) Ethiopian business development services Net work, Addis Ababa
Ethiopia
Gary, (1991) money banking and financial intermediation Addiso-wesely publishing company.
Jhingan m.l, (2012), money banking international trade and public finance vrinda
publications’ltd, 8th
Edition
Peter s. Rose, (2010), commercial banking management USA Irwin/ mc graw, hill 8th.
Edition
Shekher, kc, (2005) banking theory and practice, New Delhi vkas publication.
Sylvia c.hundgins, (2010) banking management and financial service, published by mc graw –
hill, international edition, 8th
. Edition
T.N hajela, (2015) money banking and international trade, published by ane books private
limited company, 8th
Edition
Timothy w.koch, (2006) banking management, printed in United States of America 6th
edition
www.abay bank.et.com.
www.business dictionary .com.

42. 42
Appendix
DEBRE MARKOS UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
DEAR ABAY BANK MANAGERS AND EMPLOYESS
This questionnaire is designed for the purpose of collecting data to assessment of loan and
advance processing practice which is required for senior essay as an integral part of my study.
Your organization increases the credibility of this paper and it become at most confidentiality.
The data that will be collected from you is used for the academic purpose only .Therefore, I
request you to help me in answering these questions below. Your response has a great value to
the soundness as well as the validity of the study findings.
Note:
 No need of writing your name.
 Pease put (x) mark on the box which is correspondent to your answer.
 Thank you for your cooperation in advance.
 Background of the respondent
1. Sex A. male B. female
2. Educational level
A. Diploma C.BA Degree
B. Certificate D. above BA Degree
3. Indicate your work experience in Bank credit process.
A. below 1 year B. 1-2 years C. 3-5 years
D. 5-10 years E. Above ten years

43. 43
4. Your current position in the branch
A. Loan officer B. Branch manager C. division head (loan)
D. Section head (loan) E. Credit analyst
 Objective related question
5. Which types of loan provided by Abay Bank?
A. Construction loan E. transport
B. Agricultural loan F. Import export
C. Consumer loan G. Manufacturing loan
D. Domestic trade and service
6. What are the main problems that the Bank is currently facing in loan processing
activity?
A. Adverse economic condition
B. Lack of information about customer
C .Lack of qualified staff
D. Government regulation policy
E. Competitors entrance in the industry
7. Are the customers willing to disclose any information the bank need for loan and
advance processing?
A. yes B. No
8. Which loan facilities available in Abay Bank?
A. Overdraft C. Term loan
B. guarantees D. Over drawl

44. 44
9. Which department of the Bank approved credit facility request by prospective
borrowers?
A. Branch credit committee
B. Manager Credit committee
C. Executive management Credit committee
D. Board committee
10. Does Abay Bank has collateral evaluation criteria?
A. yes B. No
11. What assets the Bank would accept as collateral?
A. Building D. Machinery
B. Inventory C. Vehicle
12. How do you evaluate the effectiveness of Abay Bank loan processing and follow up
activity?
A. High B. Medium C. Low
13. Do you think Abay Bank achieve its objective in relation to loan processing?
A. Yes B. No
14. Is there any effort exerted by Abay Bank to create customer awareness about loan?
A. Yes B. No
15. Is the loan agreement properly documented?
A. Yes B. No

45. 45
16. What types of Non-performing loan does Abay Bank faces?
A. Sub standard B. Doubtful C. Loss
17. Does the Bank applies know your customer principle?
A. Yes B. No
18. How much is loan to collateral ratio of the Bank?
A. 40 % B. 50 % C. 60% D. 80%
19. Does Abay Bank applies loan portfolio management?
A. Yes B. No
20. Is there have the Bank working capital financing loan and project financing loan?
A. Yes B. No
21. Which term loan available in Abay bank?
A. Short B. medium C. Long
 INTERVIEW QUESTIONS
1. What are the requirements expected from the applicant to get loan from the bank?
2. What are the major problems facing the bank with regard to loan processing?
3. In your opinion what is the impact of loan processing practice on non-performing loan?
4. How does the bank evaluate the credit worthiness of the customer?