1.

Introduction
1.1. Background of the study

Banking is an intermediary financial service business that undertakes to engage in dealing

with others money. Meaning, it is a business committed to create economic values by connecting
the “have” and the “have not” in the business environment. In any business environment, there
are parties that have business ideas, better know-how of investment opportunities or
entrepreneurial capacities and others those have the financial resource but not the formers. For
the sake of understanding and throughout this paper, the parties with business idea, better know-
how of investment opportunities or the entrepreneurial capacity will be referred as entrepreneurs
while the later will be referred as investors. The entrepreneurs have the business-expertise
resources while the inventors have the financial resources. When these parties have the chance to
come together and the trust to work together, they can create economic value that makes both
better off. Bank credit is one, and major, of the banks valuable earning assets. Banks are a
highly leveraged business undertakings that manage huge financial resources mobilized from the
public in the form of equity capital and deposit. The public deposits its saving fund at banks
because banks offer saving account as a relatively low risk investment alternatives. Banks
should, therefore, manage this public fund prudently in a way that ensures the trust, in
administering the fund with due care and allowing withdrawal of same on demand for the
depositors and enhancing the firm value for shareholders, in delivering of the promised return
within the agreed time period as per the terms and conditions stated and stipulated in their
contract. Bank credit is a core commercial banking function that deals with the following main
activities:

 Plan loanable fund based on the available financial resource raised through equity
capital and deposits accepted from the society.
 Identify and determine priority business areas or industrial sectors to which financial
assistance can be extended in the form of loan to the level of the planned loanable fund
based on the economic policies and strategic directions of the bank; crafted in line with
the NBE directives.
 Plan and establish credit terms for the respective priority business areas or industrial
sectors that have effective demand for loan finance.
  Monitor and control the established credit terms
 Evaluate and examine the established credit terms
 Plan and implement loan workout programs and debt recovery
 Plan and implement debt provisioning and write-off
 Plan and implement credit risk management functions
 Ensure due diligence and compliance to NBE directives issued to monitor and
control the credit function of commercial banks.

In so doing, NBE supervises the establishment and licensing of banks in operating banking
business in Ethiopia. As such, it monitors and controls regularly the credit appraisal process and
management functions of banks, because this activity is the core banking function that drives the
lion share of growth and risk of banks. NBE directs monitors and controls the credit appraisal
process and management activities of commercial banks with periodical inspection, examination
and review techniques. It appraises and evaluates the performance of banks regularly to ensure
compliance to the relevant directives. The main directive instruments of NBE in monitoring the
credit appraisal process and management activities of banks are the following

 Regular Loan status review requirements by the loan review committee of the
board of directors of the respective commercial bank.
 Requirement for establishment of hierarchical loan approval committee and
setting discretionary limit for the respective committee.
 Setting single borrower limit to the extent of 25% of the total capital of the
respective commercial bank.
 Setting single bower limit to anyone of the related party and aggregate borrower
limit to all related party directly or indirectly to be to the extent of 15% and 35%
of the total capital of the respective commercial bank respectively.
 Setting loan portfolio mix to term structure of loans and advance; where portfolio
mix of short term loan to be not less than 40% of the total loans and advance at
any one time.
 Setting portfolio mix to type of credit facilities; where overdraft loans and
revolving credit facilities not to be greater than 25% and 10% of the total loans
and advance respectively at any time.
  Setting limit to non-performing loans position not to be greater than 5% of the
total loans and advance at any time.

The purpose of these directives is monitoring the risk that could arise out of concentration or
poor credit appraisal process and management function; and thereby ensure prevalence of the
minimum acceptable asset quality so as to promote and protect the interests of relevant
stakeholder’s i.e., shareholders, corporate depositors, international business partners and the
government.

Generally, Credit appraisal process is a structured approach to minimize uncertainties

arising from the probability that the borrower will default to pay the money that he/she takes as a
loan (either the principal or interest or both). Effectiveness in this area has an impact on the
profitability, liquidity, solvency, loan portfolio and financial leverage of commercial banks in
every country.

Bunna International Bank sc is one of private commercial banks licensed to operate banking
business in Ethiopia. As banking is a sensitive industry, because of the peculiar natures of the
financial sector, it is highly regulated by NBE being subject to a separate formation banking
business proclamation unlike to other industries which are formed according to the commercial
code of Ethiopia. NBE has issued different directives relevant to the banking industry in
response to the economic and market conditions that need to account for domestic and
international factors of economic, political-legal, socio-cultural and technological phenomenon.

1.2. Statement of the problem

Currently the banking business is so sensitive because more of their income (revenue)
will be generated from credit (loan) given to their customers (Jeoitta Colquitt. 2007). This credit
creation process exposes the banks to high credit risk which leads to loss. Without effective
credit approval process good bank performance or profit will be unthinkable. If one knows the
impact level of credit approval process on profitability he/she can give a great attention on the
process of those credit risks, particularly those responsible communities /credit approval
committee bodies / in banks, lecturers in the universities and colleges, bank policy makers, like
National bank of Ethiopia in the case of ours. When they are aware of about the impact level
credit approval process towards credit risk and profitability, then they are going to take care of
their credit decision and search best credit approval process mechanisms which will be good for
the business. Theoretically, credit risk occurs when either a good borrower is rejected or a bad
borrower is accepted. Both situations lead to loss of income due to rejecting a good borrower or
sustaining loss because of credit default due to accepting a bad borrower. Credit default that
results from accepting a bad borrower or otherwise reflects the asset quality problem of banks.
Hence, managing credit risk is imperative for banks to ensure sustainability of the business by
enhancing the interests of the depositors, the shareholders and other relevant stakeholders.

Regarding our case Bunna International Bank also engaged in providing short term and medium
credit like other commercial banks in the country in general and in Addis Ababa in particular.
Whereas, some of the employees in this company informally state that the non-performing loan
(NPL) to gross loan ratio raise from time to time. This statement by the employees about credit
performance of the bank leads us as indices to take a preliminary study on the general credit
approval process of the bank.

As per the preliminary study result, in the form of unstructured interview and from Annual
Report of the Bank (Bunna International Bank, annual report of June30,2016 G.C), it is found
that there is some warning sign of problem that the bank credit and NPL increases year to year
that might be against the financial position of the bank future. Hence, the major concern of this
study will be to assess credit appraisal process policy and procedures like screening and
monitoring, long-term customer relationship, collateral requirements and credit rationing of
Bunna International Bank.

1.3. Basic Research questions

1. To what extent the bank follows NBE directive policies and regulations in credit
appraisal process?
2. What are the criteria’s followed by the Bank before the approval of credits?
3. What could be the possible recommendation to improve the quality of credit appraisal
process?
1.4. Objectives of the Study
1.4.1. General Objective
The overall objective of this study is assessing credit appraisal process of Bunna
International Bank S.Co.

1.4.2. Specific objectives

1. To identify the bank performance in following NBE directive policies and regulations in
credit appraisal process.
2. To assess criteria’s set by the bank before granting credits to borrowers.
3. To propose recommendations to improve the quality of credit appraisal process.
1.5. Significance of the study

Studying the credit appraisal process of Bunna International Bank S.C. has the following
significances;

 The study will help Bunna International Bank to managing their credit appraisal process
by letting them know what affects it and which variable is the most important.
 It serves for further study in the sector and will help as additional input for concerned
policy makers and future researchers.
 The study will add knowledge on the field of credit banking and financial resource.
1.6. Scope of the study

This study is focused on the assessment of credit appraisal process of Bunna International
Bank at main branch. .So its scope is delimited to credit appraisal process and only to at main
branch. This Study also will use secondary source of data will cover only the time periods
from 2014 to 2017.

1.7. Limitation of the study

To assess the credit appraisal process of Bunna International Bank, more time, cuscus survey
and extreme openness from the respondents are required. However, most of the Bank
employees and credit analysts may lack openness in reacting to some questions forwarded to
them.
1.8. Research Methodology
1.8.1. Research Design
The research method, which will be we use in doing this study, will have quantitative and
qualitative nature. From the quantitative approach, the study will use self-administered survey.

1.8.2. Sample and sampling technique

The population of the study will includes credit analysts and credit managers of Bunna
International Bank S.C at head office. The total number of population is 16 (sixteen) and we the
researchers believe to include the total population as a study participants. The sampling design
for this population is census sampling procedure. Census sampling is a study of every unit,
everyone or everything in a population. It is known as a complete enumeration which means a
complete count. The major reasons we will use is the whole population the first is to minimize
the risk of sampling second more reliable than the other sampling techniques and the third we
believe that the size of the study population is easy to address and to participate.

1.8.3. Methods of data collection

We the researchers will use interview technique and questionnaires will distribute to the all credit
analysts and credit managers to get primary data. The questionnaires will be designed both open
ended and close ended questions. The interview technique will be designed as semi structured.
The reason for incorporating both open and closed ended questionnaires is to capture the data by
giving the chance what they perceive about a given question, respectively. On the other hand the
reason to use semi structured interview is it is helpful to find out truth and facts based on the
interviewee’s response. In addition to the primary source, secondary sources of data will be
collected. Such as annual reports and internal policies and regulations manual on credit
management, Internet and handouts will be used. Furthermore we the researchers will review
relevant documents and Internet sources relating to the subject matter to be studied.

1.8.4. Methods of data Analysis

After we collect the data it will be presented by tables. Next to that we the researchers will
analyze the collected data using simple statistical tools including frequency and percentage.
Reference

Jeoitta Colquitt. , 2007. , ‗Credit Risk Management: How to Avoid Lending Disasters
and

Maximize Earning‘ .3rd ed. Mercy College. McGraw-Hill