BULE HORA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESSMENT OF CREDIT PROVISION SYSTEM (CASE STUDY ON

COOPERATIVE BANK OF OROMIA BULE HORA BRANCH)

ARESEARCH PROPOSAL SUBMITED TO DEPARTMENT OF

ACCOUNTING AND FINANCE IN PARTIAL FULFILMENT FOR
REQUIREMENT OF BACHLERS OF ARTS DEGREE (BA) IN
ACCOUNTING AND FINANCE

NAME ID: NO.

BY: ALEMU DABA.................................AcFn/RU/2027/09

: WAKTOLE TADESA.........................AcFn/RU/2024/09

ADVISOR: DAWUD.A

MARCH, 2019

BULE HORA ETHIOPIA

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 ABSTRACT
This study will focus on the assessment of credit provision system of cooperative bank of Oromia
Bule Hora branch. The researcher will use both primary and secondary data source. Among the
primary data interview and questionnaire will be used. Secondary data like Cooperative bank of
Oromia Bule Hora branch credit manual, books and other documents will be used. In order to
achieve the research objective the researcher will use descriptive method of data analysis and
use judgmental sampling technique both for employees and for the customers. The collected
data will be analyzed and presented using descriptive analysis method like table and
percentages. Finally based on the analysis made the possible conclusion and recommendation
will be developed.
 Table contents
Table content
ACRONYMS
CHAPTER – ONE
1. INTRODUCTION
1.1 Back ground of the study
1.2 Background of the organization.
1.2.1 Vision
1.2.2 Mission
1.3 Statement of the problem
1.4 Objectives of the study
1.4.1 General objective
1.4.2Specific objectives
1.5 Significance of the study
1.6Scope of the study
1.7. Limitation of the study
1.8. Organization of the paper
CHAPTER TWO
2. REVIEW OF RELATED LITERATURE
2.1 Introductions
2.2. Meaning and function of credit
2.3. Credit analysis
2.3.1 Stages of credit analysis
2.3.2. 5C’s of credit analysis
2.3.3 Credit evaluation process
2.4 Credit management (CM)
2.4.1 Project appraisal
2.4.2 Documentation
2.4.3 Recovery of loans advance
2.5 The role of credit provision in economic development of a country.
2.6 Loan origination process
 2.7 Steps in lending loan
2.8 Types of Loan2s
2.9. Loan disbursement process
CHAPTER THREE
3 RESEARCHMETHODOLOGY
3.1. Research Design
3.2 Target population of study
3.3 Sampling technique and Sample size
3.4. Sources and Method of Data Collection
3.5 Method of Data Analysis and Interpretation
Reference……………………………………………………………………………………………………………………………33
ACRONYMS
CAF: credit application form

CCR: commercial credit report

CBO: Cooperative bank of Oromia

S.C: Share Company

DTS: domestic trade service

OD: overdraft loan

5C’S: capital, collateral, capacity, character and condition

CM: Credit management

 CHAPTER – ONE

1. INTRODUCTION
1.1 Background of the study
Credit is a contractual agreement in which borrower receives something of value
now and agree to repay the lender at some date in the future generally with interest.
The term also refers to the borrowing capacity of an individual or company
(www.investopedia.com/terms/credit.asp). The term credit provision refers to the
process of providing loan to the customer.

The principle function of credit is to transfer property from those who own it to
those who wish to use it, as in granting of loans by bank to individual and
cooperative bodies that plan to initiate or expand their business ventures. The
transfer is temporary and is made for price known as interest, which varies with
risk involved and also with the demand for and supply of credit (Stigliz,1981).

Without credit, the vast investment required for the development of large scale
enterprise on which the high living standard of country are based on would have
been impossible.

The use of credit also makes feasible the performance of the complex operation
involved in modern business without the constant handling of money. Credit
operation carried out by means of document known as credit instruments, which
includes bill of exchange, money order, checks, draft, promissory note and bonds.
These instruments are usually negotiable they may legally transferred in the same
way as money. When the party issuing the instrument desires to prevent it used by
anyone other than the party to whom it is issued, he or she may do so by inscribing

6
the words “not negotiable” on the instrument. Credit facility should be arranged to
meet the requirement of borrower (Coyle, 2002).

Cooperative bank and their competitors proved credit to land development process,
for planting and harvesting crops, for insurance companies, for financial
companies and other small business in local areas (Rose and Hudgins, 2008)

Therefore, the study focus on cooperative bank of oromia (CBO) regarding credit
provision system in the case of Bule Hora branch

The reason why the researcher wants to do this study is that: even though this
research will done before by another researcher it cannot conduct on this area audit
is done on another financial institution, but the researcher wants to do on
cooperative bank of oromia, Particularly in cooperative bank of Oromia Bule Hora
branch to fulfill the gap between the bank and other financial institutions.

1.2 Background of the organization.

Cooperative bank of Oromia S.C. was established to fulfill the demand and supply
gap observed in the financial sector among cooperatives and other operators in
Ethiopia. CBO S.C was established on October 29, 2004 G.C in accordance with
article 304 of commercial code of Ethiopia. It was established in line with
proclamation no. 84/1994 G.C with authorized capital of birr 300 million The bank
has started full-fledged banking operation in march 2005 G.C, with paid up share
capital of birr 112 million. Know the CBO has 108 branches. Among those
branches Cooperative bank of Oromia Bule Hora branch was one which is
established in 2004 G.C.

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1.2.1 Vision
 To be competent, reputable and socially responsible bank in Africa.

1.2.2 Mission
To provide full-fledged and customer responsive banking services for cooperatives
societies, individuals and other entities with special emphasis to agricultural and
agro-based businesses financing, and to maximize shareholders value through use
of competent and disciplined employee, visionary leaders and modern banking
technologies

1.3 Statement of the problem

Credit provision is important and necessary for achieving individual, group and
organization performance. It is very important in a day to day business activity to
improve sustainability and timely advancement in the country. Provision of
adequate and timely credit to the customer is a requirement of credit delivery
system. So, identifying factors that lead poor performance of the bank regarding
credit provision are important. The following problems may arise in most banks,
these are: poor selection of borrowing customers, incomplete credit files and
providing of loans beyond borrowers capacity (Rose and Hudgins, 2008).

Credit provision requires effective management attention and focus, otherwise

different problems arise due to uncollectable credits such as opportunity cost will
be rise and late repayment time credit practice may make to the bank to declare in
bankrupt (Kumar, 2002).Due to these problems cooperative bank may have face
difficulties in achieving its objectives related to adequate and timely credit
provision. So the study would attempt to assess the credit provision system in
cooperative bank of oromia Bule Hora branch.

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The following basic research question will be addressed in this study:

1. What are the policies and procedures to select applicant customer?

2. What are criteria that are considered by the bank when providing the credit?

3. What are the supervision and follow-up procedure of the bank after give credit?
4. What are the problems faced by the bank when providing the loan?

1.4 Objectives of the study

1.4.1 General objective
The general objective of the study will be to assess the credit provision system of
cooperative bank of oromia, in Bule Hora branch.

1.4.2Specific objectives
The specific objectives of the study will be to:

 To assess policies and procedure for selection of applicant customer.

 To assess criteria that are considered by the bank when providing the credit.
 To assess the banks supervision and follow- up after grant its credit for
customer.
 To assess the problems faced by the bank when providing the loan.

1.5 Significance of the study

The customers and cooperative bank of oromia are the primary beneficiaries of this
study, since the finding of the study will provide the bank with different
conclusions and recommendation. As a result, the bank will be taking some
corrective actions. Further, the researchers would be believe that this study will fill
the research gap that exists in credits provisions and stimulate other researcher to
carry out similar studies on this area in the future.

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1.6 Scope of the study
Cooperative bank of Oromia have many branches. However due to cost and budget
constraint the study delimit to cooperative bank of Oromia Bule Hora branch. The
study will focus on the assessment of credit provision system specifically
cooperative bank of Oromia Bule Hora branch. This study will be confined by
areas and target groups to make it feasible with the available time and resources.

1.7. Limitation of the study

When conducting the research the researcher will face some limitation. Including:

o Some of the respondents may not willing to fill and return the distributed
questionnaires.
o The researcher may face lack of enough capital to do the research very well.
o Lack of experience in conducting research.

1.8. Organization of the paper

The proposal paper will organized into three chapters. Chapter one presents
background of the study, background of the organization, statement of the
problem, objectives of the study, significance of the study, scope of the study,
limitation of the study and organization of the paper, chapter three deals with the
research design and methodology, chapter four contains data presentation and
analysis.

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 CHAPTER TWO

2. REVIEW OF RELATED LITERATURE

2.1 Introductions
2.2. Meaning and function of credit
The word credit was derived from the Latin word creditium which means to
believe or trust in economics. The term credit refers to a promise one party to pay
another for money borrowed or goods and service received. It is a medium of
exchange to receive money or goods on demand at some of future date (Kumar and
Mittal, 2002).

Credit refers to the amount given by somebody to someone including the basis of
terms and credit conditions. It may be in the form of kind or in cash. It may also
define as the right on account of the immediate transfer of goods (world book of
encyclopedia, 2001).

The principle function of credit is to transfer property from those who own it to
those who wish to use it, as in granting of loans by bank to individual and
cooperative bodies that plan to initiate or expand their business ventures. The
transfer is temporary and is made for price known as interest, which varies with
risk involved and also with the demand for and supply of credit. Without credit, the
vast investment required for the development of large scale enterprise on which the
high living standard of country are based on would have been impossible (stigliz,
1981).

The use of credit also makes feasible the performance of the complex operation
involved in modern business without the constant handling of money. Credit
operation carried out by means of document known as credit instruments, which
includes bill of exchange, money order, checks, draft, promissory note and bonds.

11
These instruments are usually negotiable they may legally transferred in the same
way as money. When the party issuing the instrument desires to prevent it used by
anyone other than the party to whom it is issued, he or she may do so by inscribing
the words “not negotiable” on the instrument. Credit facility should be arranged to
meet the requirement of borrower (Coyle, 2002),

Cooperate banks and their competitors proved credit to land development process,
for planting and harvesting crops, for insurance companies, for financial
companies and other small business in local areas. Loan is the amount of money
provided by the bank to the firm or individual investor in a credit basis to repay in
the future, with the interest charged for the use of money plus the principal
amount. It is the largest source of income for banks unlike security; most bank loan
involves personal relationship banker and borrower. The division of department
reasonable for making recommendation on the fate of most loan applications is the
credit department (Rose and Hudgins, 2008).

Loan has three terms which can be classified as short term, which is agreed to be
repaid within one year, medium term loan, which is agreed to be repaid in one to
five years, and long term loan, which is agree to repay one to fifteen years. There
are different types of loans including real estate loan, residential and non-
residential mortgages and others real estate loans, business loans (commercial and
industrial loans) and consumer loans. From bank point of view, loans are less
liquid than other assets. unlike securities a loan cannot be cashed in before it comes
due, so the loan has higher default risk than other assets do in compensation for
their lower liquidity and higher risk loan yield the highest rate of return among
bank assets when economic activities strengthen, the ratio of bank loan to total
bank asset increase and bank profile rises (Roger & miller, 1993)

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Loan is an amount of money advanced to a borrower, to be repaid at latter date
usually within interest legally. A loan is contract between a buyer (borrower) and
the seller (lender), in force able under uniform cooperative code. In most states the
terms and conditions for Repayment of loan, including the finance charge, or
interest rate, are specified a loan may be payable on demand (demand loan), in
equal monthly Installment (wiki Answers. Co)

2.3. Credit analysis

2.3.1 Stages of credit analysis
Credit analysis can be defined as the process of determining the current credit
worthiness of loan applicant and forecasting financial and accounting analysis of
the current and future activity and financial situation of the loan applicant in the
specific economic environment and expected changes in the for the coming
periods. The credit inspector can work out a correct stand during the decision
making process about the credit applied for on the basis of comprehensive credit
analysis. The information gathered during credit analysis. The information
gathered during credit analysis. The information gathered during credit analysis is
of great significance to accurate structuring of credit, which would contribute to
lowering the credit risks. The stages the credit analyses are as follows: Collecting
and analyzing information about company applying for loan and formulating
indicates about its financial situation, Collect and analyze information about credit
events, Assessing the credit risks, Checking reliability of information, provided by
company applying for a loan, Preparing analysis of credit risks, Taking decision
and Setting the credit term (Daniel F, 2008).
2.3.3 Credit evaluation process
Bankers do not want to make loan to borrowers who cannot repay them. Therefore,
prior making loan banks evaluate the credit risk of prospective borrowers and
ability to pay loans. The traditional method involves financial analysis of balance
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sheet and income statement. However the use of credit score for all types of loans
(e.g. commercial .consumers, mortgages) has become increasingly popular while
bank credit department usually do their own financial analysis, credit scores are
provided by variety of vender
Credit scoring is the use of statistical, operational research, and data mining
models to determine credit risk of prospective borrowers. The credit score is a
number calculated by credit bureau or another credit score that is used in making
credit decision and for other purposes.

Guidance states that credit scoring method can be used for controlling credit
selection, managing credit losses, evaluating that existing criteria are sound and
consistently applied; improving profitability. The major advantage of using credit
scoring models are that they reduce the cost of evaluating credit and increase
speed, consistency and accuracy of credit decision. Credit scoring technologies are
used to assess risk adjusted profitability of accounts ship for delinquency
intervention, for Fraud detection, and other purpose. This is widely used in making
consumer loans, home mortgage loan and some commercial loans (Gup and kolar,
2005).

2.4 Credit management (CM)

CM is one of the major functions, which financial institutions undertake for proper
mobilization of funds the credit management function includes loans and advances
it also involves a large number of activities ranging from credit investigation to
contract with borrowers (Gup and kolari, 2005).Credit management consist of the
following main areas: Appraisal of credit proposal, Documentation, Follow-up and
supervision of end –of credit and Recovery of loans advance

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2.4.1 Project appraisal
Project appraisal is systematic and compressive review of the economic
environmental, financial, and social and other such aspects of a project to
determine it will meet its objectives. A banker has limited funds at his disposal. He
is often contorted with a large number is project proposals seeking financial
assistance. In order to ensure rational allocation & optimum utilization of scarce
fund, a banker must properly evaluate every proposed carefully.

2.4.2 Documentation
Documentation is the process of obtaining the relevant documents from borrowers.
Documents contain the price term, condition which the money had been lent, and
protect the banker against willful default by the borrower. Documents serves as
important evidence in the court of low when loan is granted against security of
some assets, documents provide a legal and binding charge documents from the
borrower whenever a loan advance is granted.

There are definitely a number of steps to follow when banks under certain process
was dealing with loans.

1. Loan application and enquiries: To start any loan processing, the applicant must
first submit a written application. The letter of application should state the purpose
of the requested fund, loan amount, name of the applicant, signature of the
applicant, type of collateral to be offered and duration of the loan period. Besides
basic requirements like valid and appropriate license, audited or provisional
financial statements should be fulfilled.

2. Interview stage: Before starting the paper work for the actual processing of a
loan, borrowers must be interviewed by the respective loan offers of a branch.

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3. Credit information: All available internal and external sources should be used to
obtain credit information about the applicant before deciding on the financing of
the business.

4. Field visit: the loan officers should go and visit the applicant’s business sites to
perform the required procedures.

5. Property estimation: The property assessor, on behalf of the bank performs the
estimation of secured property.

6. Deliberations at bank’s loan committees: Bank loan committees are expected to

review the cases presented seriously and exhaustively to arrive at a careful and
decision and recommendation

7. Informing customers about the decision of the bank: All decision must be
communicated to the applicants in writing with the specific reasons considered in
the decision at the shortest possible time.

2.4.3 Recovery of loans advance

In order to insure timely of loans and advances banker should take due precautions
both at appraisal stage and after disbursement of loan precaution of appraisal
stages: - select borrower properly, ensure that the projects are visible, make proper
assessment of borrowers financial needs, projects are visible, make proper
assessment of borrowers finical needs, fixed are visible, make proper assessment of
borrowers financial needs, fixed repayment after providing loan consumption etc.
After disbursement of loan the banker should carry out effective follow up and
supervision (Scott Mason, 1991).

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2.5 The role of credit provision in economic development of a country.
Credit plays an important and active role in the economic development of a
country. If the banking system in a country is effective, efficient and disciplined, it
brings about a rapid growth in the various sectors of the economy (available at:
http: www.informationable.com).

1. Credit promotes capital formation: Bank plays an important role in the rising of
the financial resources. They encourage saving by giving various type of incentive
to the savers. They expand branch of the bank in rural and urban areas and
mobilize saving evens at many place. This saving are then made available to the
business, which make use of them productive purpose in the country. The bank is
therefore, not only storehouse of the country wealth but also provide stream of
resources necessary for economic development.

2. Investment in new enterprise: Business persons normally hesitate to invest their

money in risk enterprise. Bank generally, provides short and medium term loans to
entrepreneurs to invest to new enterprises and adopt new methods of production.
The provision of timely credit increases the productive capacity of the economy.

3. Balanced development of different regions: Bank plays an important role in

achieving balance in different region of the country. They help in transferring
surplus capital from developed regions to the less developed regions. The traders
and industrialists of less developed regions are able to gate adequate capital for
meeting their business needs. This, in turn, increases investment, trade and
production in the economy.

4. Influencing economic activity: The bank can also influence the economic
activity of the country through its influence on: Availability of credit creation and
Rate of interest.

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If the bank is able to increase the amount of money in circulation through credit
creation by lowering the rate of interest, it directly affects economic development.
A low rate of interest can encourage investment. In addition, the credit creation can
raise aggregate demand, which leads to more production.

2.6 Loan origination process

1. Application processing: when an applicant fills out application form and submit
it to a field office the loan originator must determine whether the application is
complete and asks follow up equations needed to understand the applications
situation is enough detail to assess the household’s property status. (Www. Rank.
Funjouko/interest. Pdf.com)

2. Borrowers eligibility: Once the application has been selected for processing, the
loan originator must make a formal determination of application eligibility, this
involves verifying the household’s income, checking credit history of all parties to
note and reviewing all other eligibility requirements.
(www.ranko.funjouko/interest.pdf.com).

3. Property requirement: Once a house hold has located a home or decided on

design of dwelling to be constructed, there must be provide key information to
allow the loan originator to determine whether property is modest and the
agencies’ under writing guide lines. (Www.Ranko.Funjouk/interest.pdf.com).

2.7 Steps in lending loan

1. Find prospective loan customer: Most loans to individuals’ arise from direct
requests from a customer who approaches a member of the lenders staff and asks
to fill out a loan application. Business loan requests, on the other hand, often arise
from contract of the loan officers and sales representative makes as they solicit
new account from firms operating in the lenders market area. Increasing the

18
lending Game is becomes sales position sometimes loan officer will call on the
same company for months before the customer. Finally agree to give the lending
institution try by filling out loan application. most loan department personnel fill
out customers contract report when they visit a prospective customers place of
business .This report is updated after each subsequent visit, giving the next loan
officer crucial information about prospective client before any other personal
contract is made. (Rose and Hodglin, 2000).

2. Evaluating a prospective customer character & sincerity purpose: Once a

customer request loan, an interview with loan officer usually follows; giving the
customer the opportunity to explain his /her credit needs. That interview is
particularly important because it provides opportunities for the loan officers to
assess customers’ character and sincerity purpose. If a customer lacks sincerity in
acknowledging the need to adhere to the terms of loan this must be recorded as a
strong factor weighting against approval of loan request (Rose and Hodglin, 2000).

3. Making sit visit and evaluating a prospective customer Record: If business as a

mortgage loan is applied for loan officer often makes a sit visit to asses’
customers’ location and conditions of property and ask clarifying questions. The
loan officers may contact other creditors who have provisory loaned money to
those customers to see what their experience has been. Did the customer fully
adhere to previous loan agreement and where require, keep satisfactorily deposit
balance? A previous payment record often ravels much about the customers’
character, sincerity of purpose and sense of responsibility in making use of credit
extended by lender (Ibid).

4. Valuation of prospective customer’s financial conditions :All is favorable to this

point, the customer is asked to submit several crucial document the lender needs in

19
order to fully evaluate loan request including complete financial statements in case
a corporation board of director`s resolution authorizing the negotiation of loan with
lender(Ibid).

5. Assessing possible loan collateral & sinning loan agreement: If loan committee
approves customers request the loan officer or the credit committee will usually
check on the property or other assets to be pledged as collateral to insure the bank
has immediate access to collateral or can a quire title to property involved if the
loan agreement is defaulted(Ibid).

6.Monitoring compliance with loan agreement & other customer needs: The new
agreement must be monitored continuously to insure that the terms of the loan are
being followed and that all required payment of principal and interest are being
made are compromised For larger commercial credits the loan officers will visit
the customers’ business periodically to check the firm progress and see what other
service the customer may need usually officer or other staff member enters
information about new loan customer un a computer file known as customer
profile.(Rose, 2008).

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 CHAPTER THREE

3 RESEARCH METHODOLOGY
3.1. Research Design
The research design will plan in such a way to provide for proper performance of
the research. It helps for analyzing the data which will collect through various
methods of collecting data (C. R. Kothari, 2004). Based on the data which will be
relevant for the study, the research design used for the study will be descriptive
study method because to describe the characteristics of objects, peoples, group,
organizations or environments. The researcher will select descriptive study because
it is appropriate for researcher in consuming less time and helps to answer the
research questions which are factual in nature and helps to go further and draw
conclusion from the data.

3.2 Target population of study

The target populations of the study will be employees and customers of the banks.

3.3 Sampling technique and Sample size

The researcher will use non probability purposive sampling technique for
employees because it is important for the researcher to choose and pick only those
who best meet the purposes of the study and those who have more knowledge.
Total employees of the bank are 22 from this the researcher select 8 employees as a
sample from the bank those who have close related to credit provision.

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3.4. Sources and Method of Data Collection
For this study the researcher will use both primary and secondary sources of data.
To collect primary data the researcher will use both open and close ended
questionnaires for both employees and customer’s and structured interview for
credit manager of the bank because to obtain detail information regarding the
subject matter of the study. Secondary data may collect from different documents
of the bank like credit manual, different books, website and related documents.

3.5 Method of Data Analysis and Interpretation

The collection of data will analyze by using descriptive analysis method. Data
analysis will further transformation of processed to look for patterns by using
descriptive analysis. That will further process, analyze and interpret by using
different tables. Then the survey result from questionnaires will represent through
written form, tables and percentages. Finally conclusion and recommendation will
be given.

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3.6. Cost Budget
Item Quantity Duration in Unit cost Total cost
day per day (Birr)

Personal cost

Researcher

Transpiration 2 round

(university to cooperative 2
bank of oromia)
2 2.5 10

Typist 20

Equipment

Printing 20 2birr 40

Paper 25 0.50 cent 14.5

Pen 1 6 6

Pencil 2 0.60 cent 1.20cent

Robber 2 1.50 cent 3.00

Miscellaneous expense 20

Total 110.70

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3.7. Time Budget
No Activity Months

Oct Nov Dec Jan Feb Mar April May

1 Topic selection xx

2 preparation of research proposal Xx

3 Recommendation of comments Xx
to first draft of the proposal

4 Typing of final proposal xx

5 Submission of proposal xx

6 Data collection xx

7 Data analysis xx

8 Submission of first draft of Xx

research report comments

9 Typing of final report Xx

10 Submission of final research Xx

11 Presentation Xx

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