Introduction

In accordance with the branch expansion policy of the bank, the feasibility study to open the second branch in Oromia Regional State in Eastern Wellega zone at Nekemte town is assessed and presented in this report. The branch, if found feasible, is expected to operate in one of the Sub-cities ("Gandas") in Nekemte town. The result of the socio-economic environment is presented in section II, followed by the financial analysis (section III). The manpower and physical asset requirements are also presented (section IV) as per the standard of the bank before conclusion and recommendation (Section V). Finally annex tables are attached for reference.

Assessment of Socio-Economic Environment

General Socio-Economic Condition
East Wellega zone is one of the twelve zones in Oromia Regional State, which are structured according to their geographical location. The zonal administration is found in a Nekemte town. Nekemte town is one of the old towns in the country, established in the mid 19th century and is relatively the largest town among towns in Western Oromia Regional State. There are two main historic arguments as to how the town attained the name "Nekemte" as it's called. The first assumption is, King Kumsa Moroda (1888-1923) who built his palace at Bakanisa kase, ex-residence of Nekemte Geda system gave the name Nekemte to the land that belonged to his ancestor as especial seat of his contemporary rule. The others say, the name Nekemte originated from Afan Oromo language to mean in row' or arrayed in line indicating houses built and shops opened in line along the road side. Nekemte is located at a distance of 331 km west of Addis Ababa, 1 110km North East of Gimbi, the principal town of West Wollega Zone

and 250 km North West of Jimma Zone in Oromia Regional state. The town is bounded by Guto Gida district of the zone in north, south and in west side and also Wayu Tuka woreda of the zone surrounds the Nekemte town in east side. Nekemte has also boundary with farmer associations namely Gari, in the East, Fayinerra in the west, Kitessa in the North, and Alami in the south that supplies agricultural products to the market. Currently it is a capital city of East Wollega Zone of Oromia Regional State with the total land area estimated to be 5,480 hectare. Administratively, it is divided in to six sub towns or "Gandas". Based on the 2006 population and housing census result, the population of Nekemte town is estimated to be 90,211 in 2011. Male population is slightly higher (51.1%) than the female population and the population is expected to grow by about 4.11 percent per year as that of national urban standard. The above estimated population figure does not include villages around this town (Sasiga, Diga, Guto Gida and Wayu Tuka) which are potential customers of economic activities in Nekemte town. In average terms, 25% of the Population within the working age interval is unemployed. According to the information from Nekemte Town Revenue Office, there are about 13,000 houses, out of which 12,090 (93%) residential, 780 (6%) business and only 1% constitutes governmental or nongovernmental offices. The ownership indicate that there are 9,490 (73%) private houses, 3,120 (24%) are governmental (accounted to Gandas) and 390(3%) belongs to Rental Houses Administration. Recently, the government has strictly given due attention to urban housing condition and allocated capital budget for condos construction at national and regional level to alleviate housing problem in which Nekemte is also one of the center. According to the information, in the surrounding rural areas, more than 92% of families live in their own dwelling units and only 1.2% in rented houses. In both urban and rural areas, close to 6% of the population live in rent-free houses. This includes individuals living with their relatives. 2

The town has one government university, four government colleges and thirteen private colleges. The number of students enrolled in these higher educational institutions is estimated above twenty eight thousand. Further, there are one public hospital and a number of heath institutions providing health service to the public. Regarding earning conditions, the major sources of income for the towns households include salaries, earning from self-employment, domestic work and causal labor, petty trade and pension. Nearly 25% of the towns households face income shortage to cover basic needs. Moreover, underdeveloped and unproductive self employment in the town aggravates the situation. Therefore, earning condition of the population can be considered as lower and middle income group.

Trade and Economic Activities

According to the Trade and Industry Office of the Nekemte Town, with in six sub towns there are about 1,615 traders having trade licenses with a total capital of birr 50.7 million. As shown in Table A, the retail, service, industrial and wholesale sectors accounted for 48.67%, 40.99% 5.20% and 5.02% of the licensed businesses. On the other hand, the Agriculture sector contributed less than one percent of the licensed trades. (See table A) Regarding tax payment, there are 176 category A&B and 1324 category C1 businesses in the town. These figures showed insignificant increase compared to last year tax payers' number in each category. The collection of tax and the trend in capital and regular budget allocated to the town does not show considerable change with in last three years. There are various business activities taking place in this zonal city. Among these, service sector and agricultural products transactions
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Category A & B businesses are those businesses whose annual sales are above 500,000 and in the range of 100,000 and 500,000 birr respectively and have their own financial accounts for tax purposes. But Category C businesses belong to businesses whose annual sales are below 100,000 birr.

dominates the market. Hotels, restaurants, various shops which include electronics and mobile accessories, boutiques and small scale retail shops are abundant. locations for these The two main squares and their vicinities are mentioned businesses. All businesses are

concentrated with in the radius of 400 meters from these squares. Hence, financial institutions are located around these mentioned squares following trade and businesses that are taking place in the area. On the other hand, most of the cities part is residential and comprises the usual retail businesses at smaller scale. Even though, industry is one of the motive powers for achieving rapid economic development, it is limited to small scale industries such as grain mills, oil processing industries, coffee hullers', wood and metal works and certain traditional handcraft activities in the town. city and their number are increasing through time. Regarding transportation service, since the town is center for various trades and businesses, many towns and villages around the city transport their products to the market in this town. For this reason Nekemte has more the 38 transport lines to these towns and villages. These identified small scale industries are the only industries that are operating in the

According to the information from Zonal Trade, Industry and Transport

Office, the average number of vehicles (public transport) crossing the town per day is about 57 local and 14 cross-country with passengers of about 1140 and 840 respectively. This number rises to its peak when higher educational students move in or out of the city at the beginning and end of their courses. Related to its good geographical location, the town is center for conference and small scale tourism. The nineteen centaury monarchy palace, known us King Kumsa Moroda's (1888-1923) Palace is one of the tourist attractions of the town. The other vast business transaction is that of agricultural products. The near by agricultural output supplying villages like Uke, Loko, Anger, 4

Megersa, Logo, Aleltu and Garisa Oda provides the market with maize, Sesame, Sorghum and Teff. The villages' agricultural activities mainly focus on the summer (Meher) production season. Accordingly they do have once in a year production period. Production wise, these villages collected about 831 thousand quintals of cereal and oil seeds yields including sesame. The average annual price of sesame is Birr 1800 per quintal. On the other hand, the prices of teff, maize and sorghum are Birr 620, Birr 190, and Birr 325 per quintal respectively. The price of cereals decreased compared to last year significantly thereby decreasing trade activities of the town. In relation to this cereal agriculture, Ethiopian Commodity Exchange (ECX) has opened cereal warehouse in Nekemte town this year. This warehouse( formerly known Sorga Warehouse) serves to store cereal products especially, sesame from Yaso and kamashi in Benishingul Gumuz Region and Horu Gudru, Gutin and other small villages in Wollega zone. Table A. Licenses issued in Nekemte Town Number and Capital of Trade Licenses %age %age Number of Sector Businesses
786

Share number

Capital (000')
5,231 3,669 36,069 5,674 74 50,717

Share Capital
10.3 7.2 71.1 11.2 0.1 100

Retail 48.7 Whole Sale 81 5.0 Service 662 41 Industry 84 5.2 Agriculture 2 0.12 Total 1,615 100 Source: Nekmte town Trade and Industry

Office

Infrastructural Facilities
The necessary infrastructural conditions for banking service such as telephone, telex, fax, internet, postal service and 24 hours electric 5

service are available in this town. The major asphalt road, Addis AbabaNekemte is under construction in two phases. The first phase, Addis Ababa - Bako is close to completion. The other half Nekemte-Bako is under construction by Chinese contractor. The other 110 km asphalt road connecting Nekemte and Ghimbi is already completed. The town has daily transport link with Jimma through Bedelle, and with Dembidolo through Ghimbi. The regional offices of Ethiopian Electric & Light Power Corporation and Ethio-Telecom are also found in this town. The only problem the town has this time is shortage of clean water, and yet the regional government is under taking water supply project for Birr 120 million.

Future prospects of the Area.

Nekemte is not an industrial town. The engine of economic activities is the agricultural sector. In addition, following the geographical location of the town, i.e. Nekemte is center for areas in the western part of the country, there is high demand for hotel and transport services. Therefore, there are various investment activities under going around the mentioned business areas. Table C. Investment Flow in Nekemte town Birr)
On Construction Capital No 1 2 3 4 5 Project Hotel Agriculture Industry Building Cont'. Others Total (000) 107,436 13,697 207,547 189,807 518,484 Job opportunity 178 57 453 645 1,377 Operational (A) 7 5 5 27 44 completed (B) 8 15 12 35
construction/not started

(In '000

Total (A+B+C ) 35 11 77 160 283

(C) 20 6 57 121 204

Source: Nekemte Town Investment Office

Accordingly, there are 283 investment activities with a total investment capital of Birr 518 million. The investments under pipeline mainly focused on the construction of building complexes and hotels. The only industrial investment expected in the area is that of The Defense Industrial Engineering. On the other hand, the municipality is undertaking construction of Wollega stadium. About 50% of the task has been completed. On regional basis there is a plan to construct Nekemte-Bure Asphalt road which will connect East Gojam to East Wollega. The Air Ports Enterprise has also a plan to construct Gute Air port in the town. Never the less, the town does not have such a huge investment activities on ground that can change its growth at higher rate with in the next five years.

Banking Service
Nekemte town has three public and three private commercial bank branches. Namely,CBE Nekemte branch, CBE Haro Sorga branch (with the name of manmade lake from tribute Sorga) and CBB Nekemte branch. CBE and CBB Nekemte branches are located around the second square2. Where as, the Haro Sorga branch of CBE is located a bit far from the existing AIB branch. Further, CBE is serving the university students in the main campus with in small room through window service. On the other hand, Cooperative Bank of Oromia (CBO), International Bank of Oromia (IBO) and Awash International Bank (AIB) are the three private commercial banks in the town. OIB has moved its branch (formerly was inside Desalegn Hotel) beside Senaf International Hotel which is close to the first square. CBO is located around Nekemte conference hall. Where as, AIB's existing branch is located on the first road on the mid way between First Square and the mosque. The branch is expected to shift to the new ground plus four storeys building (Alternatively, the choice may be to locate the proposed branch in the new building) with in the next few months. The new location is close to
2

The two main highways in the town are commonly known with the name first road and second road. These two high ways have squares with the name first and second square too.

various businesses which will enable the branch to maintain the existing customers and attract new. Regarding number of customers using these branches, Nekemte CBE and Nekemte Awash bank branches are busy of serving customers commonly on local money transfer. On other hand, OIB, CBO and CBB are serving customers to status that can be said satisfactory.

Proposed Location of the New Branch

It is difficult to choose a location for second branch in the town like Nekemt for two reasons. The first is, for private commercial bank like AIB, the goal of opening branch is for the purpose of earning profit. Hence, if the second branch is located in the business area mentioned in the study, two of AIB's branches will compete for the same market, where the market is not probably more than service providing capacity of the existing branch. The second is, if we locate the branch near to the residential area, the target area benefit is only mobilizing deposit which can affect negatively the profitability of the proposed branch. Never the less, following the NBE's directive, it is better to follow a strategy to mobilize deposit so as to maximize loans and advances. Hence, in order to mobilize deposit, the proposed branch has to be close to business areas which are operating in residential areas. On this regard; areas known as "Board" and an area where the existing branch operates are suitable for the aimed target. These areas and their vicinities have little bit better business concentration compared to other residential areas. In the future, number of businesses can increase though it might take longer time. In addition there are bank branch standard buildings for the proposed branch in this area.

Financial Analysis
The Representative Branch
Considering proximity and similar socio-economic conditions, Nekemte AIB branch is taken as a representative for the upcoming branch. This branch launched operation in December, 1999. During its decade of 8

operation, this branch has a profit balance for the first four years of its operation. However, the loss of this branch is showing decreasing trend in the last three years and finally reached a loss balance of Birr 31.2 thousand as at December 31,2010 which is by far less than the planned loss. The branch has good deposit mobilization and money transfer trends compared to other services it delivers. The branch has 34 staff as at the end of December 31, 2010, out of which 24 are clerical and the rest non-clerical. On other hand, comparison between zonal towns which have equal administrative status and where AIB opened its branches, namely Jimma, Assela and Gonder the profit performance of Nekemte branch is not significantly different form these branches. The deposit to loan ratio of Nekemte branch is lower compared to the average performance of these branches. Further comparison with Shashemen and Dire Dawa branches revealed that, Shashemen and Dire Dawa branches registered profit of Birr 4.8 and 4.9 million at the time these towns acquire their second AIB branches. Further, the opening of these new branches does not have higher impact on the profitability of these older branches. This can be an indication for the existence of big difference between Shashemane, Dire Dawa and Nekemte towns both in the performance of branches operating in these towns and the economic capability they have. (See table 4a and 4b)

Assumptions Used
i. It is assumed that 50% and 40% businessmen from Category C businesses and also 0.5 and 0.4% 3of total population of the town (civil servants and employees of private sector with saving potential) will open saving accounts at the first year in maximum and minimum scenario respectively and the average

Total Population=90,211, Work force=60%*total population, Employed population=75%*Workforce, Saving potential= .05/.04%*employed population (based on the economic research made by Ethiopian Economic Association); finally AIB's proposed branch takes 30% of depositors taking into consideration the number of bank branches and individuals will open more than one saving account.

amount per account is taken to calculate saving deposit amount.

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(see table 1) It is also assumed that 25% and 15% businessmen

ii.

from Category A and B businesses of the town will open a demand account at maximum and minimum scenario at the first year and the average amount per account is taken to calculate demand deposit amount. 5(see table 1) iii. Demand deposit is assumed to grow by 50 and 40 percent per annum both at the maximum and minimum operation condition in the second and third year of operation respectively. iv. Saving deposit is assumed to grow by 50 and 40 percent per annum both at the maximum and minimum operation condition in the second and third year of operation respectively v. Following the trend the representative branch follows and removal of credit cap by NBE it is assumed that the branch under study will disburse loan amount equivalent to 55% and 45% of deposit it will mobilize on its first year performance at maximum and minimum scenario respectively. vi. The loan amount is assumed to grow by 60 and 50 percent at maximum and minimum operation condition in the second and third year of operation, respectively. vii. average viii. Interest income and interest expense of the upcoming branch are estimated based on the bank's actual effective lending rate (10.11%) and deposit rate (4.36%) estimated for the year 2010/11. The Commission and Service Charge as well as Other Income are assumed to be 15% and 10% of the performance of the representative branch as at the last year June 30 (the full

This estimation takes into account the unemployment rate in towns and also the share of the other banks in the market. 5 This takes into account the expected share of other banks in the market. In addition the average commission and service charge performance of the existing branch shows an average of 12% increment for the last four years.

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physical year performance), balance at maximum and minimum scenario.6 ix. Commission and Service Charge as well as Other Income is assumed to grow at 40 and 30 percent both at maximum and minimum scenarios in the 2nd and 3rd years respectively x. Salaries and benefits of the new branch are estimated based on the manpower requirement for the target the branch assumed to meet. Furthermore, it is assumed to grow at 10% per annum. xi. General and Administrative expenses is estimated based on the bank's standard for a new branch and taking into consideration particular characteristics of the branch, like office rent that is assumed to be 12,000(The office rent of Nekemte AIB Branch)) birr per month. It is also assumed that these expense items will grow at 10% in the study years. xii. Deprecation expenses on fixed assets are estimated based on the currently applicable depreciation rates and these rates are also assumed to remain the same during the three years.

c. Projection of Deposits and Loans and Advances

As shown in Table 1, the branch is expected to mobilize total deposit of birr 8.2, 12.3 and 18.5 million in the three consecutive years at the maximum performance scenario. At the minimum scenario, it is projected to mobilize a total deposit of birr 6.3, 8.8
and 12.3 million in the first, second and the third years of

operation, respectively. With regards to Loans and Advances, the new branch is anticipated to disburse about birr 4.5, 7.2 and 11.5 million at its
6

The percentage assumption is calculated following the trend of the new branches performance vis--vis the representative branches opened in Shashamene, Dire Dawa and Adama.

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maximum operation and birr 2.8, 4.2 and 6.3 million at its minimum operation level in the three consecutive years.

d. Projections of Income and Expense

As shown in Table 2, the total income projected for the new branch is about birr 562, 878 and 1,375 thousand at the maximum operation in the 1st, 2nd and 3rd years of operation, respectively. Similarly, birr 356, 519 and 761 thousand is expected to be generated in the three consecutive years in the minimum operation scenario. With regard to expense, the branch is expected to incur birr 1.2, 1.3 and 1.6 million in the maximum operation scenario and Birr 1.1, 1.2 and 1.4 million in minimum operation scenario. The upcoming branch is also expected to incur loss in both scenarios in the first three years of its operation, but it will have positive net balances at the fourth year in maximum scenario.

e. Results of Financial Ratios

To assess the operational efficiency and the viability of the proposed branch, this feasibility study considers the operating ratio and return on asset (ROA). The operating ratio, which is the quotient of the operating expense and operating income, expected to be 326, 206 and 132 percent in maximum operation scenario and 725, 475 and 314 percent in minimum operation scenario. With regard to ROA, the new branch is also expected to generate (14.07), (6.63) and (2.00) percent at maximum operation and (28.94), (17.75) and refer Table 3) (9.76) percent at minimum operation scenario. (Please

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Major Requirements of the Branch Manpower Requirement

The proposed branch needs about 18 employees with different levels of educational and experience as per the target of the bank branch. Accordingly, the branch will have a monthly salary expense of birr 25,490 and monthly allowance of birr 8,305. The details of the required job titles with the corresponding monthly salary and allowance are presented in Table 2.1.

Fixed Assets
With respect to fixed asset, a total of birr 1.12 million is required to furnish the upcoming branch with the necessary office furniture, vehicle and other equipment to make it operational. Of the total cost, birr 650 thousand and birr 33.6 thousand is budgeted for the motor vehicle and computers respectively. The remaining balance is allocated for the purchase of different office equipment, furniture and fittings. (For details please see table 2.3.)7

Conclusion and Recommendation

Nekemte, which is historic town in Western Ethiopia, is the center of business and economic activities. Major activities in the town are agricultural output transactions, Hotel & related businesses and transport services. However, the development of trade and industry in the town is at infant stage compared to the long age of the town. Currently, the price of agricultural products such as maize and teff is showed a slightly decreasing value at the mid year compared to the price in previous years. Hence, the economic activities of the town calm down as a result of this price fall. In addition, as discussed above, the town does not have substituting economic engines to maintain the
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. Since, the main target of the branch is for the purpose of deposit mobilization, the vehicle assumed to serve the branch is Toyota corolla. Further, Counter & Partition and some fixed assets are not included in cost calculation because of the new building includes these fixed assets and hence the proposed branch can use these fixed assets from the existing or else can obtain in the new building depending on the office the proposed branch will operates.

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equilibrium. However, as the information from ECX indicates the price is increasing through time and is awaking the economic activities in the area. Regarding the oil seed, the town serves as a bridge to store these products from the neighboring villages and zones in the ECX ware house. From this activity, the town earns income providing hotel service to heavy truck operators. The branch in Nekemte town is one of loss making branches in AIB. The number of staff it has is enough to render quality service to our customers in all kinds of services increasing quality of service delivery. For instance, CBE is serving university students at their dormitory, opens saving accounts to peasants and trader on the major market days and is attracting major oilseed customers to use their branches for money transfer earned from ECX transactions. Where as, our Nekemte branch has few customers from ECX participants and serves customers in branch building. Opening a branch for the purpose of maintaining the previous location is not feasible for town like Nekemte. This is because; the town has a number of buildings and villas that can serve as branch building for any commercial banks. Surprisingly, there is a ready building for bank branch between the new and the existing AIB branch locations. Further, the constructions of multipurpose building complexes are wellunderway which has rooms for banking sector. Hence, we can tackle the threat coming from competitors by preparing the existing branch through efficient service provision and technological advancement. Never the less, the new NBE directive pushed commercial banks to mobilize deposit aggressively. On the other hand, Nekemte has encouraging environment for commercial banks targeting the mobilization of deposit. Hence, it is better to establish deposit mobilizing branch in the town to control and further monopolize the area banking market. In addition, the opening of the new branch may help the existing through solving the problems the existing branch practiced which are mentioned above. Furthermore, the decreased cost of fixed assets (since the new branch building is facilitated with some 14

fixed assets) and employment of manpower which are necessary vis-vis the target deposit mobilization, opening the proposed branch will compensate the negative attitudes opening new branch in the town and will build good image of the bank in the town.

Besides, the financial forecast for this branch shows that the new branch will have positive net income at the 4 th year of its operation in maximum scenario. The projected net income and financial ratios also show that the branch will improve its efficiency and profitability over time. Therefore, it is recommendable to open second branch in Nekemte town either in the office where the existing branch operates or in area which is described in the study.

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INTRODUCTION ASSESSMENT OF SOCIO-ECONOMIC ENVIRONMENT

1 1

General Socio-Economic Condition..............................................................1 Trade and Economic Activities....................................................................3 Infrastructural Facilities.............................................................................5 Future prospects of the Area......................................................................6 Banking Service.........................................................................................7 Proposed Location of the New Branch ........................................................8

FINANCIAL ANALYSIS

The Representative Branch........................................................................8 Assumptions Used.....................................................................................9 c. Projection of Deposits and Loans and Advances.....................................11

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d. Projections of Income and Expense.......................................................12 e. Results of Financial Ratios ...................................................................12 Major Requirements of the Branch............................................................13 Manpower Requirement...........................................................................13 Fixed Assets............................................................................................13

CONCLUSION AND RECOMMENDATION

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