QUEENS’ COLLEGE

SCHOOL OF BUSINESS AND ECONOMICS

EFFECTS OF LENDING PRACTICE ON PROFITABILITY OF A BANK:

CASE OF AWASH BANK

SENIOR PAPER PROPOSAL SUBMITTED TO QUEENS’ COLLEGE, IN PARTIAL

FULFILMENT OF THE REQUIREMENTS FOR THE BACHELOR OF ART IN
ACCOUNTING & FINANCE
BY
1. HELEN BEZABIH ID: 0010/12
2. BEKANA AKENA ID:0012/12
3. FIREHIWOT DAGNE ID:0005/12
4. HARON DELIL ID: 0021/12
5. KENZIYA SEFA ID:0020/12
6. YORDANOS TEREFE ID: 0041/12

ADVISOR
ABRAHAM FIKRIE (MA)

ADDIS ABABA-ETHIOPIA
NOV, 2022
 CONTENTS
List of acronyms ...................................................................................................................... ii
CHAPTER ONE ...................................................................................................................... 1
1. INTRODUCTION ............................................................................................................ 1
1.1.Background of the study ................................................................................................... 1
1.2.Statement of the Problem .................................................................................................. 1
1.3.Research Question ............................................................................................................ 2
1.5.Objective of the Study ...................................................................................................... 2
1.5.1. General Objectives of the Study ........................................................................ 2
1.5.2. Specific Objectives of the Study ....................................................................... 3
1.6.Significance of Study ........................................................................................................ 3
1.7.Scope of the Study ............................................................................................................ 3
1.8.Limitation of the study ...................................................................................................... 3
1.9.Organization of the Paper ................................................................................................. 3
CHAPTER TWO ..................................................................................................................... 4
2. REVIEW OF RELATED LITRATURE .......................................................................... 4
2.1.Theoretical Review ......................................................................................................... 4
2.1.1. Concept and Definition of loan ................................................................................. 4
2.1.2. Types of loans ........................................................................................................... 4
2.1.3. The Loan process ...................................................................................................... 4
2.1.4. Loan Execution and Administration ......................................................................... 5
2.1.5. Officials Oversight .................................................................................................... 5
2.1.6. Loan Policies ............................................................................................................. 5
2.2.Review of Empirical Studies .......................................................................................... 6
2.3.Conceptual Frame Work................................................................................................ 7
CHAPTER THREE ................................................................................................................. 8
3. RESEARCH METHODOLOGY ..................................................................................... 8
3.1.Research Design................................................................................................................ 8
3.2.Data Types and Sources .................................................................................................... 8
3.3.Methods of Data Collection .............................................................................................. 8
3.4.Population, Sample Size ................................................................................................... 8

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 3.5.Methods of Data Analysis................................................................................................. 8
CHAPTER FOUR ................................................................................................................... 9
TIME AND BUDGET SCHEDULE ....................................................................................... 9
4.1. The Time Schedule .......................................................................................................... 9
4.1.Budget ............................................................................................................................. 10
References .............................................................................................................................. 11

List of tables

Table 3. The Major Activities and their Expected Required Time………………….. 11

Table 4. The Financial Budget Schedule …………………..………………………… 12

List of acronyms

AB: Awash Bank

HO: Head Office

NPL: Non–performing loans

CIL: Commercial and industrial loans

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 CHAPTER ONE

1. INTRODUCTION

1.1. Background of the study

Among service giving industries in the world the role that Bank play are paramount. In the world of
competition, business companies must be head of their competitors to become successful in their
business. Banks established for Commercial purposes should extend Loan to different types of
borrowers for many different purposes. As with any investment, extending loans to businesses and
individuals involves taking risk to earn high returns (Mac Donald and Koch, 2018).

Returns come in the form of loan interest and investment income from new deposits. Firm-specific
problems may arise from changing technology, labor strikes, shifts in consumer preferences, or bad
management. Individual borrowers find that their ability to repay closely follows the business cycle
as personal income rises and falls. Loans as a group thus exhibit the highest charge-offs among bank
assets, so banks regularly set aside substantial reserves against anticipated losses (Ragahavan, 2013).

According to some sources, loans are the dominant asset in most banks’ portfolios, representing on
average 50 to 75 percent of total assets. Although lending practice can do vary significantly for
similar sized banks several characteristics stand out. The ratio of net loans to asset is greatest at
banks to asset and for savings institution the largest bank have on average, reduced their dependence
on loans relative to smaller banks. Commercial and industrial loans (CIL) represent the second
highest concentration of loans at bank. Loans to individual are greatest for banks than in asset, but
contribute proportionally less elsewhere (Semu, 2010).

Therefore, Loan management is a paramount importance for success of banks. It enables banks to
improve revenues and reduce financial risks. This research therefore, aimed to study the effects of
lending practices of on profitability of a bank for the case of AB (Awash Bank).

1.2. Statement of the Problem

According to many sources, loans are the most important asset held banks, lending provides the bulk
of bank income. Bank loans fluctuates and influenced by the changes in economy policy and the
economy in general. The practice of banks in handling their loan likely affects their profitability.

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Awash Bank plays an important role in the Ethiopian economy. In the provision of loans process to
the customers, Awash Bank under takes pre application interview, accepting customers,
collecting necessary documents, Loan information inquiry evaluating Loan application business
visit, collateral evaluation, risk analysis, decision on request informing the applicant the Loan
decision performing administration works like registering the collateral offered by the customer,
disbursing the loan and follow up. However, when coming to profitability, this Loan activity which
is the important role vested to it, it’s becoming area of serious attention.

Some identified that there are observed problems on the lending practice of the bank that may alter
the profitability of Banks; on the collection of detail information about the borrower’s, on the
evaluation the collaterals to counterfeit with the borrower’s request, in assessing the existing Loan
facility compatible with the borrowers business as well as the market situation and in properly follow
up the same steps which is compliance with the bank profitability.

The expansion and high demand for loans are a recent phenomenon in Ethiopia, the challenge they
encounter in the manner loans are managed are high. Many studies were conducted, however, they
are not comprehensive in relating the effect of loan on profit of Bank. Therefore, in order to fill the
gap, this study attempted to assess the effects of lending practices of on profitability of a bank for
the case of Awash Bank.

1.3. Research Question

2. What procedures’ awash bank follows to deal with the loan given to the customers?
3. What factors causes repayment of loan in Awash Bank at Head Office?
4. What are the credit facility of the bank in taking into consideration the changing situation?
5. What are the impact of loans on banks profitability?

1.5. Objective of the Study

1.5.1. General Objectives of the Study

The general objectives of the study is to analyze the effects of lending practice on profitability of a
Bank in the case of Awash Bank.

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1.5.2. Specific Objectives of the Study

Specifically the forthcoming study will try to address:

1. To examine the procedures’ awash bank follows to deal with loan.

2. To identify factors that cause non repayment of loan in Awash Bank.
3. To assess the credit facility of the bank in taking into consideration the changing situation.
4. To investigate the impact of loans on banks profitability

1.6.Significance of Study

This study can help the bank to take it as an input in identifying major problems related with loan
process and analysis profit. In addition, the outcome of the study helps in applying policies and
procedures, rules and regulations. Moreover, it is significant to the student researchers on overall
activities of the bank in lending practice. Finally the study can be used as a reference for further
study.

1.7. Scope of the Study

Because of time, cost and energy, this study will be conducted in Awash Bank head office because
of there is more access for information and relatively higher number of customers than any other
branches. This study evaluated the effectiveness of the bank’s lending practice, its compliance with
policies and procedures; and the possibility of profit to be generated.

1.8. Limitation of the study

The following constraints may encounter the forthcoming study:-

 Higher officials may not be a volunteer to respond to the needed information.
 The difficulty of Complexity of data system to gather information.

1.9. Organization of the Paper

This proposal is organized in four chapters. The first chapter deals with introduction parts, the
second chapter presents review of the related literatures, the third chapter deals with the research
design methodology of the study and the fourth chapter presents the time schedule and Budget.

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 CHAPTER TWO

2. REVIEW OF RELATED LITRATURE

The following chapter discusses about the problem under research through theoretical, empirical
and conceptual parts. It discusses the type of loan banks follows to deal with loan, loan process, Loan
Execution and Administration, and loan policies.

3. Theoretical Review
In this chapter the overview of the Literature consideration to explain factors related to the issue
will be discussed from books, articles, research papers, internet publications and unpublished
sources.
2.1.1. Concept and Definition of loan

Loan is: - the thing that is lent especially a sum of money (Garry, 2004). In finance, a loan is the
lending of money by one or more individuals, organizations, or other entities to other individuals,
organizations, etc. The recipient incurs a debt and is usually liable to pay interest on that debt until
it is repaid as well as to repay the principal amount borrowed.

2.1.2. Types of loans

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as
collateral. A mortgage loan is a very common type of debt instrument, used by many individuals to
purchase housing. Unsecured loans are monetary loans that are not secured against the borrower's
assets (Anthony and Santomero, 2003). Demand loans are short term loans that are atypical in that
they do not have fixed dates for repayment and carry a floating interest rate which varies according
to the prime lending rate. A subsidized loan is a loan on which the interest is reduced by an explicit
or hidden subsidy.

2.1.3. The Loan process

The process includes three functions; business development and Loan analysis, underwriting or
Loan execution and administration, and Loan review. Each reflects the bank’s written loan policy
as determinate by the board of directors (Koch, 2006). Loan policies formalizes lending guidelines
that employees follow conduct bank business. Three potentially different Loan cultures are; values

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driven, current-profit driven, and market-share driven.

2.1.4. Loan Execution and Administration

The process by which the formal Loan decision is made varies by bank. It depends on many factors
such as the bank’s organizational structure, bank size, number of employees and length of
experience, and even the types of loans made. The banking industry is not exempted from Loan at
all. There is then a need to implement efficient Loan performance measurement. Loan risk
performance measurement is very important in the industry of banking. In fact, if you would ask
any person in the banking industry how important it is, he or she would tell you that this aspect has
an impact on the overall success of the bank itself. Thus, banks and other financial institutions,
especially the ones that are delving in the business of lending, should pay attention to this aspect.

2.1.5. Officials Oversight

Board Responsibilities

The board of directors is responsible for reviewing and approving a bank‘s Loan risk strategy and
policies. Each bank should develop a strategy that sets the objectives of its Loan-granting activities
and adopts the necessary policies and procedures for conducting such activities.

Management Responsibilities

Senior management has the responsibility for implementing the Loan risk strategy approved by the
board of directors and for developing policies and procedures for identifying, measuring, monitoring
and controlling Loan risk. Senior management must ensure that there is a periodic independent
internal or external assessment of the bank‘s Loan management functions (Ayalew, 2009).

2.1.6. Loan Policies

The foundation for effective Loan risk management is the identification of existing and potential
risks in the bank‘s Loan products and Loan activities. This creates the need for development and
implementation of clearly defined policies, formally established in writing, which set out the Loan
risk philosophy of the bank and the parameters under which Loan risk is to be controlled. Measuring
the risks attached to each Loan activity permits a platform against which the bank can make critical
decisions about the nature and scope of the Loan activity it is willing to undertake.

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2.2. Review of Empirical Studies

Saeed and Zahid (2016) studied how credit risk impacted on commercial banks profitability. This
was an investigation on profit making by commercial banks in the UK and how credit risk affects
them. ROA and ROE were used in measuring profitability. Credit risks were measured using non-
performing loans and impairments. Financial data for the banks was obtained for a period between
2007 to 2015. A multiple analysis was applied in analyzing the data collected. Indicators on credit
risk positively influenced banks profitability. This is an implication that the aftermath of the 2008
credit crises, UK banks are involved in credit provision and are gaining interest rates and
commissions.

Tuladhar (2017) did an evaluation on CRM effects on Nepalese Commercial Banks profitability.
The investigation was mainly about credit risk management impact and profitability. Data was
obtained between 2011 and 2015 from commercial banks. Analysis was conducted in using
regression and panel data. It was established that CRM and profitability in Nepalese banks had a
significant association. It was further, indicated that bank size, coverage ratio and capital adequacy
ratio with performance had positive relationships. Board gender composition, leverage ratios and
NPLs with performance of the bank had negative associations. Cash reserve ratio, liquidity and
quality of assets had significant effects to performance of banks.

A positive association was established between CRM and Sweden banks profitability

(Ara, Bakaeva& Sun, 2009). In Indonesia, Ruziqa (2013) noted an adverse association between
credit risk and profitability of financial institutions; a positive association amid credit risk and a
firm’s liquidity. In Nigeria Kolapo, Ayeni and Oke (2012) found that CRM was related to profits
made by banks in the country. In Kenya, Kithinji (2010) noted that CRM had no association with
profitability of banks.

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2.3. Conceptual Frame Work

Conceptual framework is a structural representation of the study objectives. In order to summarize

aim of the paper was describe the effect of loan on the Profitability of Bank awash Bank the subsequent
conceptual model prepared. Based on most of the related literature review parts, the bank’s
profitability (dependent variable) is affected by Credit facility, Non repayment of loan, and Procedures
they follow in dealing with loan is set as independent variable.

Procedures

Profitability of
Non repayment of Bank Loan
loan

Credit facility

Figure 2.1 Conceptual Framework

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 CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. Research Design

In order to answer the basic research questions, the study will use descriptive research method
because, it allow describing the research setting as it is and also allows using of both quantitative
and qualitative approach.

3.2. Data Types and Sources

Both primary and secondary data will be collected for the study. The primary data will be obtained
from employees and borrowers of the bank through questionnaires and interview. Secondary data
source such as the company annual reports, manuals, articles, journals and other published and
unpublished documents relevant to the study will also be used.

3.3. Methods of Data Collection

Primary data obtained from both open and close ended questionnaires and by conducting interview.
Questionnaires will be distributed to the employees and borrowers of the bank: interview will be
conducted to the manager of the Loan department of the HO (Head Office). Secondary data source
such as the banks’ annual reports, manuals, articles, journals and other documents relevant to the
study will be reviewed and observed.

3.4. Population, Sample Size

The respondents of the study will include Borrowers and employees related with loan of the bank.
Accordingly 20 employees and 20 borrowers will be selected as representative sample in order to
have sufficient and reliable data.

3.5. Methods of Data Analysis

The study will use both qualitative and quantitative data analysis techniques. The responses that are
collected from questionnaires will be analyzed by quantitative approach; tabulation and percentage.
Responses that will be obtained through interview were narrated qualitatively.

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 CHAPTER FOUR

TIME AND BUDGET SCHEDULE

4.1. The Time Schedule

Table 3 The Major Activities and Their Expected Required Time.
Months in 2022
S.
November December January
№ Activities
1 2 3 4 1 2 3 4 1 2 3 4
1 Reviewing the Literature
2 Proposal Writing
3 First Draft proposal
5 Proposal Defense
6 Data collection
7 Data Analysis
8 Report Writing
9 First Draft Research Paper
10 Second Draft Research Paper
11 Submission of Final Paper
12 Presentation

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4.1. Budget

The total financial budget required to carry out the study is approximately Birr 10,087.00. The
details of each of finance required to accomplish the study are summarized and depicted in the
following table.

Table 4. The Financial Budget Schedule

Unit
Unit of Total Costs
S. № Description Unit(s) cost (in
Measurement (in ETB)
ETB)
1 Internet and Stationary Materials
2 internet service 80 Hour 15 1,200
3 32 GB Flash disk 2 Number 700 1,400
4 A4 paper 2 Ream 700 1,400
5 Questionaries’ printing 56*4 Pages 5 1,120
6 CD-RW Sony 5 Number 25 125
7 Pen (BiC) 5 Number 25 125
8 Final Research printing 70*4 Pages 5 1,400
9 Binding 4 Set 100 400
10 Misc. Expense 2,000
Total 9,170
11 Contingency (10 %) 917
G/TOTAL 10,087

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 References
 Anthony M. Santomero, K. (1997). Commercial Bank Risk Management: An Analysis of
the Process’. Warton: University of Pennsylvania.

 Ayalew Fikru (2009). Introduction to Money and Banking. Addis Ababa: Ethiopian
Investment of Banking and Insurance.

 Gary, Smith (1995). Banking and Financial Intermediation. London: Oxford University
Press. Joan Selorm, T. (1998). Loan Risk in Banking. California: Mc Gram Hill.

 Kamrage, G. (1996). Loan Process in Commercial Banks. New Delhi: Tata McGraw- Hill
Companies.

 Koch W. (1995). Bank Management (6th Edition). South Coloronia: The Dry Den Press.

 Mac Donald, S. and Timothy W. Koch (2006). Management of Banking. California:

University of South Carolina.

 Ragahavan, R.S. (2003). Loan Management. New Delhi: Mc Graw Hill.

 Semu (2010). Banking Loan Management Guideline in Ethiopia. Addis Ababa: Addis
Ababa University Press.

 S.Scott, Mac Donald and Timothy, Koch (2006). Management of Banking. South Carolina:
University of South Carolina.

 Www. Awash Bank. Org. et. Com /2022 /

 Contributor writers about Loan related issues on “www.google.com”/ December, 18, 2013/
Adam Monotography, Francis Duffy, Malvin Richardesn, Johnson mark, Maroon Saidu, S.
Pole Mark, Thomas M. Paringer, Joshua Kennon, Collin Fitzsimmons, Frank J. Fabozzi.

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