A Study on Manufacturing Project Financing by Commercial Bank of Ethiopia: Challenges and Prospects
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Date
2015-02
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Addis Ababa University
Abstract
The importance of manufacturing project to economic growth is unquestionable in that it
benefits the economy at large in terms of creating employment opportunity, increasing in
the GDP of the nation, import substitution and the like. On the other hand, banks that
finance manufacturing projects get large amount of income and profit if they provide
loans to large and/or more number of projects. However, care should be taken as to the
challenges of manufacturing project financing since they are risky and are undertaken
in uncertain, forecasted business environment on the one hand and they need huge
investment capital on the other. Hence, the purpose of this study is to assess the
challenges and prospects of manufacturing project financing by Commercial Bank of
Ethiopia and give the required recommendation as a remedy for solving or reducing the
effects of the challenges and utilize the prospects in a better manner.
The study employed both quantitative and qualitative research approaches to achieve
the intended objectives. Both primary and secondary data types were used to collect
data from managerial and non-managerial credit performers and internal records of the
bank. Review of credit documents, questionnaire and semi-structured interview were
used for collecting both primary and secondary data types. Simple random and
purposive sampling technique was used to select sample employee respondents of CBE.
Moreover, descriptive survey method was used. All the close ended questions of the
questionnaires were analyzed quantitatively using mean, frequency counts and
percentages. Accordingly, the study revealed that the absence of quality and
completeness of manufacturing project proposals submitted by customers and poor
credit culture of customers of the bank, low level skill of credit performers, lack of
support of research unit to credit process of the bank, and absence of adequate data
and information in the CBE for credit processing , less availability of data and up-to-date
data & information outside CBE are major challenges of the manufacturing project
financing by the CBE.
In addition to this the current credit risk grading system of the CBE is found to be
important for conducting credit analysis. However the challenges observed is that the
parameters are subjective and broad in definition. In areas like Business risk and
Management risk are found to be subjective to rate. No industry average in the sector. In
Customer relationship risk especially in rating indicators like customer integrity and
honesty is a challenge to rate. Finally recommendations were made based on the results
of the study. Key recommendations include giving proper advice and seminars to
customers, and intensive training, strengthening research& development and
Management information system process of the bank, better the bank prepares its own
industry average which can be used for internal rating purpose, develop and implement
internal rating systems with larger numbers of grades to distinguish finer degrees of
credit risk, and setting a policy of submission of project proposals done by known
consultancy firms
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Challenges and Prospects