Assessment of Project Appraisal Practice in Interest Free Banking System: The Case of Commercial Bank of Ethiopia

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Date

2021-07-04

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Addis Ababa University

Abstract

This paper focuses on assessing the project appraisal practice of Islamic banking system(IBS) and the sharia values and principles incorporated in the appraisal practice of IFB of CBE. The study took commercial bank of Ethiopian (CEB) as its case study. The appraisal practice of the Interest Free Bank (IFB) of CBE was assessed to check whether each aspects ( the technical commercial, financial, managerial and risk analysis) are duly evaluated or not. Descriptive research design is used and qualitative method was applied. Population of the study composed of interviewees in IFB of CBE project appraisal office in which data is collected using census survey. The study assessed and analyzed technical aspect of projects by evaluating technology to be used by the project, raw material, technical knowhow availability, selection of product mix, selection of plant and machinery, evaluation of plant layout and assessment of project scheduling in which every aspect is well considered for the most part in the project appraisal practice of the bank. Commercial evaluation is assessed by checking parameters of demand for the product, marketing plan and strategy and analysis of competition. In assessing financial viability the result of the analysis show that the bank use cash flow statement and highly reliant on discounted cash flow analysis. Even though the bank establish cost of capital which is profit rate by taking equivalent rate of conventional banks interest rate, its criticized as its not fully in line with sharia principles. Regarding managerial capability of project the study found out that the banks well assess the hard skills while soft skills are neglected. The bank in evaluating risk of proposed project they have robust risk management plan. Regarding the incorporation of sharia vales in the appraisal framework of IFB banks, the finding of the analysis show that the addition of sharia screening in the initial stage of the appraisal framework is a major aspect as it serves IFB of CBE in making sure all proposed projects are fully compliant to sharia principles/ ruling.

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Keywords

project appraisal, project appraisal frame work, Islamic banking, Interest free banking

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