Assessment on Practice of Real Property Valuation for Collateral In Addis Ababa: In The Case of Two Selected Private Commercial Banks
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Date
2023-04-01
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Addis Ababa University
Abstract
The main aim of the study is to assess the existing practice of real property valuation for collateral in the case of commercial banks in Addis Ababa; and investigate if the practice is consistent among the banks and to check if the practices are compatible to the internationally accepted principles. In order to accomplish this objective, the real property valuation practice for collateral in banks was considered as a real-life context as existing phenomenon; thus, appropriate case study method is deployed to investigate the aforementioned valuation related matters in the selected banks in Addis Ababa. The case study method allowed the researcher to use a variety of data using multiple data collection mechanisms that facilitated the validation of data through triangulation. It also helped the researcher avoid bias and error of data. The study assessed the local and international guidelines related to real property valuation, manuals of selected banks and Ethiopian bankers association. And, it finally bench marking practice of real property valuation on Ethiopian banks’ guidelines is done based on the findings. The study revealed that each bank has its own valuation manual and procedures to do valuation. The amount of loan given to borrowers is not based on the market value of the property. In addition, the value of a property estimated by the banks doesn’t predict the actual market price but on securing the bank from risk as much as possible to ensure the banks can get their money back in case of default. Thus, properties are compulsorily undervalued by the lending banks and restricts the borrowing potential of investors and firms. Almost all commercial banks employ cost method due to availability of relevant comparative cost data, the difficulty in updating rental rates of buildings, and lack of stability in the Ethiopian property market. The depreciated replacement cost method of building valuation and determination of land value of land use right are not also compatible to the generally accepted standards due absence of income and expense data of subject and comparable property. The study recommended the need to minimize variation of value; revisit the existing land property law; align the standards to the generally accepted practice; develop standardized valuation framework in banks, and it is also strongly recommended that valuators need to demonstrate appropriate academic/professional qualifications, and technical competence to improve the practice..
Key words: real property, collateral, basis of valuation, valuation methods, location value