Besamint

: Process of the loan system

in Hibret bank
BUSA 510Operations Management

BUSA 510
Operations Management project

Ermias Mekuria
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Tables of content
Content Page
Introduction …………………………………………………………………………… 2
Share Capital………………………………………………………………………….3
Vision, mission and value statement………………………………………………. 3
The major products that Hibret Bank S.C have……………………………. ….….4
Types of loan in Hibret Bank S.C……………………………………………………4
Loan Processing steps and requirments…………………………………………. 5
Theoretical and conceptual loan processing vs actual in Hibret Bank………….6
The process starts from application letter ………………………………………….7
Conceptualize the theory vs the actual…………………………………………….13
Summary……………………………………………………………………………….13
Summary and conclusion…………………………………………………………….14
Bibliography……………………………………………………………………………15
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Acknowledgements
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Introduction
Hibret Bank was incorporated as a Share Company on 10 September 1998 in
accordance with the Commercial Code of Ethiopia of 1960 and the Licensing and
Supervision of Banking Business Proclamation No. 84/1994 (Hibret Bank S.C 2012: 1).
The Bank obtained a banking services license from the National Bank of Ethiopia and
is registered with the Trade, Industry and Tourism Bureau of the Addis Ababa City
Administration (Ibid: 1). Over the years, Hibret Bank built itself into a progressive and
modern banking institution, endowed with a strong financial structure and strong
management, as well as a large and ever-increasing customers and correspondent
base.
At the end of June 2008, Hibret Bank reported a net profit with a return on equity of
29.51% (Ibid: 1). Today, Hibret Bank is a full-service Bank that offers its customers a full
range of commercial banking services with a network that includes 3 branches. Hibret
Bank's priority in the coming years is to strengthen its capital base, maximizing return
on equity and benefit from the latest technology in order to keep abreast with the latest
developments in the local and international financial services industry (Ibid: 1).

Hibret Bank is one of the Pioneer Private Banks in Ethiopia. Hibret is founded with the
underlying rationale that values diversity. The founding shareholders were enterprising
Ethiopians from all walks of life that combined and committed their resources to
establish the Bank. The name “Hibret” is an Amharic word for collaboration and
synergy.

The Bank was incorporated as a Share Company on 10 September 1998 GC in

accordance with the Commercial Code of Ethiopia 1960 and the Licensing and
Supervision of Banking Business Proclamation No. 84/1994.

Over the years, Hibret Bank has built a reputation for providing innovative financial
solutions to the Ethiopian Banking industry. Furthermore, the Bank’s transformational
strategy 2030 is implemented to build a strong financial structure and a mutually
benefiting “Eco-system” for customers, strategic partners and stakeholder.

As a result of the Bank’s competitive edge in technology and reputable name, Hibret
Bank is selected as a pioneer partner by Giant National Brands such as The Ethiopian
Airlines in “Hibir Sheba Miles” the Ethio Telecom in “Tele-Birr” and the Ministry of
Revenues for e-tax payment.

Today, Hibret is a reputable Brand in Ethiopia, with more than 400 branches and sub-
branches (still expanding), 4706 plus employees out of which 41.8% are women. Hibret
Bank is now the preferred Bank by big international and local businesses, non-
governmental organizations and institutions.
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Share Capital
At the time of its establishment, UB's authorized capital was Br. 100 million, out of
which Br. 20,863,100 was fully subscribed and paid-up in cash by 335 founder-
shareholders (Ibid: 2). Having considered the need to bolster a better image for the
Bank, enhance its lending capacity and enable it to absorb a larger risk, the Third
Extraordinary General Meeting of the Shareholders, which was held on 7 December
2002 at Addis Ababa Hilton, unanimously approved the increase of the paid-up share
capital to Birr 200,000,000. - (Two hundred million) in five years' time, the sales of the
shares to reach the capital goal ended in February 2006 well ahead of the planned date.
Subsequently, the fifth extraordinary meeting of shareholders approved the increase of
the paid-up capital to Birr 400,000,000.00 (Four Hundred Million Birr) in another five
year time.
Accordingly, new shares were on sale starting from April 2007 and surprisingly the
shares offered were all subscribed well ahead of the planned time, which indicates the
public trust United developed in a short period of time (Ibid: 2). Once again, the seventh
extraordinary General meeting of the Shareholders, held on the 23rd day of November
2010 at the Addis Ababa Hilton, has unanimously approved the increase in the capital
of the bank to be implemented in such a manner that the authorized capital of the Bank
shall be Birr 1,000,000,000.00 (One Billion Birr) as well as the paid-up share capital of
the Bank shall be increased from Br. 400,000,000.00 (four hundred million) to Br.
600,000,000.00 (six hundred million) in three years' time by issuing 2,000,000 new
ordinary shares for subscription.
All the new shares floated have been subscribed in just three months' time,
although, the plan was to complete the sale of the shares in three years' time (Ibid: 2).
Hibret Bank S.C. has its 37-storey Headquarters named “Hibir Tower” at the center of
the country’s financial district. It is a state-of-the-art building with international standard
facilities and architectural aesthetics. Hibir Tower is indeed Hibret Bank’s legacy to the
capital of Africa, Addis Ababa and the nation as a whole
Vision
The vision of Hibret Bank is to be "The Preferred Bank" in the banking industry of
Ethiopia (Ibid: 3).
Mission
UB's mission is to render Quality Commercial Banking Services to the best
satisfaction of its customers; to enhance Shareholder value; to be one of, if not the best,
employers in the industry; and, to discharge its corporate responsibilities to both the
community in which it operates and the environment which it shares with the world
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Value Statement
• The customer is Hibret Bank's lifeline.
• Hibret Bank invests in its employees and dignifies them.
• Hibret Bank is committed to quality.
• Hibret Bank is a responsible corporate citizen.
• Hibret Bank works towards profitability and growth.
• Hibret Bank values honesty, integrity and loyalty.
• Hibret Bank lives its values (Ibid: 3).
The major products that Hibret Bank S.C have.
These are
1. Trade Finance Services
(All finance services that are suitable to customers Import and export, foreign
currency, Forex bureau and Loan)
2. Personal
(All personal saving account. There are about 14 different ordinary saving
accounts the major ones like Ordinary savings, Muday Deposits and Hibir health
savings and 14 different more)
3. Business
(All business tailored accounts like demand deposits (current account), special
saving blocked account and 12 different more products)
4. Diaspora
(Hibret Provides a wide range of services to Ethiopian Diaspora living abroad.
Save at Hibret and earn Interest)
5. Interest free
(Hibret Bank provides Interest Free Banking services which are complaint to the
sharia principle)
6. E-banking (All debit cards, interest free cards tailored multi-channel banking)
7. ATM services which the bank offer in the metropolitan destinations

Types of loan in Hibret Bank S.C

1. Advance on import loan
2. Agriculture and other loan
3. Animal fattening and abattoir for export loan
4. Building construction residential and commercial loan
5. Real estate loan
6. Working capital for machinery rental
7. Working capital for contractors
8. Construction machinery and equipment purchase
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9. Business influential individual loan (for housing, automobile and for personal)
10. Collateral loans to lease financial institution with foreign currency equity
contribution.
11. Diaspora financing (housing, automobile, real estate, manufacturing movable
economic assets)
12. Domestic trade services
13. Export and other export related services loan
14. Employees of big depositors financing
15. Employees of high valued customers
16. Employment agency loan
17. Floriculture and horticulture loan for export
18. Hotels above three stars loan
19. Lease financing- Hire purchase
20. Loans and advances to be repaid on foreign currency
21. Loans to embassy staff, diplomats, expats and employees of international
organization
22. Loan availed against cash collateral
23. Loan against foreign bank guarantee
24. Loan to be guarantee to micro finance institutions
25. Loans and advances to be guarantee to business who channeled common
surette (One to one) amount foreign currency.
26. Manufacturing export and local
27. Merchandize loan
28. Mine, power and water resource loan
29. NGO employees financing loan
30. Other service sector loan
31. Real estate developer with foreign currency equity contribution which kept as
cash collateral dominated in LCY and FCY Loan
32. Personal loan/ consumer loan
33. Pre-shipment facility for coffee
34. Service export (consultancy, logistics, tour, travel and others)
35. Staff loan
36. Transport service loan
37. Trade bill discounting

Loan Processing steps and requirments

Eligibility Criteria
 The business should have valid and relevant trading license from
concerned government body.
 The business is required to be operational for at least in the past
one year. However, in cases where the owner or general manager of
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the business has relevant work experience, six months operational

period can be acceptable,
 The business should produce all relevant documents required to
process the loan,
 It should also fulfill all requirements set by the Bank and the
National Bank of Ethiopia (NBE)
After all the above points fulfilled the bank will be cornered to the following points.
Hibret bank will outline all the major steps needed to be completed by a loan
processor in order to ensure a successful loan package. While there are variations
to these steps depending on your employer, NBE (national bank of Ethiopia) and
other laws. The following points will still serve as a good checklist in any loan
processing environment.

Theoretical and conceptual loan processing vs actual in Hibret Bank

The following steps are how to get loan from Hibret bank, the process starts with
New Loan File

The loan file is where it all begins. The loan officer from the branch office starts
with a new file. The loan file will contain mainly with an application from the customer. In
addition, it will include comments made by officer in charge who has had their input in
the loan application process. As well as any notes about the potential borrower that
was made during the loan interview process.

Then a loan officer read through the application, comments, notes, and overall loan
request. The customer understands the loan in its entirety before moving forward. If a
customer has any questions about the loan you need to clarify these issues with the
Loan Officer before moving forward.
After it reviewed the information and a clear picture of the loan, the branch manager
enter this information into company's loan processing automation system. Then the
case goes to head office/branch office depending on the amount to be requested then it
will go now proceed to the next step.
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The process starts from application letter

1. Letter of application
The loan application should specify every detail request of the loan clearly
including;
 The name of the applicant
 The amount of loan requested birr
 The purpose of the loan requested in birr
 The purpose of the loan for which it is use
 The installment payment if monthly, quarterly, semiannually or lump sum
 Duration of the loan in which the borrower intends to pay the debt
 Type of collateral to be offered (movable or immovable)
 Full address
 Signature

2. Opening of Account
The applicant is supposed to open either current or saving account if he or she
is new to the branch and was no any account, he or she is new to the branch and
was no any account before. This is helpful to direct all his or her transactions
through a bank account which will finally hint on the financial performance of the
customer and the activity of the business.
In addition, it helps to disburse the approved loan and also to debt for the
periodic installments and other charges like insurance and stump duty charges.
3. Submission of Necessary Documents.
For the review and comments as to who is authorized to conclude loan contract
on behalf of the enterprises and also whether he or she can mortgage the
property of the company along with the application, the customer should summit
the following;
 Like appropriate and renewed original licenses with one copy which shows
the beginning capital and year of establishment at least one year in
business
 Collateral documents.
If the collateral is building; the plan and ownership certificate (title
deed if the collateral is vehicle need to present car ownership card)
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 Audited financial statements

 Memorandum of association registration certificate and article of
association and power of attorney where applicable must be presented (in
case of plc and S.C)
 Any document relevant to the business such as contract made with other
organizations and any feasibility study connected with new investment
proposal
 Based on the above documents the bank makes further investigation
 Confirms the geniality of the documents presented by the applicants
 Interview the applicant’s way she or he needs the money, how she or he
has planned to return it and other
 credit information from NBE central data center in order to know the
applicant is a defaulter or was good customer in another bank
 In relation to the amount of money that the customer requested, the bank
was different hierarchies that scrutinize and approve the loan to be
granted.

This is as described below; Up to birr 750,000 the branch loan committee can
approve and above birr 750,000.00 approved by the head office credit
committees.
4. Interview
Before starting the paper work for the actual processing a loan, the loan officer
makes further investigation. The respective loan officer must interview borrowers
in order to confirm the genuinely the documents presented by the applicant the
questions raised and the response made must be recorded on file and attached
to the respective file for reference.

Questions declared are like;

 Address
 Name of his /her wife or husband (for credit purpose)
 Year established (organization)
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 Initial capital & present capita in birr

 Facility applied birr
 Purpose
 security offered
 relation with this bank and other such as depositor, borrower or
mortgage
 other liability such as payable, bank loans, tax payable and third-
party liability
 assets such as cash in bank, cash on hand, goods in stock,
advance payment on merchandise in transit etc.
 income such as sales other income etc.
 expense such as salaries and wages, insurance, utility and other
5. Credit Information
Before deciding on financing of the business it should be obtain both
internal and external sources before making a decision on the financing of the
business it should be a decision on the financing of the applicant.
Internal source of information is the customer's account in the bank. The
business activity and credit worthiness of the applicant can be obtained by the
reputation and magnitudes of the transactions as well as the checked balances
for lack of funds.
Other means of information may be past records of settled loans to confirm
his agreement habit. As an additional source NBE central data will also provide
inform if there is belief that the customer was doing his other credit or deposit
with other banks. The NBE specifies the applicant's credit relationship with other
borrowers past and present performance on credit activity. After this the next
step is to review the borrower's business activities.
6. The Business Visit
The branch management and the loan officer should visit the applicant's business
site as well as the personal guarantor if any.
The purpose of this visit will be
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 To confirm the announced financial position by checking physically the

amount of cash on hand, receivable document, buildings. Goods in stock etc.
 Access whether the applicants are actually operation a business that they are
licensed
 Have an overall view that the business of the applicant by observing as
regards demands of the area the numbers of employee and machineries.
 Determine the address of the borrower or this guarantor for subsequent visit
also to identify the security pledged.

7. Property Estimations

This is done only after being satisfied with the activities of the business. The
property must be fixed in its nature, have already marketable value not characterized
by wide fluctuation and movable like motor vehicle.

Bank engineer or loan officer with the branch manager must estimate all
properties offered as security on fee paid. It is estimated by loan officers or hired
professional evaluators who are experienced in market value of all kinds of
properties. Collaterals typically vehicles must be estimated every request of loan due
to a rapid deprecation. While building must be re- estimated every three years or
after extension is made.

In relation to amount of loan that the customer requested the bank has different
hierarchies, up 750,000 birr and if the collateral is vehicle an engineer from head
office estimates the collateral.

8. Source of Repayment
Before proposing loan for a person or to an organization, it should be known that
from which sources should the loan expected to be repaid. It is supposed to repay
from the proceeds of the business activities from his /her sales volume in which
generates income within reasonable period of time not from the liquidation of the
collateral.
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And also thinks about repayment schedule such as monthly, quarterly, semi-
annually, at maturity etc. this is observed from the borrowers financial analysis of
income statement and balance sheet which includes cash on hand available during
visiting, cash in bank as at date, account receivable and note receivable as per
his /her book register during visiting, goods in stock at visiting shipment in transit as
per the receipts, building held as collateral and other additional assets, networking
capital, current ratio, sales to receivables ration, sales to current asset ratio income
for tax as percentage of current asset, and total debt to net worth ratio. After all this
done the loan officer prepares the LAF to approve or reject
9. Loan Contract

After the loan committee approves the proposal of loan the loan contract is to
be prepared immediately in all proposed formats and copies as needed in order to
register.

Loan contracts are contracts of which the borrower owns or acknowledges the
loan forwarded to him, undertakes to pay the periodic installments, agree to pay the
indicated interest rate. Loan contracts are witnessed (stat of the bank) by the person
and must be signed by the branch manager and the borrower. After this signing of
the contract, the borrower will be identified and will also get a copy.

10. Security Contracts

Similar to loan contracts, security contracts are also signed the contracts by
the branch manager and the guarantor for and with the witness (Staff of the
bank) of three persons.
Besides to this the spouses (wife and/or Husband) of the guarantors should
join in signing the contracts in case of married person. In general, other relevant
appends to the contract, like variable interest rate append, defect clause append,
insurance appends etc. should be fulfilled in and signed by contract witnessed.
After signing all the contracts, they should be sent to the respective offices for
registration of debt against the property.
For instance, for building the contracts are sent to the municipality who will
register the loan, retain a copy of the contract return the rest to the branch.
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For vehicles the ministry of transport and communication register the loan on
the respective files of the vehicle. As per the writer opinion this task should be
handling by the bank messenger order to not create insolvency to customers.
The main aim of registering the loan at these offices is to safe guard the lender
interest against transferring of the title of the collateral to the third party without
the awareness of the bank.
11. Insurance coverage for the collateral
Insurance can be briefly defined as the coverage by contracts was by one
alliance under takes to identify of guarantee another against loss by a specified
contingency.
All properties considered as guarantee while granting loans should be
covered and authorized by insurance companies against relevant risks in the
name of the bank and the property holder.
12. Loan disbursement
Next achieving all the responsibilities declared in the report body, then
approving of the loan, the contract registered and confirmed insurance policies
submitted, disbursement could bid nevertheless, prior to forwarding the loan, the
following points should notice.
 For the purpose of management of end use of the loans they should paid
directly to the concerned seller or supplier gains written consent of the
borrower it the loan approved is for the purpose of purchasing truck etc. but if
the loan is for working capital, disbursed to his or her saving or checking
account
 All conditions stated by the loan committee should be fulfilled
 The borrower should give as theorization to the lender wages such as
periodic loan repayments, revenue stamps, estimation facing other charges
pertaining to the credit.
All the information and entries should be immediately posted in computer only
since, it is computerized of open in the name of the borrower.
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Conceptualize the theory vs the actual

As I tried to mentioned above, I tried to see the theoretical ways of getting the loan from
the bank. All the process by considering what we learnt in the operation management
on the generic process’s strategies.

For instance, I can see the process strategies to meets or exceeds customer
requirements, cost and managerial goals, for having a long-term effect on costs of loan
and quality in delivering to the customers with all limitations. I have learnt also how the
process analysis and design of bank on the customer perception about the loan and the
services at large. Also, how the bank as an organization competitiveness to achieve its
goal. Similarly, one of the tools for process analysis and design was service blue
printing (they establish loan boundaries, how the steps in getting the loan involvement,
they flow with system they have, how establishing time frame and analyses profitability)
was vivid in the organization.

Theoretically the bank loan department tries to deliver the loan services to all
customers, since the main motto of the bank is to deliver all the services to all
customers they need. But the actual of the loan department and the bank system at
large is fail to do so. Because of the gap from both the bank and customer’s side.

From the customer side

After all the process and the preconditions fulfilled to get the loan, the bank
disburses the loan so the customer and gets the loan. Here is the mismanagement
begins, the customer gets the loan for the example for manufacturing business but they
are using the loan for the building the construction. At the same glance the customer
fails to pay the loan since the loan money used for construction of commercial building.
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Hence the customer fails to pay the loan with one thousand different reasons.
Hence the bank fails and late to collect the loan repayment. For this the bank uses
different mechanisms to protect itself.

From the Bank Side

Most non-performing loans (NPL) are due to mismanagement loan system from the
bank staffs and customers. To protect the bank from NPL (non-performing loans) the
bank goes to bureaucratic reasons for the loan which make a big boundary for those
they are honest and potential customer that they use a loan for the purpose of the
intended goals.

Summary

 The Hibret bank loan system takes a minimum day to disburses the loan,

customers are encouraged to get the loan.

 Loan technically benefits both the customers and the bank, but the bank only

issues loan for those customers who have

o A profitable business according to the perception of the loan officer

o The bank did not issue loan for those they begin the new business

o If the customer financial statement is weak but the business idea is

agreeable, they don’t issue loan

o Loan issued for those customers who are influential person or for those

who are honored due to their deposit history in the bank.

Conclusion and recommendations

The Hibret Bank S.C should review loan procedures for those customers who are new
to business. Because Hibret bank didn’t issue the loan for the beginners. The bank
should made further investigation why borrowers are not repaying their loan since they
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might mismanage it or abuse it for other use. Hence, the bank should consider step by
step disbursements loan otherwise potential customers might shift to other banks.
With the purpose of select potential and risk-taking applicants the bank should
have adequate applicant screening criteria such as, credit discipline or repayment
history current capacity to repay loan personnel behavior and business experience
should be considered at the time of applicant screening.

BIBLOGRAPHY

Suekuar; 1987 banking theory and practice in India, 8th edition Hibret Bank S.C. (2012)
Hibret Bank manual, Revised lending interest rate charges and fees manual, January 2022
Hibret Bank S.C (2020) credit procedure manual
Hibret Bank S.C (2012) Domestic Manual, International bank policies and procedures.
Loan management and its role in the lending process: https://www.researchgate.net/publication
https://www.hibretbank.com.et/