Islamic Financing Process in Interest Free Banking Services Providers in Ethiopia

I. Financing Origination

The customer or his/her/its legal agent may present formal financing and financing- related requests to the bank in writing in person or through fax that indicates the intention of the customer to be financed and willingness to pay at its maturity. If the financing request is processed based on the application received through fax, the original financing application shall be presented before the decision.
At his/her/its convenience, a customer can present financing application to the branch/interest free banking window service or to IFB- CRM (interest free banking - customer relationship manager) for existing customer or IFB - IFA (interest free banking-investment & financing advisor) for new customer. For business customers, the IFB-CRM may collect documents at customer’s business premise.
The customer relationship officer (CRO)/BM (branch manager) is responsible to collect and send customer’s application, submitted at the branch, along with relevant documents to the IFB- financing Advisor/DM (district manager) for a new customer or to the IFB-CRM for existing customer.
The IFB - IFA/DM is also responsible to collect application of new customers that apply for a financing at CPC (central processing centre) and classify them and introduce with IFB-Customer Relationship Manager.
The IFB-CRM is responsible for conducting the due- diligence assessment on the customer by collecting all the required loan processing documents from the customer. However, it has to be aligned with the objectives of the financing process which are mainly maintaining quality loan portfolio, timely delivering the request of the customer and cost-effectiveness.
If the branch/ interest free banking window service is located beyond 30 km from the FPC (financing processing center), the CRO or BM shall collect all the required financing processing information to the center.

And the IFB-CRM shall check completion of it, forward to the IFB financing appraisal team and recommend after completion of the financial analysis/appraisal. Business visit, to collect processing documents/information, from the center especially for remote branches shall be done based on the amount of financing request and/or relevance of the remaining information in consultation with the respective manager.

II. Interview

The main objective of conducting the interview is to solicit adequate and complete information and to conduct due diligence on the application.
Immediately after a financing request has been lodged, the IFB-CRM will conduct a detailed face-to-face interview with the applicant to obtain full information pertaining to the credit request. The interview, as appropriate, should cover the eligibility criteria and the following additional items:

i. The essence of the trade partner’s/debtor’s/ borrower’s business;

ii. Business conditions, such as production, sales, etc.;

iii. The types of products or services handled;

iv. The purpose for which the financings are required;

v. The amount and nature of other liabilities of the applicant;

vi. The cash-flow from which the facility is to be repaid, taking into account working capital and capital spending requirements;

vii. The main customers and suppliers of the business;

viii. The reliability and sustainability of the supply of goods/raw material;

ix. The reputation of the buyers;

x. The availability of an alternative market;

xi. The willingness of the shareholders/owners and management to repay and their track record with the Bank;

xii. The competence of the management;

xiii. Whether there are any unusual risks foreseeable at the outset;

xiv. The external factors, which can influence the success or failure of the customer in a volatile environment;

xv. The collateral being provided;

xvi. The compliance with good environmental practices and regulations and the impact of any potential clean-up liabilities;

xvii. The status of the applicant’s economic sector and his/her/its position within that sector; and

xviii. Any other information considered necessary to assess the risk of the proposal.

3. On the basis of the information gathered through the interview, the IFB-Customer Relationship Manager shall decide on the request. If the customer is not eligible, he/she may reject the application in consultation with his/her immediate coach and report to the Manager Portfolio Management Team in writing stating the reasons for rejecting the request.
4. The IFB-CRO/BM forwards the request to CPC immediately after accepting the documents provided by the customer and delivering the checklist for the remaining so that the customer would fulfill the necessary documents at IFB- CPC. However, for branches located more than 30 km from the center, documents shall be forwarded after completion as per the checklist. If the customer’s financing application is accepted, the IFB-CRM shall provide an acknowledgment letter after fulfillment of all the necessary documents.
5. For outlying area financing requests District coordinating officers shall collect all the required documents and information and conduct due diligence report in collaboration with the concerned district office and send to the central IFB- Customers relationship subprocess.

III. Required Financing Processing Documents

1. For applications accepted based on the interview, the CRM/district coordinating officer shall collect all processing documents based on the checklist.

2. The CRM must ensure that the applicants have submitted financial statements (including balance sheet, income statement, and cash-flow statement). The statements may be actual and/or projected in the following manner:

a. All businesses established as share companies should submit the latest fiscal year audited financial statements within one year regardless of the requested financing type and amount. In addition to the audited financial statements, the latest interim financial statements should be presented for the period under review.

b. The businesses established as private limited companies, sole proprietorship and partnership which has been in business for a year or above and whose total exposure is Birr 5,000,000 (five million) and above shall submit the latest fiscal year audited financial statements within one year from the closing date of the financial year. In addition to the audited/provisional financial statements, the latest interim financial statements shall be presented for the period under review.

c. The audited financial statements presented by the applicant shall be prepared and audited by external auditors. External auditors, in this regard, shall mean persons/companies who have certificates of professional competence duly authorized by the relevant institutions/authorities and those organs established at the federal or regional level to organize and register cooperative societies in line with proclamation No. 147/ 1998.

d. All businesses established as private limited companies whose total exposure is less than Birr five million and has been in business for three and more years must present provisional financial statements for the latest three consecutive fiscal years, prepared in accordance with the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS)

e. Sole proprietorship and partnership businesses, whose total exposure exceeds Birr one million but is less than Birr five million, must present provisional financial statements for the latest three consecutive fiscal years, prepared in accordance with the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). However, a Commercial Credit Report (CCR) may be used for a business established as a sole proprietorship and partnership and whose total exposure is below Birr one million.

f. Newly established businesses must present projected financial statements and cash –flow projections for at least the financing repayment periods.

g. The IFB-CRM and/or CRO and/or BM shall be individually and severally responsible, to the extent possible, for cross-checking the information contained in the financial statements.

IV. Finance Processing and Collateral Estimation Fee

During Finance processing and collateral estimation, the Bank incurs valuation and processing costs. Hence, the customer shall partly bear the collateral valuation and finance - processing cost as indicated in the table below immediately after the IFB-Customer Relationship Manager provided acknowledgment letter.

No. Request limit Finance Processing and Collateral Valuation fee (in Birr)

1 <100,000 (400 Birr)

2 100,000 <X< 200,000 (600 Birr)

3 200,000 <X< 1,000,000 (1,000 Birr)

4 1,000,000 <X< 6,000,000 (2,000 Birr)

5 6,000,000 <X< 20,000,000 (3,000 Birr)

6 X > 20,000,000 (5,000 Birr)

1. Restructuring, or Periodical Revaluation of collateral As per the above finance Exposure/Request limit

2. Appeal Shall be charged as a fresh request based on the above rates.

3. Renewal at the existing finance facility limit 50% of the fee of the respective Finance Request limit

4. Renewal at the increasing finance facility limit 50% of the fee of the respective Finance Request limit plus Financing Processing and Collateral Valuation fee for the incremental portion

5. Collateral Release with Replacement 50% of the above fee for the respective Outstanding balance for which the asset has been pledged

6. Collateral Release 25% of the above fee for the respective Outstanding balance for which the asset has been pledged

7. Periodic collateral evaluations to be made by the Bank’s own initiation, before the expiry of the revaluation time stated on this procedure and if there is no Financing request Free of charge

8. Credit Information Inquiry Birr 200

a. If the collateral properties to be estimated are more than ten, the customer shall pay additional Birr 300for each additional property.

b. All other related costs like per-diem, transportation, and fuel shall be born by the bank.

V. Credit/Financing Information Inquiry

1. Origination: An inquiry for credit information could emanate from IFB-Customer Relationship Managers or Financing/Loan Recovery Officers. Nonetheless, when deemed necessary IFB-Financing Analysts, any IFB-Financing Approval Team/individual member(s) may request credit information.

2. The credit information originator should forward his/her inquiry to the Management Information Service.

3. Credit information inquiry response:

i. The Management Information Service should register the inquiry in a logbook prepared for this purpose.

ii. Management Information Service should collect credit information from the Bank through NBE and provide the information to the inquirer through on-line access, dial-up system, fax or any other medium of communication within the specified standard time.

iii. The Management Information Service will have direct online access to the National Bank of Ethiopia

VI. Business Visit

1. For existing customers business visit is one of the regular activities of the IFB- Customer Relationship Manager.

2. For new customers, upon receipt of the Customer Application Form and the supporting documents, the IFB-Customer Relationship Manager shall conduct a business visit. However, for the branches located beyond 30 km from the center, the business visit from the center shall be done based on the amount of loan and the relevance of the remaining information whereas the IFB-Consumer Relationship Officer or Branch Manager provides all the required information.

3. Documents that are not legible or bear deletions without signature or where the seals are difficult to identify should not be accepted.

4. Having ascertained that the supporting documents are complete, the IFB- Customer Relationship Manager must use a tick mark to indicate same on the checklist that is to be attached to the FAF.

VII. Financing and Risk Analysis/Appraisal

1. Financing and Risk Analysis refers to a critical assessment of a business entity to see whether it is strong enough to warrant financing of money to it, and related risks, it is generally done to assess the creditworthiness of a customer and involves examining the ability of a customer to repay the debt of some kind. Financing Analysis should screen out both the positive and the negative aspects of each Financing request.

2. Financing Analysis/Appraisal is performed based on the information obtained from the following sources;

a. Customer's application;

b. Qualitative information from the IFB-Customer Relationship Manager/CRO;

c. Interview or discussion from the IFB-Customer Relationship Manager;

d. Financing Application Form;

e. Financial statements;

f. Financing/credit database of the Bank and/or market data (to be collected by the IFB-Financing analyst), such as industry-wide profitability, liquidity and leverage ratios, portfolio concentration (by sector, ownership, product and geographic area), macro- and micro-economic data, market situation, market share, where applicable, intensity of competition, industry characteristics, business cycle, etc.;

g. Supporting documents;

h. The range of accounts/overdraft utilization/ account performance;

i. Credit information report;

j. Legal opinion; and

k. Other pertinent sources.

3. The IFB- Financing Expert/Analyst(s) should carry out a comprehensive analysis in order to determine the strength of the business, and do so with the highest ethical and professional standards of conduct.

4. The content of Financing and risk analysis/appraisal shall follow the IFB-Financing and risk analysis format. Using this format the financing officers ensures that all significant and relevant issues related to a specific case are covered and the final recommendation/sanction is based on a proper analysis of the customer’s circumstances both from financial and non-financial aspects.

5. The depth of Financing Analysis/Appraisal

i. The intensity of the Financing and risk analysis may vary based on the nature of request; type of the business the customer is engaged in, and level of associated Financing risk. The report shall address the content and key issues that are relevant to the request.

ii. In case of the existing customer(s), the Financing Risk Analysis Report shall concentrate on new developments of the business and summarized on a few pages as far as possible. However, the major issues shall not be missed.

6. To properly analyze/appraise the Financing request the Financing Manager/IFB- Financing Officer shall gather adequate information about the customer from different sources on historical financial statements, projections, business strategy, skills and experience in management and personal character.

7. The IFB-Customer Relationship Manager is responsible to gather the required documents/information in the required manner from the customer when a request arises from IFB- Financing Analysis or IFB-Approving Team.

IX. Financing Negotiation

The IFB-Customer Relationship Manager can negotiate with the customer on items like tenure/duration of the facility, disbursement arrangements, repayment, charges, collateral issues, and covenants.

X. Markup/Profit Rate Negotiation

The IFB- Customer Relationship Manager/CRO/ District Coordinating officer shall negotiate initial markup/profit rate agreement with the applicants. While negotiating the appropriate markup/profit rate, the industry average of the sector, historical returns of the applicant, the proposal of the applicant and the conventional rate shall be considered as a benchmark to determine the minimum markup/profit rate.

Tuesday, April 23, 2019