I. IntroductionIn accordance with the branch expansion policy of the bank, the

feasibility study to open the second branch in Oromia Regional State in

Eastern Wellega zone at Nekemte town is assessed and presented in

this report. The branch, if found feasible, is expected to operate in one

of the Sub-cities ("Gandas") in Nekemte town.

The result of the socio-economic environment is presented in section II,

followed by the financial analysis (section III). The manpower and

physical asset requirements are also presented (section IV) as per the

standard of the bank before conclusion and recommendation (Section

V). Finally annex tables are attached for reference.

II. Assessment of Socio-Economic Environment

a. General Socio-Economic ConditionEast Wellega zone is one of the twelve zones in Oromia Regional State,

which are structured according to their geographical location. The zonal

administration is found in a Nekemte town.

Nekemte town is one of the old towns in the country, established in the

mid 19th century and is relatively the largest town among towns in

Western Oromia Regional State. There are two main historic arguments

as to how the town attained the name "Nekemte" as it's called. The first

assumption is, King Kumsa Moroda (1888-1923) who built his palace at

Bakanisa kase, ex-residence of Nekemte Geda system gave the name

Nekemte to the land that belonged to his ancestor as especial seat of

his contemporary rule. The others say, the name Nekemte originated

from Afan Oromo language to mean ‘in row' or ‘arrayed in line’

indicating houses built and shops opened in line along the road side.

Nekemte is located at a distance of 331 km west of Addis Ababa,

110km North East of Gimbi, the principal town of West Wollega Zone

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and 250 km North West of Jimma Zone in Oromia Regional state. The

town is bounded by Guto Gida district of the zone in north, south and in

west side and also Wayu Tuka woreda of the zone surrounds the

Nekemte town in east side.

Nekemte has also boundary with farmer associations namely Gari, in

the East, Fayinerra in the west, Kitessa in the North, and Alami in the

south that supplies agricultural products to the market. Currently it is a

capital city of East Wollega Zone of Oromia Regional State with the total

land area estimated to be 5,480 hectare. Administratively, it is divided

in to six sub towns or "Gandas".

Based on the 2006 population and housing census result, the

population of Nekemte town is estimated to be 90,211 in 2011. Male

population is slightly higher (51.1%) than the female population and the

population is expected to grow by about 4.11 percent per year as that

of national urban standard. The above estimated population figure does

not include villages around this town (Sasiga, Diga, Guto Gida and

Wayu Tuka) which are potential customers of economic activities in

Nekemte town. In average terms, 25% of the Population within the

working age interval is unemployed.

According to the information from Nekemte Town Revenue Office, there

are about 13,000 houses, out of which 12,090 (93%) residential, 780

(6%) business and only 1% constitutes governmental or non-

governmental offices. The ownership indicate that there are 9,490

(73%) private houses, 3,120 (24%) are governmental (accounted to

Gandas) and 390(3%) belongs to Rental Houses Administration.

Recently, the government has strictly given due attention to urban

housing condition and allocated capital budget for condos construction

at national and regional level to alleviate housing problem in which

Nekemte is also one of the center.

According to the information, in the surrounding rural areas, more than

92% of families live in their own dwelling units and only 1.2% in rented

houses. In both urban and rural areas, close to 6% of the population live

in rent-free houses. This includes individuals living with their relatives.2

The town has one government university, four government colleges and

thirteen private colleges. The number of students enrolled in these

higher educational institutions is estimated above twenty eight

thousand. Further, there are one public hospital and a number of heath

institutions providing health service to the public.

Regarding earning conditions, the major sources of income for the

town’s households include salaries, earning from self-employment,

domestic work and causal labor, petty trade and pension. Nearly 25% of

the town’s households face income shortage to cover basic needs.

Moreover, underdeveloped and unproductive self employment in the

town aggravates the situation. Therefore, earning condition of the

population can be considered as lower and middle income group.

b. Trade and Economic ActivitiesAccording to the Trade and Industry Office of the Nekemte Town, with in

six sub towns there are about 1,615 traders having trade licenses with a

total capital of birr 50.7 million. As shown in Table A, the retail, service,

industrial and wholesale sectors accounted for 48.67%, 40.99% 5.20%

and 5.02% of the licensed businesses. On the other hand, the

Agriculture sector contributed less than one percent of the licensed

trades. (See table A)

Regarding tax payment, there are 176 category A&B and 1324 category

C1 businesses in the town. These figures showed insignificant increase

compared to last year tax payers' number in each category. The

collection of tax and the trend in capital and regular budget allocated to

the town does not show considerable change with in last three years.

There are various business activities taking place in this zonal city.

Among these, service sector and agricultural products transactions

1 Category A & B businesses are those businesses whose annual sales are above 500,000 and in the range of 100,000 and 500,000 birr respectively and have their own financial accounts for tax purposes. But Category C businesses belong to businesses whose annual sales are below 100,000 birr.

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dominates the market. Hotels, restaurants, various shops which include

electronics and mobile accessories, boutiques and small scale retail

shops are abundant. The two main squares and their vicinities are

locations for these mentioned businesses. All businesses are

concentrated with in the radius of 400 meters from these squares.

Hence, financial institutions are located around these mentioned

squares following trade and businesses that are taking place in the

area. On the other hand, most of the cities part is residential and

comprises the usual retail businesses at smaller scale. Even though,

industry is one of the motive powers for achieving rapid economic

development, it is limited to small scale industries such as grain mills,

oil processing industries, coffee hullers', wood and metal works and

certain traditional handcraft activities in the town. These identified

small scale industries are the only industries that are operating in the

city and their number are increasing through time.

Regarding transportation service, since the town is center for various

trades and businesses, many towns and villages around the city

transport their products to the market in this town. For this reason

Nekemte has more the 38 transport lines to these towns and villages.

According to the information from Zonal Trade, Industry and Transport

Office, the average number of vehicles (public transport) crossing the town

per day is about 57 local and 14 cross-country with passengers of about

1140 and 840 respectively. This number rises to its peak when higher

educational students move in or out of the city at the beginning and

end of their courses. Related to its good geographical location, the town

is center for conference and small scale tourism. The nineteen centaury

monarchy palace, known us King Kumsa Moroda's (1888-1923) Palace is

one of the tourist attractions of the town.

The other vast business transaction is that of agricultural products. The

near by agricultural output supplying villages like Uke, Loko, Anger,

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Megersa, Logo, Aleltu and Garisa Oda provides the market with maize,

Sesame, Sorghum and Teff.

The villages' agricultural activities mainly focus on the summer (Meher)

production season. Accordingly they do have once in a year production

period. Production wise, these villages collected about 831 thousand

quintals of cereal and oil seeds yields including sesame. The average

annual price of sesame is Birr 1800 per quintal. On the other hand, the

prices of teff, maize and sorghum are Birr 620, Birr 190, and Birr 325

per quintal respectively. The price of cereals decreased compared to

last year significantly thereby decreasing trade activities of the town. In

relation to this cereal agriculture, Ethiopian Commodity Exchange (ECX)

has opened cereal warehouse in Nekemte town this year. This

warehouse( formerly known Sorga Warehouse) serves to store cereal

products especially, sesame from Yaso and kamashi in Benishingul

Gumuz Region and Horu Gudru, Gutin and other small villages in

Wollega zone.

Table A. Licenses issued in Nekemte Town

Sector

Number and Capital of Trade

Licenses

Number of

Businesses

%age

Share

number

Capital

(000')

%age

Share

Capital

Retail 786 48.7 5,231 10.3

Whole Sale 81 5.0 3,669 7.2

Service 662 41 36,069 71.1

Industry 84 5.2 5,674 11.2

Agriculture 2 0.12 74 0.1

Total 1,615 100 50,717 100

Source: Nekmte town Trade and Industry Office

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c. Infrastructural FacilitiesThe necessary infrastructural conditions for banking service such as

telephone, telex, fax, internet, postal service and 24 hours electric

service are available in this town. The major asphalt road, Addis Ababa-

Nekemte is under construction in two phases. The first phase, Addis

Ababa - Bako is close to completion. The other half Nekemte-Bako is

under construction by Chinese contractor. The other 110 km asphalt

road connecting Nekemte and Ghimbi is already completed. The town

has daily transport link with Jimma through Bedelle, and with

Dembidolo through Ghimbi. The regional offices of Ethiopian Electric &

Light Power Corporation and Ethio-Telecom are also found in this town.

The only problem the town has this time is shortage of clean water, and

yet the regional government is under taking water supply project for

Birr 120 million.

d. Future prospects of the Area.Nekemte is not an industrial town. The engine of economic activities is

the agricultural sector. In addition, following the geographical location

of the town, i.e. Nekemte is center for areas in the western part of the

country, there is high demand for hotel and transport services.

Therefore, there are various investment activities under going around

the mentioned business areas.

Table C. Investment Flow in Nekemte town (In '000

Birr)

No Project

Capital

(000)

Job

opportunity

Operational

(A)

Construction

completed

(B)

On

construction/not

started

(C)

Total

(A+B+C

)

1 Hotel 107,436 178 7 8 20 35

2 Agriculture 13,697 57 5 - 6 11

3 Industry - - - - - -

4 Building Cont'. 207,547 453 5 15 57 77

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5 Others 189,807 645 27 12 121 160

Total 518,484 1,377 44 35 204 283

Source: Nekemte Town Investment Office

Accordingly, there are 283 investment activities with a total investment

capital of Birr 518 million. The investments under pipeline mainly

focused on the construction of building complexes and hotels. The only

industrial investment expected in the area is that of The Defense

Industrial Engineering. On the other hand, the municipality is

undertaking construction of Wollega stadium. About 50% of the task

has been completed. On regional basis there is a plan to construct

Nekemte-Bure Asphalt road which will connect East Gojam to East

Wollega. The Air Ports Enterprise has also a plan to construct Gute Air

port in the town. Never the less, the town does not have such a huge

investment activities on ground that can change its growth at higher

rate with in the next five years.

e. Banking ServiceNekemte town has three public and three private commercial bank

branches. Namely,CBE Nekemte branch, CBE Haro Sorga branch (with

the name of manmade lake from tribute Sorga) and CBB Nekemte

branch. CBE and CBB Nekemte branches are located around the

second square2. Where as, the Haro Sorga branch of CBE is located a bit

far from the existing AIB branch. Further, CBE is serving the university

students in the main campus with in small room through window

service. On the other hand, Cooperative Bank of Oromia (CBO),

International Bank of Oromia (IBO) and Awash International Bank (AIB)

are the three private commercial banks in the town. OIB has moved its

branch (formerly was inside Desalegn Hotel) beside Senaf International

Hotel which is close to the first square. CBO is located around Nekemte

conference hall. Where as, AIB's existing branch is located on the first 2 The two main highways in the town are commonly known with the name first road and second road. These two high ways have squares with the name first and second square too.

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road on the mid way between First Square and the mosque. The branch

is expected to shift to the new ground plus four storeys building

(Alternatively, the choice may be to locate the proposed branch in the

new building) with in the next few months. The new location is close to

various businesses which will enable the branch to maintain the

existing customers and attract new.

Regarding number of customers using these branches, Nekemte CBE

and Nekemte Awash bank branches are busy of serving customers

commonly on local money transfer. On other hand, OIB, CBO and CBB

are serving customers to status that can be said satisfactory.

f. Proposed Location of the New Branch It is difficult to choose a location for second branch in the town like

Nekemt for two reasons. The first is, for private commercial bank like

AIB, the goal of opening branch is for the purpose of earning profit.

Hence, if the second branch is located in the business area mentioned

in the study, two of AIB's branches will compete for the same market,

where the market is not probably more than service providing capacity

of the existing branch. The second is, if we locate the branch near to

the residential area, the target area benefit is only mobilizing deposit

which can affect negatively the profitability of the proposed branch.

Never the less, following the NBE's directive, it is better to follow a

strategy to mobilize deposit so as to maximize loans and advances.

Hence, in order to mobilize deposit, the proposed branch has to be

close to business areas which are operating in residential areas. On this

regard; areas known as "Board" and an area where the existing branch

operates are suitable for the aimed target. These areas and their

vicinities have little bit better business concentration compared to other

residential areas. In the future, number of businesses can increase

though it might take longer time. In addition there are bank branch

standard buildings for the proposed branch in this area.

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III. Financial Analysis

a. The Representative BranchConsidering proximity and similar socio-economic conditions, Nekemte

AIB branch is taken as a representative for the upcoming branch. This

branch launched operation in December, 1999. During its decade of

operation, this branch has a profit balance for the first four years of its

operation. However, the loss of this branch is showing decreasing trend

in the last three years and finally reached a loss balance of Birr 31.2

thousand as at December 31,2010 which is by far less than the planned

loss. The branch has good deposit mobilization and money transfer

trends compared to other services it delivers. The branch has 34 staff

as at the end of December 31, 2010, out of which 24 are clerical and

the rest non-clerical.

On other hand, comparison between zonal towns which have equal

administrative status and where AIB opened its branches, namely

Jimma, Assela and Gonder the profit performance of Nekemte branch is

not significantly different form these branches. The deposit to loan ratio

of Nekemte branch is lower compared to the average performance of

these branches. Further comparison with Shashemen and Dire Dawa

branches revealed that, Shashemen and Dire Dawa branches registered

profit of Birr 4.8 and 4.9 million at the time these towns acquire their

second AIB branches. Further, the opening of these new branches does

not have higher impact on the profitability of these older branches.

This can be an indication for the existence of big difference between

Shashemane, Dire Dawa and Nekemte towns both in the performance

of branches operating in these towns and the economic capability they

have. (See table 4a and 4b)

b. Assumptions Usedi. It is assumed that 50% and 40% businessmen from

Category C businesses and also 0.5 and 0.4% 3of total population 3 Total Population=90,211, Work force=60%*total population, Employed population=75%*Workforce, Saving potential= .05/.04%*employed population (based on the economic research made by Ethiopian

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of the town (civil servants and employees of private sector with

saving potential) will open saving accounts at the first year in

maximum and minimum scenario respectively and the average

amount per account is taken to calculate saving deposit amount. 4(see table 1)

ii. It is also assumed that 25% and 15% businessmen

from Category A and B businesses of the town will open a

demand account at maximum and minimum scenario at the first

year and the average amount per account is taken to calculate

demand deposit amount. 5(see table 1)

iii. Demand deposit is assumed to grow by 50 and 40

percent per annum both at the maximum and minimum operation

condition in the second and third year of operation respectively.

iv. Saving deposit is assumed to grow by 50 and 40

percent per annum both at the maximum and minimum operation

condition in the second and third year of operation respectively

v. Following the trend the representative branch follows

and removal of credit cap by NBE it is assumed that the branch

under study will disburse loan amount equivalent to 55% and

45% of deposit it will mobilize on its first year performance at

maximum and minimum scenario respectively.

vi. The loan amount is assumed to grow by 60 and 50

percent at maximum and minimum operation condition in the

second and third year of operation, respectively.

vii. Interest income and interest expense of the upcoming

branch are estimated based on the bank's actual effective

average lending rate (10.11%) and deposit rate (4.36%)

estimated for the year 2010/11.

Economic Association); finally AIB's proposed branch takes 30% of depositors taking into consideration the number of bank branches and individuals will open more than one saving account.4 This estimation takes into account the unemployment rate in towns and also the share of the other banks in the market. 5 This takes into account the expected share of other banks in the market. In addition the average commission and service charge performance of the existing branch shows an average of 12% increment for the last four years.

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viii. The Commission and Service Charge as well as Other

Income are assumed to be 15% and 10% of the performance of

the representative branch as at the last year June 30 (the full

physical year performance), balance at maximum and minimum

scenario.6

ix. Commission and Service Charge as well as Other

Income is assumed to grow at 40 and 30 percent both at

maximum and minimum scenarios in the 2nd and 3rd years

respectively

x. Salaries and benefits of the new branch are estimated

based on the manpower requirement for the target the branch

assumed to meet. Furthermore, it is assumed to grow at 10% per

annum.

xi. General and Administrative expenses is estimated

based on the bank's standard for a new branch and taking into

consideration particular characteristics of the branch, like office

rent that is assumed to be 12,000(The office rent of Nekemte AIB

Branch)) birr per month. It is also assumed that these expense

items will grow at 10% in the study years.

xii. Deprecation expenses on fixed assets are estimated

based on the currently applicable depreciation rates and these

rates are also assumed to remain the same during the three

years.

c. Projection of Deposits and Loans and AdvancesAs shown in Table 1, the branch is expected to mobilize total

deposit of birr 8.2, 12.3 and 18.5 million in the three consecutive

years at the maximum performance scenario. At the minimum

scenario, it is projected to mobilize a total deposit of birr 6.3, 8.8

and 12.3 million in the first, second and the third years of

operation, respectively.

6 The percentage assumption is calculated following the trend of the new branches performance vis-à-vis the representative branches opened in Shashamene, Dire Dawa and Adama.

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With regards to Loans and Advances, the new branch is

anticipated to disburse about birr 4.5, 7.2 and 11.5 million at its

maximum operation and birr 2.8, 4.2 and 6.3 million at its

minimum operation level in the three consecutive years.

d. Projections of Income and ExpenseAs shown in Table 2, the total income projected for the new

branch is about birr 562, 878 and 1,375 thousand at the

maximum operation in the 1st, 2nd and 3rd years of operation,

respectively. Similarly, birr 356, 519 and 761 thousand is

expected to be generated in the three consecutive years in the

minimum operation scenario.

With regard to expense, the branch is expected to incur birr 1.2,

1.3 and 1.6 million in the maximum operation scenario and Birr

1.1, 1.2 and 1.4 million in minimum operation scenario.

The upcoming branch is also expected to incur loss in both scenarios in

the first three years of its operation, but it will have positive net

balances at the fourth year in maximum scenario.

e. Results of Financial Ratios To assess the operational efficiency and the viability of the proposed

branch, this feasibility study considers the operating ratio and return on

asset (ROA). The operating ratio, which is the quotient of the operating

expense and operating income, expected to be 326, 206 and 132

percent in maximum operation scenario and 725, 475 and 314 percent

in minimum operation scenario.

With regard to ROA, the new branch is also expected to generate

(14.07), (6.63) and (2.00) percent at maximum operation and (28.94),

(17.75) and (9.76) percent at minimum operation scenario. (Please

refer Table 3)

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IV. Major Requirements of the Branch

a. Manpower RequirementThe proposed branch needs about 18 employees with different levels of

educational and experience as per the target of the bank branch.

Accordingly, the branch will have a monthly salary expense of birr

25,490 and monthly allowance of birr 8,305. The details of the required

job titles with the corresponding monthly salary and allowance are

presented in Table 2.1.

b. Fixed AssetsWith respect to fixed asset, a total of birr 1.12 million is required to

furnish the upcoming branch with the necessary office furniture, vehicle

and other equipment to make it operational. Of the total cost, birr 650

thousand and birr 33.6 thousand is budgeted for the motor vehicle and

computers respectively. The remaining balance is allocated for the

purchase of different office equipment, furniture and fittings. (For

details please see table 2.3.)7

V. Conclusion and RecommendationNekemte, which is historic town in Western Ethiopia, is the center of

business and economic activities. Major activities in the town are

agricultural output transactions, Hotel & related businesses and

transport services. However, the development of trade and industry in

the town is at infant stage compared to the long age of the town.

Currently, the price of agricultural products such as maize and teff is

showed a slightly decreasing value at the mid year compared to the

price in previous years. Hence, the economic activities of the town calm

down as a result of this price fall. In addition, as discussed above, the

7 . Since, the main target of the branch is for the purpose of deposit mobilization, the vehicle assumed to serve the branch is Toyota corolla. Further, Counter & Partition and some fixed assets are not included in cost calculation because of the new building includes these fixed assets and hence the proposed branch can use these fixed assets from the existing or else can obtain in the new building depending on the office the proposed branch will operates.

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town does not have substituting economic engines to maintain the

equilibrium. However, as the information from ECX indicates the price is

increasing through time and is awaking the economic activities in the

area. Regarding the oil seed, the town serves as a bridge to store

these products from the neighboring villages and zones in the ECX ware

house. From this activity, the town earns income providing hotel service

to heavy truck operators.

The branch in Nekemte town is one of loss making branches in AIB. The

number of staff it has is enough to render quality service to our

customers in all kinds of services increasing quality of service delivery.

For instance, CBE is serving university students at their dormitory,

opens saving accounts to peasants and trader on the major market

days and is attracting major oilseed customers to use their branches for

money transfer earned from ECX transactions. Where as, our Nekemte

branch has few customers from ECX participants and serves customers

in branch building.

Opening a branch for the purpose of maintaining the previous location

is not feasible for town like Nekemte. This is because; the town has a

number of buildings and villas that can serve as branch building for any

commercial banks. Surprisingly, there is a ready building for bank

branch between the new and the existing AIB branch locations. Further,

the constructions of multipurpose building complexes are well-

underway which has rooms for banking sector. Hence, we can tackle

the threat coming from competitors by preparing the existing branch

through efficient service provision and technological advancement.

Never the less, the new NBE directive pushed commercial banks to

mobilize deposit aggressively. On the other hand, Nekemte has

encouraging environment for commercial banks targeting the

mobilization of deposit. Hence, it is better to establish deposit

mobilizing branch in the town to control and further monopolize the

area banking market. In addition, the opening of the new branch may

help the existing through solving the problems the existing branch

practiced which are mentioned above. Furthermore, the decreased cost 14

of fixed assets (since the new branch building is facilitated with some

fixed assets) and employment of manpower which are necessary vis-à-

vis the target deposit mobilization, opening the proposed branch will

compensate the negative attitudes opening new branch in the town and

will build good image of the bank in the town.

Besides, the financial forecast for this branch shows that the new

branch will have positive net income at the 4 th year of its operation in

maximum scenario. The projected net income and financial ratios also

show that the branch will improve its efficiency and profitability over

time.

Therefore, it is recommendable to open second branch in Nekemte

town either in the office where the existing branch operates or in area

which is described in the study.

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I. INTRODUCTION 1

II. ASSESSMENT OF SOCIO-ECONOMIC ENVIRONMENT 1

a. General Socio-Economic Condition 1

b. Trade and Economic Activities 3

c. Infrastructural Facilities 5

d. Future prospects of the Area. 6

e. Banking Service 7

f. Proposed Location of the New Branch 8

III. FINANCIAL ANALYSIS 8

a. The Representative Branch 8

b. Assumptions Used 9

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c. Projection of Deposits and Loans and Advances 11

d. Projections of Income and Expense 11

e. Results of Financial Ratios 12

IV. MAJOR REQUIREMENTS OF THE BRANCH 12

a. Manpower Requirement 12

b. Fixed Assets 12

V. CONCLUSION AND RECOMMENDATION 13

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