Common Steps to Get a Bank Loan
Although the loan application process may vary slightly from one financial institution to the other (and from one type of loan to another), banks generally share some common steps and required documents (as do different types of loans).
Once you have found the best bank loan interest rate, follow these steps for a speedy loan application approval.
- Present Loan Application to the Bank
- Fill out the Loan Request Application Form (LRAF)
- Provide All Necessary Legal and Financial Documents
- Pay Pre-Approval Processing Fees
- Have a Consultation with the Bank
- Wait for Approval
This must state the date of application, the loan purpose, type, amount, and conditions requested, and the collateral offered. It must be signed/stamped by the applicant/authorized personnel
Make sure to fill in all required details and that it is signed by the applicant and bank staff.
Ensure that the documents are as free from error as possible to avoid wasting time resubmitting files. Any sign of fraud caught at this step may also automatically result in the rejection of the loan request.
This may include fees to maintain the loan account, as well as credit information fee (this is to reimburse the bank’s expense when it gets your credit history from the National Bank of Ethiopia).
Note: Beware of banks that have zero processing fees as they may call for a higher rate of interest, stamp duties, and other legal charges instead.
This step may or may not be skipped depending on the bank’s discretion. It is a face-to-face conversation with the concerned bank authority to get more detail on the applicant and ensure that he/she can pay the principal and interest amount allocated.
The bank will now evaluate all the submitted papers and fees.
- The time it takes for your loan request to be processed depends on many variables such as the business nature and amount of loan taken out, the type of collateral involved, the term of the loan (short, medium, and long), the value proposition that you may provide the bank, and so on.
- Also, keep in mind that there may be millions of other people requesting credit, and your chance of a quick loan takeout heavily depends on your place on that long list. It could take you 3 days, 3 months, or even a year to get approval.
The moment the loan request is authorized, the bank will send an offer letter to the applicant disclosing the following:
- The loan amount that has been approved.
- The annual percentage rate/interest rate on the total loan balance.
- Whether the interest rate is variable (usually with inflation) or fixed.
- Information about the loan’s length of repayment date/ maturity date.
- How the debt is to be repaid.
- Credit terms, policies, and conditions.
Once the applicant receives the letter, he/she must check thoroughly to make sure the terms are as agreed upon before signing the acceptance copy.
This step differs for business and personal loans, but the one thing they may have in common here is the technical check and/or estimation fee the applicants may be asked to pay.
The applicant will now sign the final agreement for the disbursement of the loan. All original copies of properties put up as collateral will be handed over to the bank. The sale of these collateralized assets will not be possible. Fees to be paid after approval may include some or all of the following:
- Stamp Duty: Usually 1% of the loan
- Loan Processing Fee: Usually 0.25% of the loan. This may be paid at the pre-approval stage.
- Revenue Stamp: ETB 5 (5 Birr). Yes, you read that right.
Common Documents Needed to Get a Bank Loan
As with the steps above, there are many documents required regardless of what type of bank loan and bank loan interest rate you are applying for.
- Legal Document
- Proof of Identity: Renewed ID or passport.
- TIN no./Certificate of borrower and spouse
- If single, a fresh singleness certificate that is not more than 6 months old.
- If married, marriage certificate and ID of the spouse.
- If the marriage certificate is issued abroad, it needs to be authenticated by the concerned government organ in Ethiopia.
- Date of application
- Loan purpose, type, amount, and condition
- Collateral proposed
- The document proving the power of attorney if necessary
- If this was issued abroad, it requires authentication by the concerned body here in Ethiopia.
- For the borrower
- For the spouse of the borrower, if married.
- If the collateral is a building/other fixed assets, provide proof of ownership.
- If it’s a vehicle:
- Libre copy and copy of renewed insurance and endorsement (if the car has a plate number)
- Proforma invoice (if the vehicle does not have a license plate)
Business Bank Loan Interest Rate Specifics
Business/Commercial loans are the most widespread type of loans given out in Ethiopia. The paperwork may differ based on the business structure (Proprietorship, Partnership, or Corporation). In the case of a PLC, Share Company (S.C.), or Partnership, some or all of the following may be essential:
- Article of association, memorandum of association, and minute of shareholders, if any.
- Business plan
- Feasibility study for project financing
- Active loans LAFs with contracts, if any.
- Latest LAF signed by at least 2/3 of the committee members.
- Latest business visit report
- Credit Information in the name of:
- Applicant and spouse
- General management and major shareholders who make up over 50% of the shares, if PLC or S.C.
- Updated credit information from the lending bank’s head office or district by letter to NBE if information retrieved from the Credit Reference Bureau is not the latest
- Management profile, debt confirmation agreement, OD working form
- Completed contracts, contracts on hand & payment certificates, and letter of award, if applicable
- Import and/or export performance
- Proforma invoice & sales agreement in the case of purchase of fixed assets
- Ethiopian Revenues and Customs Authority’s (ERCA) confirmation on applicable custom duty liability on duty-free machineries/vehicles.
- Land Holding Certificate (LHS)
- Real property valuation for building
- Engineering opinion for change of LHS number and any other major change on site
- Ownership booklet for vehicle, machinery, and equipment
- Renewed Insurance for the above-listed assets
- Share certificate, bank guarantee, CDT, and list of merchandise
- Financial Statements:
- Unaudited: Commercial credit report (CCR)- provisional, interim, and projected.
- Audited (for loan request > 5 million ETB): Audit report confirmation, and assurance that the external auditor is on NBE’s authorized list.
- Latest credit risk grading
- Account Statement: applicant’s 1-year account turnover with the loan processing bank and/or other banks.
Personal Bank Loans Specifics
- Once the property is selected, all the original property documents are submitted to and remain with the bank until repayment of the entire loan balance which usually state:
- The seller’s surname.
- The seller’s identification and address proof.
- The name of the property.
- The property’s address.
- If the seller is not the primary or actual owner, the chain of written documents.
- Land Holding Certificate (LHS) and approval for building purchase request.
- The bank then checks the legality and authenticity of the submitted papers. If unsatisfactory, more credentials may be mandatory.
- To take precautions, the bank usually sends property experts to evaluate the property site/vehicle to be bought or constructed. This is done to verify:
- The current stage of construction and work progression.
- The construction’s quality.
- Property Valuation
- The amount of time required to construct the house.
- The layout of the house and whether or not the governing authority has approved it.
- If the builder possesses the necessary certificates for construction on the land, and so on.
If the house is already built:
- The age of the structure.
- Internal or external property upkeep.
- The loan term and whether or not the building meets the applicant’s loan eligibility criteria.
- The construction’s quality.
- The existing mortgage on the house.
- The appraisal of real estate.
- The building’s approval plans, adherence to government regulations, and so on.
* This technical check and value estimation of the site usually results in an estimation fee.
Other Supporting Documents
- Borrower’s bank statement
- Proof of employment/income
- Marriage certificate of the seller if the fixed asset is purchased from individuals.
- Bill of Quantity for construction requests
- Renewed trade license of the seller for a vehicle without a plate number
- Mandatory deposit of 5% of a vehicle’s purchasing value, and 15% of a building’s price or cost of construction.
Diaspora Bank Loans
Loans for Ethiopians living abroad or with different citizenships follow, for the most part, the same credit acquiring process as any other Ethiopian. The catch is that diasporas are usually expected to repay their debt using foreign exchange. But it is also possible to make payments in ETB (Ethiopian Birr), albeit at higher bank loan interest rates. Check out our posts for more information on how to create a diaspora account in Ethiopia and which banks offer the best diaspora loan interest rates.
Interest-Free Bank Loans
Interest-free loans in Ethiopia, as far as our current intel goes, encompass only business-type loans. Since the beneficiary does not pay back the principal plus the interest, the bank instead becomes a partner to the applicant’s business and shares the profit generated. The only extra thing required here is a proforma or a list of prices at which you are planning to sell your products. This lets the bank know how much profit they can expect to see.
Extra Notes on Ethiopian Bank Loan Interest Rates
- A typical bank loan interest rate may range from 13- 18%, but this rate may get lowered significantly for those who pay in foreign currencies, mainly USD ($), Pound (£), and Euro (€)
- Most Ethiopian banks give personal (house, car, and other consumer) loans primarily to diasporas, embassy employees, NGO employees, and generally other company workers or individuals that can generate foreign exchanges for the bank.