Assessment of real property valuation methods in Ethiopian financial institutions (Banks): The Case of Jimma Zone

Abstract

Nowadays valuation of a real property is one of the crucial aspects of property in business which is becoming the critical practice in financial institutes to promote sustainable economic development. As many potential factors affect the precision of valuation results and investment appraisal, the valuation method as much as possible should identified, assessed, mitigated and the most suitable approach for the development should be chosen. To reduce the fluctuation of the result of real property among the financial institutions, which entails both over and under estimation issues occurred. However, owners and customers faced to dissatisfaction, inconsistency in property valuation and unbalancing with the current market condition. To come up with, the aim of the study was to assess the real property valuation methods in Ethiopian financial institutions (banks) in the case of Jimma zone. To address the problems, questionnaires were designed and distributed property valuators who directly participating in valuating property in both private and governmental banks. To supplement the questionnaire, a desk study was conducted on property valuation method documents. Consequently; analysis of data was processed using simple statistical approach, examining, tabulating and by using the relative importance index method (RII) determining the property valuators perceptions of the relative importance of the identified performance factors and ranking the different performance factor. The outputs of the overall analysis showed that almost all banks found in the areas use cost approach type of valuation methods depending on the basis prepared by their organization particularly or Ethiopian Bankers Association manuals. Private Banks would not use depreciation value of the real property due to the interference of management and there would be competition between each other to lend their money and treat their customers. Market condition, construction materials types and the availability of basic utility are the main factors affecting real property valuation. The study recommends to the financial institution (banks) to improve real property valuation methods by following valuation principles and procedures to reduce the over/under estimation might be occurred. The guideline of the all banks should be prepared nationally by independent organization to avoid the variation occurred especially between private banks, to follow similar procedures and methods of real property valuation.