ADDIS ABABA UNIVERSITY COLLAGE OF BUSINESS AND

ECONOMICS

ASSESSMENT OF CREDIT MANAGEMENT PRACTICE AT

UNITED BANK S.C

BY
HABLE ASRAT
ID No.GSE/1547/08

Under Guidance of
Sewale Abate (P.H.D)

June, 2018
ADDIS ABABA, ETHIOPIA
ASSESSMENT OF CREDIT MANAGEMENT PRACTICE AT
UNITED BANK S.C

A THESIS SUBMITTED TO MBA COORDINATION OFFICE,

COLLECGE OF BUSINESS AND ECONOMICS, ADDIS ABABA
UNIVERSITY

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

DEGREE OF MASTER OF BUSINESS ADMINISTRATION IN
FINANCE

BY
HABLE ASRAT
ID No.GSE/1547/08

Under Guidance of
Sewale Abate (P.H.D)

June, 2018
ADDIS ABABA, ETHIOPIA
 ADDIS ABABA UNIVERSITY COLLAGE OF BUSINESS AND
ECONOMICS

ASSESSMENT OF CREDIT MANAGEMENT PRACTICE AT

UNITED BANK S.C

BY

HABLE ASRAT

ID No.GSE/1547/08

APPROVED BY BOARD OF EXAMINERS

__________________ __________________
Dean, Graduate
Studies Signature& Date

______________________________ _____________________

Advisor
Signature & Date

______________________________ _____________________

External Examiner
Signature & Date

______________________________ _____________________

Internal Examiner Signature & Date

__________________________ ________________________
 DECLARATION

I, the undersigned, declare that the thesis entitled “ASSESSMENT OF CREDIT MANAGEMENT
PRACTICE AT UNITED BANK S.CO.” is my original work, prepared under the guidance of Dr.
Sewale Abate. All sources of materials used for the thesis have been duly acknowledged. I further
confirm that the thesis has not been submitted either in part or in full to any other higher learning
institution for the purpose of earning any degree.

Name: Hable Asrat

Signature: ______________

Addis Ababa University

June, 2018

Addis Ababa
Ethiopia
 APPROVAL

This is to certify that this Thesis has been submitted in fulfillment of the requirements for the award
of the degree of Masters of Business Administration with my approval as a university advisor.

Advisor’s Name: Sewale Abate (PhD)

Signature _________________

Addis Ababa University

June, 2018

Addis Ababa
Ethiopia
 ENDORSEMENT

This thesis has been submitted to Addis Ababa University Facility of Business and Economics for
examination with my approval as a University advisor.

Advisor’s Name: Sewale Abate (PhD)

Signature : ______________

Addis Ababa University

June, 2018

Addis Ababa
Ethiopia
 Table of Contents

1. Chapter One: Introduction

1.1. Back Ground Of The Study .……………………………………………………...1

1.2. Statement of the Problem ………………………………………………………....2
1.3. Research Questions ……………………………………………………………….4
1.4. Objective of the Study……………………………………………………………..4
1.4.1. General Objective…………………………………………………………..4
1.4.2. Specific Objective……………………………………………………………4
1.5. Significance of the Study ………………………………………………………….4
1.6 limitation of the study………………………………………………………………5
1.7. Scope of the Study……………………………………………………....................5
1.8. Organization of the Study………………………………………………………....5

2. CHAPTER TWO: Literature Review

2.1. Introduction………………………………………………………………………..6
2.2. Definitions of credit management ………………………………………………..6
2.3. Process of credit management ……………………………………………….......7
2.4.Credit risk management……………………………………………………..........12

2.5. Credit policy and procedure …………………………………………………......13

2.6. Credit analysis ………………………………………………………………........14
2.7. Credit information ………………………………………………………...……..17
2.8. Nonperforming loans …………………………………………………………….19
2.9. Credit collection technique ……………………………………………................19
2.10. Credit risk grading system in credit operation..……………………………....20

2.11. Loan follow up……………………………………………………………………21

2.12. Provisions …………………………………………………………………….......22
2.14. Review of Empirical Studies ……………………………………………………23

2.15. Conceptual frame work………………………………………………………….25

3. Chapter Three: Research Design and Methodology

3.1. Introduction ….………………………………………………………………………27

3.2. Research Design ……………………………………………………………………..27
3.3. Population ……………………………………………………………………………27
3.4. Data Collection Procedure….…………………………………………………….....27
3.4.1 Primary Data…………………………………………………………….....28
3.4.1.1 Questionnaire……………………………………………………..28
3.4.1.2 Interview ………………………………………………………….28
3.4.2. Secondary Data…………………………………………………………....28
3.5. Sampling techniques ………………………………………………………..............28
3.6. Sampling Size…………………………………………………………………………….29
3.7. Data Analysis ………………………………………………………………………..29

4. Chapter Four: Analysis, Results & Discussion

4.1. Demographic Characteristics of Respondents …………………………………….30

4.2. Research Related Questioners ………………………………………………………32
4.3. In Depth Interview …………………………………………………………………..44

5. Chapter Five: Conclusions & Recommendations

5.1. Conclusions ……………………………………………………………………….....50

5.2. Recommendations …………………………………………………………………...51

5.3. Area for future research …………………………………………………………....51

 Acknowledgment
First and for most I would like to thank God for giving me the strength to finish this paper. Second I
would like to thank my advisor Sewale Abate (P.H.D) for his guidance and patience. I also would like to
thank my family, friends for their support and last but not least I would like to thank my husband
Mekonnen Lakew for your invaluable support and for believing on me throughout this year
 Table Description Page
No.
Table 4.1 Performance of questionnaires administered 30.
Table 4.2 Gender issue 30.
Table 4.3 Age 31.
Table 4.4 Marital status 31.
Table 4.5 Educational qualifications of respondents 31.
Table 4.6 Work position of respondents 32.
Table 4.7 Credit related experience of respondents 32.
Table 4.8 Credit processing/appraisal 32.
Table 4.9 Monitoring and control of credits 34.
Table 4.10 Credit risk management 35.
Table 4.11 Credit risk grading/rating 36.
Table 4.12 prevailing factors affecting timely decision 37.
Table 4.13 Credit policy, processing, and collection procedures 38.
Table 4.14 Time interval for processing a single loan and make decision 39.
Table 4.15 Credit creation by the bank 40.
Table 4.16 Collection techniques of the bank 40.
Table 4.17 Credit policy and procedure of the bank 40.
Table 4.18 Rate of credit analysis and processing 41.
Table 4.19 Methods used to improve repayment 41.
Table 4.20 Effectiveness of forcing measures 42.
Table 4.21 Non Performing loans to total loan ratio 42.
Table 4.22 Provision Held For Non Performing Loan 43.
 ABSTRACT

Sound credit management is a prerequisite for a financial institutions stability and continuing
profitability, while deteriorating credit quality is the most frequent cause of poor financial
performance and condition. These research asses the practice and effectiveness of credit
management in united bank s.co. Therefore the purpose of undertaking this study is to explore the
credit management practice in united bank s.co and to see the possible factor that influence the
credit management activity of the bank and to suggest possible solution for those factor affecting the
bank credit management process negatively. For the purpose of the study both primary and
secondary data is used. Primary data is collected using semi structured questionnaire and interview.
The secondary data is collected from the bank’s audited annual reports(2013-2017), directives,
credit policy and procedure of the bank and bulletins of the bank. Based on the nature of the study
the research design is descriptive with a qualitative research method. Descriptive statistical tools are
used to analyze the data collected. Hence, the nature of the Study is descriptive. The research found
that lack of credit follow up by branches, lack of information system to support the credit risk
grading system of the bank, branches negligence to the credit policy and procedure of the bank when
exercising their discretionary lending limit, will full default by borrower, borrower lack of
knowledge on loan usage, fund diversion for unintended purpose , and centralized decision making by
the bank influence the attainment of successful credit management at united bank s.co. Also on a
positive note the bank s credit policy and procedure is in line with NBE’s rules and regulation. Also
for the year under consideration the bank NPL to Term loan ratio is under 5% which is set by the
NBE. Finally based on this findings recommendations are given. These includes keeping up with the
current portfolio quality, to strictly adhere & implement the bank s credit policy and procedure, to
take up pre-audit a part of the credit analysis process, managing the length of hour it take to process
one loan request.

Key word: credit management and credit portfolio, NPL

 CHAPTER ONE
INTRODUCTION
1.1. Back Ground of the study

The Ethiopian government promulgated the Monetary and banking proclamation No.83/1994 and
supervision of banking business No. 84/1994 to liberalize the financial sector through reforms by
bestowed banking laws that encourage the entry of private banks into the financial system in order to
stimulate competition with the public banks which significantly promoted the development of the
banking sector tremendously. Accordingly, many private banks have already been established and
their number is increasing from year to year. Currently there are a total of 19 banks in Ethiopia. Due
to this fact a fierce competition among banks has come to exist. In order to stay strong in this
competitive banking environment banks act as an intermediary to mobilize the excess fund of surplus
sectors to provide necessary finance, to those sectors, which are needed to promote for the sound
development of the economy.
Banks play an important function in the economy of many countries. They are the main
intermediaries between those with excess money (depositors) and those individuals and businesses
with viable projects but requiring money for their investment (creditors). Banks have at least the
following functions: lending money, safeguarding individuals deposit, transferring money locally or
globally and working as paying agent. In their operation banks face various risks he types and degree
of risks to which banks are exposed depends upon a number of factors such as its size, complexity of
the business activities, volume etc. credit, market, liquidity, operational, compliance/legal/ regulatory
and reputation risks. Out of all risks credit risk is believed to have adverse impact on profitability and
growth. Credit management also called credit control is a dynamic field where a certain standard of
long-range planning is needed to allocate the fund in diverse field and to minimize the risk and
maximizing the return on the invested fund by increasing collection, reducing credit cost, extending
more credit to credit worthy customers, and developing competitive credit terms.
This indicates that credit provision should be accompanied by appropriate and attractive credit
policies and procedures that enhance performance of credit management and protects the banking
industry from failure.
According to Greuning (2003) more than 80% of all bank balance sheets relate to credit. The goal of
the credit management is to maximize the performing asset and the minimization of the
nonperforming asset as well as ensuring the optimal point of loan and advance and their efficient
management. The overall success in credit management depends on the banks credit policy, portfolio
of credit, monitoring, supervision and follows up of the loan and advance. According to Basel
Committee on Banking Supervision (1999) credit can be defined as a transaction between two parties
which one (the creditor or lender) supplies money or monetary equivalent goods services, etc.
In return for a promise of future payment by the other (the debtor or borrower) before allowing credit
facility a banker should be satisfied that the applicant qualifies the following five essentials which
may be termed as 5 Cs Strischek, (2000) namely- Character: borrower‟s integrity, honesty and
intention to repay the loan money, Capacity: borrower‟s business ability, particularly profit making
report, Capital: financial strength to cover a business risk, Conditions: it is general business
condition, Collateral: borrower‟s ability to produce additional securities Golin, J.(2005).
Lang and Jagtiani (2010) state that loan administration is a process which is designed to avoid
damages to an organization as a result of events unanticipated even though possible. According to
Asiedu-Mante (2011) loans management includes instituting proper rightful policies and measures
that will make sure that proper authorities give out loans, the loans get to the right customers, and the
loan is given for productive reasons which are economically viable and appropriate.
Effective Credit management practices help the banks to ensure selection of right type of loan
proposals/projects/ventures/enterprise and right type of borrower. For selecting the borrower security
should not the only thing to be relied upon. So responsibilities of the bankers to investigate the client
from different view point i.e. the strength and weakness of the client so that the client will be able to
repay the bank loan as repayment schedule with profit. To prevent future financial crises, it is
absolutely necessary to manage credit so as improve the borrowers‟ financial literacy, the lenders‟
process of transparency and to better assess loan product affordability and suitability. Thus, the axle
of this study is to make an in depth assessment on the relationship between the theories, concepts and
models of credit management and what goes on practically in one of the reputed private banks in
Ethiopia- United Bank S.C.
United Bank was incorporated as a share company on 10 September 1998 in accordance with a
commercial code of Ethiopia of 1960 and supervision of banking proclamation No.1994.the bank
obtained a banking service license from the national bank of Ethiopia and is registered with trade
industry and tourism bureau of the Addis Ababa city administration. At the end of June 2017 united
bank reported a net profit 381 million with earning per share of 27.17%.currently united bank is a full
service bank that offers its customers a wide range of services with a network of 97 branches, 17 sub-
branches, 89 out laying branches and 9 out laying sub-branches (UB Annual Report, 2017).
1.2. Statement of the problem
Bank credit can be defined as money provided by the banks for eligible customers to support
execution of legally formed profitable business or investment activities that have eco nomic
importance, with an agreement to pay back the principal with interest within the period specified in
the loan contract.
According to Shekhar, 1985, credit plays an important role in the lives of many people and in almost
all industries that involve monetary investment in some form. Hence, the issue of credit management
has a profound implication both at the micro and macro level. The very nature of the banking
business is so sensitive because more than 85% of their liability is deposits from depositors
(Saunders, Cornett, 2005). Banks use these deposits to generate credit for their borrowers, which in
fact is a major revenue generating activity for most banks. Not being able to manage financial risk
especially credit risk would lead to financial anguish including economic failure.

Credit management can be seen as an essential part of lending and as such in its absence, good loans
can turn bad. Thus it is expedient to note that the importance of credit management cannot be over-
emphasized and good credit management requires qualified personnel and the establishment of
adherence to sound credit policies, procedures. If the loan is well managed; it will increase the bank‟s
profitability and sustainability in the future. However, if failed to do so, it will be the major threat to
their survival (Koch&MacDonald, 2003).

United Bank is one of private banks in Ethiopia playing an important role in country‟s economy and
social life. Among the various services provided by the bank, lending has been the primary activity
for over a decade. It advances a large sum of its income to borrowers. It is equally true that bank
loans, as they are profitable, equally risky. Bank loans fluctuate and influenced by the changes in the
economic policy and the economy in general. It is very important for the bank to formulate and
update their loan policies in order to minimize risk associated with them.

A loan default that results from poor credit management reduces banks lending capacity. It also
denies new applicant‟s access to credit as the bank‟s cash flow management problem augment in
direct proportion to the increasing default problem. In other words, it may disturb the normal inflow
and out flow of fund a bank has to keep staying in sustainable credit market. It also increase the
bank‟s legal cost if the loan pass the workout stage and the case goes to court

In light of this the practice of credit management in United Bank s.co is being studied in this
research.
1.3. Research questions
This study was intended to answer the following questions

 Does the bank implement its credit policy and procedure properly?
 What cause the bank‟s borrower to default?
 What are the major factor influencing the credit management of United Bank s.co?
 What efforts are expected of branch‟s before and after loan disbursement to avoid bad debts?
 How is the bank‟ credit granting process of United Bank s.co. Supporting the credit
management process.
 What credit collection strategies are adopted in the management of credit in UB?

1.4. Objective of the study

In view of the stated problems the general and specific objectives of the study are stated as follow.
1.4.1. General Objective
General objective of the study is to assess the practice of credit management at united bank S.C.

1.4.2. Specific objectives

 To assess the enactment of the credit management process by observing how it is conducted,
monitored and updated in United Bank s.co.

 To assess bank specific factors that influence credit management practice of United Bank
s.co .

 To analyze the credit portfolio diversification and credit collection strategies.

 To examine if there is a gap in the current process regarding the range of tools and methods
employed in credit management.

1.5. Significance of the Study

Loans and advances are known to be the main stay of all commercial banks. They occupy an
important part in gross earnings and net profit of the banks. The share advances in the total asset of
the banks forms a lion share almost more than 80 percent and as such it is the back bone of banking
sector. Bank lending is very crucial for it makes possible the financing of agricultural, industrial,
construction, and commercial activities of a country. The strength and soundness of the banking
system primarily depends upon health of the advances. Therefore the ability of banks to formulate
and adhere to policies and procedures that promote credit quality and curtail nonperforming loans is
the means to survive in the stiff competition. In ability to create and build up quality loans and credit
worthy customers leads to default risk and bankruptcy as well as hampers economic growth of a
country. Hence even though this study is only limited to one commercial bank in Ethiopian because
of the below mentioned limitations it assumed to be significant in indicating best practice and
concepts for prudent lending to enhance the performance of credit management to all managers and
policy makers of the bank as well as to all financial institutions and banks. Moreover, it may help as
a benchmark for researchers who are interested in the area to extend it further.

1.6. Limitation of the study

In conducting this research the researcher was also involved in another professional work which
makes time be a great constrain. Also for the Same reason the researcher is limited with the scope of
the study as Well because of data availability the researcher limited the study to only one private
bank in Ethiopia namely United Bank S. Co

1.7. Scope of the Study

Geographical Scope

The study covered united bank S.Co as a sample among other private banks due to the concern on the
availability of data, time and budget.
Subject Scope

The study focuses on the assessment of credit management practice at united bank S.C.

Data scope

Primary data include structured questionnaires and interview where as secondary data‟s are review of
working policy and procedure, reports for the financia l years (June 30, 2013- June 30, 2017), NBE
directives and other related publications.
1.8. Organization of the study

The Study is organized into five chapters. The first chapter introduces the background of the study,
statement of the problem, the research objectives and questions, significance of the study, scope of
the study and organization of the study. The second chapter presents theoretical and empirical
review of the related literatures. The third chapter deals with methodology of the study. The fourth
chapter is concerned with data analysis and interpretation. The last chapter presents the conclusion
and recommendations drawn from findings of the data
 CHAPTER TWO
LITERATURE REVIEW
2.

2.1. Introduction
This chapter gives the framework of the present literature on the procedures and processes that can
be included in the operations credit management in financial institution.
2.2. Definitions of credit management
Credit is derived from a Latin word “credere” meaning trust. When a seller transfers his wealth to a
buyer who has agreed to pay later, there is a clear implication of trust that payment will be made at
agreed date. Major causes of serious banking problems are directly related to lax credit standards for
borrowers. Poor portfolio assessment or lacks of attention to changes in economic circumstances are
common in emerging economies Hirtel and Lopez, (1999). Banks as financial institutions extend
credit to their customers in form of loans, overdrafts and off balance sheet activities (i.e. letter of
credit (LC) and guarantees). Banks grant credit to enhance their revenues streams, maintain a
competitive edge, to act as its bargaining power in the industry, as the industry practice as well as to
enhance the relationship with their customers.
The fundamental objective of the bank management is to maximize shareholders wealth. This goal is
interpreted to mean maximizing the market value of the firm‟s ordinary shares. Wealth maximization
in turn requires that managers evaluate the present value of cash flows under uncertainty with larger
near-term cash flows proffered when evaluated on a risk adjusted basis. To obtain higher yields on
returns, a bank must either take an increased risk or lower operating costs. Thus managers must
evaluate and balance the tradeoffs between the opportunity for higher returns, the probability of not
realizing those returns, and the possibility that the bank might fail (Koch & MacDonald, 2006).
There are many definitions given for credit management by different scholars. Among these some are
here cited as follows:
Credit management is implementing and maintaining a set of policies and procedures to minimize the
amount of capital tied up in debtors and to minimize the exposure of the business to bad debts.
(http://www.smallbusiness.wa.gov.au/assets/Small-Business-Briefs/small-business-
brief-credit-management.pdf). Credit Management from a debtor‟s point of view is managing
finances especially debts so as not to have a tail of creditors lurking behind your back. Cre dit
management is a responsibility that both the debtor and the creditor should seriously take.
(http://www.selfgrowth.com/articles/Tabije3.html)
When it functions efficiently credit management serves as an excellent instrument for the business to
remain financially stable.
2.3. Process of Credit Management
More than 80% of financial institution‟ balance sheet is related to credit. For this reason banks should
take a careful care when dealing with credit. The process of credit management begins with
accurately assessing the credit-worthiness of the customer base and his/her business viability. This is
done by looking in to loan applications carefully which is part of the loan process. This is particularly
important if the company chooses to extend some type of credit line or revolving credit to certain
customers. Hence, proper credit management is setting specific criteria that a customer must meet
before receiving the proposed credit arrangement. Basu and Rolfes (1995) indicate that the success
of a financial institution is built on a proper and quality credit management process. As part of the
evaluation process, credit management also calls for determining the total credit line that will be
extended to a given customer. Several factors are used as part of the credit management process to
evaluate and qualify a customer for the receipt of some form of commercial credit. This includes
gathering data on the potential customer‟s current financial condition, including the current credit
track record that discloses the character of a customer in meeting obligations as well as collateral
value. As a result the writer discusses the different procedures that can be employed in each of these
areas with the sole aim of examining the present loan management procedure of financial of
institution mainly bank. A weak credit risk management system is the reason for many none
performing loans (Nishiru and al, 2001).
Generally credit management has three basic steps credit analysis, credit approval and follow-up.
The first two are pre-disbursement process while the last one is a post disbarment process.
Credit management of banks simply put in the frame ork of the above category includes the
following:-

Credit application

Credit assessment

Credit disbursement

Credit monitoring
 Credit recovery

Credit Application

The credit application is the primary step in the credit management process. Regardless of the size
and purpose of the loan a loan application is required. Though it may appear as simple questions to
the applicants they should understand the importance of the document. The application documents
contain detail information about the applicant. The information among other things include : name of
the applicant, address, residential address, age, telephone number, marital status, number of
dependants, educational background, hometown, the type of business, business location ,number of
years in business, reasons for the loan, amount required, the repayment period, security pledge if any
and guarantors. It is the content of this document which financial institutions can take any legal
action against a borrower who defaults. Since this is the initial stage of the credit management
process any error committed at this stage goes a long way to negatively affect the whole process. A
loan defaulter can escape legal punishment if the content of the loan application form is not properly
structured. Hence the need to evaluate the existing loan application forms to ensure that they are
properly structured to protect the credit unions.
Credit Assessment

This is the procedure for gathering the necessary information on a potential borrower and projects in
other to conduct risk assessment exercise to determine the associated risk. This is carefully done by
the financial institutions before providing any loans. This is also done to check the viability of the
proposed project to undertaken. This as well helps to examine the technical viability, the economic
viability and the financial viability of the project to be undertaken. The risk associated with the loan
can be reduced by doing the above. Credit risk simply means the risk of default as a result of a
borrowers‟ failure to repay the loan taken from a financial institution.
Appropriate assessment of a customer determines the financial situation and also helps to measure
capability of the customer to repay the loan when due. This involves the authentication of primary
and collateral security provided by the customer which will be relied on when the repayment of the
loan becomes difficult. This is a fundamental point in the credit procedure. It is said to be the heart
beat of a healthy credit portfolio. This involves collecting, analyzing and processing infor mation as
provided by the applicant on the credit application form. This helps to assess the applicants‟ credit
worthiness and helps to reduce the difficulties between borrowers as an agents and the financial
institution as the principal. The lending institution‟s loans management processes procedures and
directives controls the loan evaluation processes. The question that must be answered before
anything else is whether or not the borrowers have the financial capacity to repay the loan, that is,
repay the credit when due with the appropriate interest rate. The factors underlying the evaluation of
a borrower should be based on the credit assessment principles of the financial institution which is
the basic principles of lending which is also used by the financial institution , it is also known as the
5 C‟s which is Character, Capacity, Capital, Collateral and Conditions (Matovu and Okumu,1996). In
another context, Rouse (1989) referred to mnemonics used as common checklist to review loan
application as: CCCPPARTS (Character, Capital, Capability, Purpose, Person, Amount, Repayment,
Terms and Security); PARSER (Person, Amount, Repayment, Security, Expediency, Remuneration);
CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment, Insurance/Security).

The disparity in the mnemonics relates to the fundamental principle of evaluating the potential of
having credit repaid. Credit Appraisal thus ascertains the risks associated with lending functions in
financial institutions .This is an indication that if the credit assessment is not properly done by the
credit union, the risk associated with the credit will not be identified. It is generally carried out by the
trained staff of the credit department of the institutions which are engaged in providing credit to their
customers. In the present case, process used in credit risk assessment and appraisal has been studied
to identify the various parameters and stages in credit assessment; appraisal and disbursement
processes exist in the financial institution. It is intended to make sure actions which lenders take
which facilitate repayment or reduce repayment likely problems. This information about the riskiness
of the borrower makes the financial institution to take remedial actions like asking for collateral,
shorter duration of repayment, high interest rates and other forms of payment (Stiglitz and Karla,
1990) .When a financial institution does not do it well, its performance is highly affected. Edminster
(1980) stressed the importance of credit analysis when he observed that its abandonment often
resulted into several banks using credit card to process. The variables we have, according to Hunte
(1996) added the period taken to process loan applications, credit experience, part of collateral
security to the loan approved. It was established that long waited period of time reflected a shortage
of credible credit information required to make informed credit decisions and availability of funds for
onward lending. This in turn leads to a bigger risk, more extreme credit rationing and low repayment
rates. Hunte (1996) also realized that customers with loan experience showed the capability to
manage the loans better hence good quality borrowers for the financial institution.
A less borrower who is not experienced has less ability to handle a business loan and therefore is not
credit worthy (Devaney, 1984; Robinson, 1962; Hunte, 1996). This shows that there are big risks
linked with first time borrowers since the loan officer has scanty information on their credit records
and little knowledge on their ability to repay the loan when due. Therefore financial institution
should attach all the seriousness to the credit assessment process in order to reduce the credit risk
associated with credit since loans are the largest assets of financial institution like banks. Financial
institution like bank have hirercialy arrangement in order to approve loan and based on their greads
branches would have a discretionary lending limit. Discretionary lending limit is the limit is the limit
set to each branches based on their grade allowing them to disburse loan in different sector (credit
policy and procedure of united bank s.co.)
Credit Disbursement

After an applicant has been carefully assessed and has been proven that the applicant meet the credit
requirement of the credit union. The credit officer together with the credit committee gives their
approval by appending their signature on the loan application form. This gives bank the right to
disburse the funds to the applicant.
Credit disbursement is the act of giving or paying out money to customers who have been accessed
and approved to be given credit. Disbursement ensures that money is made available to the customer
after all assessment has been done and approval has been given. The assess ment process also ensures
that the authenticity of the security and other required documentations are received certified before
funds are given out to the qualified customer. If the loan pay-out control is not strong, the reliability
of the loan management process will greatly be affected and can be undermined and misused by the
unscrupulous staff of the organization. Thus, documentations and pay-out of the loans are vital in the
management of loans because they ensure that the lending institution has the r ight documentation,
collateral and guarantees of the loan agreement. Insurance, signing loan contract, registration of the
property/collateral the bank being primary owner. This are the pre-disbursement requirement by
bank.
These are significant in the case of the customers fail to pay because the financial institution would
be suitably secured and have legal backing to guarantee the retrieval of the loan. This would
eventually reduce the provision for bad debts that financial institutions have which will improve their
financial position. Once the credit application satisfies all the bank‟s credit conditions, a
comprehensive analysis is done to determine if the application complies with the institution‟s
conditions then approval is given for disbursement to the applicant. Financial institution have quite
different way of disbursing loans to its members which is different from how other financial
institutions do. The credit disbursement can be crediting the loan amount to the customer‟s account
all at once or it is done phase by phase for project type loans

Credit Monitoring
Credit Monitoring is an integral part of lending activity. Financial institutions have a great
responsibility to maintain the quality of the assets and to recover the interest and principal due in
time. Though adequate precautions are taken during assessment and approval of a loan, a financial
institution has to be more vigilant. Unless early warning signals are captured, a financial institution
may not be able to take proper remedia l measures to arrest and reduce bad debt in the institution. A
financial institution needs to put in place a very sound and effective credit monitoring system for
watching the borrower‟s account from various angles for prompt action. In line with Robinson (1962)
and Anjichi (1994), many of the agonies, frustrations and distress financial institutions can be
reduced by good credit monitoring and follow up process. A good supervision helps maintain a good
loan. It may be by visiting the borrowers' places of business to examine the general state of affairs.
Insufficient maintenance is often an early sign of financial distress. The general business policy and
advice the client as to how to put things in order. A financial institution can modify its own lending
policies as well as loan monitoring procedures. Furthermore, keeping track of deposits trend and
deposits balances gives a clue to the present state of affairs of the customer. Monitoring of loan
facilities given to customers is an important task in ensuring that the project from which repayment
will be made is successful. Huppi and Feder (1990) revealed that efficient monitoring leads to high
retrieval of loans by revealing likely dangers (like loan diversions) and reminding defaulters of their
responsibilities towards the lending institution ,thus calling for redoubling of efforts in the direction
of loan repayments. Monitoring of credit facilities has been directed characteristically on ensuring
repayment when there are signs of defaults for repayment of interest and principal installments.

Credit Recovery /work out process/

It is undeniable fact that any institution in the business of lending is likely to meet customers who
will default in payment or will fail to pay at all. This is why the institutions create provision for bad
and doubtful debt in their books to take care of these eventualities. When despite every attempt by
the lender to reach amicable arrangement for repayment and no agreement has been possible it will
be necessary to treat the loan as a recovery matter. This is especially prominent in the financial
institutions especially where the institutions provide services which are continuous but not one time.
Loan recovery is the collection of a loan amount from a customer in default.
In simple terms, loan recovery refers to the pay back of the principal loan amount together with
interest. Financial institutions need to be aware of loans that are at risk of not being paid back (also
known as NPL or non performing loan). Collections department of the bank will begin contacting the
individual loan defaulter‟s. They must notify them of the amount owed and any interest accrued. The
financial institutions may also contact any guarantor of the loan if it is a secured loan, the institution
may go through the laid down legal process to take over the asset.

2.4. CREDIT RISK MANAGEMENT

OCC (2011) identifies fundamental credit risk management principles as sound underwriting,
comprehensive financial analysis, adequate appraisal techniques and loan documentation practices,
and sound internal controls. Rose and Kolari (1995) see credit risk as the likelihood that borrowers
will not be able to repay their loans within the period agreed upon. Kay (2002) sees Credit risk as
distribution of financial losses due to unexpected changes in the credit quality of counterparty in a
financial agreement.
Kay (2002) also sees it as the possibility of loan default or any type of inability to honor a financial
agreement when due. Kay stated that the likelihood of default is estimated by specifying a model of
investor uncertainty; a model of the available information and its evolution over time and a model
definition of the default event.
Smook (1997) defines risk assessment as the general procedure of risk identification, quantification,
evaluation, acceptance, aversion and management. He explains that risk management involves risk
evaluation and risk control. In the piece he states that Risk assessment is a complex procedure of
developing tolerable levels of risk to individuals, groups, or the society in general. It includes the
associated procedures of risk acceptance and risk aversion. Fatemi and Fooladi (2006) characterize
credit risk as risk that occurs from the ambiguity in a borrowers‟ capacity to meet his/her debt. At a
different slant, King (2008) defines credit management as the “policies and practices businesses
employ in recovering payments from their defaulting customers”.
With respect to the levels of priority in financial institutions, it is expected that their main focus is to
make known that this type of risk management is efficient beyond all others Fatemi and Fooladi,
(2006). Risk acceptance means that the risk taker is ready to admit some risks to make a gain or
benefit from it. This is when the risk is not avoidable or cannot be controlled. The acceptance level is
a reference level against which a risk is identified and then compared. If the risk determined is less
than the level that it can be accepted, the risk is then said to be within the acceptable range. On the
other hand, if it is higher than the accepted level it is seen as unacceptable and avoidable, steps may
be taken to control the risk or the project in question should be stopped.
Credit risk means the possibility of loan loss as a result of a borrower‟s inability to make payments as
per the loan agreement. Credit risk management, meanwhile, is the practicing of measures that
reduces the impact of those losses by appreciating the competence of both a bank‟s capital and loan
loss reserves at any given period time, a process that has long been a challenge for financial
institutions to fully implement. The worldwide financial predicament and the credit crunch that
followed makes credit risk management very relevant. Accordingly, regulators began to call for
more transparency. They wanted to know that a bank has thorough knowledge of customers and their
related credit risk. And new Basel III regulations have created an even greater regulatory trouble for
banks. To abide by the more rigorous regulatory requirements and contain the higher capital costs for
credit risk, many financial institutions are changing their approaches to credit risk. The institutions
who see this as sternly being a compliance exercise are being short-sighted. Better credit risk
management also creates a chance to greatly progress overall performance and secure a competitive
advantage over the competitors. The perception and the reception of risks differ based on the nature
of the risks and depend on many fundamental factors.
The risk may include a "dread" hazard or a common hazard, be encou ntered occupationally or non-
occupationally, have immediate or delayed effects and may affect average or especially sensitive
people or systems. Risk aversion is the control action taken to keep away from risk. Risk
management is concerned with the outcome of future events, whose exact result is not certain and the
design of strategies to handle these uncertainties, over a variety of probable results. Generally,
outcomes are categorized as favorable or unfavorable, and risk management is the art and science of
planning, assessing, and handling future events to ensure favorable outcomes.
The large amount of debt that has been dispersed in the financial institutions over the years has
undoubtedly has resulted bad debts and loan arrears across most of the financial institutions. This
survey will concentrate on the management of credit and its impacts on the existence and profitability
of the credit unions.

2.5. Credit Policies and Procedures

A Credit Policy is not something that is only operated by the Credit and risk Department. All
employees involved with customers, in any way, need to be aware of the credit policy and ensure tha t
it is operated consistently. In order to be effective, credit policies must be communicated throughout
the organization, implemented through appropriate procedures, monitored and periodically revised to
take into account changing internal and external circumstances. They should be applied appropriate,
on a consolidated bank basis and at the level of individual affiliates In addition; the policies should
address equally the important functions of reviewing.

Economic conditions and the firm‟s credit policies are the chief influences on the level of a firm‟s
account receivable. Economic conditions, of course, are largely beyond the contr ol of the financial
manager. As with other current assets, however, the manager can vary the level of receivables in
keeping with the tradeoff between profitability and risk. Lowering quality standards may stimulate
demand, which, in turn, should lead to higher profitable receivables, as well as a greater risk of bad
debt. The credit and collection policy of one firm are not independent of those of other firms. If
product and capital markets are reasonably competitive, the credit and collection practices of one
company will be influenced by what other companies are doing. Such practice related to the pricing
„‟The examination of certain policy variables implies that the competitive process is accounted for in
the specification of the demand function as well as in the opportunity cost associated with taking on
additional receivables. The policy variables include the quality of the trade accounts accepted; the
length of the credit period, the cash discount, any special terms such as seasonal dating and the
collection program of the firm. Together, these elements largely determine the average collection
period and the proportion of bad debt losses‟‟. (Horne, 1995: 361)

2.6 Credit Analysis

Credit analysis is the primary method in reducing the credit risk on a loan request. Credit analysis is
also the primary step in the credit management process. This includes, accepting application
determining the financial strength of the borrowers, estimating the probability of default and
reducing the risk of non repayment to an acceptable level. In general, credit evaluations are based on
the loan officer's subjective assessment or judgmental assessment technique. Once a customer
requests a loan, bank officers analyze all available information to determine whether the loan meets
the bank‟s risk-return objectives. Credit analysis is essentially default risk analysis, in which a loan
officer attempts to evaluate a borrower‟s ability and willingness to repay.
Similarly Compton (1985) identified three distinct areas of commercial risk analysis related to the
following questions: 1) what risks are inherent in the operations of the business?
2) What have managers done or failed to do in mitigating those risks?
3) How can a lender structure and control its own risks in supplying funds?
The first question forces the credit analyst to generate a list of factors that indicate what could harm a
borrower‟s ability to repay. The second recognizes that repayment is largely a function of decisions
made by a borrower. Is management aware of the important risks, and has it responded? As (Timothy
1995) quoted, the last question forces the analyst to specify how risks can be controlled so the bank
can structure to an acceptable loan agreement.
A bank‟s credit analysts often use the five C‟s of credit to focus their analysis on the key dimensions
of an applicant‟s credit worthiness Lawrence (1997:776-777), identified five C‟s of credit. They are
“character, capacity, capital, collateral and condition”.
Character: The applicant‟s record of meeting past obligations, financial, contractual, and moral.
Past payment history as well as any pending or resolved legal judgments against the applicant would
be used to evaluate its character.
Capacity: The applicant‟s ability to repay the requested credit. Financial statement analysis, with
particular emphasis on liquidity and debt ratios, is typically used to assess the applicant‟s capacity.
Capital: The financial strength of the applicant as reflected by its ownership position. Analysis of
the applicant‟s debt relative to equity and its profitability ratios are frequently used to assess its
capital.
Collateral: The amount of assets the applicant has available for use in securing the credit. When the
amount of available assets larger the greater the chance that a firm will recover its funds if the
applicant defaults. A review of the applicant‟s balance sheet, asset value appraisals, and any legal
claims filed against the applicant‟s assets can be used to evaluate its collateral.
Conditions: The current economic and business climate as well as any unique circumstances
affecting either party to the credit transaction. For example, if the firm has excess inventory of the
items the applicant wishes to purchase on credit, the firm may be willing to sell on more favorable
terms or to less creditworthy applicants.
Analysis of the general economic and business conditions, as well as special circumstances that may
affect the applicant or firm is performed to assess conditions.
The credit analyst typically gives primary attention to the first two C‟s-character and Capacity
because they represent the most basic requirements for extending credit to an applicant.
Consideration of the last three C‟s-Capital, Collateral, and Conditions- is important in structuring the
credit management and making the final credit decision, which is affected by the credit analyst‟s
experience and judgment.
According to Golden and Walker (1993), there are five C‟s of bad debt; which represent things to
guard against in order to help prevent problems. They include: Complacency, Carelessness,
Communication breakdown, Contingency, and Competition.
Complacency refers to the tendency to assume that because things were good in the past they will be
good in the future. Common examples are an over reliance on guarantors, reported net worth, or past
loan repayment success because it‟s always worked out in the past.
Carelessness involves poor underwriting, typically evidenced by inadequate loan documentation, a
lack of current financial information or other pertinent information in the credit files, and a lack of
protective covenants in the loan agreement. Each of these makes it difficult to monitor a borrower‟s
progress and identify problems before they are unmanageable.
Loan problems often arise when a banks credit objectives and policies are not clearly communicated.
n

This is communication breakdown. Management should articulate and enforce loan policies, and
soon as they appear.
Contingency refers to lenders‟ tendency to play down or ignore circumstances in which a loan
might in default.
Competition involves following competitors‟ behavior rather than maintaining the bank‟s own
credit standards.
During credit analysis bank use various lending tool and techniques
 Credit/Concentration/ limit: - Credit limit is one of the tools financial institutions use to
control their loan portfolio. Setting credit limit is one of the main ways financial institution
use to control its‟ credit process to reduce risks associated with lending. Bessis (2002) shows
the significance of employing the credit limit process so as to avoid any credit risk which
 could imperil the financial position of the institution. In Ethiopia private bank work
according to the concentration limit set by national bank of Ethiopia.
 Affordability:-Increased regulatory focus and rising interest rates mean lenders need to revisit
their measures of affordability ahead of changes. Precisely evaluating customers‟
affordability and suitability are indispensable requirements for all lending institutions who
wish to widen credit responsibly as well as reducing exposure to risk. As lending institutions
trying to balance growth with risk, some customers are faced with insufficient disposable
incomes, the current economic situation has made it necessary for lending institutions to
employ a better credit processes. Failure to implement a proper credit management process
could put pressure on customers and lenders at a time when the economic climate not
improving. „Affordability is the assessment of a customer‟s financial capabilities to fund new
and outstanding loan now and in the future. Thomas (2009) indicates that when assessing the
affordability of a borrower it is their lack of cash flow and not assets that causes loan default
in institutions.
 Risk assessment model: - Risk Assessment Model is internal rating software intended to aid a
bank or financial institution in evaluating a borrower for credit. This is in line with the
requirement under the internal ratings-based processes of the Basel II Accor d.
 Credit scoring/credit risk grading: - This is a statistical system used to foretell the possibility
that a loan will be in arrears, become delinquent or a borrower will default in repayment
(Loretta 1997). Credit. This method is largely accepted as the primary system of examining
the creditworthiness of customers.
 Arrears intervention: - Arrears is a legal term used by lending institutions to describe the part
of a loan that is unpaid, overdue or repayments is missed as per the agreed loan terms. Finlay
(2008) indicates that pressure should be put on loan defaulters at the early stages of the
default, this action remind the defaulters about their obligations towards the institution. In
line with Finlay‟s assertion, Hinder (2004) urges financial institutions to integrate adequate
communication process when retrieving debt in arrears from customers.
2.7 Credit Information
Credit information is another tool that is used by bank in credit analysis. Adequate and timely
information that enables a satisfactory assessment of the creditworthiness of borrowers applying for a
bank loan is crucial for making prudent lending decisions. Prudent lending decisions made on the
basis of adequate information on the creditworthiness of borrowers are one of the principal factors in
ensuring the financial soundness of banks. But, there has been serious difficulty in Ethiopia of getting
accurate and timely information on prospective borrowers that facilitates the making of such prudent
lending decisions. One of the means for alle viating this difficulty of getting accurate and timely
information on prospective borrowers is the establishment of a Credit Information Center (CIC)
where relevant information on borrowers is assumed to be pooled and made available to lending
banks.
Binging this to our country context according to article 36 of the Licensing and Supervision of
Banking Business Proclamation No. 84/1994, the National Bank Ethiopia (NBE) has issued these
directives to establish such a Credit Information Center (CIC). Though there is still serious
limitations in the accuracy of the credit information extracted the summary of the directive is as
follows:
 Banks shall provide, alter and update credit information on each and every one of their

borrowers using online system.

 Upon written request by banks, the Supervision Department of the NBE shall provide to the
requesting bank, in writing, all credit information available in the Central Database on a
prospective borrower within three working days from the date of receipt of the request;
 Access to the Central Database shall be restricted to the user group;
 The role of the NBE shall be restricted to administering the Credit Information Sharing
system, providing in writing credit information on borrowers available at Credit Information
Center to banks, ensuring that access to online system to update or alter credit information is
given only to authorized persons and ensuring that the system is operating smoothly and
reliably;
 The NBE shall not be responsible for any damages, c laims or liabilities that may arise as a
result of inaccurate, misleading or incomplete credit information on borrowers supplied to the
Credit Information Center by individual banks and shared, through the NBE, with other
banks.
 Each bank shall provide, e lectronically, the initial credit and other related information to the
Credit Information Center on each and every one of its borrower;
  Each bank shall be fully responsible for providing accurate, complete and timely credit
information to the Credit Information Center. In cases where errors have been made, such
errors shall be corrected promptly by the concerned bank;
 Each bank shall be fully responsible for any damages, claims or liabilities that may arise as a
result of providing inaccurate, misleading or incomplete credit information to the Credit
Information Center or failure to provide, inadvertently or otherwise, information to the
Center that should have been provided in line with these directives;
 Each bank shall use the credit information on borrowers obtained from the Central Database
of the Credit Information Center only and only for making a lending decision. Such
information shall be treated with utmost confidentiality and shall not be disclosed to any third
party or used for any other purpose;
 Each bank shall be fully responsible for any damages, claims or liabilities that may arise as a
result of disclosure of credit information on borrowers obtained from the Credit Information
Center to third parties or use of that information for purposes other than for making a lending
decision.

2.8. Non-Performing Loan

Loans and advances constitute the primary source of income by banks. As any business
establishment a bank also seeks to maximize its prof it. Since loans and advances are more profitable
than any other assets, a bank is willing to lend as much of its funds as possible. But banks have to be
careful about the safety of such advances (Radha .M, et al, 1980). Bankers naturally try to balance
the issue of maximizing profit by lending and at the same time manage risk of loan default as it
would impair profit and thereby the very capital .Thus a bank needs to be cautious in advancing loans
as there is a greater risk which follows it in a situation where the loan is defaulted.
Under the Ethiopian banking business directive, non-performing loans are defined as “loans or
advances whose credit quality has deteriorated such that full collection of principal and/or interest in
accordance with the contractual repayment terms of the loan or advances in question (NBE, 2008).”
It further provides that:
…, loans or advances with pre established repayment programs are nonperforming when principal
and/ or interest is due and uncollected for 90 (ninety) consecutive days or more beyond the
scheduled payment date or maturity (NBE, 2008).
In addition to the above mentioned category of non- performing loans, overdrafts and loans or
advances that do not have pre-established repayment program shall be non-performing when:
The debt remains outstanding for 90 (ninety) consecutive days or more beyond the scheduled
payment date or maturity;
The debt exceeds the borrower‟s approved limit for 90 (ninety) consecutive days or more;
Interest is due and uncollected for 90 (ninety) consecutive days and more; or for the
overdrafts,
(i) the account has been inactive for 90 (ninety) consecutive days or
(ii) deposits are insufficient to cover the interest capitalized during 90 (ninety) consecutive days or
(iii) the account fails to show the 20% of approved limit or less debit balance at least once over 360
days preceding the date of loan review.
2.9. Credit Collection Techniques
Effective credit collection techniques are one of the necessities for financial institutions in any
economic climate. Knowing how to encourage customers to pay their outstanding debts to financial
institutions like banks on time can increase the cash flow of banks. Therefore a number of collection
techniques are employed. Under normal circumstances loan clients are expected to pay in cash or
deposit or keep their installment repayment as per the agreement made. As the loan account becomes
past due or overdue the collection effort becomes more personal and strict. The basic techniques are:
 Telephone Calls: If the loan client passes the due date, a telephone call may be made to the
customer to request immediate repayment and up to date his or her account.
 Personal visits: - If the telephone call made is not resulted positive response vesting his
business and discussing the issue with the customer can be a very effective collection
procedure.
 Reminder Letters: - If the efforts made so far is unsuccessful and not resulted positive
response a polite letter is to be served reminding the customer of its obligation followed by
warning letters for the action to be taken in future and its consequence.
  Using Collection Agencies: Firms can turn uncollectible accounts over to a collection
agency or an attorney for collection. The fees for this service are typically quite high; the
firm may receive less than fifty percent on accounts collected in this way.
 Legal Action: legal action is the most stringent step in the collection process. It is an
alternative to the use of a collection agency not only is direct legal action expensive, but is
may force the debtor in to bankruptcy, thereby reducing the possibility of future business
without guarantying the ultimate receipt of overdue amount.
2.10. Credit Risk Grading System in Credit Operations

This is another tool that is used during credit analysis Risk grading is a key measurement of a bank‟s
asset quality and it is a robust process. Therefore borrower‟s risk grade should be clearly stated on
the credit application form for using credit decision making process. Although the major objective of
credit rating is to determine the ability and willingness of a borrower to pay at the agreed terms, the
rating does a bit more than just classif ying the borrowers into „pass and fail categories. Treacy and
Carey (2000) suggested that in designing a credit rating system, a bank In CRG Manual, five risk
components viz. financial risk, industry/business risk, management risk, security risk and rela tionship
risk have been identified which are responsible of failing to meet the obligations by the borrowers.
(credit risk grading manual of united bank s.co). These risk components are rated based on the some
basic parameters. Note that there are twenty parameters under the five risk components to reflect the
risk exposure. Financial risk comes from the financial distress of the counterparty.
It includes identification of extent of leverage through debt-equity ratio, liquidity of the borrower
through current ratio, profitability performance through operating profit margin and coverage
through debt-service coverage ratio. Business/Industry risk arises due to adverse change in business
or industry situation. In order to assess the borrower‟s business/industr y risk the size of borrower‟s
business in terms of annual sales volume, age of business, industry growth, market competition and
entry & exit barriers are to be assessed. Management risk is conducted in assessing the competence
and risk taking propensity of the management. It covers the parameters like experience, second
line/succession plan and team work of the management. Security risk is assessed by analyzing the
primary security, collateral security and support. Relationship risk is considered under CRG by
assessing the account conduct, utilization of limit, compliance of covenants and balance of personal
deposits.

2.11. Loan follow up

Lending decision is made on sound credit risk analysis /appraisal and assessment of creditworthiness
of borrowers. But past records of satisfactory performance and integrity are no guarantee future,
though they serve as useful guide to project trend in performance. Loan granted on the basis of sound
analysis might go bad because of the borrower may not meet obligations per the terms and conditions
of the loan contract.
It is for this reason that proper follow up and monitoring is essential. Monitoring or follow -up deals
with the following vital aspects:
• Ensuring compliance with terms and conditions
• Monitoring end use of approved funds
• Monitoring performance to check continued viability of operations
• Detecting deviations from terms of decision
• Making periodic assessment of the health of the loans and advances by nothing some of the key
indicators of performance that might include: profitability, activity level and management of the unit
and ensure that the assets created are effectively utilized for productive purposes and are well
maintained.
• Ensuring recovery of the installments of the principal and interest in case of term loan as per the
scheduled repayment program
• Identify early warning signals, if any, and initiate remedial measures thereby averting from possible
default. Basically there are three types of loan follow up systems. These are: Physical follow up,
financial follow up and legal follow up. Each is discussed in section that follows.
a) Physical Follow -up
Physical follow-up helps to ensure existence and operation of the business, status of collateral
properties, correctness of declared financial data, quality of goods, conformity of financial data with
other records ( such as taxes ,register books), availability of raw materials, labor situation, marketing
difficulties observed ,undue turnover of key operating personnel, change in management set up
among others.
b) Financial follow up
Financial follow up is required to verify whether the assumptions on which lending decisions was
taken continues to hold good both in regard to borrowers‟ operation and environment , and whether
the end use is according to the purpose for which the loan was given.
c) Legal Follow-up
The purpose of legal follow up is to ensure that the legal recourse available to the Bank is kept alive
at all times. It consists of obtaining proper documentation and keeping them alive, registration,
proper follow up of insurances. Specific issues pertaining to legal follow up include: ascertaining
whether contracts are properly executed by appropriate persons and documents are complete in all
aspects, obtaining revival letters in time (revival letters refer to renewal letter for registration of
security contracts that have passed the statutory period as laid down by the law), ensuring
loan/mortgage contracts are updated timely and examining the regulatory directives, laws, third party
claims among others.

2.12. Provisions
Loans and advances are financial instruments originated by the bank by providing money to the
debtors. There is a 50% chance the loan might be repaid on time, delayed or not at all. For this reason
banks set aside finance to cover this loans since they lend out customers deposit which needs to be
repaid on demand. This finance to be set aside is called provision. It is stated as costless impairment
losses. Impairment losses comprise specific provisions against debts identified as bad and doubtful
and general provisions against losses which are likely to be present in any loans and advances
portfolio. The Bank follows the National Bank of Ethiopia Supervision of Banking
Business Directives SBB/43/2008 in determining the extent of provisions for impairment losses. The
Directive classifies loans and advances into the following.
a) Pass Loans
Loans and advances in this category are fully protected by the current financial and paying capacity
of the borrower and are not subject to criticism. It is fully secured, both as to principal or interest
payments, by cash or cash substitutes are classifie d under this category regardless of past due or other
adverse credit factors.
b) Special Mention
Any loan or advance past due 30 days or more, but less than 90 days.
c) Substandard
Non- performing loans or advances past due 90 days or more but less than 180 days.
d) Doubtful
Non- performing loans past due 180 days or more but less than 360 days.
e) Loss
Non-performing loans or advances past due 360 days is classified as loss.
Extent of Provision Required
As per the directive of the national Bank of Ethiopia the extent of provision required for impairment
of losses is determined as follows.
I. Pass loans 1 percent of outstanding loan balances
II. Special mention loans 3 percent of outstanding balance
III. Substandard loans 20 percent of the net loan balance
IV. Doubtful loans 50 percent of the net loan balance
V. Loss 100 percent of the net loan balance
2.13. Review of Empirical Studies
Credit management is a serious threat to banks; therefore various researchers have examined the
impact of credit management on banks in varying dimensions.
Ahmad and Ariff (2007) examined the key determinants of credit risk of commercial banks on
emerging economy banking systems compared with the developed economies. The study found that
regulation is important for banking systems that offer multi-products and services; management
quality is critical in the cases of loan-dominant banks in emerging economies. An increase in loan
loss provision is also considered to be a significant determinant of potential credit risk. The study
further highlighted that credit risk in emerging economy banks is higher than that in developed
economies.
Ahmed, Takeda and Shawn (1998), in their study found that loan loss provision has a significant
positive influence on non-performing loans. Therefore, an increase in loan loss provision indicates an
increase in credit risk and deterioration in the quality of loans consequently affecting bank
performance adversely. Ben-Naceur and Omran (2008) in attempt to examine the influence of bank
regulations, concentration, financial and institutional development on commercial banks‟ margin and
profitability in Middle East and North Africa (MENA) countries from 1989-2005 found that bank
capitalization and credit risk have positive and significant impact on bank‟s net interest margin, cost
efficiency and profitability.
Berger and De Young (1997), poor management in the banking institutions results in bad quality
loans, and therefore, escalates the level of non-performing loans. They argue that bad management of
the banking firms will result in banks inefficiency and affects the process of granting loans. The
banks” management might not thoroughly evaluate their customers”credit application due to their
poor evaluation skills. Therefore, banks” inefficiencies might lead to higher non-performing loans.
Kargi (2011) evaluated the impact of credit risk on the profitability of Nigerian banks. Financial
ratios as measures of bank performance and credit risk were collected from the annual repor ts and
accounts of sampled banks from 2004-2008 and analyzed using descriptive, correlation and
regression techniques. The findings revealed that credit risk management has a significant impact on
the profitability of Nigerian banks. It concluded that banks” profitability is inversely influenced by
the levels of loans and advances, non-performing loans and deposits thereby exposing them to great
risk of illiquidity and distress.
Pyle (1997), in his study on bank risk management held that banks and similar financial institutions
need to meet forthcoming regulatory requirements for risk measurement and capital. However, it is a
serious error to think that meeting regulatory requirements is the sole or even the most important
reason for establishing a sound, scientific risk management system. It was held, managers need
reliable risk measures to direct capital to activities with the best risk/reward ratios. They need
estimate of the size of potential losses to stay within limits imposed by readily available liqu idity, by
creditors, customers and regulators. They need mechanisms to monitor positions and create
incentives for prudent risk taking by divisions and individuals.
Girma (2011) investigated the relationship between bank performance and credit risk management. It
could be inferred from their findings that return on equity (ROE) and return on assets (ROA) both
measuring profitability were inversely related to the ratio of non-performing loan to total loan of
financial institutions thereby leading to a decline in profitability.
Tekele (2011) studied the reasons behind the problem of loan recovery and determinants of loan
default and summarized some of the causes for loan defaults as improper selection of an
entrepreneur, poor analysis of project viability, inadequacy of collateral.
He further discussed that factors affecting loan recovery can be categorized as pre-establishment
problem, implementation, and operational problem.
Wondimagegnehu (2012) on “The determinants of Nonperforming loan on commercial ban ks of
Ethiopia” also found as poor credit assessment, failed loan monitoring, underdeveloped credit
culture, lenient credit terms and conditions, aggressive lending, compromised integrity, weak
institutional capacity, unfair competition among banks, willful defaults by borrower and their
knowledge limitation, fund diversion for un expected purposes and overdue financing has significant
effect on NPLs. The above empirical review of literature emphasizes that all the studies so far
conducted are mainly discussing the loan recovery problems, determinant factors for default of
borrowers, the effect of Credit risk on bank performance and profitability in financial institutions in
general at Macro-level and micro level.
Nagarajan (2001) in his study of risk management for financial institutions in Mozambique found
that risk management is a dynamic process that could ideally be developed during normal times and
tested at the wake of risk. It requires careful planning and commitment on part of all stakeholders. It
is encouraging to note that it is possible to minimize risks related losses through diligent management
of portfolio and cash-flow, by building robust institutional infrastructure with skilled human
resources and inculcating client discipline, through effective coordination of stakeholders.
As to the knowledge of the researcher there are no studies conducted mainly to identify the problems
related to lack of effective credit management with reference to united Bank Share Company. Thus,
the researcher felt it appropriate to take up the present study entitled “ASSESSMENT OF CREDIT
MANAGEMENT PRACTICE AT UNITED BANK SHARE COMPANY ” to examine the credit
management problems and thereby to recommend courses of action that are assumed to promote
quality loan growth and curtail non-performing loans.

2.14. Conceptual Framework

Wikipedia defines conceptual frame work as an analytical tool with several variations and contexts. It
is used to make conceptual distinctions and organize ideas. it is particularly important in organizing
devices in empirical research. According to Miles and huberman (1994), “a conceptual frame work
explains, either graphically or in narrative form (both much preferred), the main thing to be studied,
the factors, constructs or variables, and the presumed relationships among them” (P. 18). The whole
purpose of developing conceptual frame work is to make research findings mea ning full. From the
previous empirical works the dependant and independent variables and their e ffect on one another is
put as follow. The center of the study is credit management

credit policy and

procedure

Economic level of Follow up

the country

Adhering to the
Quality of credit rules and
Assesment regulations of
Credit regulatory bodies
Managment
practice of
financial
institution

credit risk
Fund
Diversion

Collection
techinique Financial
effectivness
Performance

Loan provision

As it can be seen from the above conceptual frame work the variables involved are interdependent on
one another and also affects the credit management practice of a bank directly or indirectly. And
some factors like economic condition of a country affects
 CHAPTER THREE
Research deign and Methodology
3.1. Introduction
The methods used in assembling data and information for this research is shown and justified in this
chapter. This stage is about how research was executed and how respondents were approached, as
well as how the research was completed. Therefore in this section the research identifies the
procedures and techniques that were used in the collection, processing and analysis of data.
Specifically the following subsections are included; research design, data collection instruments, data
collection procedures and finally data analysis.

3.2. The Research Design

Data could be collected and analyzed on the bas is of research design because it provides the structure
for such an assessment, Bryman and Bell (2013). This research is a descriptive research; the research
uses questionnaire and interview as data collection tool. This was exactly used to collect useful
information for assessment of credit management process at united bank s.co.

In this work, the respondents‟ opinions and experiences gathered from the questionnaire and
interviews provided the needed input to the data. These data are gathered from both primary and
secondary sources. The data are evaluated and added to the findings of the research. The survey is a
quantitative one as a result of that the research questions are intended to suit the quantitative analysis.
Due to that, a lot of the questions are close ended questions; however few of the questions are open
ended questions while the interviews are all open ended questions

3.3. Population
The population of this study are the employees who are directly involved in credit processing and
administering. This means Department heads, division heads, Branch managers, Assistant branch
managers, Loan section heads, Loan officers, Loan supervisor, and Loan Committee members of all
branches are included in the target group.

3.4. Data Collection Procedures

For the purpose of this study, both primary and secondary data are used. Interviews and
questionnaires are used to collect primary data. The interviews are conducted with the management
of the credit portfolio and management as the topic of the research relates directly to them and the
questionnaire are distributed to branches to loan offices and branch assistant or managers, and to
members of credit management & analysis department.

3.4.1. Primary Data

This source provides data which is original and might have not been used before. The questionnaire
and interviews are used as the principal source of data gathering.
3.4.1.1. Questionnaire
Questionnaire constitutes a very important instrument of data collection. The difficulty with it is
when respondent are scattered around a very large arrear and when a large number of the sample size
is illiterate. With this study, the questionnaire contained close ended questions as well as questions
which open ended in nature. The questions that are close ended offer the respondents the opportunity
to choose from answers provided whereas the open ended questions allow the respondents to give
their answers. This technique helps to maintain the focus of the work on its primary objectives. The
questionnaires for the purpose of this study the questionnaires are distributed right inside the case
study both at branch and head office level. This allows the recovery possibility to be very high.
3.4.1.2. Interview
This is a face to face encounter with a purpose. In undertaking this research, face -to-face was used to
gather information from the member of credit portfolio and management staffs of the bank. Even
though data is collected from branches and other departments at head office level involved in credit
service the credit portfolio and management department is chosen for an interview since it is directly
involved with credit management. As it is centered on the objective of the study and the research
questions Interview affords a follow up questions to respondents for clarity.

3.4.2. Secondary data

Secondary data were collected from annual report of the bank from 2013 to 2017, working policy and
procedure of the bank , 2015, related journal, NBE directives, management directives of the bank
issued at various times like Mgt. Directive No.002/10 on loan work out procedure of the bank, Mgt.
Directive No.005/12 credit information user guide line and other relevant data‟s to aid the researcher.
3.5. Sampling techniques

The sampling technique used for the purpose of this study is stratified random sampling the
technique of stratification is often employed in the preparation of sample designs because it generally
provides increased accuracy in sample estimates without leading to substantial increases in costs.
Though in order to select relevant respondents stratified random sampling is employed thus the
population is divided in to sub groups or strata based on branches and head office and samples were
selected from each stratum.

3.6. Sampling size

Considering the objectives of the study, Proportionate Stratified Sampling (PSS) approach is
followed to select the number of respondents from each stratum by which the researcher considered
50 branches (53%) as samples drawn from the entire population out of the entire 94 branches as of
June 30, 2017 which are found in Addis Ababa city. The branches are chosen as a sample because
one of the most important and primary activities in the credit management process i.e. Credit
analysis takes place at branch level. To this end the minimum numbers of staffs directly involved at a
branch level are two thus 100 employees were selected from branch level as a sample. Moreover due
to the fact that the number of officers found at head office level at credit analysis and appraisal
department, follow up department and risk department are 30 all are considered as a sample which
brings the total sample size 130.

3.7. Data analysis

Most of the data were more of qualitative in nature thus; they are summarized and presented using
descriptive statistical tools like percentages, frequency counts and ratios. Furthermore tables and
figures are used to facilitate the analysis and to make it presentable for the readers. After the
respondents answers are analyzed on the respective table explanation regarding the practice of credit
management at united bank s.co is given based on the respondents answer.
 CHAPTER FOUR
ANALYSIS, RESULTS, AND DISCUSSIONS
This chapter is concerned with the presentation, analysis, and interpretation of the data gathered via
primary sources both questionnaires and interviews and secondary sources collected from the bank‟s
annual reports, manuals and data bases.

4. Questionnaires Distributed and Collected

Table 4.1.: Performance of Questionnaires Administered

Questionnaires Freq. %
Distributed 130 100
Collected 105 81
Source: Researcher’s Survey Result from Primary Data Sources

As it can be seen from Table 4.1, 130 questionnaires were distributed to employees of the bank who are
working and experienced in credit area. In this cases 105 (81%) percent of the distributed questionnaires
were collected. As the distribution and collection of questionnaires is managed by self and assistant of
others whom the researcher believed to have experience in the area together with high cooperation
rendered from the employee the achievement was to the required level and this has enabled to extract
sufficient and relevant information to the objective of the research.

4.1. Demographic Characteristics of Respondents

The demographic nature of the employee has a great contribution in the credit management of loans and
advance in understanding the credit policies and procedures as well as exercising and improving it when
demanded. Thus, in this research process the demographic characteristics of respondents like gender, age,
marital status educational level, work position and credit related experience are assessed.

Table 4.2.: Gender

Issue Gender Frequency %

Male 80 76
Female 25 24
Total 105 100
Source: Researcher’s Survey Result from Primary Data Sources

The mix of gender of the employee in the loan area is, 76 percent dominated by the male parts and 24
percent is female as it is shown in table 4.2.
Table 4.3.: Age

Age Freq. %
20-30 60 57
31-40 35 33
41-50 10 10
Above 50 0 0
Total 105 100
Source: Researcher’s Survey Result from Primary Data Source

Most of the age of the respondents young and adolescent as shown in table 4.3., 57 percent are in the
range of age between 20 to 30, and 33 percent are also between the ranges 31 up to 40. This implies the
bank has the human resource that can work energetically and competitively understanding the mission
and goals of the bank in this area.

Table 4.4.: Marital status

Marital status Fre %

Single 50 48

Married 55 52

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

By its nature the financial industry is very sensitive and risk exposed requiring human resources who are
responsible, trust full, and accountable for the prudent management of the finance. Hence if the employee
working in such risk exposed area is tied up with such social responsibilities it adds value. In the table 4.4
52 percent of the respondents are married while 48 percent are yet single.

Table 4.5.: Educational Qualifications of Respondents

Qualification Fre %

Diploma 0 0

First degree 80 76

Masters 25 24
 PHD 0 0

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

Educational background of employee is an important factor to be considered with regard to making loan
related decisions. As it can be reviewed from table 4.5, 76 percent of the respondents are degree holders
whereas 24 percent of respondents are Masters Holders. This denotes that the majority of the respondents
working in credit area are well experienced and trained and still updating themselves. This enables the
Bank to perform most and become competitive.

Table 4.6.: Work Position of Respondents

Position Fre %

Managerial 30 29

Loan work out process 25 24

Clerical 50 47

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

Table 4.6 shows 29 percent of the respondents are at managerial position which includes branch managers
and assistant branch managers where as 24% are professionals at officer level and 47 percent are clerics
mainly loan officers and analyst.

Table 4.7.: Credit Related Experience of Respondents

Duration Fre %

1-5 year 44 42

6-10 year 46 44

Above 10 year 15 14

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

 As it can be seen on table 4.7., More than 40 percent of the respondents have credit experience of 6- 10
years and 14 percent have above 10 years experience which helped the researcher to capture good quality
of data Credit processing and appraisal is done by the bank prior before providing any loans and advances
which starts since a prospective borrower walks in to the branch.

4.2 Research related questionnaires

Table 4.8.: Credit Processing/Appraisal

No Strongly Agree Uncertain Disagree Strongly Total

agree disagree

Fre % Fre % Fre % Fre % Fre % Fre %

The bank demands a business

A. plan from all clients to identify 18 17 50 48 10 10 25 24 2 2 105 100
risk exposure

The bank look at relevant

B. experience of the loan 95 90 10 10 0 0 0 105 100
applicant

The bank carries out credit

C. processing activities 11 10 52 50 15 14 25 24 2 2 105 100
independent of the appraisal

The banks credit granting and

approval process establish
D. 51 49 50 48 4 4 0 0 0 0 105 100
accountability to decision
makers

There are times the credit

granting and monitoring of
E. applicant’s can be influences 6 6 40 38 25 24 20 19 14 13 105 100
by directors, senior managers
or influential staff of the bank

F. The bank look at collateral

105 100 0 0 0 0 0 0 0 0 105 100
whenever granting any loan

G. The bank consider the past 5 5 100 95 0 0 0 0 0 0 105 100

repayment track record of
applicants

Though; Solid loan appraisal process is considered as the foremost means to control loan quality.
Following this the researcher raised some questions. As indicated in table 4.8 item (A) Respondents were
asked whether the bank analyze borrowers risk exposure by inquiring business plan 17% of the
respondents strongly agreed with the issue while 48% agreed in the mean time 24% of them disagree,2%
of them strongly disagree and 10% of the respondents are uncertain.

In the same table item (B) respondents were asked whether the bank look at the relevant experience of
loan applicants with this regard 90% of the respondents strongly agreed and 10% of them also agree. As it
can be seen on item (c) of table 4.8, 10% of respondents strongly agreed the bank carried out credit
processing activities independent of the appraisal where as 50% agreed.

On table 4.8 item (d) respondents were asked whether the credit granting process establishes
accountability to decision makers; 49% of the respondents strongly agree at the same time 48% of them
agreed while 4% of the respondents were uncertain and none of them disagree.

Regarding the question presented whether credit granting and monitoring of applicants influenced by
senior bank management members and directors on table 4.8 item (e) 6% of the respondents strongly
agree while 38% of them agree and 24% of the respondents were uncertain where as 19% of respondents
disagree and 13% of them strongly disagree. Item (f) of table 4.8 describes that 100% of the respondents
strongly agree that the bank look at collateral when ever granting a loan.
It is clearly seen that 100% of the respondents witnessed that the bank look at the past repayment track
record of applicants on table 4.8 item (g) being 95% of them strongly agreed and 5% of agreed. While the
above table 4.8 is summarized; one can see that the credit processing and appraisal of the bank is in a
good condition except matters that the credit granting and monitoring is influenced by Influential persons
of the bank and the case that the bank sometimes requests business plan from prospective borrowers
which might deteriorate the bank asset quality. Requesting business plan tells the customer has a clear
direction as to how to operate his/her business. It is also noticed that even th ought the bank has it as a
policy to request for a business plan most interested applicants are not able to provide because they do not
have the culture of preparing one. On some occasions it was also noticed that the banks influential bodies
involve in the decision making of some loan related decisions to certain customer when it is believed that
the customer has a potential and the customer‟s relation with the bank is found to be beneficiary. The
 bank estimates the securities offered by its own engineers and takes the value it believes that property
deserves (Property estimation guideline of the bank, 2013).
Table 4.9.: Monitoring and Control Of Credits

No Strongly Agree Uncertain Disagree Strongly Total

agree disagree

Fre % Fre % Fre % Fre % Fre % Fre %

Does collateral estimation

A. regularly assessed & related 20 18 65 62 10 10 10 10 0 0 105 100
to applicants financial health

Does the bank do pre audit

B. before fund has been released 5 5 100 95 105 100
to the applicant

The bank periodically prepare

credit quality reports for
C. 16 15 89 90 0 0 0 0 0 0 105 100
signaling loan loss in any
portfolio

Customers are given sufficient

D. 0 0 0 0 3 3 26 25 76 72 105 100
advice on the usage of loans.

Source: Researcher’s Survey Result from Primary Data Source

Also the Structured Questioners prepared were focusing on the monitoring and control of credits among
this in the aforementioned table 4.9 item (a) respondents were asked whether the bank do collateral
estimation regularly related to the borrowers financial health with this regard 62% of the respondents
agree and 18% of them strongly agree where as 10% of them disagree and 10% of the respondents were
uncertain.
Item (b) of table 4.9 assessed whether the bank do pre-audit before disbursement has been made to the
borrower 95% of the respondents strongly disagree with the statement where as 5% of them are uncertain.
As it is shown on the above mentioned table 4.9 Item (d) on table 4.9 shows 15 and 90 percent of the
respondents strongly agree and agreed respectively regarding, the periodical preparation of quality credit
report signaling loan loss of any portfolio the bank. As it is depicted on item (e) of table 4.9 respondents
were asked whether sufficient customer training on the usage of loan 25 and 72 percent of them disagree
and strongly disagree respectively while 3 percent showed that they are uncertain. Every three years
 securities offered for loans are re-estimated as long as the loan is active (Property estimation guideline of
the bank, 2013).
Hence, proper monitoring of credit has assumed greater significance in the effective management of
leading yet most of the respondents have witnessed that the bank does not provide any advice on the
usage of loan and no pre audit is made prior to disbursements which are critical factors. the bank advice
branch manages to undertakes pre and post disbursement visits usually the pre disbursement visit is
undertaken but the post disbursement is not taken seriously by branches or the bank as whole and beside
this monitoring mechanism it would be advisable for the bank to provide advice to the customers on how
to use the credit. Pre audit can be costly especially time wise but it can be used as one important control
mechanism in credit analysis and appraisal process but it can be seen that the bank does not take in to
consideration. The credit portfolio management department collects data‟s related to loan on a monthly
and quarterly basis compile that data and report to National Bank of Ethiopia, the bank‟s president office
and board of directors.

Table 4.10: Credit Risk Management

No Strongly Agree Uncertain Disagree Strongly Total

agree disagree

Fre % Fre % Fre % Fre % Fre % Fre %

The loan portfolio is invested 15 14 70 67 15 14 5 5 105 100

A.
in different sectors of the
economy
Does the bank loan portfolio 60 57 20 19 25 24 105 100
B.
concentrate in particular
sectors of the economy
The bank quickly responds to 75 71 10 10 15 14 5 5 105 100
C. market changes

Source: Researcher’s Survey Result from Primary Data Sources

The importance of prudently managing sectoral concentration risk in banks‟ credit portfolio is generally
well recognized On the above mentioned table 4.10 item (a) 14 and 67 percent of the respondents strongly
agree and agree respectively that loan portfolios of the bank are invested in different sectors of the
economy while 5% of the respondents replied their disagreements and 14 percent are uncertain about the
sectoral distribution.
 On the same table item (b) 57 percent of the respondents strongly agree the bank loan portfolios
concentrates on particular sectors while 19 and 24 percents of the respondents describe their level of
disagreements and strong disagreement on the statement. Most of the bank‟s loans are concentrated on
certain risks most of the time mainly domestic trade, transport loan and export. This arises from the
demand but also exposes the bank to concentration risk.

Table 4.10 item (d) raises question about whether the bank quickly respond to market change with this
regard 71 percent of the respondents agree 10 are uncertain while 14 and 5 showed their disagreement and
strong disagreement which is relatively good from the researcher point of view. This shows that the bank
tries to stay competitive still protecting the market value of the bank and the share holder‟s interest. Any
change in the market a good example can be the 2017 devaluation which led the bank to increase the
interest rate by 2% on every loan and advance.

Table 4.11: Credit risk grading/rating

No Strongly Agree Uncertain Disagree Strongly Total

agree disagree

Fre % Fre % Fre % Fre % Fre % Fre %

A. The bank has an internal 105 100 0 0 0 0 0 0 0 0 105 100

credit rating system.
Does the bank do credit
B. 95 90 10 10 105 100
rating on all projects
approved at branch level
C. The bank quantifies risk 75 71 30 29 105 100
through credit rating
The bank rate the
D. 105 100 105 100
management capacity of
loan applicants
Does the bank rating system
E. 25 24 80 76 105 100
predicts debt repaying
capacity of loan applicants
The rating system is
F 45 43 35 33 25 24 105 100
supported by information
systems
Source: Researcher’s Survey Result from Primary Data Sources

The credit risk grading is the process of assessing the risk that the bank has engaged in every borrower of
the bank. It‟s among many essential instruments for sound credit management. United bank co have it on
credit risk grading/rating system developed by its IT team. The system tries to rank the loan applicants of
the bank a risky/bankable/ and not risky/not bankable/. The system uses five parameter in order to do that
namely track record/pat loan repayment and account operation history/, management experience,
relationship of the customer with the bank, realizable and coverage of the security offered, and financial
performance of the applicant‟s business In relation to credit rating/grading/ 100% of the respondents
strongly agree that the bank has internal rating system.
In table 4.11 item (a) but regarding the question with respect to the bank do rating on all the projects
approved at branch level 90 and 10 percent of them agree and disagreed respectively on the same table
item (b) this implies branches when they approve a loan using their discretionary lending limits does
credit risk grading as long as it is not for staff loan. Table 4.11 item (c) describes whether the bank
quantifies its risk through credit rating with regard to this 71% of them agree and 29% of them are
uncertain. . There are 1 to 5 ranks in the credit risk grading system 1 being a good grade and showing that
the customer id bankable while 5 is to a customer that can‟t be financed most of the time this process is
only done because it is mandatory and is rarely used for decision making. Item (d) of table 4.11 depicts
whether the bank rate the management capacity of respondents in line to this 100% of the respondents
strongly agree. Respondent‟s reaction with regard to whether the bank predicts debt servicing capacity of
loan applicants is reflected on item (e) of table 4.11 so 76% of them agree where as 24% of them shows
their strong agreement. On Table 4.11 item (f) questions raised whether the bank rating system is
supported by information systems with regard 43 of the respondents agreed, 33 are uncertain and 24
percent disagreed with the statement this implies there is a critical need to support the grading process
through information system to avoid subjectivity. Even though there is an information system
supported credit risk grading system currently it can easily be manipulated.

Table 4.12: prevailing factors affecting timely decision

No Strongly Agree Uncertain Disagree Strongly Total
agree disagree

Fre % Fre % Fre % Fre % Fre % Fre %

A. Delay in obtaining credit 15 14 20 19 70 67 105 100

information
B. Lack of adequate man power 5 5 30 28 70 67 105 100

C. Centralized decision making 50 48 55 52 105 100

process
Submission of incomplete
D. 78 74 27 26 105 100
data by prospe ctive
borrower
Source: Researcher’s Survey Result from Primary Data Sources

One of the major ways customers decide to use a bank is the possibility of getting a loan and the
time it takes to be done with the process. Therefore even though timely and accurate credit
decisions are critical to banks there are factors which hinders them to do so therefore the researcher
aspired to question which are the most prevailing factors affecting timely decision among this table
4.12 item (a) describes how much is the impact of delay in obtaining credit information 14 and 70
percent of them show their agreements and disagreements respectively where as 19% of them says
they are uncertain about the statement. Credit information is a mechanism of haring a customer‟s
credit relation with any of the banks it is done by using a system that is developed by national bank
of Ethiopia and is updated every month end. It is actually one of the requirement of the national bank
of Ethiopia not to process a loan without enquiring credit information.

Item (b) questions if there is lack adequate man power 5% of the respondents agreed while 28 and 67
percent of them disagree and strongly disagree respectively. This is noticed mainly in new branches
where there are not a lot of loan activities.
Item (c) of table 4.12 questions whether centralized decision affects timely decision with this regard
48 and 52 percent of them strongly agree and agree with the statement. Loans at united bank s.co are
approved at different level based on their discretion by three committee BCC (branch credit
committee), CMC (credit management committee), ECC (executive credit committee) the later two
are at head office level so the delay mainly happen when loans are approved at head office level.
Item (d) shows that 74% of respondents agree that Submission of incomplete data by prospective
borrower is most prevailing factor in timely credit decision where as 24 percent of them disagree.
Even though loan are not granted to customer ho submit incomplete document the problem is after
informing the loan applicant‟s of the required document it take the loan applicant to provide the bank
with all the document needed to process the loan on time. Customer‟s document presentation is
mainly affected by what they were told at the beginning when they initiated the loan process if they
are not given full information then they will be greatly dissatisfied with the service they get and
mainly the will lose time and other times it is lack of proper documentation by the customer causing
this problem.

Table 4.13: Credit policy, processing, and collection procedures

No Credit policy, processing and collection Yes No Total

Fre % Fre % Fre %

A. The bank has credit policy or manual 105 100 105 100

B. The bank has updated credit policy 100 90 5 5 105 100

C. The bank’s credit policy in compliance to 105 100 105 100

NBE rules and regulations.
D. The bank’s loan service are as per 68 65 37 35 105 100
client’s preference
E. Collection technique used by the bank 73 70 32 30 105 100
are effective
Source: Researcher’s Survey Result from Primary Data Sources

In the table 4.13, 100 percent of the bank employee replied positively for having credit policy and
procedure manuals. It is one of the tool and technique used in credit management process. Hence it is
crucial to have credit policy document to protect the bank against over exposure, mal-administration
of credit, managing of non-performing loans, and arrive at a trade-off between returns and risks. 90
percent of respondents recognized it is updated. The bank updated the main credit policy and
procedure manual through time by issuing various procedures about a specific amendment. The
revision the banks credit policy and procedure is based on change in the, bank specific factors.
Moreover, 100 percent of the employees have agreed on the compliance of the credit policy and
credit procedures to the regulation and directions of the National bank of Ethiopia (NBE), which is
the regulatory body of the nation. In the table 4.13, 65 percent of the employees believed that the
prevailing loan service is to the client preference of the prevailing growth of loans while as well as
35 percent of them have recognized the deviation of the loan service provided with the preference
and expectation of the potential loan clients. Still the bank tries to recognize potential loan areas and
sectors and is trying to reach all societies need by introducing new loan products. Finally on item E
of Table 4.13. 70 percent of the respondents agreed that the collection techniques are effective while
30 percent voted against it.

Table 4.14 Time interval for processing a single loan and make decision

No Fre %
Time interval in loan process
A. Less than 15 Days 10 10

B. 15 Days To 30 Days 20 19

C. Above 30 Days 75 71

Total 105 100

Source: Researcher’s Survey Result from Primary Data Source

Many factors contribute to the time it takes to complete one loan process like the time it takes to
collect the needed documents, analysis both at the branch and the approving organ also depends
on where the loan is being approved branch, liquidity status of the bank. Loan processing is one of
the measurements of credit management in banks. Hence, the processing procedure, transparency,
and length of time are some of the factors determining the convenience of lending facilities which
contributes to loan growth and lasting client - bank relationship. Bearing this in mind the researcher
raised question about the time interval for processing single loan and to pass decision 10% of the
respondents says it takes less two weeks where as 19% of the respondents repl ied it takes between
two weeks to a month while 71% of the respondents replied more than a month

Table 4.15: Credit Creation by the bank

Credit creation Fer %

By staffs approaching promoted clients 25 24

By new clients approaching with new 80 75

 request

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

As it is shown in the table 4.15, 75 percent of the loan is created by new applicants approaching the
Bank with credit request while 24 percent is created by the employees approaching potential loan
clients. These shows the Bank employees especially branch managers should further exert efforts to
approach potential loan clients as it is the best way of creating quality loans as well as to win the
prevailing so stiff competition.

Table 4.16: Collection techniques of the bank

Fre %

Debiting customers account as per an 56 53

undertaking letter

Cash/cheque payment 15 14

Transfer 29 28

All 5 5

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

The collection technique so far adopted by the Bank is cash/check payment, debiting own account
per the given undertaking authorization, and transferring through the bank’s branch excluding
commission charge. As it is shown in table 4.16, 53 percent adopts debiting the clients account, 14
percent uses cash collection system, and 5 percent uses either cash or debiting account system of
collection technique While 28 percent uses transferring when the clients are out of the branch. Hence,
the most common collection techniques used by the bank is transfer and debiting Clients account.

Table 4.17: Credit policy and procedure of the Bank

Credit policy and procedure Fre %

 Rigid 35 33.3

Flexible 32 30.5

Average 38 36.2

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

How encouraging and flexible a bank‟s credit policy is another factor for customers to decide to be a
customer of a bank or not in compliance to the policy of the regulating body, all banks formulate
their own credit policies and procedures which assist to provide different type of credit within each
credit policy to their loan customers. Therefore, knowing the outlook of loan clients for each bank is
very important in reshaping its credit policy and procedures.
Hence, In order to know the nature of the Bank‟s credit policy, the researcher raised questions for the
employees of the Bank. Consequently, as revealed in Table 4.17, 36.2 percent of the respondents said
the credit policy and procedure of the bank is on average in its workability and 33.3 percent c laimed
as it is rigid. While, 30.5 percent of them said that the credit policy of the Bank is flexible. In the
interview made most of the division and department managers have agreed on the importance,
attractiveness and convenience of flexible credit policies and procedures as it assists for loan creation
and growth. They also noted that the flexibility should come by keeping the protection and the best
interest of the bank in mind.

Table 4.18: Rate of credit analysis and processing

Rate of analysis and process Fre %

Excellent 5 5

Very good 48 45

Good 42 40

Fair 10 10

Poor 0 0

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

In relation to credit analysis, as indicated in table 4.18, 45 percent of the bank employees have rated
the credit analysis of the bank very good, 5 percent rated Excellent, 40 percent rated good while 10
percent rated fair. Hence, there is a gap needed to improve the quality of credit analysis and loan
processing at both head office and branch level to the status of excellent level that enables to create
quality loans managing non-performing loans.

Table 4.19: Methods used to improve repayment

Measure Fre %

Loan scheduling 10 10

Additional loan 5 5

Frequently insisting the client 90 85

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

Branches should start on the repayment probability of the loan since the beginning of the loan. They
should consult with the customer on the frequency of the repayment based on the cash flow of the
customer‟s business. As it is indicated in table, 4.19, 85 percent used to settle the non-performing
loan through frequent follow up and insisting the loan client. Moreover, 10 percent of the bank
employees have replied the bank reschedules loans when the cause of default occurs justifiable while
5% of them replied additional loan is made. From the interview with the staff of the portfolio and
credit management they would go in to a great length before the loan could go in to the legal
department and foreclosure could follow but the first and the most important step in done in the
branch where the loan was granted.

Table 4.20: Effectiveness of forcing measures

Forcing measure effectiveness Fre %

Effective 75 71
Ineffective 30 29

Total 105 100

Source: Researcher’s Survey Result from Primary Data Sources

With regard to the enforcing me chanisms, the researcher raised questions and assess their
effectiveness as shown in table 4.21 above, 71 percent of the respondents confirm the
effectiveness while 29 percent disclosed its ineffectiveness. The main reason for the ineffectiveness
is that in most cases people do not want to buy others property which is held as collateral by banks.

Table 4.21 Non- performing Loans to Total Loan Ratio

Outstanding
Year Disbursement Collection NPL NPLTL IN %
loan

2013 2.22 2.58 4.71 119.2 2.53

2014 2.08 3.30 5.06 87.9 1.73

2015 2.17 3.23 6.86 116.2 1.69

2016 3.17 5.24 8.5 143.1 1.68

2017 4.95 5.98 11.9 95.9 0.81

Total

Source: NBE Annual report, Annual Progress Report of the Bank and own computation

The whole disbursement and outstanding loans figure is in billion while the collection and outstanding
loan figure is in millions.

Non- performing Loans to Total Loan Ratio is one of the most important criteria to assess the quality of
loans or asset of any commercial bank. NPTL measures the percentage of gross loans which are doubtful
in banks‟ portfolio. The lower the ratio of Non-performing loans to total loan ratio, the better is the
performance with this in mind when we look at the NPTL ratio of the bank taken five years from 2013-
2017 its shows the bank has managed to keep the ratio below the threshold set by NBE which is 5%.
Table 4.22 Provision held for Non- performing Loans

Year Actual amount held Planned Variation

2013 87.56 95.4 7.84

2014 77.81 99.75 21.94

2015 73.04 103.41 30.37

2016 83.87 91.53 7.66

2017 110.98 119.43 8.45

Source: Annual Progress Report of the Bank, Annual report of the bank and own computation

The whole figure is in millions in the above table. As can be seen from the above table the bank
holds provision less than they anticipates also beside the year 2016 & 2017 the amount held showed
a decreasing trend. As can be seen from the data presented on table 4.23 for the years where there is
low NPL there is higher provision held for example year 2017. The explanation for this
misunderstanding is the concept of NPL. Non-performing loans (NPL) is status given for loan and
advances that stays outstanding for more than 90 Days. Not over due/impaired loans (provision held 1%),
overdue but not impaired (provision held 3%), impaired loans (provision held 20%,50%,100%) for the
last status the provision percentage depends on the number of days the loan stays outstanding/unpaid.

From the fiscal year ended 2013 going on to fiscal year 2014 the newly disbursed loan are very low
showing only an increase of 0.3 billion so as can be seen from the table with reference to table 4.22 the
provision held decreased following the decrease with NPL and Loan and Advances in the fiscal year
ended 2014. Therefore in the two years the banks provision decreased 11.05%. from the fiscal year 2014
to 2015 the provision increased only by 2.01% mainly because there was only a 0.09 billion increase in a
freshly disbursed loans in the fiscal year 2015

As I tried to mention above NPL only covers the impaired portion of the loans but it should be noted that
the bank is required to hold provision for each outstanding loans under the different 5 stages by NBE.

From the fiscal year 2015 to 2016 the increase in the banks provision is not major only by 14.8%. in the
two years under neither past due nor impaired loans increased by 1.6 million, past due but not impaired
loans increased by only 238,718 which is small relative to other years under consideration. Impaired loans
increased by 26.8 million again relatively it is small.
From the fiscal year 2016 to 2017 NPL (impaired loan) decreased from 143 million to 95.9 million ie by
47 million. Here the bank held 20%, 50%, 100%, while the past due but not impaired loans increased by
94.9 million where the bank held 3% provision. The banks neither past nor impaired outstanding loan
increased by 3.4 billion where the bank was required to held 1% provision that means over all it incurred
a 32.32% increase in provision.

4.3. In depth interview

In order to get deep understanding about the credit management of United Bank s.co, in-depth interview
was conducted with department managers and division heads. All of the interviewees have had over seven
year‟s credit experience. Accordingly the interviewee‟s responses to the questions are depicted briefly as
follows. However, most interview responses are presented and analyzed in the questionnaire analysis part
as a supportive response. Before the response is presented in a summarized way an interview guide
line is given as follow.

First before I choose my interviewees profiled their position function in relation to the topic of my
research. Since they study is about credit management there is no better place than credit portfolio
management department the bank to conduct the interview with since the staff in that department is solely
engaged in the credit management process. The next step I took was setting a requirement and from all
the staffs I choose the manager of the department who has a long year experience in credit management
and loan work out. Since this is an additional way of collecting primary data I set my priority to asking
about the actual credit management practice to be my priority and only limited my question to that.

The summary of the questions asked with the response is shown below:-

A. Generally Perception about Credit Management of the Bank by the interviewees

Most of the respondents have so many in common as to what they believed the credit management
practice of the bank. Loan processing and lending function is the core product of all banks in general as it
contributes the major shares of revenue to its profitability. In other words loans and advances are known
to be the main stay of all banks. They occupy an important part in gross earnings and net profit of the
banks. The share advances in the total asset of the banks forms a lion share (almost more than 60%) and
as such it is known as the back bone of banking sector. The strength and soundness of the banking system
primarily depends upon health of the advances. Therefore, in order to promote the lending function to the
required level the Bank should produce and follow up to date, convenient credit policies, and procedures
to attract potential loan clients so as to develop a long lasting two way borrower and bank relationships.
 B. Interviewed responses summary for factors that affect credit management of Bank.
Respondents indicated that several factors affect credit management of the bank. The fundamental aim of
managing credit is to perk up the quality of business decision making at all levels of the firm and thereby
to maximize shareholder wealth. Thus Most of the respondents exposed the need of improvement
prevailing procedures in accepting loan applicants by the bank, underestimation of properties offered for
collateral, length of loan processing time, excessive reduction of loans requested and recommended by the
branch and diversion of loan funds, over presenting of project costs by borrowers, poor projects feasibility
studies from the customer sides, Bank‟s clients started new businesses in which they had no experience,
un updated exchange of clients credit information are the major ones.

C. Summary of interviewed responses for how the bank asses credit worthiness of
applicants

As per the interviewee‟s response once a customer requests a loan, bank officers analyze all available
information to determine whether the loan meets the bank‟s risk-return objectives. Credit analysis is
essentially default risk analysis, in which a loan officer attempts to evaluate a borrower‟s ability and
willingness to repay. The Bank assesses the creditworthiness of a loan applicant mostly by gathering
detail information Depending on the type of credit exposure and the nature of the credit relationship with
the borrower, the factors to be considered and documented in credit approval include:
 Interview and site visit

Inte rvie w
 Purpose of the loan
 Type of business
 Financial need of the business
 Liability of the business if there is any
 Source of repayment
 Customer and market base
 Competency of the management
 Past performance of the business
Site visit
 This is important to get a broader of the applicant‟s business to make a physical
examination and verification of items declared on financial statement.
  To see future conditions of the business.
 Financial viability of the applicant‟s business and the applicant be classified as
bankable
 Knowing customer (character, capacity, capital, Collateral and condition)
 Summary of borrower and affiliated credit relationship with UB and other banks. Are
there any non-performing loans with other banks,
 Fulfillment of documentation and compliance requirements such as renewed trade
license, TIN, tax clearance, memorandum and article of association, financial
statements, due diligence and etc …
 Financial ratio analysis
 Credit information enquiry responses to check whether the applicant has any loan
arrear with other banks
 Collateral identification and valuation are the major ones.
D. Summary of interviewed responses towards the bank preference of collateral based
lending.

As per the interview conducted the Bank prefers the business type and applicant creditworthiness as first
way out and collateral is the second way out as basis for lending. In principle, loan can be provided both
on clean base and on collateral base. However, the Bank prefers collateral based lending because of the
following main reasons:
The economic level of the country: the living standard of the society, poverty,
etc;

The culture of the society in lending is at its infant stage.

The educational level of the society.

Limited resources of the bank

It is believed to be the safest way of lending in minimizing credit risk and others.
The other most important issue to be continually reviewed related to collaterals is period of limitation of
loan and mortgage contracts and their registration.

E. Factors believed to cause occurrences of NPL by the interviewees

Respondents indicated that several factors contribute to loan default. As per the outcome of the interview
the factors can be categorized as banks‟ internal situations and borrowers related. The factors are
organized and presented under the respective subtitles.
Banks internal factors

These are factors relating to internal inefficiencies due to systems, governance, human resource issues and
the related. Under theme this most of the interview participants raised the following issues:
 Bankers lack of integrity,
 relaxation in the follow up of loans,
 Credit analyst‟s capacity limitation,
 Banks aggressive lending to maximize profit,
 Not conducting Know your customers (KYC) principles properly before lending,
 Mistakes on estimation of collateral and evaluating the borrower‟s financial report
 Lack of credit information from other banks on a timely basis
 Lack of communication and consultation with the defaulter not after the loan is declared NPL but
when the applicant first applies for loan.

Customer related factors

These are factors that emanate from borrowers and have strong bearing on occurrences of Loan default.
Under this ground the following were raised:
 Fund being directed to unintended purpose,
 Unstable economic and political condition
 Borrowers not making competitive analysis before engaging in a particular sector,
 Excess government intervention in the applicant business/sector
 Business management problems- most of family owned businesses don‟t have good
management and they also suffer from succession,
 Poor record keeping by businesses,
 Intentional or willful default,

F. Summary of interviewed response of the bank credit recovery.

The credit recovery method, used by the bank is treated in the same fashion as of credit collection
methods. The measures that are used include strict follow up and insisting the client, debt rescheduling,
court proceeding, and foreclosure. In the bank, credit is transferred to the legal service when it fails to
regularize or settle the loans in default and when all efforts to amicably settle the loans fail and it is
ascertained that legal action is to be the last alternative.

G. Summary of interviewed res ponse about portfolio management of the bank.

As per the interviewees view, the loan portfolio is typically the largest asset and the predominant source
of revenue for the Bank. As such, it is also one of the major sources of risk for the Bank‟s safety and
soundness. Accordingly UB employs various risk assessment mechanisms such as customer grading,
portfolio limit management, credit review and provisioning to effectively manage its credit risk exposure.
 Chapter Five

Conclusion and Recommendation

5.1. Conclusion
In this chapter, conclusions of the research findings that has been discussed an analyzed in detail in the
previous chapters is briefly presented. In addition, general conclusions that are highly related with the
research objective of this paper are offered. Furthermore, possible recommendations based on the findings
are made. Lastly, implication for further research is indicated.

As qualified, soc ially responsible and experienced manpower enhances competence majority of
employees of the bank working in credit area are Degree holders still updating their educational status,
married and highly experienced, this enables the bank to accelerate its service delivery and become
competitive in the growing stiff competitive industry, to meet its vision of “Becoming the most preferred
Bank in Ethiopia.” And „„number one bank in Africa in 2030‟‟.

The credit policy and procedures as well as other pertinent manuals and guidelines help to create common
understanding and uniformity among all employees. The Bank is compliant to all directions of national
bank of Ethiopia in all of its activities of credit management. Hence the way of categorizing and holding
provisions for the non performing loans is as per the direction and requirement of the National bank of
Ethiopia.

As far as the bank strives hard to assure the quality of its credit; the Bank implemented internal risk
rating/grading/ procedure majority of respondents believed it is well implemented at branch level to
support the loan processes and to classify customers on a risk level. The majority agreed that it is
supported by information systems while the remaining are uncertain or disagreed.
Submission of incomplete documentation and centralized credit decision mainly affects accurate and
timely decision which makes loan delivery time of the bank lengthy. The majority of the respondents
agreed that one loan process takes more than 30 days to be finalized.

The collection techniques so far adopted by the bank is appropriate and effective that most common
collection techniques used by the bank is transfer and debiting Clients account per pre undertaking.
Document study revealed that NPL position of the bank is below the thresh hold set by NBE which is 5%
considering the period from 2013 to 2017.

Most of the time loans are created by new clients approaching the bank but respondents believed that the
service is not that much to the clients‟ preference.

Most respondents revealed the credit analysis and appraisal of the bank is in a very good condition except
matters that the credit granting and monitoring is influenced by influential persons of the bank which
makes decision subjective. It was an understanding of most respondents that influential personnel‟s
involve mainly when they found the client having a potential for the most part.

Hence, proper monitoring of credit has assumed greater significance in the effective management of
leading yet most of the respondents have witnessed that the bank does not provide any advice on the
usage of loan and no pre audit is made prior to disbursements which are critical factors. Most branches
even though it is clearly stated on the credit policy of the bank do not also undertake post disbursement
visit unless there is something wrong with the loan repayment.

From the analysis it is clearly shown that even though the bank portfolio is invested in different sectors of
the economy and is as per the pre-set concentration limits in every sector which respondents witnessed.
The bank is currently concentrating on specific sectors in the years under consideration.

In addition in depth interview found out that due to underdevelopment of credit orientation borrowers
engaged in business that they had no depth knowledge, diverted loans and advances for unintended
purpose, willful default, over presenting of project costs and poor projects feasibility studies are factors
which leads to customers default.
As a point of future studies if a comparison among various commercial banks in this manner is
undertaken to clearly see bank specific gaps in the credit management process of banks.
5.2. Recommendation
The following are some of the suggestion that I would like recommend to United Bank S.Co management
and concerned parties
- The bank advisable give more emphasize on its implementation on credit policy and procedure, in order
to have a better approach that will meet the objective of the bank.
-As it is disclosed in the analysis part of the study most of the bank employees have complaints on the
credit policy and guidelines regarding loan discretion, length of loan processing time, repayment
schedule, and excessive requirements for analysis. These are the major factors impeding client reputation
and retarding to attract potential loan clients. Hence, the bank should made remarkable changes on its
credit policy and procedure guidelines regarding the above aforesaid drawbacks in order to solve the
current problems and achieve the client reputation.
- The bank advisable frequently follow-up by visiting borrowers business to create long- lasting
relationship and assure future payment.
- In today‟s competitive world the bank must try to develop a credit policy in line with the existing
situation of the market.
- The banks advisable develop different types of credit facilities to the borrower as per potential borrower
preference.
- The bank is advisable assess borrowers past financial history, credit worthiness and perform detail
financial analysis before extending loans to avoid non-performing loans. Requesting financial report is
not enough by itself.
- Even though credit management is the first way to avoid bad debt still there would be loans that would
surpass all the work out process and become a bad debt but because some branches do not apply the
procedure of credit management it becomes hard to handle the case when it reaches legal measures.
Branch managers should have the banks interest at heart at all times and apply the banks credit po licy and
procedure.

5.3. Area for future research

This study is under taken in United bank Share Company as a case study of credit management
performance of the Bank it is only limited to one commercial bank in Ethiopia because of time limitation
but if the credit management process of other commercial bank in Ethiopia are considered a ell and a
comparison analysis is done.
 REFERENCE
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Capital Management and Signaling Effects, Working Paper, Department of Accounting,
Syracuse University, 1-37.
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 Bailey, M., (2008), Bad science in credit scoring, Available from: Bailey, M., (2008),
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 Besi, H.L, and Hardikar, V.K. 1993). Practical Banking Advances. (9th Ed.)New Delhi; UBS
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 Brigham, E.F., Gapenski, L.C. and Daves, P.R. (1999). Intermediate Financial Management.
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 Credit risk management and corporate governance‟, Atlantic Economic Journal, Vol. 38, No 2,
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 Eppy, I. (2005) Perceived Information Asymmetry, Bank lending Approaches and Bank
Credit Accessibility by SMEs in Uganda (Unpublished thesis) Makerere University
 Fan, L.,Shaffer, S. (2004). “Efficiency versus Risk in Large Domestic US Banks.”Managerial
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 Hitt, Robert E. Hoskisson, Richard A. Johnson, Douglas D. Moesel. (1996). The Market for
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 Horne, J.C. and Wachowicz, J.M. (1998). Fundamentals of Financial Management. New Jersey:
Prentice Hall
 Hulme, D. and P. Mosley (1996), Finance Against Poverty, Volume 1 and 2, Routledge, London
 Israel, G.D.(1992): Determining Sample Size, Revised 2009,Viewed on April 20, 2011
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 Kariuki, J.N. (2010),”Effective Collection Policy.”KASNEB Publishers, Nairobi.
 Kargi, H.S. (2011). Credit Risk and the Performance of Nigerian Banks, Ahmadu Bello University,
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 Koch, W.T. (1995). Bank Management (3 rd Ed) USA: The Dryden press, see Harbor Drive.
 Knox, S. (2004). Credit Analysis Technology in a Changing Business Environment. Boston:
CFO Publishing Corp
 Lang, W., and Jagtiani, J., (2010), “The mortgage and financial crises: The role of credit risk
management and corporate governance”, Atlantic Economic Journal, Vol. 38, No
 Management directives of United Bank S.co related to credit operation issued between 2013-
2017
 Migiri, D.O. (2002):”Credit Management Models: A case of banks in Kenya,” Thesis, University
of Nairobi, Nairobi.
 Myers, C.S. and Brealey, R.A. (2003). Principles of Corporate Finance. New York: McGraw-
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 National Bank of Ethiopia, Directive No.SBB/36/2004: Licensing and Supervision of Banking
Business Proclamation No.84/1994, Addis Ababa.
 National Bank of Ethiopia, (2008): Asset Classification and Provisioning Directive No.
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APPENDEX

ADDIS ABAB UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS
MBA PROGRAM

Dear respondents:

This is a questionnaire designed to collect data on the credit management practice of united bank
S.C which will be used as an input for a thesis in a partial fulfillment of Masters of Degree in
Business Administration. Your genuine response is solely used for academic purpose and the
data will be treated utmost confidentiality. Therefore, your kindly cooperation is appreciated in
advance.

I. GENERAL INFORMATION

(Tick the appropriate box)

1. Gender

Male Female

2. Age
20-30 years 31 -40 years 41 -50 years above 50

3. Marital status

Single Married

4. Educational back ground

Diploma Degree Masters PhD and above

5. Current position

Managerial professional clerical

6. Credit related experience within the bank

 1-5 years 5-10 years above 10 years

II. REASEARCH RELATED QUESTIONS

Please respond to the following statements by indicating the extent to which you agree or disagree

1. Credit processing and appraisal Strongly Agree Uncertain Disagree Strongly

agree disagree

A. The bank demands a business plan from all

clients to identify risk exposure

B. The bank look at relevant experience of the loan

applicant

C. The bank carries out credit processing activities

independent of the appraisal

D. The banks credit granting and approval process

establish accountability to decision makers

E. There are times the credit granting and

monitoring of applicant’s can be influences by
directors, senior managers or influential staff of
the bank

F. The bank look at collateral whenever granting

any loan

G. The bank consider the past repayment track

record of applicants
 1. Credit Risk Management Strongly Agree Uncertain Disagree Strongly
agree disagree

A. The loan portfolio is invested in different

sectors of the economy
B. Does the bank loan portfolio concentrate
in particular sectors of the e conomy
C. The bank has pre-set concentration limits
in every sector
D. The bank quickly responds to market
changes

Details on manuals
8. Do you have a credit manual or policy?

a) Yes b) No

9. Do you think it is up to date & convenient for loan creation?

a) Yes b) No

10. If your answer to Q no, 9, is “No”, specify the impediments encountered

________________________________________________________________
11. How can you see your institution‟s credit policy and procedure?
a) Rigid b) Flexible c) Average

12. Do the policies and procedures exactly comply with regulations of national bank?

2. Monitoring and control Strongly Agree Uncertain Disagree Strongly

of credit agree disagree

A. Does collateral estimation regularly

assessed & related to applicants
financial health

B. Does the bank do pre audit before fund

has been released to the applicant

C. The bank implement the condition &

sanction set by different appraisal
organs

D. The bank periodically prepare credit

quality reports for signaling loan loss in
any portfolio

E. Customers are given sufficient advice

on the usage of loans.
a) Yes b) No

Credit creation and procedure

13. How long it takes to process and make a decis ion on a single credit request?

a) Less than 15 days b) 15-30 c) above 30 days

14. Most of your current loan is created

a) By approaching promoted clients b) By clients approached with request

15. How do you rate the credit analysis and procedure followed by the bank in Extending credit?

a) Excellent b) Very good c) Good d) Fair e) Poor

16. Does the bank provide loan service that fit to the preference of the borrowers?
a) Yes b) No
17. If your answer to Q no, 18, is “No” please specify the reasons

Follow-up collection
18. Which of the following credit collection technique/s/ are mostly adopted by your Bank?
a) Cash/check payment
b) Debiting client account per pre undertaking
c) Using reminder letters
d) Transferring

e) All
19. Do you think the credit collection technique used by your bank is effective?

a) Yes b) No
20. If your answer to Q19 is “No”, please specify the appropriate technique/s/ that you think is best?
_____________________________________________________________________________
_____________________________________________________________________________
21. How often does your institution visit clients business after fund has been released?
a) Monthly b) quarterly c) Semi-annually d) in time of default
22. What do you think is/are the major reason/s/ for default in your Branch?
a) Lack of follow-up
b) Lack of training
c) Willful default
d) Loan diversion
e) Lack of market for clients‟ product
 f) Others, (specify) ______________________________________________________
23. What measure/s is/are taken on the side of the bank to improve the repayment situation? (Hint:
Check all answers that apply)
a) Loan rescheduling
b) Additional loan
c) Frequently insisting the client
d) Others,(specify) ________________________________________________________
24. What measures are taken by the bank to enforce repayment?
a. Foreclosure
b. Court proceedings
c. Others,(Specify) _________________________________________________________
25. How do you evaluate the loan enforcement mechanism?
a) Effective
b) Ineffective
26. If your answer to Q 25 is “Ineffective”, what is/are the reason/s/ behind this?
a) Buyers don‟t want to buy some on‟s property because of bank loan
b) Limited purchasing power of the society
c) High initial bid amounts
d) Others, (specify) ________________________________________________________
27. Would you please specify any problem/s/ of credit management that your institution faces so far
apart from the above raised issues?

28. Would you please specify the major credit problems you assume?

29. For the problem/s/ that you mentioned above, please list out all the possible and better solution/s/
that can improve the credit management system of your bank

Thanks for your tim