ST.

MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES, MBA PROGRAM

ASSESSMENT OF CREDIT MANAGEMENT PRACTICES:

IN CASE OF HIBRET BANK S.C

BY: FASIKA GEBREMESKEL

IDNo: SGS/0045/2012A

ADVISOR: MOHAMMED SEID (ASS.PRO)

Dec 2021
Addis Ababa, Ethiopia

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 ST. MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES
FACULTY OF BUSINESS

ASSESSMENT OF CREDIT MANAGEMENT PRACTICES:

IN CASE OF HIBRET BANK S.C

A THESIS SUBMITTED TO ST. MARY’S UNIVERSITY SCHOOL OF GRADUATE

STUDIES IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE
DEGREE OF MASTER OF BUSINESS ADMINISTRATION

BY: FASIKA GEBREMESKEL

IDNo: SGS/0045/2012A
ADVISOR: MOHAMMED SEID (ASS.PRO)

DEC 2021

ADDIS ABABA, ETHIOPIA

ii
 ST. MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES
FACULTY OF BUSINESS

ASSESSMENT OF CREDIT MANAGEMENT PRACTICES:

IN CASE OF HIBRET BANK S.C

BY: FASIKA GEBREMESKEL

IDNo: SGS/0045/2012A

APPROVED BY BOARD OF EXAMINERS

____________________ ________________ _____________

Dean, Graduate Studies Signature Date

____________________ _______________ ____________

Research Advisor Signature Date

____________________ _______________ _____________

External Examiner Signature Date

____________________ _______________ _____________

Internal Examiner Signature Date

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 STATEMENT OF DECLARATION
I, the undersigned, declare that this thesis is my original work, presented under the guidance of Mohammed
Seid (Asst. Professor). 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 institution for the
purpose of earning any degree.

Fasika Gebremeskel Signature _____

St. Mary's University, Addis Ababa Ethiopia Dec 2021

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 ENDORSEMENT
This thesis has been submitted to St. Mary's University, School of Graduate Studies for examination with
my approval as a university advisor.

___Mohammed Seid_______ _ _____

Advisor Signature

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 Acknowledgments

First and foremost, thanks to the Almighty God for helping me in every aspects of my life. Next, I am
highly indebted to my advisor Mohammed Seid (Asst. Professor) for his unreserved support and guidance
throughout the study.

Besides, I would like to thank Hibret Bank staffs who showed their willingness to give me the necessary
data and who committed their precious time to fill the questionnaires.

Finally, I would like to extend my gratitude goes to my beloved families, my company Wagwago Trading
plc. and staffs ,Ato Haileyesus Habteab ,Ato Berhanu Reta ,Hailemariam G to those who supported me
during the course of my study and to successfully undertake this research.

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 Table of Contents
Acknowledgments ........................................................................................................................................... vi
List of Table ..................................................................................................................................................... ix
List of Acronyms ............................................................................................................................................... x
Abstract ........................................................................................................................................................... xi
CHAPTER ONE ................................................................................................................................................... 1
INTRODUCTION ................................................................................................................................................ 1
1.1 Background of the study .................................................................................................................... 1
1.2 Statement of the Problem .................................................................................................................. 3
1.3 Research questions ............................................................................................................................ 5
1.4 Objective of the study ........................................................................................................................ 5
1.7.1. General objective........................................................................................................................ 5
1.5.2. Specific objectives...................................................................................................................... 5
1.6 Significance of the Study................................................................................................................... 6
1.7 Limitation and Scope of the Study .................................................................................................... 6
1.7.1. Scope of the Study...................................................................................................................... 6
1.7.2. Limitation of the Study .............................................................................................................. 6
1.8 Organization of the paper .................................................................................................................. 7
CHAPTER TWO .................................................................................................................................................. 8
LITERATURE REVIEW ........................................................................................................................................ 8
2.1. Introduction ....................................................................................................................................... 8
2.2. Theoretical Review ............................................................................................................................ 8
2.2.1. Concept and definition of credit management practice .............................................................. 8
2.2.2. Credit Management Practice ...................................................................................................... 9
2.2.3. Process of Credit Management ................................................................................................ 10
2.2.4. Credit Policies and Procedures ................................................................................................. 11
2.2.5. Credit Administration............................................................................................................... 12
2.2.6. Credit Process ........................................................................................................................... 12
2.2.7. The Loan System ...................................................................................................................... 16
2.2.8. Proposed Lending Tools........................................................................................................... 17
2.2.9. Credit Collection Techniques ................................................................................................... 19
2.2.10. Credit Monitoring & Review .................................................................................................... 20
2.2.11. Non-Performing Loan (NPL) ................................................................................................... 20
2.2.12. Provisions ................................................................................................................................. 21
2.2.13. Credit Risk Management .......................................................................................................... 22
2.2.14. Credit Control ........................................................................................................................... 24
2.3. Empirical review.............................................................................................................................. 25
2.3.1. Empirical Evidence from other countries................................................................................. 25
2.3.2. Empirical Studies in Ethiopia ................................................................................................... 29
2.4. Research gap .................................................................................................................................... 31
CHAPTER THREE ............................................................................................................................................. 33
RESEARCH METHODOLOGY............................................................................................................................ 33

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 3.1. Introduction ..................................................................................................................................... 33
3.2. Research approach ........................................................................................................................... 33
3.3. Research design ............................................................................................................................... 33
3.4. Population and Sampling procedures .............................................................................................. 34
3.4.1. Target Population ..................................................................................................................... 34
3.4.2. Sampling technique and sample size........................................................................................ 34
3.5. Sources of Data ................................................................................................................................ 35
3.5.1. Primary sources of data ............................................................................................................ 35
3.5.2. Secondary source of data.......................................................................................................... 36
3.6. Data collection methods .................................................................................................................. 36
3.7. Data analysis methods ..................................................................................................................... 37
3.8. Validity and reliability ..................................................................................................................... 37
3.8.1. Validity ..................................................................................................................................... 37
3.8.2. Reliability ................................................................................................................................. 38
CHAPTER FOUR ............................................................................................................................................... 39
ANALYSIS, RESULT AND DISCUSSION ............................................................................................................. 39
4.1. Introduction ..................................................................................................................................... 39
4.2. Demographic Characteristics of Respondents ................................................................................. 39
4.3. Assessing the Bank‟s Credit Management Practice ........................................................................ 42
4.4. Non-Performing Loan Management ................................................................................................ 45
4.5. Credit monitoring process ............................................................................................................... 48
4.6. Credit Risk Management ................................................................................................................. 51
4.7. In depth Interview Questions........................................................................................................... 54
CHAPTER FIVE ................................................................................................................................................. 56
CONCLUSION AND RECOMMENDATIONS ...................................................................................................... 56
5.1. Conclusion ....................................................................................................................................... 56
5.2. Recommendations ........................................................................................................................... 57
REFERENCE ..................................................................................................................................................... 59
APPENDIX ....................................................................................................................................................... 61

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 List of Table

Table 1 Lists of selected branches and sample respondents .......................................................................... 34

Table 2 Interpretation Responses ................................................................................................................... 37
Table 3 Socio Demographic Characteristic of the study participants ............................................................ 40
Table 4 Practical loaning activities and alignment against NBE requirements ............................................. 42
Table 5 Management of non-performing loan by the bank . .......................................................................... 45
Table 6 Credit monitoring process ................................................................................................................. 48
Table 7 Credit risk management activities of the bank .................................................................................. 51
............................................................................................................................................................................

ix
 List of Acronyms

NBE National Bank of Ethiopia

LC Letter of Credit
CIC Credit Information Center
NPL Non-Performing Loan
CM Credit Management
SPSS Statistical Package for Social Science
SD Standard Deviation

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 Abstract

The main objective of this study was to investigate credit management in light of the practices of
modern credit management in financial institutions in case of Hibret Bank. To achieve this objective,
descriptive research design has been employed along with both quantitative and qualitative research
approaches. For the study both primary and secondary data is used. Primary data is collected using
questionnaire, interview and the secondary data is collected from the bank’s audited annual reports
(2018/19-2020/21). A purposive sampling technique was used to select respondents from Hibret Bank
employees who work at the head office and 8 other branches in Addis Ababa. Structured
questionnaire was used to collect the data from a sample of 79 employees. Data were analyzed using a
descriptive statistics. The findings reviled that the bank is not controlling the borrowers limit as per
the NBE requirements and it lacks effective credit management system in controlling the credit limit of
borrowers. The existing credit policy and procedure of the bank is encouraging flexibility to guide the
loaning activity. The bank has been continuously make sure that the NPL cases has transferred to
foreclosure process to get timely decision to reduce additional provision expense of the bank. But this
does not help the bank to effectively implement its loan recovery mechanism to reduce its bad loans.
Moreover, the bank has failed to make proper follow up on the loans availed whether they are
spending on the actual purpose of the loan requested and also the credit monitoring procedure is not
regularly reviewed and updated in the bank. Finally based on the findings of the study, the following
recommendations are given. The bank should checks the borrower history before granting loans and
properly assessed the customer ability to meet obligations in credit processing or appraisal system
and properly assess the customer ability to meet obligations. Besides, the bank should give sufficient
training to the customers on loan usage.

Key Terms: Credit Management, Credit portfolio, NPL

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 CHAPTER ONE
INTRODUCTION
1.1 Background of the study

The importances of financial institutions in any developed or developing economy, financial institutions
are not only easing the credit flow in the economy but also improve the productivity by stimulating
investment in the long run (Richard, 2011). Economic growth is possible with a sound financial sector
(Rajaraman and Visishtha, 2002). Economic growth in any country is classified into good performance
and poor performance. Good performance of those financial institutions is the symbol of prosperity. On
the other side, poor performances of those institutions hinder the economic growth and structure of the
particular region affects the whole world (Khan and Senhadji, 2001).

Credit creation is the main income generating activity for the banks. But this activity involves huge
risks to both the lender and the borrower. The risk of a trading partner not fulfilling his or her obligation
as per the contract on due date or anytime thereafter can greatly risk the smooth functioning of a bank‟s
business. On the other hand, a bank with high credit risk has high bankruptcy risk that puts the
depositors in jeopardy. Among the risk that face banks, credit risk is one of great concern to most bank
authorities and banking regulators. This is because credit risk is that risk that can easily and most likely
prompts bank failure (Conford A., 2000).

Proper credit management sound credit policy guide appropriate credit analysis using physical
analytical tools & insure timely follow up loan repayment after disbursements with the aim of averting
loans failing in arrears or overdue categorize. Regulation if credit is arrears through the collection
efforts & one reschedule exercises .In order to achieve smooth & good repayments & minimization of
none performing Loan (Anwar, 2013).

Lending is one of the principal tasks of all banks in any country working for profit. It is evident that a
substantial proportion of the total revenue of all banks in Ethiopia comes from interest on loan and
advances. Loan and advances comprise a very large portion of a bank‟s total assets. The strength of a
bank is thus judged by the soundness of its loan management. Wise and prudent policies and procedure

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with regard to credit management are considered important factors inspiring confidence in depositors
and prospective customer of a bank. This also holds true for Hibret bank S.C.

Bank lending is inherently risky; the risk can be minimized and controlled through a high professional
management of the lending function and through the formulation of prudent lending practice.

Credit management practice means the total process of lending starting from inquiring potential
borrowers up to recovering the amount granted credit. In the sense of banking sector, credit
management is concerned with activities such as accepting application, loan appraisal, loan approval,
monitoring, and recovery of non-performing loans. Banks take into account many considerations as a
factor of credit management, which helps them to minimize the risk of default that results in financial
distress and bankruptcy. This is due to the reason that while banks providing credit they are exposed to
risk of interest and principal repayment, which need to be managed effectively to acquire the required
level of loan growth and performance (Shekhar, 2005).

A strong and effective credit management practice is one that reinforces and compliments its
corporate objectives and goals. The main problem that banks encounter in credit administration is that
some of the granted credit facilities are not re-paid leading to a loss of depositor‟s funds and
emergence of bad debts. Therefore, it becomes a matter of convincing determination to assess Hibret
bank‟s credit management practice. Since the Non-Performing Loan (NPL) position of the bank has a
fluctuating tendency in the past few financial periods.

Hibret bank was incorporated as a share company on September 10, 1998 in accordance with the
commercial code of Ethiopia of 1960, with paid up capital of birr 24.8 million by 335 shareholders
(nbebank.com, 2021). Lending is one of the most important activities. It is evident that a substantial
proportion of the total revenue of all banks in Ethiopian comes from interest on loan and advances.
Hibret bank S.C. officially began its operation on September 21, 1998. The first branch, Beklobet
Branch, was officially inaugurated and started providing domestic banking services on October 1, 1998.
In 1998, the bank‟s deposits were birr 116 million, loan and advances 83 million, from 1998 onwards,
these financial indicators have shown a significant increase and in the fiscal year that ended June 30,
2012, the bank has registered birr 7.26 billion in total assets, birr 4.85 billion in deposits, birr 5.75

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billion in loans and advances, Currently, Hibret bank is a full service bank that offers its customers a
wide range of commercial banking services with a network of 339 branches and 9 sub-branches, and
a number of additional outlets on the pipeline.(UBAnnualReport,2020/21).

As stated above, credit management should be given special emphasis than that of the other operational
functions because of that the success or failure of financial institutions depends up on the good
performance of credit. Therefore, the purpose of this study is to examine the practices of credit
management in light of the practices of modern credit management in financial institutions.

1.2Statement of the Problem

Banking industry is a major source of finance for any type of business. Loan is one of the mechanisms
used by financial institutions as a major source of income. Also the process of repayment default is also
fraud for the institutions.

According to Colquitt (2014) the banking business is more sensitive due to more of their income will be
generated from credit given to their customers. This credit business operation exposes the banks to high
credit risk which leads to loss. Without effective credit risk management good bank performance or
profit will be unthinkable. Credit is mainly granted by banks. Banks manage credit properly the bank
has prepared policy and procedure of useable for adequate credit management practice. Based on this
the bank is creating short term, medium and long term credit facility to its customer. Credit
management has a profound implication both at the micro and macro level.

Credit Management refers to the efficient credit policy variables to ensure prompt collection of loans
granted to customers and at the same time boost their confidence in and loyalty to the bank Ankrah,
(2011). This is the function within the bank to control credit policies that will improve revenues and
reduce financial risks. It is an aspect of financial management involving credit analysis, credit rating,
credit classification and credit reporting. Sound credit analysis, credit rating, credit classification and
credit reporting standards are an excellent point of collectability performance and effective credit policy
management leads to enlargement of economy and construct the self-reliance of customer by reducing
the frequency and depth of loan problem Koch, (2005).

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Hibret bank S.C, like the other commercial banks in Ethiopia, is very successful in mobilizing deposits
from customers. However, the rate of the growth in loans and advances is not keeping pace with fast
growth of deposits on which the bank incurs cost. Based on the management report of June 2012, total
deposits (demand, fixed, and saving) is birr 4.85 billion and total loans and advances is birr 5.75 billion.
This fact underlies that serious moves should be made to enhance the bank‟s loan portfolio.

On the other hand, the bank‟s financial statement (annual report 2020/21) shows that on the average
2.72% in the level of the non-performing loans. As Hibret bank expands and reaches more customers, it
has also increased its exposure to risk. An increase in the non-performing loan portfolio is an indication
of the deterioration to the total portfolio. Due to the increasing amount of non-performing loans of
banks, the National Bank of Ethiopia (NBE) directs all commercial banks to review loans and advances
regularly and classify them in a manner consistent with five categories, which are pass, special mention,
substandard, doubtful and loss.

Regarding to Hibret bank, Non-performed Loan (NPL) calculated based on the National bank provision
calculation guideline. For instance, by 2020/21, NPL of Awash bank, Bank of Abyssinia and Dashen
bank are less than 3% (Annual report of Awash, Abyssinia and Dashen banks, 2020/21). The same
Hibret bank has less than 3% NPL in the year 2018/19, 2019/20 & 2020/21 and the following table
indicates NPL‟s position of the bank for the last three years and it is higher than other competitive
private banks of Ethiopia.

No. Year NPL %

1 2018/19 1.48%
2 2019/20 1.9%
3 2020/21 2.72%

(Annual Report of Hibret bank 2018/19, 2019/20, 2020/21)

Additionally, some researches were conducted in Ethiopia mainly focused on credit management
practice of different commercial banks. Saheb and Krishna (2018) assessed on credit risk management
technique and practice of Commercial Bank of Ethiopia and Awash Bank;Gedefaw, (2019) has

4
assessed credit risk management system and practice of four Ethiopian private commercial banks
Berhan International Bank S.C, Bunna International Bank S.C, Debub Global Bank S.C and Enat Bank
S.C. Hable, (2018) has assessed credit management practice of United Bank S.C. Sahlemichael, (2009)
has investigated credit management on Ethiopian Commercial Banks; many researches were focusing
on the effect of assessment of credit management practice. As a result, this paper is to assess and find
out what tools and techniques are used in the bank and to what extent their current performance are
supported by proper credit management practice policy, procedure and strategy and to what extent
Hibret bank can manage its credit management.

1.3 Research questions

This researcher tries to answer the following question:

 What are the major factors influencing the credit management practice of Hibret Bank s.co?
 What is the implication of loan performance in Hibret Bank‟s profitability (Performance)?
 How is the credit collection strategies adopted in the management of credit department in Hibret
Bank?
 How the Bank manage non - performing loan?
 What measures are taken by the bank to minimize non- performing loans?
 How appropriate is the credit processes and evaluation follow up system in the bank?

1.4 Objective of the study

1.7.1. General objective
 The general objective of the study is to evaluate credit management and practices of the bank and
recommend possible solutions.
1.5.2. Specific objectives
 To assess factor influencing the credit management practice of Hibret Bank s.co
 To assess the implication of loan performance in Hibret Bank‟s profitability
 To asses credit collection strategies adopted in the management of credit department in Hibret
Bank
 To assess how to Hibret Bank manages non - performing loan

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 To assess the measurements taken by the bank to minimize non- performing loans
 To assess the credit processes and evaluation follow up system of the bank
1.6 Significance of the Study

Among the various financial services given by banks, lending is the most important and principal
activity which generate higher profit and existence of the bank. The optimum utilization of efforts to
increase the bank‟s loan portfolio is unquestionable. Following this, the significance of this paper focus
emphasize on showing relative position of Hibret Bank in the banking industry in terms of total
deposits, loans, and advances and other performance measures especially which related to the credit
area. After assessing the problems associated with lending activity of the bank, this studies advance
recommendations that can provide possible solutions for the identified problems. Beside this, the
finding has significant in indicating the best practice and concepts for practical 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 and a reference for researchers
who are interested in the area to extend it further.

1.7 Limitation and Scope of the Study

1.7.1. Scope of the Study

The scope of the study is restricted to assess the credit management practice in case of Hibret Bank S.C.
at corporate level only in some selected directorates which are directly and indirectly engaged in the
same related role in the credit management process. All Hibret bank districts, Branches and other
financial institutions involved in the banking service are not included in the study due to shortage of
time and more importantly to make the study manageable, it has been delimited to only Hibret Bank
S.C.

1.7.2. Limitation of the Study

Because of financial, COVID 19 and time constraint, the study was conducted only in Hibret Bank head
office and other eight branches located under South East AA district (Bole Medhnialem, Wello Sefer,
African Venue and Millennium branches) and North Addis Ababa district (Meskel flower, Legahar,

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Sidist Kilo and Megenegna branches. Since banks are profit making organizations and most
information are held secret, assessing information as needed is a bit difficult.

1.8 Organization of the paper

The Study is organized into five chapters. The first chapter includes brief the introduction including
background of the study and the organization, statement of the problem, research questions, objectives
of the study, limitation of the study, scope of the study, significance of the study and organization of the
paper. The second chapter covers related literature review, the third chapter deals with the research
methodology part including the research design, the study area, the sampling techniques, data gathering
technique and instruments and data analysis techniques. In the fourth chapter presets the results &
discussion and in the fifth chapter conclusion & recommendations of the study were included

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 CHAPTER TWO
LITERATURE REVIEW
2.1. Introduction
The purpose of this chapter is to describe and document what has been written and recorded in different
manuals, magazines, journals, literatures and authors about Bank Credit Management and Practices. For
this particular study, the researcher has arranged under four sections that include the theoretical review,
empirical review, conceptual framework, research gap and conclusion.
2.2. Theoretical Review
2.2.1. Concept and definition of credit management practice

Credit is derived from a Latin word „creditum‟, which means to believe or trust. In economics, the term
credit refers to a promise by one party to pay another for money borrowed or goods or services
received. It is a medium of exchange to receive money or goods on demand at some future date, ML
JhiNGan (2002).

Another definition of credit is that has originated from the Latin word “credo” which means ,I believe
“credit is matter of faith in the person & not less than in the security offered credit is increasing a
purchasing power an individual organization derived from financial institution the total amount offset
of idle income held by depositors in the banks, or as a net addition to the total amount of purchasing
power .In facts no economy can function without credit all economic transactions today .It is the very
life blood of modern business & commercial system, K.C Shekhar ( 1974).

It is a term used to identify accounting functions usually conducted under the umbrella of Accounts
Receivables, Wise-geek (2010). Essentially, this collection of processes involves qualifying the
extension of credit to a customer, monitors the reception and logging of payments on outstanding
invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding
charges on a customer invoice. When functioning efficiently, credit management serves as an excellent
way for the business to remain financially stable.

Banks as financial institutions extend credit to their customers in f or m of loans, over drafts and off

8
balance sheet activities (i.e. letter of credit (LC) and guarantees). Banks grant credit to enhance their re
venues 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.

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. Credit management is a responsibility that
both the debtor and the creditor should seriously take. When it functions efficiently credit
management serves as an excellent instrument for the business to remain financially stable.

2.2.2. Credit Management Practice

According to Asiedu-Mante (2011) credit management practice involves establishing formal legitimate
procedures and policies that will ensure that the proper authorities grant credit, the credit goes to right
people, the credit is given for the productive activities or for businesses which are economically and
technically viable. The appropriate size of credit is given, the credit is recoverable and there is adequate
flow of management information within the organization to monitor the credit activity.

Loans management refers to the effective use of the four major credit policy variables to ensure that
there is quick collection of loan given to borrowers when due and at the same time improve on their
confidence and loyalty to the bank, Van Home (1995). Myers and Brealey (2003) consider credit
management to be made up of techniques and strategies used by an enterprise to ensure that an optimal
level of credit and its effective management are kept. This is one aspect of monetary administration
including credit examination, credit assessment, and credit scoring and credit reports.

Nzotta (2004) opined that credit management greatly influences the success or demise of banks and
other financial institutions. This is because the failure of deposit banks is determined largely by the
quality of credit decisions and thus the quality of the risky assets. He further notes that, credit
management provides a leading indicator of the quality of deposit banks‟ credit portfolio. One
important precondition for effective credit management is the ability to intelligently and efficiently
manage customer credit lines. He continued by stating that to reduce over exposure to bad debts,
overbooking and insolvency, financial institutions should have a better understanding of the financial

9
strength of customers, credit account history and evolution of payment methods of clients.

Office of the Controller of the Currency (2011, Ghana) defined Loan portfolio management as the
mechanism by which risks that are inherent in the credit granting process are controlled and effectively
administered. It involves evaluating the steps taken by management of financial service providers of
credit to identify and exercise adequate control over the element of risk throughout the credit delivery
process. Credit management starts with granting of a facility and does not stop until the full and final
payment has been made. Technically a transaction cannot be termed as complete until full payment has
been made. Good lending therefore ensures that the borrower follows the repayment plan set up for him
in a timely and prompt manner otherwise; this eventually leads to the total loss of interest that the
institution could have earned due to the opportunity cost of the loan, the risk involved and time value of
money.

Credit management is primarily concerned with the effective management of debtors as well as
judicious financing of receivables. The objectives of credit management can therefore be expressively
stated as safeguarding the portfolio of the banks‟ investments in debtors and maximizing shareholders
wealth. Policies and practices ought to be rigorously enforced for granting credit facilities to customers,
collection of repayments that are due and limiting the high risk factor of non-performing loans.

2.2.3. Process of Credit Management

The process of credit management begins with accurately assessing the credit -worthiness of the
customer base and his/her business viability. 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. As part of the evaluation process, credit management also calls for determining the total
credit line that will be extended to a given customer, Yalemzewed (2013).

According to Agyman (1987), several factors used as part of the credit management process to evaluate
and quality a customer for the receipt of some form of credits. These factors include;

10
 Gathering data on the potential customer‟s current financial condition, including the current credit
score.
 The current ratio between income and outstanding financial obligations
 Competent credit management which not only protects the vendor/bank from possible losses, but
also protects the customer from creating more debt obligation that cannot be settled in a timely
manner.
According to Edwards (2004), Banks Credit Management process can be summarized in three main
stages. Theses stages are:
 Credit initiation
 Documentation and disbursement
 Credit Administration
When the process of Credit Management function becomes, efficient, everyone involved benefits from
the effort. The vendor /bank has a reasonable amount of assurance that invoices issued to a client will
be paid within terms, or that regular minimum payments will be received on credit account balances.
Customers have the opportunity to build a strong rapport with the vendor and thus create a solid credit,
Habtamu ( 2015).

2.2.4. 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 that it
is operated consistently, Hagos( 2010).

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 control 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

11
be influenced by what other companies are doing.

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 of the
product or service and must be viewed as part of the overall competitive process. 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,
Hagos (2010).

2.2.5. Credit Administration

The credit administration refers to the credit support, control systems and other practices necessary for
the effective monitoring of credit risks taken by the Bank. Some of the important points of the credit
administration are:

 Control of Credit files.

 Safekeeping of credit and documentation files.
 Follow-ups for expirations of essential documents like CA's and insurance.
 Control of credits and excesses over approved lines.
 Monitoring of collateral inspections, site visits and customer calls.
 Monitoring of repayments under term credits.
 Reporting: the portfolio is periodically reviewed to make sure that the names tiered are still
complying with the risk acceptance criteria.
2.2.6. Credit Process

Banks succeed when the risks they assume are reasonable, controlled commensurate their resources &
credit competence. Lending officers must accurately identify measure & moorage, if their banks are to
succeed. Before a bank agrees to commit its funds to a company its credit officers have responsibility
to grasp the quantitative & qualitative details of each transaction thoroughly analyze its variables &
make adequate for their impact, P.Henry,( 1981).

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 2.2.6.1. 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 dependents,
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 Michael Danso (2015).

The loan application form makes provision for loans committee‟s member‟s approval signature and
rejection comment. This document is the most important document as far as the loan agreement
is concerned. It is the content of this document which the credit union 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 (Ibid).

2.2.6.2. Credit Information

Is information related to applicant performance & credit worthiness have to be collected from different
source carefully & as much as possible genuinely .Other banks could be useful sources. In resents time
national banks under go certain processes while dealing with credit .One of the means for alleviating
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.

According to article 36 of the Licensing and Supervision of Banking Business Proclamation No.

13
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, claims 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.
2.2.6.3. Credit Analysis

Credit analysis is the evaluation of borrower‟s capacity in properly servicing the loan. It is done to
ensure that loans are made in appropriate terms to clients who can and will pay it back. What analysis is
needed and in what scope, is primarily determined by the type and size of loan, but the ultimate purpose
is to place good loans so that both parties can benefit from it and meet their objectives. In properly
analyzing the credit worthiness of borrowers, lenders often look at some five factors that are known as
the five C‟s of credit. (James Ballard, 2003)

Credit analysis refers to the process of deciding whether or not to extend credit to a particular customer.
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 official attempts to evaluate a borrower‟s ability and willingness to repay (Koch, 1995).

14
Koch explained in his book that Eric Compton identified three district areas of commercial risk analysis
related to the following questions:

A. What risks are inherent in the operations of the business?

B. What have managers done or failed to do in mitigating those risks?
C. 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. The last question forces the analyst to specify how risks can be controlled so the
bank can structure an acceptable loan agreement.

Pandey (1990) and Kich (1995) stated in their book that there principal factors taken in to consideration
when granting credit. Pandey states 3c‟s of credit: character, capacity and capital, but Koch mentions 5
c‟s: character, capital, capacity, condition and collateral.

Character - It is the extent to which the borrower is willing to pay the credit .The debt repayment
capacity is useless without the will of the borrower to repay the debt character is about the manner of
the borrower interims of having a well defining purpose, a responsible attitude toward. Using the
borrowed sum responsibility, truthfulness, serious purpose, & intention to pay are important elements to
evaluating character. The credit officer can ensure this through serious interview. Example previous
credit experience which including manner of Meeting finical obligation with individual companies,
groups. E.g. that has good performance & character to pay their debt, James (2002).

Capital - The success of business depends on motivation attached to ownership interest; banks will
have to make sure that there is proportional risk of owners in the venture, hence the level of capital will
have to evaluate to ensure that the shoulder the risk party with ownership interest. In this connection
factors like customers net worth equity in horn & other assets should be taken as indictors, James,
(2002).

Capacity – It represents the debt payment capacity a good borrowers earning can be taken as indicator
of credit payment capacity .for instance, for a poor farmer, the capacity can be determined by looking

15
the possible discretionary income he/she can have .That income left after meeting requirements like
food, & clothing. The average family size should be taken in to consideration since it affects the
discretionary income to a large extent. A family with three members can have better discretionary
income than a family with six members because the total income that seem to be fixed is going to be
shared by large numbers as the family size increase .Another factor that can dictates the capacity of
borrower is the indebted of the borrower so far .for instance, if he is indebted to someone else (may be
to local informal money lender) he may use proceed he gets from selling. The product toward the
payment of his earlier debt, James (2002).

Condition – The environment surrounding them affects borrowers. For instance: climatic condition
(absence of rain for example) is one factor that affects agriculture sectors. Farmers are affected by
droughts, hails& an even rainfall. The ability of farmers to repay their debts is directly linked to such
risk in terms of successful crops, selling stocks etc…in addition to this market for the product is another
condition that affects the capacity of farmers to pay back their credits .for example; if the productivity
in other area of the country is good, then the prices of agriculture product will decline flow which
adversely affect the cash of the farmer. All conditions that can affect the borrower in the future should
be assessed before the credit is granted, failure to recognize such things may lead to bankruptcy
especially if the credit portfolio is concentrated on certain region, Lulseged (2002).

Collateral – collateral is the lenders secondary source of repayment or security in the case of default.
Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but it does
not justify lending proceeds when the credit decision is originally made.
2.2.7. The Loan System

The financial intermediary needs to establish the amount of credit risk latent in the credit proposal and
within the boundaries of that risk, a decision has to be made whether to accept or reject the proposal.
An effective credit management system provides the right framework for such decisions to be made
Puri and Poli (2013) For any provision of credit line within the retail sector for instance, a borrower
must have a pre-existing capacity to repay the loan either from his/her salary or income from self-
employed business or profession. But financing in the commercial sector is somewhat different.

16
A borrower is not always required to have a pre-existing capacity to repay a working capital or a term
loan that he or she seeks from the bank. The capacity to repay is built over the duration of the facility
with the help of the bank loan. As the borrower‟s business expands, incremental cash flows are
generated from which the debt can be serviced and repaid as per agreement. Growth of business in the
right direction supported by the bank credit drives the cash flow of the business upwards. It is the
assessment of incremental cash flows which helps the lender to determine the repayment capacity of the
borrower to meet loan obligations in a timely manner, Yaw Adu (2015).

Bank lending is premised on the assertion that the debtor has the willingness and capability to requite
the loan at all stages in their business transactions with the bank. However, the capacity to pay back
depends on future income streams and the disposition to repay has to be based on the pre-existent
commitment that has been undoubtedly demonstrated by the borrower. It is a statement of faith
because the lender relies largely on the debtor‟s ability and competence despite business downturns to
at least guarantee future cash flows and ensure the flow of regular payments. These are some of
the factors that are necessary in carrying out an effective appraisal of the customer and provide the basis
for making well-informed decisions as regards the credit granting process.

2.2.8. Proposed Lending Tools

The current economic difficulties crave for new credit management processes to be put in order to help
reduce the lending risk, Fatemi and Fooladi (2006). Consequently, several tools and technologies will
be discussed that have emerged from other research work which could be integrated in the management
of credit in the unions.

2.2.8.1. Credit Limits

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. Dekker (2004)
argues that the credit officers‟ responsibility is to set repayment period and principle amount that

17
would support the affordability of the customer.

Nevertheless, Bessis (2002) also states that the setting of credit limit could conflict with the
development of the financial institutions business volume as it will control the customer‟s rate of taking
Loans. Furthermore, he states that a shorter loan repayment period affects the interest income generated
by the banks. This further increases the possibility of customers not being able to meet their repayment
installment as it will increase big.

Consequently borrowers are needlessly grouped into a delinquency state (Dekker, 2004). Contrary to
this, Dekker (2004) indicates that the longer the repayment period of a loan facility the greater the
likelihood that borrower will default in repayment. This is due to the changing environment and
possibly the changing circumstance and situation of the borrower. Accordingly, the question then arises
that, are financial institutions employing a rigorous credit limit procedure in their credit assessment?
The amendment of credit unions system of credit assessment is to support their basic values of their
formation which is assisting their members in the time of difficulties.

2.2.8.2. Loan Rescheduling

Loan rescheduling is a process by which the loan repayment agreement is changed as a result of loan
default in loan repayment. Most credit unions have rescheduling policy in place which helps them to
minimize the effect of none performing loans. Practice that involves restructuring the terms of an
existing loan in order to extend the repayment period . Debt rescheduling may mean a delay in the due
date(s) of required payments or reducing payment amounts by extending the payment period and
increasing the number of payments.

In the other wards it refers to loans that have been restructured and re-negotiated between
authorized institutions and borrowers because of deterioration in the financial position of the borrower
or of the inability of the borrower to meet the original repayment schedule and for which the revised
repayment terms, either of interest or the repayment period, are non- commercial.

In line with this, Jensen (2016) states that, once the going concern value of a financial institution is

18
more than the liquidation value, its value of debt will have to be controlled in order to guarantee the
survival of the financial institution. A well-developed literature has focus on the borrower – lender
bargaining process in the design of debt contract (Hart and Moore 1998). At this point the new terms is
done in favor of the loan defaulter thus it is done to the ability of the loan defaulter. The essence is to
ensure that the loan does not go bad.

2.2.9. 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 call: 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.
 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. Collection letters are the first step in the
collection process for past due and overdue loan accounts.
 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

19
 force the debtor in to bankruptcy, thereby reducing the possibility of future business without
guarantying the ultimate receipt of overdue amount.
2.2.10. Credit Monitoring & Review

Proper credit risk management involves due credit analysis, having the position approved cash
disbursed & ultimately follows up the credit in order to have the extended credit repaid back. Many
good credits could become the problem of credits unless a continuous follow up made which enables to
detect signs that reveal difficulties. The objective of the credit monitoring & review, among the others,
include:

 Ensure that credits are directed to the intended purpose

 Ensuring that credit covenants are compiled with
 Follow up borrower‟s business condition
 Maintaining good quality of the credit
 Identify emerging problems
Attention should be given to the following particulars while condition of monitoring & review
credits (ibid).
 Check on all early warning signals
 Check the end of the credit funds
 Asses all condition of the credit funds
 State finding & interpret them/improvements, deterioration & changes

2.2.11. Non-Performing Loan (NPL)

Credit is concerned to be non-performing when principal or interest is due& unpaid for 90 days or
more. National bank of Ethiopia‟s directive No. SBB/32/2002, define non-performance loan whose
credit & validity has deteriorated, so that full collection of principal and/or interest in accordance with
the contractual terms of the credit is in question. Credit with pre-established repayment program shall
be considered non-performing when:-

20
 The debt remains outstanding for ninety consecutive days or more beyond the scheduled payments
date or maturity
 The debt exceeds the borrowers approved limit for ninety consecutive days or more
 Interest is due & uncollected for ninety days or more
 For over draft the account has been in active for ninety consecutive days and/or deposit are
insufficient to cover the interest capitalized during the period (IBF)
 Non-performing loan are whose credit quality is deteriorated, full, collection principal and/or
interest in accordance with contractual terms of the credit is in question.

Non-performing Loans represent bad loans, the borrowers of which failed to satisfy their repayment
obligations. Banks as intermediaries of funds are responsible for attracting resources and inject it in
various economic sectors. In the process of resources allocation, banks encounter several risks and
nowadays while making profits, one of the most important risks is default risk, which leads to increase
in non-performing loans (NPLs). Based on rules in banking system, the amount of non-performing
loans should not be more than 5% of remaining facilities of each bank, but increasing growth of NPLs
amount concerned officials and with considering the role of banks in the country‟s economy, this
phenomenon could be named a “national” concern (Ghasemi,2010).

Despite ongoing efforts to control bank-lending activities, non-performing loans are still a major
concern for both international and local regulators. To date there is no bank crises happened in Ethiopia
due to non-performing loans, but there is an indicator of high NPL in the country, which may lead to
that direction if not controlled on time (NBE, 2010).

2.2.12. 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

21
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.

1) Pass: - credits which are categorized fully protected by the current financial &paying capacity of
the borrowers.
2) Sub-standard:- Non-performing credit past due 90 days or more but less than 180 days shall at
minimum be classified sub-standard.
3) Doubtful: - Non-performance credit past due 180 days or more but less than 360 days will be
referred to doubtful
4) Loss: - Non-performance credit past due 360 days or more shall be classified as loss.

2.2.13. Credit Risk Management

According to Singh (2013) credit risk management includes all management function such as
identification, measurement, monitoring and control of the credit risk exposure. The writer further
indicated that for long term achievement of banking sector effective credit risk management practice is
a vital issue in the current business environment and poor credit risk management policy will create
serious source of crisis in the banking industry.

According to Atakelt (2015) credit risk management practice define as the process of analyzing and
renewing credit risk management documents and apply constantly in actual credit granting process,
credit administration and monitoring and risk controlling process with suitable credit risk environment,
understanding and identification of risk so as to minimize the unfavorable effect of risk taking activities
and the effectiveness of credit risk management process is dependent on different variables such as
proper application of best Risk management documents, staff quality, credit culture, devoted top
management bodies, sufficient training program, proper organizational structure, ample level of
internal control and performance of intermediation function. This indicates that credit risk
management includes different issues such as developing and implementing suitable credit risk strategy,

22
policy and procedure, accurate identifications of risk, best credit granting process, credit administration,
monitoring and reporting process determining and controlling the frequency and methods of
reviewing credit policy and procedure and setting authority and responsibility clearly. Besides he
mentioned that by establishing suitable credit risk environment, acceptable level of credit limit, best
credit granting process, proper monitoring and controlling credit risk and optimizing risk return of a
bank credit risk management develop credit performance.

Cebenoyan & Strahan (2004) examine empirically how active management of credit risk using loan
deal affects capital structure, lending, profits, and risk of banks. They find that banks which are Active
in the loan sales market hold less capital and make more risky loans than other banks. They conclude
that advances in credit risk management improve credit accessibility rather Than decrease risk in the
banking system.

The management of credit risk has become a key objective for all financial institutions across the world.
The goal of credit risk management is to maximize a bank‟s risk-adjusted rate of return by maintaining
credit risk exposure within acceptable parameters Basel (1999).

According to Anuj A. (2011) through designing and implementing a credit risk framework,
performing a credit risk assessment, building credit risk scoring models and credit risk reporting control
panel and forecasting loan loss we can construct effective credit risk management and he also believe
that most effective credit risk management focuses on processes, culture, people and organization
because we are working with them.

Credit risk management includes both preventive and curative measure. Preventive measure comprise
risk assessment , risk measurement , and risk pricing , early warning system to pick signal of future
default in advance and undertake better credit portfolio diversification. The curative measure aim at
minimizing post sanction loan losses through steps such as securitization, derivative trade, risk sharing
and legal enforcement, Jain (2014).

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 2.2.14. Credit Control

According to O. Fatima (2010) credit control is concerned with the post approval and monitoring of the
credit facility, to ensure that each credit remains qualitatively satisfactory during the tenure of the
credit. It is very important to monitor (control) the facility after it has been approved to ensure that:

A. the borrower complies with the stipulated conditions

B. The facilities are utilized with the purpose for which they were approved
C. Any deterioration or negative trends in the customers‟ business or prospects are determined and
corrective actions taken.

Credit controls also entail making some basic credit returns as required by the banking act for the
purpose of monitoring the banks total commitments to clients in a particular period. Based o n David
T.R‟s statement made on the Hong Kong Monetary Authority‟s Quarterly Bulletin of 1997 edition,
poor asset quality attributable to over-concentration and poor risk selection remains main causes of
problems in banks.

In maintaining sound credit controls, a clear credit philosophy, and ongoing management of credit
portfolio with a view to identifying early warning signals of deteriorating asset quality helpful. The
bank identifies three main causes of these asset quality problems, some of which were present in more
than one case. One could be over concentration, where the failure of one loan places the bank in
jeopardy. Another was specialization, where there was a concentration of loan book in one sector,
region, or group of individuals. The third one may be poor risk selection, where the bank extends loan
without correctly price a risk.

Office of the Comptroller of Credit Portfolio Management (1998) states that besides the loan policy, the
primary controls over a bank‟s lending activity is its credit administration, loan review, and audit
functions. Independent credit administration, loan review, and audit functions are necessary to ensure
that the bank‟s risk management process, management information systems, and internal and
accounting controls are reliable and effective. The bank‟s control functions can also provide senior
management and the board with a periodical assessment of how the bank‟s employees understand its

24
credit culture and whether their behaviors conform to the bank‟s standards and values.

2.3. Empirical review

2.3.1. Empirical Evidence from other countries

There is large number of empirical literature on the study of determinants of nonperforming loan with
macro level and bank specific analysis. Some of important studies that are relevant for this study are
reviewed as follows:

Saba et al (2012) determinates of nonperforming loan in US banking sector from 1985 to2010. They
employed correlation and regression tests. The study considers the Real GDP per Capita, Inflation, and
Total Loans as independent variables, and Non-Performing Loan Ratio as dependent variable. The
regression tests shows all the independent variables have significant impact on the depended variable,
however, values of coefficients are not much high.

On the other hand, Joseph et al (2012) examined the causes of non-performing loans in Zimbabwe.
They used descriptive analysis of interpreting factors affecting NPL. The paper revealed that external
factors are more prevalent in causing non-performing loans in CBZ Bank Limited. Their findings
indicated that non-performing loans were caused by internal and external factors. In the context of CBZ
Bank Limited, internal factors such as poor credit policy, weak credit analysis, poor credit monitoring,
inadequate risk management and insider loans have a limited influence towards non-performing loans.
However, external factors namely natural disaster, government policy and the integrity of the borrower
as the major factors that caused non-performing loans in CBZ Bank Limited.

In another study, Messai and Jouini (2013) tried to detect the determinants of non-performing loans for
a sample of 85 banks in Italy, Greece and Spain for the period of 2004 to 2008. They used
macroeconomic variables and specific variables to the bank as determinates of NPL. The
macroeconomic variables are included the rate of growth of GDP, unemployment rate and real interest
rate with respect to specific variables opted for the return on assets, the change in loans and the loan
loss reserves to total loans ratio (LLR/TL). After the application of the method of panel data, they found
that NPL is negatively with the growth rate of GDP, the return on assets and positively with the

25
unemployment rate, the loan loss reserves to total loans and the real interest rate.

In the contrary, Farhan M. et al, (2012) study the economic factors causing non-performing loans in the
Pakistani banking sector. The study was conducted via a well-structured questionnaire and data was
collected from 201 bankers who are involved in the lending decisions or analyze the credit risk or
handling non-performing loans portfolio. Correlation and regression analysis was carried out to
analyze the impact of selected independent variables (Interest Rate, Energy Crisis,
Unemployment, Inflation, GDP Growth, and Exchange Rate) on the non-performing loans of
Pakistani banking sector. Top 10 Pakistani banks were selected as a sample. According to the results
Pakistani bankers perceive that Interest Rate, Energy Crisis, Unemployment, Inflation, and Exchange
Rate has a significant positive relationship with the non-performing loans of Pakistani banking sector
while GDP growth has significant negative relationship with the non-performing loans of Pakistani
banking sector.

Shingjergji and Shingjergji (2013) also analyzed the nonperforming loans in the Albanian banking
system. They used a simple regression model. In the model are taken into consideration some
macroeconomic and banking factors that have contributed to increase the nonperforming loans level.
They found out that real effective exchange rate is positively related with the nonperforming loans
according to which the international competition of the economy of a country is an important
determinant of the credit risk. In other words any time there is a deterioration of the competition in a
country‟s economy the nonperforming loans level that derives from the main export sectors is likely to
increase.

In Kenya, Wanjiru (2013) examined the cause of nonperforming loan using multiple regressions over a
period of 2008 to 2012. The study revealed that non-performing loans of commercial banks in Kenya
are positively correlated with inflation rate. The study also found that non-performing loans are
negatively correlated with real interest rate and growth rate in loans.

Similarly, Evelyn Richard (2011) critically examined the reasons for non-performing loans (NPLs) in
commercial banks in Tanzania and strategies employed in dealing with NPLs. A semi-structured
questionnaire was administered to 48 bank officers from 14 commercial banks that provide corporate

26
loans and had been in operations for at least five years. Findings suggest that use of funds for purposes
different from agreed ones as a major factor that cause NPLs. Creating an environment to make banks
seen as problem solvers and trusted advisor to borrowers was cited as the main strategy towards solving
NPLs problems.

The study of Hippolyte Fofack, (2005) investigated the leading causes of nonperforming loans during
the economic and banking crises that affected a large number of countries in Sub-Saharan Africa in the
1990s using causality and pseudo-panel models. Empirical analysis shows a dramatic increase in these
loans and extremely high credit risk, with significant differences between the CFA and non-CFA
countries, and substantially higher financial costs for the latter sub-panel of countries. The results also
highlight a strong causality between these loans and, economic growth, real exchange rate appreciation,
the real interest rate, net interest margins and interbank loans, consistent with the causality and
econometric analysis, which reveal the significance of macro and microeconomic factors.

Ali S. and Iva (2013) who conducted study on “the impact of bank specific factors on NPLs in Albanian
banking system” considered Interest rate in total loan, credit growth, inflation rate, real exchange rate
and GDP growth rate as determinant factors. They utilized OLS regression model for panel data from
2002 to 2012 period. The finding reveals a positive association of loan growth and real exchange rate,
and negative association of GDP growth rate with NPLs. However, the association between interest rate
and NPL is negative but week. And also inflation rate has insignificant effect on NPLs.

Similarly, Shingjergji (2013) conducted study on the “impact of bank specific factors on NPLs in
Albanian banking system”. In the study, capital adequacy ratio, loan to asset ratio, net interest margin,
and return on equity were considered as a determinant factor of NPLs. The study utilized simple
regression model for the panel data from 2002 to 2012 period and found as capital adequacy ratio has
negative but insignificant whereas ROE and loan to asset ratio has negative significant effect on NPLs.
Besides, total loan and net interest margin has positive significant relation with NPLs. The study
justifies that an increase of the car will cause a reduction of the NPLs ratio. Besides, an increase of
ROE will determine a reduction of NPLs ratio.

Besides, Mileris (2012) on the title of “macroeconomic determinants of loan portfolio credit risk in

27
banks” was used multiple and polynomial regression model with cluster analysis, logistic regression,
and factor analysis for the prediction. The finding indicates that NPLs are highly dependent of
macroeconomic factors.

However, Swamy (2012) conduct study to examine the macroeconomic and indigenous determinants of
NPLs in the Indian banking sector using panel data a period from 1997 to 2009. The variables included
were GDP growth, inflation rate, per capital income, saving growth rate, bank size, loan to deposit
ratio, bank lending rate, operating expense to total assets, ratio of priority sector`s loan to total loan and
ROA. The study found that real GDP growth rate, inflation, capital adequacy, bank lending rate and
saving growth rate had insignificant effect; whereas loan to deposit ratio and ROA has strong positive
effect but bank size has strong negative effect on the level of NPLs.

Chirwa (1997) used a probity model to estimate the probability of agriculture credit repayment in
Malawi. The result indicated that crop sales, income transfers, degree of diversification and quality of
information are positively related while size of club negatively related to the probability of repayment.
Other factors like amount of loan, sex, household size and club experience were found to be
insignificant.

Keeton and Morris (1987), investigated the causes of loan losses for a sample of nearly 2,500 US
commercial banks for the period 1979–1985. Using simple linear regressions, they found out local
economic conditions along with the poor performance of certain sectors like agriculture and energy
explain the variation in loan losses recorded by the banks. The study also stated that commercial banks
with greater risk desire tend to record higher losses.

Hu et al (2006) examined the relationship of ownership structure, size of banks and income
diversification with NPLs of commercial banks in Taiwan with a panel dataset covering the period
1996-1999. The study shows that banks with higher government ownership recorded lower NPLs. Hu et
al (2006) also show that bank size is negatively related to NPLs while diversification has not found a
significant association with banks NPLs in Taiwan commercial banking sector.

A study by Rahman et al (2017) on the impact of financial ratios on non-performing loans of

28
Bangladesh commercial banks applied an econometric model to find out correlations among financial
ratios and a sample of 96 observations has been analyzed from 20 banks out of 30 listed commercial
banks during 2010-2015. The study mostly agrees with the existing literature that, credit-deposit ratio,
net interest margin have a positive influence on the non-performing loans and capital adequacy ratio,
return on assets have a negative influence on the non-performing loans. It also reveals that, sensitive
sector‟s loan, priority sector‟s loan have significant positive influence on the non-performing loans and
unsecured loans, profit per employee, investment deposit ratio have significant negative impact on
gross non-performing loan.

Salas and Saurina (2002) analyze problem loans of the Spanish commercial and savings banks and find
that credit risk is determined by microeconomic individual bank level variables, such as bank size net
interest margin, capital ratio and market power, in addition to real GDP growth.

Louzis et al., (2010) examined the determinants of NPLs in the Greek financial sector using dynamic
panel data model and found as real GDP growth rate, ROA and ROE had negative whereas lending,
unemployment and inflation rate had positive significant while loan to deposit ratio and capital
adequacy ratio had insignificant effect on NPLs.

Vogiazas and Nikolaidou (2011) investigated the credit risk determinants of the Bulgarian
banking sector by means of time series modeling approach covering the time period from January

2001 to December 2010. The results indicate that, the macroeconomic and financial markets‟ variables,
specifically the unemployment rate, the construction index, the industrial production index and the real
effective exchange rate jointly with the credit growth and the global financial crisis influence the NPLs
of Bulgarian banks.

2.3.2. Empirical Studies in Ethiopia

Different researchers were conducted on this area of studies in different financial institutions.

Tekeste (2016) in his study assessment of credit management performance in emerging private
commercial banks in Ethiopia: the case of Berhan international bank S.C. The main purpose of the
study was to assess the performance of credit management of Berhan international bank as compared

29
to National bank requirements vis-à-vis its loan policy and procedures. The methodology used for the
study is population census for bank staff and convenience non- probability sampling for clients to
verify the bank respondents as the bank is the main study. The major findings of the study show that
impeding loan growth and rising loan clients complaint on the bank are regarding the lengthy of loan
processing, amount of loan processed and approved, loan period, and discretionary limits affecting the
performance of credit management.

Wendemagegnehu (2012) in his study on Determinants of non-performing loans: the case of Ethiopian
banks. The study intends to assess determinants of nonperforming loans. The researcher used mixed
research approach for the study. Descriptive statistics was employed to analyze data and the results
were tested with non-parametric tests of significance. Structure questionnaire was distributed for the
survey in both private and state-owned Banks in Ethiopia to fill by professionals holding different
positions. The findings of the study showed that the causes for loan default are 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
default by borrowers and their knowledge limitation, fund diversion for unintended purpose,
over/under financing by banks.

Geletta (2012) in his study on determinants of non- performing loans the case of Ethiopian Banks,
using descriptive statistics approach that focus on Bank specific NPLs determinant variables; indicated
that Poor credit assessment ascribing to capacity limitation of credit operators, institutional capacity
drawbacks and unavailability of national data for project financing that had also led to setting terms
and conditions that were not practical and/or not properly discussed with borrowers had been the cause
for occurrences of loan default.

Geleta (2012) also despite the fact that credit monitoring/ follow-up plays pivotal role to ensure loan
collection failure to do this properly was also found to be causes for sick loans. The research also
indicated that over financing due to poor credit assessment, compromised integrity of credit operators
were cause for incidences of NPL. In fact, cases of under financing loan requirement that meant
shortage of working capital or not being able to meet planned targets were associated with defaults. In
addition, the study also found out that due to underdevelopment of credit orientation/culture borrowers

30
engaged in business that they had no depth knowledge, diverted loans advanced for unintended
purpose and at times made a willful default.

Seyoum, et.al,(2016), in his study on the “specific factors for non-performing loans” by using
descriptive statistics (Mean, median, mode, standard deviation). Poor credit assessment and credit
monitoring are the major causes for the occurrence of NPL in DBE. Credit size (includes
aggressive lending, compromised integrity in approval, rapid credit growth and Bank‟s great risk
appetite); high interest rate, poorly negotiated credit terms and lenient/lax credit terms, and elongated
process of loan approval were Bank specific causes for the occurrence of nonperforming loans. On the
other hand, poor credit culture of customers, lack of knowledge of borrower for the business they
engaged in, willful default, loan diversion, and project management problems were identified as the
major customer specific causes of NPL.

2.4. Research gap

In general, the above empirical studies can be categorized as External/ macroeconomic factors, Bank
specific factors and Borrower specific factors. External /macroeconomic factors includes, government
policy, interest rate, unemployment, inflation, GDP growth, exchange rate, sensitivity to change in
stock market, sensitivity to change in inflation, economic cycle, asset and house price, currency
depreciation are major external determinants of loan default.
Bank specific determinants of non-performing loans are also identified by various empirical studies as
week credit assessment, lack of proper skill by the loan officers, long loan processing/approval time,
agency problem, poor credit policies, loan recovery procedures, lenient credit terms and conditions,
credit growth, poor credit assessment, failed loan monitoring, aggressive lending, compromised
integrity, ownership structure of the bank, bank size and weak institutional capacity , un fair
competition among banks, poor asset quality, poor corporate governance and risk management practice
are the major Bank specific determinants of loan default.

And borrower specific determinants of non-performing loan are identified by various studies as
uncompromised integrity of the borrower, lack of technical training for loan beneficiaries, under-
developed credit culture, and willful default by the borrower, knowledge limitation of the borrower,

31
fund diversion for unintended purpose and misuse of loan amounts states as a reason for loan default.

Varies determinants of NPL have been identified by various literature. As stated earlier, these
determinants have been categorized under External/macro-economic factors, Bank specific factors and
Borrower specific factors of loan default; however, there are still gaps identified in empirical
literatures discussed above.

The studies conducted were focused on some bank specific factors. But for non- performing loans this
are not the only factors, there are also specific factors that will lead the loan to become NPL. Most of
the studies are conducted in developed countries but very few studies are conducted in Ethiopia context.
Therefore this study aim to fill the previous studies gap on research made on Hibret bank S.C. by
applying different techniques of risk management tools like risk identification, risk understanding, risk
evaluation, monitoring and controlling. According to the researcher those tools are major tools for
assessing credit management practice. This study uses to measure the credit management practices of
Hibret bank S.C. through collecting primary data and secondary data, the questionnaires were adapted
to staffs of the bank.

32
 CHAPTER THREE
RESEARCH METHODOLOGY
3.1. Introduction

This chapter deals with research design and methodology that was used to carry out the research. In
this stage, most decisions about how research was executed and how respondents were approached, as
well as when, where and how the research was completed is discussed. Therefore, in general this part of
the study describes the research design and methodology that were used to guide the study under the
following sub-headings: the research approach, research design, sampling design, source of data, data
collection methodology data collection instrument, data analysis methods and validity and reliability.

3.2. Research approach

The research approach in this study is chosen based on the purpose and the research questions set out to
be addressed. By doing this, the study aimed to describe, and interpret the current credit management
practice of the bank. The techniques used to collect data is by distributing a questionnaire and interview
to respondents those worked on credit business department specially directors, managers and senior
officers of the departments at head office level. Accordingly, to achieve the research the objective of
this study and answer the research questions mixed methods approach were employed to obtain
understanding about the problem related to credit management and in order to benefit from the
advantages of both quantitative and qualitative approaches.

3.3. Research design

According to Babies (2003), a research design is the program that guides the investigator in the process
of collecting, analyzing and interpreting observations. It provides a systematic plan of procedure for the
researcher to follow. The design of this study is descriptive type because it describes the overall
practices of Credit Management of Hibret bank S.C.

33
 3.4. Population and Sampling procedures
3.4.1. Target Population

A population is also known as a “universe” refers to all the items in the field of inquiry (Kumar, 2008).
As indicated in the sampling technique below, the target population of this study is 79 credit department
employees who are involved in credit processing and administering at Hibret bank. This means
department heads, division heads; branch managers who are working at the selected branches, Assistant
branch managers, Loan section heads, Loan officers, Loan supervisor, and Loan Committee members
are included in the target group.

3.4.2. Sampling technique and sample size

In this study, respondents were selected using a purposive sampling technique. The rational for using
this sampling technique was because it helps to focus on people who are directly involved in credit
operations. On other words, purposive sampling is used to generate the data from the employees that
are directly engaged in the operation of the credit business of the bank.

Table 1 Lists of selected branches and sample respondents

District Grade Selected Branch Population Total number of

size sample
Hade office Hade office 63 63
South A Bole Medhanialem 2 2
East AA Wello Sefer 2 2
B African Venue 2 2
Millinum 2 2
North AA A Meskel Flower 2 2
Legehar 2 2
B Sidist Kilo 2 2
Megenagna 2 2
Total 9 79 79

Source: Hibret bank HR working document, 2021

34
With regard to the sample size of this study, it is considered all employees who are engaged in credit
and credit related operation at head office level and selected branches. Those employees are particularly
credit analysts, experts, managers, directors, on the same process at head office. Because it is the focal
area and many of the credit requests of Hibret bank are now being processed in central head office. So,
in central (head) office‟s credit business department there are 63 employees and 16 employees at
branches, who are engaged on credit and credit related operations and those are as a whole were taken
as participants of the study.

3.5. Sources of Data

To collect the necessary data, both primary and secondary data sources were employed.

3.5.1. Primary sources of data

The primary source of data was collected through the use of self- administered questionnaires and
interviews. The questionnaire was used as an instrument to collect primary data from the respondents
about their opinion at every question that designed to evaluate the credit management practice of the
bank. The questionnaire has two parts, the first part focused on general characteristics of the
respondent, and the second part of the questions focuses on the credit management practices of the
bank.

3.5.1.1. Questionnaire

The main primary source of data was through the use of questionnaires. The questionnaire was
structured in close- ended questions by which the respondents were asked to indicate their level of
agreement using a five scale likert rating measurement and was distributed to Hibret bank staffs. 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.

35
 3.5.1.2. Interview

The word "interview" refers to a one-on-one conversation between an interviewer and an interviewee.
In undertaking this research, face -to-face interview 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.

3.5.2. Secondary source of data

Secondary data was obtained from reports of the Bank, published and unpublished articles or thesis,
books and organizational brochures. Secondary data were collected from annual report (2018/19-
2020/21) of the bank related journal, in order to strength the result and findings of the study the
researcher examined the finding and conclusion some related research. This helped to see what others
say about the subject matter, what are their findings and recommendations.

3.6. Data collection methods

In order to achieve the research objectives, both primary and secondary data were collected. The
questionnaires were used because they are straight forward and less time consuming for both the
researcher and the participants (Owens, 2002). The questionnaire includes both the close - ended
questions. Questionnaires are appropriate for studies since they collect information that is not directly
observable as it is inquire about feelings, motivations, attitudes, accomplishments as well as
experiences of individuals (Borg and Gall, 1996). The questionnaire was prepared in two parts. The
first part was prepared to collect some basic demographic data and the second part to collect data
related to the research questions.

36
 3.7. Data analysis methods

This study used descriptive statistics. It addresses the objectives of the study by assessing the
organization‟s credit management practice and providing elaborative description of the bank. The data
collected via the questionnaire was recorded, encoded with the help of a Statistical Package for Social
Sciences - SPSS version 26 and analyzed using descriptive statistics.

In this study, the descriptive statistics such as percentages and frequency distribution were used to
analyze the general profile of the participants. And the study used Mean values to interpret data on the
key research questions.

Table 2 Interpretation Responses

Rating scale Mean Range Interpretation Response Made
1.0 - 1.7 strongly disagree Very low
1.8 - 2.5 Disagree Low
2.6 - 3.3 Neutral Not Sure
3.4 - 4.1 Agree High
4.2 - 5.0 Strongly Agree Very High
Source: Andrich, 1978
3.8. Validity and reliability
3.8.1. Validity

Validity refers to the test of the level of ability and appropriateness of measurements to measure so that
differences in individual scores can be taken as representing true references in the characteristics under
study. The content validity will be used to determine the validity of the instruments. In subjecting the
tools to validation, the process started by discussing with the supervisor of the study who
scrutinized all the questions in the tools to assess their appropriateness in addressing critical issues
in the study ARAKA et al (2018).

37
 3.8.2. Reliability

Reliability indicates consistency in test, survey and observation. It is the ability of research instruments
to consistently yield the same results when repeated measurements are taken under same condition
Sharma (2012). The most common method to test reliability is a Cronbach‟s alpha index. This study
also implemented this method to check reliability of the constructs. It is recommended the value of 0.5
is a sufficient value and 0.7 is a more reasonable value. All variables were assessed through this test.

38
 CHAPTER FOUR
ANALYSIS, RESULT AND DISCUSSION
4.1. Introduction

This chapter highlighted the analysis of the data and discussed the major findings of the study in
relation to the credit management practice of Hibret bank. The findings of the study are analyzed based
on the specific objectives and hypotheses of the study. In this chapter respondent‟s profile, descriptive
analysis, correlation analysis and regression analysis are discussed, which were collected from the
primary data source using questionnaire from employees of Hibret bank S.C specifically credit involved
staffs and secondary sources collected from the banks‟ annual reports, manuals and databases.

A total of 84 questionnaires were distributed to the respondents, which were current employees of
Hibret bank S.C, and 79 respondents were correctly filled and returned the questionnaire with a
response rate of 94%. The remaining 5 respondents didn‟t respond and never returned the
questionnaire.

4.2. Demographic Characteristics of Respondents

Based on the questionnaire‟s this assesses some demographic information/profile of the respondents.
Demographic profiles of the respondents were analyzed using descriptive analysis with the help of
SPSS. The demographic nature of the employee has a great contribution in the credit management
systems of the loan in understanding the credit policies, procedures as well as exercising and improving
it when demanded. Therefore, in this process the demographic characteristics of respondents like
educational level, field of specialization and credit related experience are assessed.

39
 Table 3 Socio Demographic Characteristic of the study participants
No Demographics Frequency Percentage
1. Gender Female 38 48
41 52
Male

Total 79 100

2. Educational level First Degree 51 65

28 35
Master‟s Degree

Total 79 100

3. Field of specialization Accounting 18 23

Management 33 42
Economics 7 9
Business Administration 21 27

Total 79 100

4. Position of respondents Managerial 19 24

Expert and officers 60 76

Total 79 100

5. Credit related experience < 1 year 7 9

1-5 years 19 24
6-10 years 28 35
More than 10 years 25 32

Total 79 100

Source: survey data, 2021

As shown in the table above (Table 3), from 79 respondents, 48% were females and the rest 52% were
males. This showed that the proportion males are higher than females, who are working on the credit

40
management units.

Educational background of employee is an important factor to be considered with regard to making

credit business decision. As indicated on the table above (table 3) , majority (65%) of the respondents
were first degree holders and the remaining 35% were master degree holders. Based on this finding, all
loan service users had high literacy rate and well qualified to understand about the credit management
practice. This indicated to succeed as a credit professional they need to upgrade their educational level
constantly.

Regarding the field of specialization of the respondents, majority (42%) of them were specialized by
management and the remaining 27%, 23% and 9% of the respondents were specialized by business
administration, accounting, and economics respectively. Field of specialization is an important factor to
be considered with regard to conduct the credit business operation at professional way. This implies
that the majority of the respondents working in credit area are graduates of business and business-
related fields and they have adequate professional mix for the area and this enables them to undertake
the credit management operation professionally because credit management is one element of business
administration.

As indicated in the table above (table 3), concerning the position of the respondents, majority of the
respondents (76%) were at the position of experts and officers and the remaining 24% were at
managerial position. The experts and officers are assigned on the activities of credit business operation
such as on corporate credit, commercial credit, credit underwriting, workout loan and credit portfolio
management and the managers supervised them, and approved the operation done by experts and
officers.

Regarding the professional experience of the respondents, as indicated in the table above (table 3),
majority of the respondents has more than 5 years‟ experience. In this regard, 35% and 32% of them
have 6-10 years and greater than 10 years‟ experience which helps the researcher to obtain good quality
of data on credit granting, monitoring and controlling process of the bank. The remaining 24% and 9%
have 1-5 years and less than 1 year experience. The results revealed that, majority of the respondents
have an ample experience.

41
 4.3. Assessing the Bank’s Credit Management Practice
Table 4 Practical loaning activities and alignment against NBE requirements

No Strongly Agree Neutral Disagre Strongly Total Mean SD

e Disagree
Agree
Fre % Fre % Fre % Fre % Fre % Fre %

1 The bank credit management has a 16 20 45 57 - - 13 16 5 6 79 100 3.68 3.35

policy for credit provisioning and 3.11
write-off that are aligned with NBE
requirements.
2 The bank maintains effective credit 6 8 24 30 2 3 38 48 9 11 79 100 2.75 2.51
management system to control the
single borrower limit while
extending additional loan.
3 The existing credit policy and 10 13 29 37 1 1 26 33 13 16 79 100 2.96 2.77
procedure of the bank is
encouraging and flexible to guide
credit activities of the bank.
4 Client appraisal considers the 15 19 22 28 3 4 27 34 12 15 79 100 3.01 2.84
character of the customers seeking
credit facilities.
5 To better the state of 18 23 24 30 - - 23 29 14 18 79 100 3.11 2.96
management of credit, reviews
concerning collection policies have
been done on a regular basis.
6 Client appraisal makes proper 7 9 18 23 - - 35 44 19 24 79 100 2.48 22.32
analysis on the cash flow statement
of a borrower while deciding on .
loan repayment schedules. 4
7 The practical loan processing 19 24 30 38 2 3 20 25 8 10 79 100 3.41 3.17
and appraisal activities of the 8
district offices comply with the
banks credit policy and procedure.
8 The credit management at a district 21 27 37 47 - - 15 19 6 8 79 100 3.66 3.36
level improves the credit control of
the bank.
9 Imposing loan size limits is a viable 24 30 32 41 3 4 17 22 3 4 79 100 3.72 3.41
strategy in credit management.
Source: survey data, 2021

The majority respondent agreed with the mean and SD of 3.68 and 3.35 this implies that the bank credit

42
management policy of credit provisioning and write-off are aligned with the NBE requirements under
table 4 item (Q1) shows that 20% of the respondents strongly agreed, 57% agreed, 16% are disagreed
and 6% strongly disagreed. This implies that the bank credit management policy for provisioning and
write-offs comply with asset classification and provisioning directive of the central bank.

As the NBE directive no SBB/53/12 requires banks to maintain their single borrower limit up to 25% of
their paid up capital. Regarding this the researcher desires to investigate the activity of the bank in
controlling the borrowers limit as per the bank procedure and NBE requirements As shown on table 4.6
item (Q2) majority of respondents were strongly disagree with the mean 2.75 and SD 2.51. As indicate
8% of the respondents strongly agreed, 30% agreed, 3% are neutral, 48% are disagreed and 11%
strongly disagreed. This entails that there is lack of effective credit management system in controlling
the credit limit of borrowers.

Respondents were questioned whether the existing credit policy and procedure of the bank is
encouraging and flexible enough to guide the loaning activity as indicated under table 4 item (Q3) they
were disagree with a mean of 2.96 and SD 2.77 respondent shows that 13% of the respondents strongly
agreed, 37% agreed, 1% are neutral, 33% are disagreed and 16% strongly disagreed. This finding
implies that the current credit policy and procedure of the bank is not encouraging and flexible enough
to attract and satisfy the credit demand of customers.

Respondents were questioned whether the client appraisal considers the character of the customers
seeking credit facilities as indicated under table 4 item (Q4) they were disagree with a mean of 3.01 and
SD 2.84.This table shows that 19% of the respondents strongly agreed, 28% agreed, 4% are neutral,
34% are disagreed and 15% strongly disagreed. This finding implies that the client appraisal does not
consider the character of the customers seeking credit facilities.

Regarding this, under table 4 item (Q5) respondents were asked whether regular reviews have been
done on collection policies to improve state of credit management .As a majority of the respondents
agree with the mean of 3.11 and SD of 2.96 result shows that 23% of the respondents strongly agreed,
30% agreed, 29% are disagreed and 18% strongly disagreed. This implies that the collection policy of
the bank is regularly reviewed to improve state of credit management.

43
On table 4 item (Q6) respondents were asked whether Client appraisal makes proper analysis on the
cash flow statement of a borrower while deciding on loan repayment schedules. Majority of
respondents were disagree with mean value of 2.48 and SD 2.32. 9% of the respondents strongly
agreed, 23% agreed, 44% are disagreed and 24% strongly disagreed. This indicates that there is poor
analysis cash flow statement of borrowers before approval of the loan repayment period.

On table 4 item (Q7) respondents were questioned whether the practical loaning activities at district
offices comply with the banks credit policy and procedure. Majority of respondents agree with the
mean value of 3.41 and SD 3.17 24% of the respondents strongly agreed, 38% agreed, 3% are neutral,
25% are disagreed and 10% strongly disagreed. This denotes that the practical loaning activity of
district offices comply with credit policy and procedure of the bank.

Previously Hibret bank credit appraisal and administering process were done centrally at head office.
Loan requests were processed, approved and administered at the head office but currently the bank has
disseminated its credit operation to district offices, Regarding this, under table 4 item (Q8) respondents
were asked whether the credit control of the bank were improved after the credit processing and
administering is disseminated to district offices. The majority of respondents agree with the mean
value of 3.66 and SD of 3.36. 27% of the respondents strongly agreed, 47% agreed, 19% are disagreed
and 8% strongly disagreed.

Barusa‟s (2011) view that in setting up the credit limit, considerations must be taken to maximize the
returns in terms of the sales and also the financial strengths of the customer to ascertain whether he will
be able to pay the credit obligation. Regarding this respondent were asked whether imposing credit
limit is viable strategy in credit management under item (Q9) majority of respondents were agreed on
the issue by mean value of 3.72 and SD 3.41. 30% of the respondents strongly agreed, 41% agreed, 4%
are neutral, 22% are disagreed and 4% strongly disagreed.

44
 4.4. Non-Performing Loan Management
Table 5 Management of non-performing loan by the bank .

No Strongly Agree Neutral Disagree Strongly Total Mean SD

Disagree
Agree
Fre % Fre % Fre % Fre % Fre % Fre %

1 The bank effectively implements 12 15 22 28 2 3 29 37 14 18 79 100 2.86 2.7

its loan recovery mechanism to
reduce its bad loans.
2 The bank continuously make sure 19 24 30 38 1 1 20 25 9 11 79 100 3.38 3.15
the NPL cases transferred to
foreclosure process get timely
decision to reduce additional
provision expense of the bank.
3 Collateralizing loans help protect 14 18 19 24 3 4 32 41 11 14 79 100 2.91 2.73
loan default.
4 Assessments of secondary source 20 25 32 41 - - 18 23 9 11 79 100 3.46 3.22
of repayments help the bank as
another fallbacks for outstanding
loan balances of non-performing
borrowers account.
5 The bank make proper follow up 8 10 19 24 2 3 35 44 15 19 79 100 2.62 2.44
on the loans availed whether they
are spending on the actual
purpose of the loan requested.
6 Poorly assessed and advanced 7 9 21 27 - - 37 47 14 18 79 100 2.62 2.43
loans may perform well if
properly monitored.
7 The bank prepares regular report 11 14 23 29 - - 33 42 12 15 79 100 2.85 2.67
on selected credit accounts to help
reduce future failures.
8 Collection policies available have 5 6 29 37 - - 30 38 15 19 79 100 2.73 2.54
helped in effective management
of credit practices.
9 Each districts having their own 17 22 31 39 - - 22 28 9 11 79 100 3.32 3.09
credit monitoring and follow up
team would sustainably reduce
the bank NPL.
Source: survey data, 2021

45
As per the response result that is indicated under table 5 item (Q1) respondents were with mean 2.86
and SD 2.70. 15% of the respondents strongly agreed, 28% agreed, 3% are neutral, 37% are disagreed
and 18% strongly disagreed. On the statement the bank effectively implements its loan recovery
mechanism to reduce its bad loans. As the majority of the respondents disagree on the effective
implementation of loan recovery mechanism the bank towards reduction of bad loans it indicates that
the loan recovery mechanism of the bank is not sufficiently implemented to reduce bad loans.

According to Solomon (2013) point out that the major contributing factors for the increment of NPL in
NIB bank are poor risk assessment, poor monitoring/follow-up, credit culture and relaxed credit terms.
Foreclosure is a legal process in which the bank attempts to recover the amount of loan granted to the
borrower who has stopped making payments by forcing the sale of the asset used as the collateral for
the loan and timely decision must be made on the sale of the collateralized property to avoid additional
costs and other related risk that might be faced by the bank. Regarding this under table 5 item (Q2)
respondents were asked whether the NPL cases that are transferred to foreclosure process get timely
decision to avoid additional provision expense and reduce the ratio of NPL. The majority of the
respondents with mean 3.38 and SD 3.15 were agreed on the issue.24% of the respondents strongly
agreed, 38% agreed, 1% are neutral, 25% are disagreed and 11% strongly disagreed. This shows that
the foreclosure cases get timely decision.

In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure

repayment of a loan. The collateral serves as a lender's protection against a borrower's default and so
can be used to offset the loan if the borrower fails to pay the principal and interest satisfactorily under
the terms of the lending agreement. Regarding this under table 5 item (Q3) respondent was asked
whether collateralizing loans help protect loan default. Accordingly, majority of the respondents were
disagreed with mean 2.91 and SD 2.73. 18% of the respondents strongly agreed, 24% agreed, 4% are
neutral, 41% are disagreed and 14% strongly disagreed. This reveals that borrowers pledged asset
cannot protect a loan from being defaulted.

Responses have agreed for the statement that assessment of secondary source of repayments help the
bank as other fallbacks for outstanding loan balances of non-performing borrowers. Evidenced under

46
table 5 items (Q4) by mean value of 3.46 & SD 3.22 .25% of the respondents strongly agreed, 41%
agreed, 23% are disagreed and 11% strongly disagreed. This implies that assessing for additional source
of repayment will help the bank recover outstanding loans in case the initial collateralized property or
business defaults.

As shown on table 5 item (Q5) respondents were disagree with 2.62 mean and SD 2.44 .10% of the
respondents strongly agreed, 24% agreed, 3% are neutral, 44% are disagreed and 19% strongly
disagreed. On the statement that the bank makes proper follow up on the loans availed for they are
spend on the actual purpose of the loan requested. This indicates that there is lack of proper follow up
for actual outlay of the loan after it is granted.

As indicated under table 5 item (Q6) majority of respondents didn‟t support the argument that loan
would perform well only by proper monitoring even if they are poorly assessed while advancing the
credit this is evidenced with mean value of 2.62 and SD 2.43. 9% of the respondents strongly agreed,
27% agreed, 47% are disagreed and 18% strongly disagreed. This indicates that follow up would never
substitute credit assessment.

According to the respondents under table 5 item (Q7) results showed that regular reports are not
prepared on selected credit accounts to help the bank reduce future failures, this statement is evidenced
with the mean value of 2.85 and SD 2.67. 14% of the respondents strongly agreed, 29% agreed, 42%
are disagreed and 15% strongly disagreed. This shows that there is lack of follow up on the selected
credit accounts so as to detect early sign of future repayment failures.

As shown on table 5 item (Q8) respondent were disagree with mean of 2.73 and SD 2.54. 6% of the
respondents strongly agreed, 37% agreed, 38% are disagreed and 19% strongly disagreed. That the
available collection policies have helped in effective management of credit practices. This indicates that
the collection policy must be organized in such a way that it would help to the management of credit
activities effectively.

Solomon (2013) shows on his study NIB bank have adequate policy procedure and defined credit
granting criteria and the bank lend by properly checking the borrower‟s history and follow up. The

47
 other researcher Norton and Andenas (2007), concludes that the future performance of the credit
doesn‟t grant only through conducting effective credit appraisal and credit worthiness evaluation work,
instead to assure the long-lasting sustainability and health of the project the financial institutions should
conduct regular follow up works. Regarding question presented under table 5 item (Q9) respondents
were questioned that district offices having their own credit monitoring and follow up team would
sustainably reduce the bank NPL. Accordingly, the respondents with mean 3.32 and SD 3.09 were
agreed on the issue. 22% of the respondents strongly agreed, 39% agreed, 28% are disagreed and 11%
strongly disagreed. This indicates that the bank maintaining credit monitoring and follow-up staff at all
district offices would strengthen the credit management of the bank and enable the bank to sustainably
reduce its non-performing loans.

4.5. Credit monitoring process

Table 6 Credit monitoring process

No Strongly Agree Neutral Disagree Strongly Total Mean SD

Disagree
Agree
Fre % Fre % Fre % Fre % Fre % Fre %

1 The bank strictly monitors loan terms 42 53 25 32 - - 10 13 2 3 79 100 4.2 3.83

and conditions that have been stipulated
at the time of loan approval.
2 The bank uses a loan covenant 19 24 37 47 3 4 16 20 4 5 79 100 3.65 3.33
checklist that routinely tracks its
customer‟s adherence to covenants.
3 The bank regularly reviews and 41 52 33 42 - - 5 6 - - 79 100 4.39 3.94
monitors the performance of Credit
quality at individual level.
4 The bank regularly reviews and 19 24 47 59 - - 13 16 - - 79 100 3.91 3.5
monitors the performance of credit
quality at portfolio level
5 Credit file is regularly updated in our 40 51 35 44 4 5 - - - - 79 100 4.46 3.97
bank.
6 The bank has properly applied its own 45 57 28 35 6 8 - - - - 79 100 4.449 4.01
internal risk rating system.
7 Credit monitoring procedure is - - 12 15 4 5 31 39 32 41 79 100 1.95 1.71
regularly reviewed in our bank.

48
8 Credit monitoring procedure is - - 16 20 - - 27 34 36 46 79 100 1.95 1.76
regularly updated in our bank.
Source: survey data, 2021

As indicated in table 6 item (Q1) respondents were requested about the bank strictly monitors loan
terms and conditions that have been stipulated at the time of loan approval; majority of respondents
with mean of 4.20 and SD 3.83 strongly agree. 53% of the respondents strongly agreed with this point,
32% agreed, 13% disagreed and the remaining 3% of the respondents are strongly disagreed. As it is
showed that most of the respondents replied as the bank strictly monitors loan terms and conditions that
have been stipulated at the time of loan approval. This implied that the bank ensures the fulfillment of
the contract terms and conditions of the client to identify and take corrective action if there are any
changes in the ability to repay the loan. According to Desalegn (2014) the risk management policy,
procedure and limit are adequate to identify, measure, monitor and control risk of banks. It should have
well established internal control system, which includes segregation of duties, clear management
reporting lines and adequate operating procedure. The finding on monitoring and controlling
of credit, Solomon (2013) concluded that there is no proper functioning monitoring and controlling of
credit in NIB bank.

In the same table item (Q2) majority of respondents with mean of 3.65 and SD 3.33 agree were
requested whether the bank uses a loan covenant checklist that routinely tracks its customer‟s adherence
to covenants. With this regard 24% of the respondents strongly agreed, 47% of them also agreed, 20%
of them are disagreed, 5% of strongly disagreed and the remaining 4% of the respondents are neutral.
As it is indicated that most of the respondents replied as the bank uses a loan covenant checklist that
routinely tracks its customer‟s adherence to covenants. This implied that the bank ensures the
fulfillment of client‟s obligation and this enables the bank to take the required corrective action before
the loan is non-performed.

On item (Q3) of table 6, majority of respondents with mean of 4.39 and SD 3.94 strongly agree the
bank regularly reviews and monitors the performance of credit quality at individual level. 52% of the
respondents strongly agree, 42% of them also agreed and the remaining 6% of them are disagreed. All
respondents replied as the bank regularly reviews and monitors the performance of credit quality at

49
individual level. This enables that the bank to know the client‟s status on the ability to meet their
commitments at individual level.

On item (Q4) of table 6, majority of respondents with mean of 3.91 and SD 3.50 agree the bank
regularly reviews and monitors the performance of credit quality at portfolio level. 24% of the
respondents strongly agree, at the same time 59% of them agreed and the remaining16% of the
respondents are disagreed. Even if 16% of the respondents are disagreed on the issue, the majority of
respondents replied as the bank regularly reviews and monitors the performance of credit quality at
portfolio level. This enables that the bank to know the client‟s status on the ability to meet their
commitments at portfolio level.

On item (Q5) of table 6, majority of respondents with mean of 4.46 and SD 3.97 strongly agree as
credit file is regularly updated in the bank.51% of the respondents strongly agreed with the issue while
44% agreed and the remaining 5% of the respondents are neutral. As it is indicated on the above figure,
even if 5% of the respondents standing as neutral, we can confidently say that the bank updated the
credit file. This enables that the bank to have current information on the overall loan status.

Regarding the question presented whether the bank has properly applied its own internal risk rating
system on item (Q6) of table 6, majority of respondents with mean of 4.49 and SD 4.01 strongly agree.
57% of the respondents strongly agree while 35% of them agree and 8% of the respondents were
neutral. As it is indicated here above most of the respondents replied as the bank properly applied its
own internal risk rating system. This enables that the bank to develop and maintain necessary data on
loan defaults of borrowers as per their rating category as it would help to manage credit portfolio in
proper way and to have a prior estimate of expected defaults, expected contribution and capital
requirement to maintain the portfolio.

On item (Q7) of table 6 about credit monitoring procedure is regularly reviewed in the bank; majority
of respondents with mean of 1.95 and SD 1.71 strongly disagree .41% of the respondents strongly
disagree, 39% of them also disagreed, 5% were neutral and the remaining 15% of them agreed.As it is
indicated that most of the respondents replied as the bank does not regularly reviewed the monitoring
procedure. Due to this the bank cannot detect the problem that is associated with credit monitoring

50
 procedure to take an immediate course of action.

On item (Q8) of table 6 majority of respondents with mean of 1.95 and SD 1.76 strongly disagree. 46%
of the respondents strongly disagree 34% of them also disagreed and the remaining 20% of them agreed
that credit monitoring procedure is regularly updated in the bank. As it is indicated that most of the
respondents replied as the bank does not regularly updated the monitoring procedure .This leads the
bank to follow and implement outdated credit monitoring procedure.

4.6. Credit Risk Management

Table 7 Credit risk management activities of the bank

No Strongly Agree Neutral Disagree Strongly Total Mean SD

Disagree
Agree
Fre % Fre % Fre % Fre % Fre % Fre %

1 The credit risk assessment of the bank 25 32 31 39 2 3 16 20 5 6 79 100 3.7 3.41

considers a quick response to market
changes.
2 Financial interest between the borrower 28 35 22 28 1 1 20 25 8 10 79 100 3.53 3.32
and the bank official leads to loan
default risks.
3 The existing credit risk measurement 19 24 31 39 2 3 17 22 10 13 79 100 3.41 3.18
tools used by the bank safeguard the
bank from major credit risks.
4 The bank credit risk management 11 14 23 29 - - 32 41 13 16 79 100 2.84 2.66
procedures enable staffs to identify
major credit risks.
5 The Practical credit risk assessment 20 25 28 35 3 4 23 29 5 6 79 100 3.44 3.18
activity of the district offices help the
bank reduce risks associated with loan
granting.
6 Poor credit risk assessment on the 17 22 33 42 2 3 24 30 3 4 79 100 3.47 3.17
process of analysis would lead to loan
default.
7 Providing credit risk management 15 19 31 39 1 1 22 28 10 13 79 100 3.24 3.02
training courses will practically enable
the bank reduce credit risks.

51
8 There is a proper system 13 16 22 28 2 3 31 39 11 14 79 100 2.94 2.75
implementation for understanding credit
risks in the bank.
Source: survey data, 2021

Credit collection is a key component of the credit management life cycle and the impact of getting it
right can have a significant influence in reducing the risk associated with credit management (Benoit
2009). The credit risk assessment of Hibret bank considers a quick response to market changes is
evidenced the respondents with mean 3.70 and SD 3.41 were agreed on under table 7 item (Q1) 32% of
the respondents strongly agreed with the issue while 39% agreed, 20% disagreed, 6% strongly
disagreed and the remaining 3% of the respondents are neutral. This shows that the bank credit risk
assessment considers taking fast response to changes in the market.

As indicated under table 7 item (Q2) accordingly the respondents with mean 3.53 and SD 3.32 were
strongly agreed on the issue.35% of the respondents strongly agreed with the issue while 28% agreed,
25% disagreed, 10% strongly disagreed and the remaining 1% of the respondents are neutral. That
financial interest between the borrower and the bank official leads to loan default risks this indicates the
benefit that the bank official is going to receive will lead the analysis to poor appraisal of the loan
requested.

As per the question presented under table 7 item (Q3) majority of respondents with mean of 3.41 and
SD 3.18 agree. Respondents were asked whether the credit risk measurement tools used by the bank
safeguard are the bank from major credit risks. Accordingly, respondents were 24% of the respondents
strongly agreed with the issue while 39% agreed, 22% disagreed, 13% strongly disagreed and the
remaining 3% of the respondents are neutral. This denotes that the existing credit risk measurement
tools capable of securing the bank from major credit risks.

Respondents under table 7 item (Q4) majority of respondents with mean of 2.84 and SD 2.66 disagree.
14% of the respondents strongly agreed with the issue while 29% agreed, 41% disagreed and 16%
strongly disagreed. The respondents were disagreed that the bank credit risk management procedures
enable staffs to identify major credit risks. This shows that the credit risk management procedure of the
bank is not efficient enough to enable staffs identify major credit risks.

52
It is advisable for banks to measure the credit risk of each loan requests made by clients before approval
at least to minimize the risk of adverse selection. In this regard, respondents were questioned whether
the Practical credit risk assessment activity of the district offices help the bank reduce risks associated
with loan granting. The findings under table 7 item (Q5) majority of respondents with mean of 3.44 and
SD 3.18 agree. 25% of the respondents strongly agreed with the issue while 35% agreed, 4% neutral,
29% disagreed and 6% strongly disagreed. This implies that the practical credit risk assessment
activities of the district offices enables the bank reduce risks associated with the loan granting.

On the same table item (Q6) majority of respondents with mean of 3.47 and SD 3.17 agree.
Respondents showed that 22% of the respondents strongly agreed with the issue while 42% agreed, 3%
neutral, 30% disagreed and 4% strongly disagreed. That poor credit risk assessment would lead to loan
default. This also shows that proper assessment of credit risk is required in the analysis process.

Regarding the statement providing credit risk management training courses will practically enable the
bank reduce credit risks respondents under table 7 item (Q7) majority of respondents with mean of 3.24
and SD 3.02 agree. Respondent showed that 19% of the respondents strongly agreed with the issue
while 39% agreed, 1% neutral, 28% disagreed and 13% strongly disagreed. This indicates that
providing proper training to staffs on credit risk management will help the bank enable in identifying
and avoiding major risks.

As per the assessment question presented under table 7 item (Q8) respondents were asked if there is a
proper system implementation for understanding credit risks in the bank. Majority of respondents with
mean of 2.94 and SD 2.75 disagree. Accordingly, respondents showed that 16% of the respondents
strongly agreed with the issue while 28% agreed, 3% neutral, 39% disagreed and 14% strongly
disagreed. This denoted that the bank did not implement a system to develop understanding about credit
risks.

53
 4.7. In depth Interview Questions

To gather more information about credit management policies and practices in Hibret Bank S.C.,
interview questions were forwarded to division heads, directors of credit and appraisal department,
customer relation managers department, credit information and portfolio management division, as well
as eight branch managers of the bank. Accordingly, the interviewee‟s responses to the questions are
depicted briefly as follows.

1. Summary of responses how do you evaluate the performance of the bank in terms of its loan
recovery performance? NPLs portfolio?

According to the interviewee‟s response regarding to their perception about evaluate the performance of
the bank in terms of its loan recovery performance measures the bank efficiency and effectiveness by
recording several years of loan collection, disbursement, and annual performance. 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. NPLs portfolio 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.

2. Summary of the responses is that necessary training for employees in area of credit management
practice?

According to the interviewee‟s response, in my opinion training is necessary for employees in area of
credit management practice increase productivity, positively affect staff morale and motivation,
improve the quality of work, reduce faults, waste or customer complaints

3. Summary of the responses do you think the branch lending limit and overriding limit has any
difficulty in your branches loan providing capacity and growth?

54
According to the interviewee‟s response, banks are required to hold significant amounts of capital
which typically causes lending limits to only apply to institutional borrowers. The legal lending limit
for national banks was established under the United States Code (U.S.C.) and not difficulty in our
branches loan providing capacity and growth.

4. Summary of the responses any other comments or suggestions or ideas you may have with regard to
the credit collection strategies are adopted in the management of credit department in Hibret bank?

According to the interviewee‟s response, indicated that several suggestions to the credit collection
strategies is an important service that helps to both maintain clients and free up money for lending
again. Collections are an integral part of the credit department in Hibret bank.

55
 CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
5.1. Conclusion

The banking industry has come to stay and its activities cannot be undermined given the great role it
plays in the economy of every country by receiving savings from the “haves‟ and making it available to
the “haven‟t” thus boasting productive investments. While carrying out its activity, the banks are faced
with a number of risks with credit management being cited as the most important since its poor
management can lead to a total disaster in the bank.

Hibret bank has a documented credit management policy. The bank used collateral as a primary
technique of credit risk management mechanism. The bank used different credit risk management tools
and techniques to manage the credit risk, the credit risk management and that they all have one main
objective, i.e. to reduce the amount of loan default which is a principal cause of the bank‟s failure.

The NBE directive no SBB/53/12 requires banks to maintain their single borrower limit up to 25% of
their paid up capital. However, Hibret bank is controlling the borrowers limit as per the NBE
requirements and this kind of credit management tells how effective credit management system in
controlling the credit limit of borrowers. The existing credit policy and procedure of the bank is
encouraging and flexible enough to guide the loaning activity.

As far as the Management of non-performing loan is concerned; the bank has been continuously make
sure that the NPL cases has transferred to foreclosure process to get timely decision to reduce
additional provision expense of the bank. But these kinds of practice help the bank to effectively
implement its loan recovery mechanism to reduce its bad loans. The bank has failed to make proper
follow up on the loans availed whether they are spending on the actual purpose of the loan requested
and not preparing regular report on selected credit accounts to help reduce future failures.
Consequently, proper collateralizing of loans protects the bank from the risk of loan default.

As the bank‟s credit monitoring process is concerned; there is strict monitoring of loan terms and
conditions that have been stipulated at the time of loan approval and a regularly reviews and monitors

56
of the performance of the Credit quality at individual level and regular reviews and monitors of the
performance of credit quality at portfolio level is carrying out. However, Credit monitoring procedure is
not regularly reviewed and updated in the bank.

Though, the bank credit risk management procedures does not enabled staffs to identify major credit
risks to a maximum extent; the existing credit risk measurement tools used by the bank has still yet
safeguarded the bank from major credit risks.

5.2. Recommendations

Each day, credit professionals are trusted to scrutinize complex situations and to make an educated
judgment about how to financially interact with other companies. Moreover, these professionals are
supposed to be naturally curious and constantly educating themselves in their industry. However, most
of the Credit professionals of Hibret bank are First degree holders. So, to succeed as a credit
professional they need to upgrade their educational level constantly.

It is reported that, credit professionals of the bank are not curious to identify major credit risks and
credit monitoring procedures are not regularly reviewed and updated in the bank. Thus, the bank should
made remarkable regular changes on its credit manual, procedures, policy and develop its strategies to
make simplified and flexible so that they could fit to the dynamic market environment that incorporate
or meet the idea and business plan of the clients, to satisfy the delivery of loan to its clients, to detect
poorly underwritten credits and prevent weak credits from being granted. In addition, the bank should
make the customers and employees to aware about the merits of current bank structure and current
credit manual, policy and procedure so that every customer and employee will be a risk manager and
the bank should monitor for the effective and proper implementation.

The bank has registered some sort of futile in making a proper follow up on the loans availed whether
borrowers are spending on the actual purpose of the loan requested and collateralizing of loans fully
help to protect the loan default. Hence, the bank should checks the borrower history before granting
loans and properly assessed the customer ability to meet obligations in credit processing or appraisal
system and properly assess the customer ability to meet obligations. Besides, the bank should give

57
sufficient training to the customers on loan usage.

The bank‟s credit professionals are advisable to conduct a face-to-face meeting to discuss the
customer‟s history and future plans before the loan is granting. This is very essential to know the
background of the customer and it is also one of the best ways to get to know the customer‟s needs and
establish the bank as a valued financial institution is through face-to-face meetings to discuss the
customer‟s history and future plans.

It indicated that a regular reviewing and updating of credit monitoring procedure monitoring has
assumed greater significance in the effective management of credit risk, but the bank does not review
and update the credit monitoring procedure on regular basis. Hence the bank should review and update
the credit monitoring procedure consistently.

Recommendation for Further Studies

Current studies focus on assessment of credit management practices in case of Hibret Bank s.c and used
some sample branch. Further studies would be recommended to be conducted larger sample branch
generating more accurate findings of credit management on the structure of financial organizations.

58
 REFERENCE

Agyman, K.(1997), Short term lending Policies, Journal of Chartered Institute of Bankers ;Ghana.

Ali S. and Iva S. (2013), Impact of Bank Specific Variables on the Nonperforming loans ratio in
Albanian Banking System, Journal of Finance and Accounting, Vol. 4, No. 7.

Atakelt H.A. (2015). Emphatically Study on Credit Risk Management Practice of Ethiopian
Commercial Banks. Journal of Finance and Accounting, Vol.6, No.3. PP.134-147.

Bass, RMV. (2002). Credit management (3rd Ed.)New Delhi: Stanley Thrones Publishers Ltd.

Borg, W. R. & Galle(1996). Applying educational research: A practical guide for teachers

Chirwa (1997), An Econometric Analysis of the Determinants of Agricultural Credit Repayment in

Malawi.

Edward I. A. (2004). Default Recovery Rates and LGD in Credit Risk Modeling and Practice, Stern
School of Business, New York, U.S.A .

Ghasemi,H. (2010).“ Non-Performing Loans and their role in bank‟s profitability”, Bank and
Economy,107 : 19-21 Shekhar (1985).

Habtamu Gemechu (2015, Assessment of factors affects Non-performing Loans. The case of
Ethiopian Private Banks. Addis Ababa University.

Hagos,M 2010.Credit Management, Case of Wegagen Bank Share Company in Tigray Region, 2010,
Accounting and finance, Mekele University.

Hibret Bank AnnualReport_ForEmail_2011_2020

Jensen, M. C., &Meckling, W. H. (2016). Theory of the firm: Managerial behavior, agency costs and
ownership structure. Journal of financial economics

59
K.C Shekhar, Banking Theory and Practice, 1974

Koch, W.T. (1995). Bank Management (3 rd Ed) USA: The Dryden press, see Harbor Drive.

MilerisRicardas2012: Macroeconomic Determinants of Loan Portfolio Credit Risk in Banks

Management directives of United Bank S.co related to credit operation issued between 2016-2020

National Bank of Ethiopia, Directive No.SBB/36/2004: Licensing and Supervision of Banking

Business Proclamation No.84/1994, Addis Ababa.

Rajaraman, I and Vasishtha, G (2002), Non-Performing Loans of PSU Banks: Some Panel Result,
Economic and Political Weekly, pp. 429 – 435.

Richard, E. (2011), Factors That Cause Non– Performing Loans in Commercial Banks in Tanzania and
Strategies to Resolve Them

Shingjergji, A. (2013). The Impact of Bank Specific Variables on the Non-Performing Loans Ratio in
the Albanian Banking System. Research Journal of Finance and Accounting,4(7), 148-152.

Tekeste G (2016).credit management performance in emerging commercial banks in ethiopia, in the

case of Berhan international bank (BIB), Addis Ababa.

Van Horne, C. (1995): Financial management and policy (17th Ed), Prentice Hall International Inc.
New Delhi.

Wendemagegnehu Negera (2011) Determinants of non-performing loans: the case of Ethiopian banks.

Wise Seek (2014). Credit Management, http://www.wisegeek.com/credit-management.htm

Yalemzewed Tadesse (2013), MA thesis, exploring the Credit Management Practice of Bunna
International Bank S.C, St. Mary University, Addis Ababa .

Hable(2018) Assessed credit management practice of United Bank S.C.

60
 APPENDIX
St. Marry University
Department of Business Administration

Dear respondents, this questionnaire is designed to collect relevant information about “credit
management practices of Hibret bank s.c.” which will be used as an input for a thesis in a partial
fulfillment of Masters of Degree in Business Administration. I appreciate your cooperation to give me
your time for the success of this research thesis. I assure you that the information to be shared by you
will be used only for academic purpose and kept confidential.

Therefore, your genuine, frank and timely response is very important to the outcome of the study and
you are kindly requested to complete all questions.

For further information and need my assistance while you fill the questionnaire please contact me:

E-mail: [email protected]

Thank you for your cooperation

Yours sincerely
Fasika Gebremeskel
Tell: 0912476558

61
Part I: General Information
Direction: Please select an appropriate option by encircling the appropriate number.
1.Gender
1. Male 2. Female
2.Age
1. Less than 30 years 3. 31 to 40 years
2. 41 to 50 years 4. Above 50 years
3.Level of Education
1. College Diploma 3. Second Degree (Master‟s Degree)
2. First Degree 4. Third Degree (PhD)

4.Area (field of specialization) or major field of study

1. Accounting 3. Economics
2. Management 4. Business Administration
5. Current position
1. Managerial 3. Clerical
2. Professional

6.Years of work experience

1. < 1 Year 3. 1-5 Years
2. 5-10 Years 4. > 10 Years

62
 Part II. Research Related Questions
Direction: Please indicate your degree of agreement/disagreement with the following statements
related to your perception by encircling the appropriate number. Where, (1=strongly agree (SA);
2=Agree (A); 3= neutral (neither agree nor disagree (N)); 4=Disagree (DA); and 5=strongly agree (SD).

S. No Items SA A N DA SDA

1 The bank credit management has a policy

for credit provisioning and write-off that
are aligned with NBE requirements 1 2 3 4 5
2 The bank maintains effective credit
management system to control the single
borrower limit while extending additional
loan. 1 2 3 4 5
3 The existing credit policy and procedure
of the bank is encouraging and flexible to
guide credit activities of the bank 1 2 3 4 5
4 Client appraisal considers the character
of the customers seeking credit facilities 1 2 3 4 5
5 To better the state of management of
credit, reviews concerning collection
policies have been done on a regular
basis 1 2 3 4 5
6 Client appraisal makes proper analysis on
the cash flow statement of a borrower
while deciding on loan repayment
schedules. 1 2 3 4 5
7 The practical loan processing and
appraisal activities of the district offices
comply with the banks credit policy and
procedure 1 2 3 4 5
8 The credit management at a district level
improves the credit control of the bank 1 2 3 4 5
9 Imposing loan size limits is a viable
strategy in credit management
1 2 3 4 5

63
Part III: Non-Performing Loan Management
Direction: Please indicate your degree of agreement/disagreement with the following
statements related to your perception by encircling the appropriate number. Where, (1=strongly
agree (SA); 2=Agree (A); 3= neutral (neither agree nor disagree (N)); 4=Disagree (DA); and
5=strongly agree (SD).

S. No Items SA A N DA SDA
1 The bank effectively implements its
loan recovery mechanism to reduce its bad
loans. 1 2 3 4 5
2 The bank continuously make sure the
NPL cases transferred to foreclosure
process get timely decision to reduce
additional provision expense of the bank. 1 2 3 4 5
3 Collateralizing loans help protect
loan default. 1 2 3 4 5
4 Assessments of secondary source of
repayments help the bank as another
fallbacks for outstanding loan balances of
non-performing borrowers account 1 2 3 4 5
5 The bank make proper follow up on the
loans availed whether they are spend on
the actual purpose of the loan requested 1 2 3 4 5
6 Poorly assessed and advanced loans may
perform well if properly monitored. 1 2 3 4 5
7 The bank prepares regular report on
selected credit accounts to help reduce
future failures 1 2 3 4 5
8 Collection policies available have helped
in effective management of credit
practices. 1 2 3 4 5
9 Each districts having their own
credit monitoring and follow up team
would sustainably reduce the bank NPL 1 2 3 4 5

64
Part IV: Credit monitoring process
Direction: Please indicate your degree of agreement/disagreement with the following
statements related to your perception by encircling the appropriate number. Where, (1=strongly
agree (SA); 2=Agree (A); 3= neutral (neither agree nor disagree (N)); 4=Disagree (DA); and
5=strongly agree (SD).

S. No Items SA A N DA SDA

1 The bank strictly monitors loan terms

and conditions that have been
stipulated at the time of loan 1 2 3 4 5
2 approval.
The bank uses a loan covenant
checklist that routinely tracks its
customer‟s adherence to covenants. 1 2 3 4 5
3 The bank regularly reviews and
monitors the performance of Credit 1 2 3 4 5
4 quality
The at individual
bank level and
regularly reviews
monitors the performance of credit
quality at portfolio level 1 2 3 4 5
5 Credit file is regularly updated in our
bank. 1 2 3 4 5
6 The bank has properly applied its
own internal risk rating system. 1 2 3 4 5
7 Credit monitoring procedure is
regularly reviewed in our bank. 1 2 3 4 5
8 Credit monitoring procedure is
regularly updated in our bank. 1 2 3 4 5

Part V: Credit Risk Management

S. No Items SA A N DA SDA
1 The credit risk assessment of the
bank considers a quick response to
market 1 2 3 4 5
2 changes
Financial interest between the
borrower and the bank official leads
to loan default risks. 1 2 3 4 5
3 The existing credit risk measurement
tools used by the bank safeguard the
bank from major credit risks 1 2 3 4 5
4 The bank credit risk management
procedure enable staffs to identify
major credit risks 1 2 3 4 5

65
 5 The Practical credit risk
assessment activity of the district
offices help the bank reduce risks
associated with loan granting 1 2 3 4 5
6 Poor credit risk assessment on the
process of analysis would lead to loan
default 1 2 3 4 5
7 Providing credit risk management
training courses will practically
enable the bank reduce credit risks 1 2 3 4 5
8 There is a proper system
implementation for understanding
credit risks in the bank 1 2 3 4 5

Thank you once again for your participation.

Interview Questions
1. Being a Management/Employee of the Bank, how do you evaluate the performance
of the Bank in terms of its Loan recovery performance? NPLs portfolio?

2. In your opinion, is that necessary training for employees in area of credit

management practice?

3. Do you think the branch lending limit and overriding limit has any difficulty in
your branches loan providing capacity and growth?

4. Any other comments or suggestions or ideas you may have with regard to the
credit collection strategies are adopted in the management of credit department in
Hibret Bank?

66