WOLLEGA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT ACCOUNTING AND FINANCE

ASSESSMENT OF CREDIT MANAGEMENT PROCEDURES (A CASE OF PRIVATE

COMMERCIAL BANK S.C IN NEKEMTE CITY)

A THESIS SUBMITTEDTO THE COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTINGAND FINANCE IN PARTIAL FULFILLMENT OF
THEREQUIREMENTS FOR DEGREE MASTER OF ACCOUNTING AND FINANCE.

BY:

WAKSHUMA MULUGETA KENEA

MAJOR ADVISOR: TAREKEGN TARIKU (ASSISTANT PROFESSOR)

DECEMBER, 2022

NEKEMTE, ETHIOPIA

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ASSESSMENT OF CREDIT MANAGEMENT PROCEDURES (A CASE OF PRIVATE
COMMERCIAL BANK S.C IN NEKEMTE CITY)

A THESIS SUBMITTEDTO THE COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTINGAND FINANCE IN PARTIAL FULFILLMENT OF
THEREQUIREMENTS FOR DEGREE MASTER OF ACCOUNTING AND FINANCE.

BY:

WAKSHUMA MULUGETA KENEA

MAJOR ADVISOR: TAREKEGN TARIKU (ASSISTANT PROFESSOR)

DECEMBER, 2022

NEKEMTE, ETHIOPIA

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LIST OF ACRONYMS AND ABBREVIATIONS

ACRONYMS

BCC--------------- ----Branch Credit Committee

BOD--------------- ---Board of Directors

CAD------------------ Cash against Document

CEO--------------- Chief Executive Officer

CIC------------------- Credit Information Centre

DLL-------------------Discretionary Lending Limit

EC------------------- Ethiopian Calendar

EPRDF--------------- Ethiopian People’s Revolutionary Democratic Party

FIS--------------- -----Financial Institutions

GC--------------- -----Gregorian Calendar

L/C-------------------Letter of Credit

LAF--------------- ---Loan Approval Form

MCC--------------- Management of Credit Committee

NBE-------------------- National Bank of Ethiopia

NOW--------------- Negotiable Order of Withdrawal Account

NPLS--------------- Non Performing Loans

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NPTL--------------- Non Performing to total Loan

NPTGL--------------- Non Performing Loan to Gross Loan

OBC--------------- ---Outward Bills for Collection

ODBC--------------- Outward Documentary Bills for set for Collection

ODBP--------------- Outward Documentary Bills Purchased

OPD--------------- Outward Bills Purchased

PSS--------------- Proportionate Stratified Sampling

SC--------------- Share Company

SBB--------------- Supervision of Banking Business

VP--------------- Vice President

ZBA--------------- Zero Balance Account

ABSTRACT

The research is designed as a case study on these banks and a survey method was employed. Sources of both
primary and secondary data were used. Questionnaire was used as a main instrument to collect primary data
while the secondary data was collected from the bank’s unpublished provision reports (2009-2013),
directives, credit policy and procedure of the bank. Based on the nature of the study the research design was
descriptive and the methodology used for the study was population purposively selected for bank staffs.

This study intends to assess credit management procedure of private commercial Banks s.c. based on five
C’s basic variables namely the practice of the bank in managing its loaning activity and alignment with the
National Bank of Ethiopia requirements, non-performing loan management, current credit control and its
credit risk management practice.

Main goal of all commercial banks was collecting savings of persons and entities and allocating them as
banking facilities to industrial, service and productive companies. Not refunding facilities by customers, put

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banks in many troubles such as not being able to refund Central Bank loans, more facilities compare to
customers refund and not being capable of to give more facilities.

The ability of banks to formulate and adhere to policies and procedures that promote credit quality and
curtail non-performing loans was the means to survive in the stiff competition. Inability to create and build
up quality loans and credit worthy customers leads to default risk and bankruptcy as well as hampers
economic growth of a country. However, little work was done to search the ways and means that enable to
quality loan creation and growth as well as to determine the relationship between the theories, concepts and
credit policies both at country or regional level. The main objective of the study was to evaluate the
performance of credit management procedure of private commercial banks in Nekemte city as compared to
National Bank’s requirements in comparison with its credit policy and procedures. For the purpose of the
study both primary and secondary data are used. Primary data was collected using semi structured
questionnaires. The secondary data was collected from annual reports, directives, and bulletins of the bank.
Descriptive statistical tools are used in analyzing the data collected. Hence, the nature of the Study was
descriptive. Finally, based on the findings possible recommendations are given. These include the issues
impeding loan growth and rising loan clients complaint on the bank regarding the valuing of properties
offered for character, capacity, capital, collateral, and condition affecting the performance of credit
management

Table of content

1.1 Background of the Study........................................................................................................................................7

1.2 STATEMENT OF THE PROBLEM.....................................................................................................................9

1.3 Basic Research Questions.....................................................................................................................................11

1.4 Objective of the Study...........................................................................................................................................12

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 1.4.1 General objective.........................................................................................................................................12

1.4.2 Specific objectives........................................................................................................................................12

1.5 Significance of the Study.......................................................................................................................................12

1.6 Scope of the Study.................................................................................................................................................13

1.7 Limitations of the study........................................................................................................................................13

1.8 ORGANIZATION OF THE STUDY..................................................................................................................13

2.1 Introduction...........................................................................................................................................................14

2.1 THEORETICAL LITERATURE REVIEW.......................................................................................................14

2.1.1 DEFINITION OF CREDIT..........................................................................................................................14

2.1.2. TYPES OF CREDIT...................................................................................................................................15

2.1.3 DEFINITION OF CREDIT MANAGEMENT.............................................................................................15

2.1.4 DIMENSION OF CREDIT MANAGEMENT PROCEDURE....................................................................16

2.1.5 COMPONENTS OF CREDIT POLICY......................................................................................................17

2.1.6 CREDIT INFORMATION...........................................................................................................................17

2.1.7 CREDIT PLANNING..................................................................................................................................18

2.1.8 CREDIT ANALYSIS...................................................................................................................................18

2.1.9 CREDIT PROCESS.....................................................................................................................................21

2.1.10 CREDIT APPROVAL AND IMPLEMENTATION..................................................................................22

2.1.11 NON-PERFORMING LOAN (NPLS).......................................................................................................23

2.1.13 STEPS IN THE LENDING PROCESS......................................................................................................24

2.1.14 DEBT RECOVERY STRATEGY.............................................................................................................25

2.1.15 PROCESS OF CREDIT MANAGEMENT................................................................................................26

2.1.16 CREDIT MANAGEMENT PRACTICE....................................................................................................27

2.1.17 THE ROLE OF CREDIT ANALYSIS IN MINIMIZING CREDIT RISK.................................................27

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 2.1.19 IMPLICATIONS OF LOANS ON BANKING INSTITUTIONS..............................................................28

1.1.20 FINANCIAL ANALYSIS..........................................................................................................................28

2.1.21 DEFAULT PROBLEMS............................................................................................................................29

I. Causes at borrower level:........................................................................................................................................29

II. Causes at financing institution level:....................................................................................................................30

III. Causes at economy level:......................................................................................................................................30

2.1. 22. COMMON SOURCES OF MAJOR CREDIT PROBLEMS...................................................................30

2.1.23 CREDIT CONTROL..................................................................................................................................32

2.2. EMPERICAL REVIEW......................................................................................................................................32

2.3 Credit management procedure variables............................................................................................................35

2.4. SUMMARY OF KNOWLEDGE GAP...............................................................................................................36

2.5. Conceptualization of the Variables.....................................................................................................................36

2.4: Conceptual Framework.......................................................................................................................................37

3.1 RESEARCH DESIGN..........................................................................................................................................39

3.1.1 Target Group................................................................................................................................................39

3.1.2 Sampling Technique.....................................................................................................................................39

3.1.3 Sample Size..................................................................................................................................................40

3.1.4 Data source and data Collection tools..........................................................................................................40

3.1.5 Data Analysis Method..................................................................................................................................40

4.1 Introduction...........................................................................................................................................................42

4.2 Validity of Instruments.........................................................................................................................................42

4.3 Reliability of Instruments....................................................................................................................................42

4.4 Demographic Information....................................................................................................................................43

4.4.3 Age of the Respondents................................................................................................................................44

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 4.4.4 Marital statas of respondants........................................................................................................................44

5.1 Introduction...........................................................................................................................................................55

5.2. Summery............................................................................................................................................................... 55

5.2 Conclusion............................................................................................................................................................. 60

5.3 Recommendations.................................................................................................................................................62

4.3. In depth interview................................................................................................................................................65

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CHAPTER ONE

1. INTRODUCTION

1.1 Background of the Study

Banks are financial institutions that are established for lending, borrowing, issuing, exchanging, taking
deposits, conservation, or managing money under the laws and guidelines of a respective cite. Among their
activities, credit provision was the main product that banks provide to potential business entrepreneurs as a
main source of generating income.

While providing credit as the main source of generating income, 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 was due to the reason that while banks providing credit they are
exposed to risk of default (risk of interest and principal repayment) which need to be managed effectively to
acquire the required level of loan growth procedure.

The types and degree of risks to which banks are exposed depend upon several factors such as its size,
complexity of the business activities, volume, etc. A strong and effective credit management process was
one that reinforces and compliments its corporate objectives and goals. The main problem that banks

9
encounter in credit administration was that some of the granted credit facilities are not re-paid leading to a
loss of depositor’s funds and emergence of bad debts (yonas, 2016).

Credit management process deserves special emphasis because proper credit management greatly influences
the success or failure of financial institutions. This indicates that credit provision should be accompanied by
appropriate and attractive credit policies and procedures that enhance the performance of credit management
and protect the banking industry from failure. Credit management means the total process of lending starting
from inquiring potential borrowers up to recovering the amount granted. In the sense of banking sector,
credit management was concerned with activities such as accepting application, loan appraisal, loan
approval, monitoring, and recovery of non-performing loans (Shekhar, 2005.)

According to Hettihewa (2001), Credit Management was extremely important as granting credit was
considered to be the equivalent of investing in a customer. However, payment of the debt should not be
postponed for too long as delayed payments and bad debts are a cost to the company. Thus, Efficiency and
effectiveness in performing each step of loan processing using various parameters have a significant effect
on the performance of credit management.

Hence, the purpose of this study was to assess the performance of credit management Procedure and
strengths of from different perspectives in light of the practices of modern credit management in financial
institutions. Chandrima S (202013) Credit management was the process of monitoring and gathering
payments from customers. A good credit management system (CMS) decreases the amount of capital tied
up with debtors. It was essential to have good credit management for efficient cash flow. There are instances
when a plan was expected to be profitable when assumed theoretically, but it was not possible to practical
execute it because of insufficient funds. In order to avoid such circumstances, the best alternative was to
confine the likelihood of bad debts. This can only be accomplished through following good credit
management procedure. To run a business in profit the entrepreneur needs to prepare and design new
policies and procedures for credit management. Credit management plays an important role in the banking
sector. As we all know the bank is one of the significant sources of lending capital. So, following are the
procedure, Banks follow for lending capital. Liquidity plays a key role when a bank was into lending
money. Usually, banks lend money for a short period of time. Another most important function of lending
was safety, the safety of funds lent.

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Safety means that the loan seeker should be in a position to repay the loan and interest at regular durations
of time without any fail. The repayment of the loan depends on the nature of security and the capability of
the borrower to repay the loan. Diversity while choosing an investment portfolio, a commercial bank should
abide by the principle of diversity. It should never invest its complete funds in a particular type of securities;
it should prefer investing in different types of securities.

Diversification basically targets minimizing the risk of the investment portfolio of a bank. Stability’s
another essential principle of the investment policy of a bank. A bank should prefer investing in those stocks
and securities which highly stabile in their costs. Any bank can’t incur any loss on the rate of its securities.
Profitability should be the chief principle of investment. A bank should only invest if it

earns sufficient profits from that investment. Subsequently, it should, invest in securities that have a fair and
stable return on the invested funds. The procuring capacity of securities and shares depends upon the
interest rate and the dividend rate and the tax benefits they hold. Banks make money by lending money to
borrowers and charging some interest on the amount. So, it was very important from the bank to follow the
cardinal principles of lending. In this entire process, banks earn good profits and grow as financial
institutions. Sound lending principles by banks also empowers the economy of a country to prosper and also
advertise the expansion of banks.

According to Hettihewa (2001), Credit Management was extremely important as granting credit was
considered to be the equivalent of investing in a customer. However, payment of the debt should not be
postponed for too long as delayed payments and bad debts are a cost to the company. Thus, Efficiency and
effectiveness in performing each procedure of loan processing using various parameters have a significant
effect on the performance of credit management. Hence, the purpose of this study was to assess the
performance of credit management Procedures from different perspectives in light of the practices of
modern credit management in financial institution.

1.2 STATEMENT OF THE PROBLEM

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The goal of the credit management procedure is to maximize the performing asset and the minimization of
the Nonperforming asset as well as ensuring the optimal point of loan and advance and their efficient
management. The overall success in credit management depends on the banks credit policy, portfolio of
credit, monitoring, supervision and follow-up of the loan and advance. Continuous supervision, monitoring
and follow-up are highly required for ensuring the timely repayment and minimizing the default. One of the
primary roles of Private commercial Banks to advance credit to their customers. However, not all borrowers
honor the agreement between them and the banks in regards to loan repayment. Some end up defaulting on
loan repayment and the banks concerned suffer from bad debts. It is asserted that bad debts destroy loans
which are the bank’s earning assets and as such negatively compromise the banks’ profitability.

The higher the volume of bad debts written off from the profit of the bank the lower the net profit and thus,
the amount available for distribution as dividends to shareholders, this also limits the amount ploughed back
into the business (Basil, 2013). Most of the studies conducted on credit management in Ethiopia are focused
on big banks. Habtamu (2015) assessed factors affecting non-performing loans in five big Private
Commercial banks. His study of the five big (peer 1) private commercial banks focused on Awash Bank
S.C, Dashen Bank S.C, Bank of Abysinia S.C, Wegagen Bank S.C and United Bank S.C.

Yihnalem (2015) also conducted research on the credit monitoring activity and asset quality of Dashen Bank
which was one of the largest private commercial banks in the industry. It was safe to say that there are no
studies conducted on credit management procedure on commercial banks, even though all banks are
suffering from the problem of non-performing loans. The researcher’s investigations made in the area
unveiled that no empirical research that looks into and evaluate credit management procedure of emerging
private commercial banks in Ethiopian except the very single case study made on Wegagen Bank S.c.Tigray
Region (Hagos, 2010). As observed above there are few studies on emerging banks on credit management
which engaged the bank and credit clients.

For the reason that, the researcher motivated to make an assessment on credit management procedure on
private commercial Banks and to deliver the first initial reference document for those who are interested in
carrying out similar studies on this bank or other banks and credit institutions industry.

Credit assessment helps the banker to ensure selection of right type of loan proposals and right type of
borrower. For selecting the borrower, security should not the only thing to be relied upon. So
responsibilities of the bankers to investigate the client from different view point of bank credit management
procedure i.e. the strength and weakness of the client so that the client will be able to repay the bank loan as
12
repayment schedule with profit. To prevent future financial crises, it was necessary to improve the
borrowers‟ financial literacy, the lenders‟ process of transparency and procedure of landing to better assess
loan product affordability and suitability. Due to diversified and intensified investments in the country in the
last 10 and or above years there was an increase of loan demands among investors from commercial banks
in the country. In addition to this high demands for loan from commercial banks are highly busy in
launching branches across the country. These situations have created an environment in which commercial
banks to encounter risks in credit management procedure. Loans are becoming large and at the same time
bad loans have increased substantially during the past few years, Sahlemichael M. (2009). Since commercial
banks expansion and high demand for loans are a recent phenomenon, the challenge they encounter in the
manner loans are managed a huge concern.

Although there were some studies on commercial banks risk management conducted in Ethiopia
(Sahlemichael, 2009) on credit risk management system in Ethiopian commercial banks (Case of public and
private banks). Similar studies are also done by Charles Mensha (1999) as cited in Hagos M. (2010) on the
importance of credit management in Ethiopia. Those studies made on this issue are not comprehensive and
credit risk management system may differs and change over time. Nevertheless, the studies did not assess
the challenge of not following the procedure to manage credit they encounter in the manner loans are
managed on the diversified and intensified investment in the country. As I observed and obtained
information from different angles the researcher, not only credit management solve the risk of credit but
also credit managing procured was important role

Therefore, the study attempts to assess the credit management procedure systems and practices in private
commercial Banks ( Buna,Abaye, Wegagen,Nibe, Absinia,Dashen, Oromia Corroborative, Oromia
International and Awash international Bank) on using as factors of five c’s on credit management procedure
analyses on the banks exist in Nekemte city .

1.3 Basic Research Questions

The research is intended to answer the following basic questions which are entirely related to credit
management procedure of private commercial bank in Nekemte city.

1. Does the Bank consistently fulfill its policy and procedures in identifying the characters of customers in
loan processing in nekemte city?

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2. To what extent was the Bank identify the performance of credit management procedure in determination
of the capacity of loan applicant in nekemtecity.

3. To what extent is the Banks determine capital & collateral estimation of loan applicants in itspolicy and
procedures in loan processing in Nekemte city.

4. To what level was the Bank determine the condition of loan applicants as compared to its requirement
and credit policies in Nekemte city

1.4 Objective of the Study

1.4.1 General objective
The main objective of the study is to evaluate the performance of credit management procedure of Oromia
International Bank in as compared to National Bank requirements

1.4.2 Specific objectives

1. To evaluate the compliance of the Bank to its policies and procedures in identifying the characters of
customers in loan processing in Nekemte city.

2. To evaluate the assessment of the Banks in determination of the capacity of loan applicant in its
procedure in nekemte city.

3. To determine the assessment of capital & collateral estimation of the banks in loan processing in nekemte
city.

4. To determine the assessment of the condition of loan applicants by banks as compared to its requirement
and credit policies in Nekemte city.

1.5 Significance of the Study

Loans and advances are known to be the main stay of all commercial banks. They occupy an important part
in gross earnings and net profit of the banks. The share advances in the total asset of the banks forms a lion
share (almost more than 60 percent) andas such it was the back bone of banking sector. Bank lending is very
crucial for it makes possible the financing of agricultural, industrial, construction, and commercial activities
of a country. The strength and soundness of the banking system primarily depends upon health of the
advances. Therefore the ability of banks to formulate and adhere to policies and procedures that promote
credit quality and curtail non-performing loans is the means to survive in the stiff competition. In ability to
14
create and build up quality loans and credit worthy customers leads to default risk and bankruptcy as well as
hampers economic growth of a country. However, little work was done to search the ways and means that
enable to quality loan creation procedure and growth as well as to determine the relationship between the
theories, concepts and credit policies both at country level or regional level.

Hence, this study was assumed to be significant in indicating best practice and concepts for prudent lending
to enhance the credit management procedure to all managers and policy makers of the bank as well as to all
financial institutions and banks.

Moreover, it may help as a benchmark for researchers who are interested in the area to

Extend it further.

1.6 Scope of the Study

The study was concentrated on private commercial Bank Share Company branches found in Nekemte. This
was because; it was one of the private banks working with leading area coverage in the city yet.

The study covered credit policies, procedures, and credit operations of the Bank. It assessed whether the
loan growth and performance was to the required level of the bank or not. In addition, the study was
concerned with identifying the major reasons for best practices of credit management procedure,

loan growth, and causes of loan default if any in the area. Since the lending rules and procedures of the bank
was the same in all its branches, the result obtained taking case study of this specific city was assumed to
reflect the situation of all branches of the bank in the country under normal circumstance.

1.7 Limitations of the study

Though studying at full-fledged level of the bank would have better result, due to the time and finance
constraints the researcher was limited to undertake the study in eight branches located in city of Nekemte.
The branches are stretched some selected area in the city and this has entailed transportation problem,
hardship, and time scarcity. The constraint of time had significant impacts on the study

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1.8 ORGANIZATION OF THE STUDY
This study was organized in three chapters. The first chapter deals with background of the study, Statement
of the problem, research question, objectives, significance of the study, scope and limitation of the study and
organization of the study. Chapter two presents review of related literature and empirical studies. In chapter
three research design and methodology are presented. The fourth chapter was concerned with summary of
analysis as results and discussions. Finally the fifth chapter presents the conclusion and recommendations
drawn from the findings.

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CHAPTER TWO

2. LITERATURE REVIEW

2.1 Introduction

2.1 THEORETICAL LITERATURE REVIEW

This chapter describes and documents what has been written and recorded in different manuals, literatures
and authors about Bank Credit Management Procedure.

Financial institutions, which are composed of banks, micro finances, and insurances, have comprehensive
roles in serving the needs of the society within the economy. The service was rendered through providing
three major financial functions: intermediation, or allocation, operational and payment systems. Operational
and allocation functions are the provisions of financial resources to meet borrowing needs of individuals and
other economic agents. The main microeconomic function of banks was the provision of facilities to collect
deposits and invest these deposits as credits. Provision of a sound payment mechanism was also the other
expected service from banks. Hence, the performance of banks was measured in terms of the above major
roles of the banking business and relies on the provision of these functions.

2.1.1 DEFINITION OF CREDIT

The word credit is derived from the Latin word Creditum, which means to believe or trust. In economics,
the term credit refers to promises by one party to pay another for money borrowed or goods or services
received. It was a medium of exchange to receive money or goods on demand at some future date (Jhibgan,
2002). Another definition claims that the word credit originated from the Latin word “Credo” which means
‘I Believe’. Credit was a matter of faith in the person and no less than the security offered.

Credit was purchasing power not derived from income, but by financial institutions either as an offset to idle
incomes held by the depositors in the bank, or as a net addition to the total amount of purchasing power. In
fact, no economy can function without credit.

These days all economic transactions are settled by means of credit instruments. It is the very life blood of
modern business and commercial system (Cole, 2000).

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2.1.2. TYPES OF CREDIT
Depending on the length of time, for which the loan is outstanding, credit can be classified in three
categories: Long term and Medium term credits. Credit transactions on the basis of whether or not the lender
received collateral security, they can be classified as secured loan and/ unsecured loans.

According to Clemens and Dyer (1977) cited in Kokeb (2010) Secured loan was guaranteed by collateral
which was an item of equal or greater value than the amount of the loan, such as a car, home, or cash
deposit. It was a secondary source of payment and was recommended for more than 75% of the bank’s loan.
No loan should be granted based on the value of the collateral without a clear indication of a stable primary
source of repayment. Unsecured loan: It may be granted to customers with established characteristics of
ability to repay. The purpose of the loan and the source of repayment must be clearly understood. Generally,
unsecured should not exceed 25% of the net worth. These may be available from financial institution under
many different guides or marketing packages; may also be granted to customers with established
characteristics and ability to repay (Westerfield, 1993).

2.1.3 DEFINITION OF CREDIT MANAGEMENT

There are many definitions given for credit management (CM) by different scholars. Among them,

some are provided as follows: According to Nath (2013) Credit management in a bank was a dynamic sector
where a certain standard of long-range planning was needed to allocate the fund in diverse field and to
minimize the risk and maximizing the return on the invested fund. The objective of the credit management
was to maximize the performing asset and the minimization of the non-performing asset as well as ensuring
the optimal point of loan and advance and their efficient management Credit management was
implementing and maintaining a set of policies and procedures to minimize the amount of capital tied up in
debtors and to minimize the exposure of the business to bad debts (Hagos, 2010). When it functions
efficiently, credit management serves as an excellent instrument for the

business to remain financially stable and profitable. Credit management is also the process of controlling
and collecting payments from customers. This was the function within a bank or company to control credit
policies that will improve revenues and reduce financial risks. Wise (2014) describe credit management as
the process of building a series of investments based upon credit relationships and managing the risks
involved with these investments.

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Therefore, credit management encompasses assessing the risk involved with each loan and then analyzing
the total amount of risks for all loans. The major objective of credit management is to reduce the amount of
loans default. Banks reduce the loan portfolio default risk by considering the credits repayment history of
both individuals and groups applying for loans. Myers and Brealey (2003) describe credit management as
methods and strategies adopted by a firm to ensure that they maintain an optimal level of credit and its
effective management.

Nelson (2002) also views credit management as simply the means by which an entity manages its credit
extension. It was a prerequisite for any entity dealing with credit transactions since it was impossible to have
a zero credit or default risk.

2.1.4 DIMENSION OF CREDIT MANAGEMENT PROCEDURE

According to Pandey (1997) credit management particularly performs the following core concepts in

relation to credit policy:

Formulation of credit policy: - for firms with usual credit sales the prime responsibility was
formulation of credit policy which includes the decision about three credit terms that was cash
discount, discount period and credit period. Credit term refers to the duration of credit and the term
payment of customers including discount if any credit standard specifies the attributes customer
should demonstrate to get credit.

ii. Evaluation of credit policy: - these involve evaluating the credit applicant’s worthiness. It involves three
steps:

A. Collection of credit information

B.Analyzing and evaluating information

c. Making of credit decision

iii. Implementation of credit policy: - once credit policy was formulated and evaluated the next step was
adapting and using it.

iv. Administering and controlling credit policy: -the purpose of this step was to check and control
whether implemented policy was properly working or not.

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2.1.5 COMPONENTS OF CREDIT POLICY
There are three components of credit policy. They are credit standard, credit terms and collection

Policy (Pandey, 2010).

• Credit standards: - refer to the guidelines issued by a company that are used to determine that

a potential borrower is credit worthy. Credit standards are often created after careful analysis of past
borrowers and market conditions, and are designed to limit the risk of a borrower no making credit
payments or defaulting on loaned money.

• Credit terms: - specify the length of credit period and the discount given early payment. The common
credit term for the firm to offer of “net 30” or “2/10 net 30”. Net 30 means the customer must pay its bill
within 30 days of the invoice date.

Term 2/10 net 30 means the customer was offered a 2% discount if payment was made within 10 days of the
invoice date. Otherwise, the full amount of the receivables was due in 30 days. The stated terms of credit
extension will have a strong impact on the eventual size of the accounts receivable balance.

• Collection policy: - refers to the procedures that firms follow to obtain payment of past due account. As a
general rule, the quicker account receivable was converted into cash the greater will be the profit. Collection
policy was the final element in credit policy. It involves to spot trouble in obtaining payment of past due
accounts.

2.1.6 CREDIT INFORMATION

This benefits for lenders to assess or analyses creditworthiness, the ability payback a loan and can affect the
interest rate and other terms of loan. According to Westerfield (1993) there are a number of sources to get
credit information about a customer including the following:

Financial Status- a bank asks a customer to supply financial statement such as, balance sheet and income
statement which can be used as a basis for extending or reducing of a credit.

Credit report on the customer payment history from other firms: quite a few organizations sell information
on the credit strength and credit history of business firms.

20
Banks will generally provide assistance to their business customers in acquiring information on the credit
worthiness of other firms.

The customer payment history with the bank: The likelihood of the customer on the paying was to

examine whether they have settled payment obligation and how quick they have met their obligation.

This be benefits for lenders to assess or analyses credit worthiness, the ability payback a loan and can affect
the interest rate & other terms of loan. According to Westerfield (1993)

2.1.7 CREDIT PLANNING

The concept of the credit planning has gained importance during recent years. The term credit planning was
used to mean the allocation of financial resources from which ever source they are available. In such way
that the plan target of output and investment are achieved in full and distribution of these resources doesn’t
hamper the implementation of plan programmers.

Viewed from this angle credit planning at each level of the banking system is a subsidiary one since the
bank credit was only one of the financial resource available from several sources. Bank credit occupies a
very prominent position and national allocation of their sources available with a bank was an important
aspect of economic planning and policy. The significance of such planning was enhanced when banks have
to operate principally with the deposit (Shekhor, 1999).

2.1.8 CREDIT ANALYSIS

According to Abebaw (2015) Credit analysis was the primary method in reducing the credit risk on a loan
request. This includes determining the financial strength of the borrowers, estimating the probability of
default and reducing the risk of non-repayment to an acceptable level. In general, credit evaluations are
based on the loan officer's subjective assessment (or judgmental assessment technique). Once a customer
requests a loan; bank officers analyze all available information to determine whether the loan meets the
bank’s risk-return objectives. Credit analysis was essentially default risk analysis, in which a loan officer
attempts to evaluate a borrower’s ability and willingness to repay. In the same way Compton (1985)
identified three distinct areas of commercial risk analysis related to the following questions:

1. What risks are inherent in the operations of the business? 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.
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 2. 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 was accounted
for in the specification of the demand function as well as in the opportunity cost associated with
taking on additional receivables.
The policy variables include the quality of the trade accounts accepted; the length of the credit
period, the cash discount, any special terms such as seasonal dating and the collection program of the
firm. Together, these elements largely determine the average collection period and the proportion of
bad debt losses of the business.

3) What have managers done or failed to do in mitigating those risks?

4) 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 was largely a function of decisions made by a borrower. Is management
aware of the important risks, and has it responded?

As Timothy (1995) quoted, the last question forces the analyst to specify how risks can be controlled so the
bank can structure to an acceptable loan agreement. A bank’s credit analysts often use the five C’s of credit
to focus their analysis on the key dimensions of an applicant’s credit worthiness. Pandey (1997), identified
five 5C’s of credit. They include; Character, Capacity, Capital, Collateral, and Conditions. When these 5c’s
kept credit management procedure is fulfilled properly.

Credit analysis by a lender is used to determine the risk associated with making a loan. Regardless of the
type of financing needed, a bank or lending institution will be interested in both your business and personal
financials. Credit analysis is governed by the “5 Cs:” character, capacity, condition, capital and collateral.
When there is Credit analysis, credit management is properly performed.

1. Character: The applicant’s record of meeting past obligations, financial, contractual, and moral. Past
payment history as well as any pending or resolved legal judgments against the applicant would be used to
evaluate its character.

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2. Capacity: The applicant’s ability to repay the requested credit. Financial statement analysis, with
particular emphasis on liquidity and debt ratios, is typically used to assess the applicant’s capacity.

3. Capital: The financial strength of the applicant as reflected by its ownership position. Analysis is of the
applicant’s debt relative to equity and its profitability ratios are frequently used to assess its capital.

4. Collateral: The amount of assets the applicant has available for use in securing the credit. The larger the
amount of available assets, the greater the chance that a firm will recover its funds if the applicant defaults.

A review of the applicant’s balance sheet, asset value appraisals, and any legal claims filed against the
applicant’s assets can be used to evaluate its collateral.

5. Conditions: The current economic and business climate as well as any unique circumstances affecting
either party to the credit transaction. For example, if the firm has excess inventory of the items the applicant
wishes to purchase on credit, the firm maybe willing to sell on more favorable terms or to less creditworthy
applicants. Analysis of the general economic and business conditions, as well as special circumstances that
may affect the applicant or firm is performed to assess conditions.

The credit management procedure typically gives primary attention to the first two C’s-character and
Capacity- because they represent the most basic requirements for extending credit to an applicant.
Consideration of the last three C’s-Capital, Collateral, and Conditions-is important in structuring the credit
management and making the final credit decision, which is affected by the credit management procedure
experience and judgment. Lending is not just a matter of making loan and waiting for repayment. Loan must
be monitored and closely supervised to prevent loan losses.

As noted by MacDonald (2006) cited in Abebaw (2015) there are five Cs of bad credits that represent the
issues used to guard against/prevent bad loans). These are:

Complacency: refers the tendency to assume that because of the things were good in the past, they will be
good in the future. For instance, Assuming the past loan repayment success since things have always
worked out in the past.

Carelessness: indicates the poor underwriting typically evidenced by inadequate loan documentation, lack
of current financial information or other pertinent information in the credit files, second lack of protective

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covenants in the loan agreement. Each of these makes it difficult to monitor a borrower`s progress and
identify problems before they are unmanageable.

Communication ineffectiveness: inability to clearly communicate the bank`s objectives and policies. This
is when loan problems arise. Therefore, the bank management must clearly and effectively communicate
and enforce the loan policies and loan officers should make the management aware of specific problems
with existing loans as soon as they appear.

Contingencies: refers the lenders` tendency to play down/ignore circumstances in which a loan might in
default. It focuses on trying to make a deal work rather than identifying down side risk.

Competition: involves following the competitors` action rather than monitoring the bank`s own credit
standards. Banks, however, still have required expertise, experiences, and customer focus to make them the
preferred lender for many types of loan. However, the key risk factors to be considered in credit analysis are
traditionally grouped in to five C’s and currently two C’s have been added and become seven C’s. These are
capacity, character, capital, conditions and collateral (Koch and Macdonald, 2000 and Rose, 1999). The
additional two are customer relation and competition (Koch and Macdonald, 2000).

Customer Relationship

A bank’s prior relationship with a customer reveals information about past credit and deposit experience
that is useful in assessing willingness and ability to repay (Koch and Macdonald, 2000).

Competition

It has an impact by affecting the pricing of a loan. In principle, competition should not hinder banks from
obtaining positive risk adjusted returns and it should also not affect loan accept-reject decision. In reality,
however, lenders sometimes react to competitive pressures by undercutting competitor’s rates in order to
attract new business. Similarly, loan accept reject decisions are at times compromised when competition is
strong creating industry instability (Koch and Macdonald, 2000).

2.1.9 CREDIT PROCESS

The fundamental objective of commercial and consumer lending is to make profitable loans with minimal
risk. Management should target specific industries or markets in which lending officers have expertise. The
credit process relies on each bank’s systems and controls to allow management and credit officers to
24
evaluate risk and return trade- offs. According to Timothy (1995), the credit process includes three
functions: business development and credit analysis, credit execution and administration, and credit review.

i. Business Development and Credit Analysis

Business development is the process of marketing bank services to existing and potential customers. With
lending it involves identifying new credit customers and soliciting their banking business, as well as
maintaining relationships with current customers and cross-selling non-credit services. Every bank
employee, from tellers handling drive-up facilities to members of the board of the directors, is responsible
for business development. Each employee regularly comes in to contact with potential customers and can
sell bank services. To encourage marketing efforts, many banks use cash bonuses or other incentive plans to
reward employees who successfully cross-sell services or bring new business into a bank.

ii. Credit Execution and Administration

The formal credit decision can be made individually or by committee, depending on a bank’s organizational
structure. This structure varies with a bank’s size, number of employees, and type of loans handled. A
bank’s Board of Directors normally has the final say on which loans are approved. Typically, each lending
officer has independent authority to approve loans up to some fixed amount.

iii. Credit Review

The loan review effort is directed at reducing credit risk as well as handling problem loans and liquidating
assets of failed borrowers. Effective credit management separates loan review from credit analysis,
execution, and administration.

The review process can be divided into two functions: monitoring the performance of existing loans and
handling problem loans. Many banks have a formal loan review committee, independent of loan officers,
that reports directly to the chief executive officer and

directors’ loan committee. Loan review personnel review current loan to verify that the borrower’s financial
condition is acceptable, loan documentation is in place, and pricing meets return objectives.

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2.1.10 CREDIT APPROVAL AND IMPLEMENTATION
The individual steps in the credit approval process and their implementation have a considerable impact on
the risks associated with credit approval. The quality of credit approval processes depends on two factors,
i.e. a transparent and comprehensive presentation of the risks when granting the loan on the one hand, and
an adequate assessment of these risks on the other. Furthermore, the level of efficiency of the credit
approval processes is an important rating element. Due to the considerable differences in the nature of
various borrowers and the assets to be financed as well as the large number of products and their
complexity, there cannot be a uniform process to assess credit risks.

The quality of the credit approval process from a risk perspective is determined by the best possible
identification and evaluation of the credit risk resulting from a possible exposure.

According to Oesterreichische National Bank Credit Approval Process and Credit Risk Management (2000),
the credit risk can be distributed among four risk components.

a. Probability of Default (PD)

b. Loss Given Default (LGD)

c. Exposure at Default (EAD)

d. Maturity (M)

The most important components in credit approval processes are PD, LGD, and EAD. While

Maturity (M) is required to calculate the required capital; it plays a minor role in exposure review.

The significance of PD, LGD, and EAD is described below.

Probability of Default (PD)

Reviewing a borrower’s probability of default is basically done by evaluating the borrower’s current and
future ability to fulfill its interest and principal repayment obligations.

This evaluation has to take into account various characteristics of the borrower (naturalor legal person),
which should lead to a differentiation of the credit approval processes in accordance with the borrowers
served by the bank. Furthermore, it has to be taken into account that —for certain finance transactions —
interest and principal repayments should be financed exclusively from the cash flow of the object to be
financed without the possibility for recourse to further assets of the borrower. In this case, the credit review
26
must address the viability of the underlying business model, which means that the source of the cash flows
required to meet interest and principal repayment obligations has to be included in the review.

b) Loss Given Default (LGD)

The loss given default is affected by the collateralized portion as well as the cost of selling the collateral.
Therefore, the calculated value and type of collateral also have to be taken into account in designing the
credit approval processes.

c) Exposure at Default (EAD)

In the vast majority of the cases described here, the exposure at default corresponds to the amount owed to
the institution. Thus, besides the type of claim; the amount of the claim is another important element in the
credit approval process.

Once information has been gathered, the firm faces the hard choice of either granting or refusing credit.
Many financial managers use the "five C's of Credit" as their guide (Ross etal. 1999) as discussed earlier
and identify and evaluate the credit risk resulting from a possible exposure to sanction the credit.

2.1.11 NON-PERFORMING LOAN (NPLS)

Non-performing loans generally refer to loans, which for a relatively long period do not generate income;
that is the principal, and/or interest on these loans has been left unpaid for at least 90 days (NBE, 2008).
Furthermore, the stability of banking is a pre-requisite for economic development and resilience against
financial crisis. Like any other business, success of banking is assessed based on profit and quality of asset it
possesses.

Even though banks serve social objective through their priority sector lending, mass branch networks and
employment generation, maintaining asset quality and profitability is critical for their survival and growth.
A major threat to the banking sector is prevalence of Non-Performing Loans (NPLs).

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
27
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).

According to Shekhar (1985), loan plays an important role in the lives of many people and in almost all
industries that involve monetary investment in some form. Loan is mainly granted by banks including to
several other functions like mobilizing deposits, local and international transfers, and currency exchange
service.

2.1.13 STEPS IN THE LENDING PROCESS

Finding prospective loan customers most loans to individuals arise from a direct request from a customer
who approaches a member of the lender’s staff and asks to flit out a loan application (Rose and Hudgins,
2005).

Evaluating a prospective customer’s character and sincerity of purpose Once a customer’s

decides to request a loan, an interview with a loan officer usually follows, given the customer the
opportunity to explain his or her credit needs. That interview is particularly important because it
provides an opportunity for the loan officer to assess the customer’s character and sincerity of

Purpose. If the customer appears to lack sincerity in acknowledging the need to adhere to the terms
of a loan, this must be recorded as a strong factor weighing approval of the loan request.

ii. Making site visits and evaluating a prospective customer’s credit record

If a business or mortgage loan is applied for, a loan officer makes a site visit to assess the customer’s
location and the condition of propriety and to ask clarifying questions. The loan officer may contact other
creditors who have previously loaned money to this customer to see what their experience has been. A
previous payment record often reveals much about the customer’s character, sincerity of purpose, and sense
of responsibility in making use of credit extended by a lending institution.

iii. Evaluating a prospective customer’s financial condition

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If all favorable to this point, the customer is asked to submit several crucial documents the lender needs in
order to fully evaluate the loan request, including complete financial statement and, in the case of a
corporation, board of director’s resolution authorizing the negotiation of a loan with the lender.

Once all documents are on file, the lender’s credit analysis division conducts a through financial analysis of
the applicant, aimed at determining whether the customer has sufficient cash flow and backup asset to repay
the loan. The credit analysis division then prepares a brief summary and recommendation, which goes to the
appropriate loan committee for approval.

iv. Assessing possible loan collateral and signing the loan agreement

If the loan committee approves the customer’s request, the loan officer or the credit committee will usually
check on the property or other assets to be pledged as collateral in order to ensure that the lending institution
has immediate access to the collateral or can acquire title to the property involved if the loan agreement is
defaulted. This is often referred to as perfecting the lender’s claim to

collateral.

v. Monitoring compliance with the loan agreement other customer service needs

The new agreement must be monitored continuously to ensure that the terms of the loan are being followed
and that all required payments of principal and interest are being made as promised. For larger commercial
credits, the loan officer will visit the customer’s business periodically to check on the firm’s progress and
see what other services the customer needs.

2.1.14 DEBT RECOVERY STRATEGY

Monitoring of credit faculties granted to customers a significant function in ensuring the success of the
project for which repayments is made. Huppi and Feder (1990) revealed that effective monitoring leads to
high recovery of loans by exposing possible danger ( like loan diversion) and reminding borrowers of their
obligations to the lending bank(i.e. calling for redoubling of efforts towards loan repayment).

2.1.15 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
29
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;

Gathering data on the potentials 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.

A good credit management system helps to reduce the amount of capital tied up with debtors (people who
owe money) and minimize the exposure to bad debts. Good credit management is vital to cash flow.
According to Edwards (2004), Banks Credit Management process can be summarized in three main stages.
Theses stages are:

1. Credit initiation

2. Documentation and disbursement

3. 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).

2.1.16 CREDIT MANAGEMENT PRACTICE

As noted by Abebaw (2015), credit risk continues to remain the largest sources of risk for banking
institutions in the world. Effective credit management is therefore vital to ensure that the banking
30
institutions credit activities are conducted in a prudent manner and the risk of potential bank failure; of
which success of banks hinge on their ability to manage their credit effectively. Even though there are no
strictly laid down credit management practice, most financial institutions practice the following in order to
maximize profit as well as to reduce credit risk.

LENDING

Lending is one of the core pillars of financial intermediation and for that matter a significant activity in the
operations of banks. It is at the same time highly risky.

This is asserted byMcNaughton(1992), who emphasized that risk taking is central to banking and banks are
successful when the risk they take are reasonably controlled and within their financial reserve and credit
competence. McNaughton was also of the view that to survive the numerous lending risks and to prosper,
bankers must re-examine their bureaucratic tendencies in order to become

responsible to the financial need of the economy. The bureaucratic tendencies could thus cause lots of
frustration for loan applicants to obtain credit at the right time, which may hamper the success of projects.

2.1.17 THE ROLE OF CREDIT ANALYSIS IN MINIMIZING CREDIT RISK

Credit risk analysis is the process of analyzing all available information to determine whether the loan meets
the bank’s risk return objective. It is essentially default risk analysis in which a loan officer attempts to
evaluate a borrower’s ability and willingness to repay (Koch and Macdonald, 2000), According to
Greenbaum and Thakor (1995), credit analysis determines factors that may lead to default in the repayment
of a loan and the principal objective of credit analysis is to determine the ability and willingness of the
borrower to repay the loan.

In other words, the objective of credit analysis is to determine the repayment ability of a potential or
existing customer, to assist in accept reject decision and the pricing policy as well as loan review evaluation.
The problem is how willingness and ability can be measured because loans granted at present are paid back
in the future, which depends on future happenings, and willingness to pay depends on personality
characteristics which is even more difficult to measure. Credit analysis involves examining all relevant
qualitative and quantitative data in order to make a reasonable assurance that the loan will be paid. The
depth of credit analysis depends on the size and complexity of the case and the cost benefit factors.

31
Credit analysis for commercial lending involves identifying inherent risks in the operation of business by
generating a list of factors that indicate what could harm a borrower’s ability to pay, examining what
managers have done or failed to do in justifying those risks, and structuring an acceptable loan agreement
and controlling the risk of the bank in the supplying founds (Koch and Macdonald, 2000).

2.1.19 IMPLICATIONS OF LOANS ON BANKING INSTITUTIONS

Loans generate huge interest for Banks which contribute immensely to the financial performance of banks.
However, when loans go bad, they have some adverse effects on the financial health of banks. This is
because in line with banking regulations, banks make adequate provision and charges for bad debts which
negatively impact their performance. National Bank of Ethiopia regulations on

loan provisioning indicates that loans in the non-performing categories that is loans that are at least ninety
days overdue in the default of repayment will attract minimum provision of 20%,50% and 100%
forsubstandard doubtful and loss, respectively.( NBE,2008). According to Bloem and Gorter (2001), though
issues relating to non-performing loans may affect all sectors, the most serious impact is on financial
institutions such as commercial banks and mortgage financing institutions which tend to have large loan
portfolios. Besides, the large bad loans portfolios affect the ability of banks to provide credit. Huge non-
performing loan could result in loss of confidence on the part of depositors and foreign investors who may
start a run on banks, leading to high problems. 1.1.20 FINANCIAL ANALYSIS

Review, appraisal and follow-up are three basic elements in credit management and decision-making. At the
time of considering fresh proposals or enhancement proposals, the banker reviews the past operations in
order to judge the health status of the client.

Timothy (1995) identified three basic elements used in credit management to evaluate the creditworthiness
of clients.

a) Review is for the past. It should enable the banker to find out whether it is safe to lend to a particular
client. In order to arrive at this decision, the banker has to satisfy himself about the risk and viability of the
unit. Review of any unit involves assessment of solvency, liquidity and profitability of that unit as revealed
by its financial statements, i.e. profit and loss accounts and balance sheets. Review, thus, involves
classification of profit and loss account and the balance sheet according to bank’s requirement and analysis
of these statements.
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b) Credit appraisal implies consideration of fresh or enhancement proposals on the basis of futuristic data.
While appraising proposals, the banker tries to find out: the financial need of the client, end-use of funds,
viability of operations and risk involved. In case of proposals involving working capital finance, the banker
can ascertain the aforesaid factors only when he/she is supplied with the business plan of the borrower for
the ensuring period. Business plan is expressed through operating statement, balance sheet, funds flow, and
cash flow statements, all on projected basis.

c) Follow-up maybe defined as a continuous activity aimed at ensuring observance of stipulations laid down
by the bank, picking up signals on health status of client’s position, remedial action and ensuring results of
action on a continuous basis. Safety, need-based

finance and end-use are the key assumptions of lending. A banker needs various types of data and
information from the borrowers for taking the credit decisions. Such information is generally available in
various financial statements such as income statement, balance sheet, cash flow statement, funds flow
statement, etc. But mere collections of these financial data from the borrowers are of little help unless the
banker is able to use these statements; arrange or classify them according to his/her needs and analyze them
with a view to draw meaningful conclusions.

2.1.21 DEFAULT PROBLEMS

Non-payment of loans has several undesirable consequences. It gradually destabilizes the credit system.
Costs of loan administration of overdue loans are high. Defaults pushup lending costs without any
corresponding increase in loan turnover. Also defaults reduce the resource base for further lending, weaken
staff morale, and affect the borrower’s confidence. According to Pandmanabhan (1986), causes of
delinquencies and defaults are classified as relating to three levels: borrower level, financing institution
level, and economy level.

I. Causes at borrower level:

Borrowers who deliberately divert loans to non-essential consumption find it difficult to meet repayment
commitments on time. Investments fail to generate sufficient incomes due to improper technical advice;
absence of supporting services, inadequate marketing, and etc. investments also fail due to unforeseen
causes like floods, drought, etc. In both cases repayment would be affected.

33
When borrowers have liabilities towards informal lenders, they get precedence over institutional lenders.

Contingencies at borrower household like death, sickness, etc., affect repayment performance.

Formal institutions which do not extend consumption and emergency loans are liable to have higher default
rates.

II. Causes at financing institution level:

Defective procedures for loan appraisal in the financing institutions could lead to the financing of bad
projects and consequent defaults.

Quality of loan officers, their ability and knowledge in the field, and their capacity to judge borrowers as
also the incentive packages available to them affect repayment performance.

Fixing of inappropriate repayment schedules and lack of flexibility often result in defaults. Similarly,
when the procedure for repayment is cumbersome borrowers tend to delay repayments.

Defaults have a ‘spread effect’ particularly in the marginal cases. When lenders show reluctance to
enforce sanctions against conspicuous defaulters, defaults tend to increase through a process of imitation.

III. Causes at economy level:

When overall government policies, particularly those relating to pricing of inputs and out puts, marketing
etc., discriminate against the specific sector.

Faulty monetary and fiscal policies of governments could result in high inflationary conditions.
Borrowers tend to delay repayments in such a situation to take advantage of the falling value of currency

Interest rate policies of government have a vital role in the promotion of repayments. When the real rate
is excessively low, borrowing and consumption will be much more profitable than saving and repayment.

Excessive government intervention in the day-to-day administration of financial institutions

Calamities like drought .floods, market glut, etc. could result non-performing loans.

2.1. 22. COMMON SOURCES OF MAJOR CREDIT PROBLEMS

According to Habtamu (2005), the sources of major credit problems are mentioned below:

34
Most major banking problems have been either explicitly or indirectly caused by weaknesses in credit
management. In supervisors’ experience, certain key problems tend to persist.

Severe credit losses in banking system usually reflect simultaneous problems in several areas, such as
concentrations, failures of due diligence and inadequate monitoring.

Concentrations are probably the single most important cause of major credit problems. Credit
concentrations are viewed as any exposure where the potential losses are large relative to the bank’s capital,
its total assets or, where adequate measures exist, the bank’s overall risk level.

Banking supervisors should have specific regulations limiting concentrations to one borrower or set of
related borrowers, and in fact, should also expect banks to set much lower limits on single-obligor exposure.
Most credit managers in banks also monitor industry concentrations. Many banks are exploring techniques
to identify concentrations based on common risk factors or correlations among factors. While small banks
may find it difficult not to beat or near limits on concentrations, very large banking organizations must
recognize that, because of their large capital base, their exposures to single obligors can reach imprudent
levels while remaining within regulatory limits.

Many credit problems reveal basic weaknesses in the credit granting and monitoring processes. While
shortcomings in underwriting and management of market-related credit exposures represent important
sources of losses at banks, many credit problems would have been avoided or mitigated by a strong internal
credit process.

Many banks find carrying out a thorough credit assessment (or basic due diligence) a substantial
challenge. For traditional bank lending, competitive pressures and the growth of loan syndication techniques
create time constraints that interfere with basic due diligence.

Some credit problems arise from subjective decision-making by senior management of the bank. this
includes extending credits to companies they own or with which they are affiliated, to personal friends, to
persons with a reputation for financial acumen or to meet a personal agenda, such as cultivating special
relationships with celebrity. Many banks that experienced asset quality problems in the1990s lacked an
effective credit review process (and indeed, many banks had no credit review function).

35
Creditreview at larger banks usually is a department made up of analysts, independent of the lending
officers, who make an independent assessment of the quality of accredit or accredit relationship based on
documentation such as financial statements, credit analysis provided by the account officer and collateral
appraisals.

At smaller banks, this function maybe more limited and performed by internal or external auditors. The
purpose of credit review is to provide appropriate checks and balances to ensure that credits are made in
accordance with bank policy and to provide an independent judgment of asset quality, uninfluenced by
relationships with the borrower. Effective credit review not only helps to detect poorly underwritten credits,
it also helps prevent weak credits from being granted, since credit officers are likely to be more diligent if
they know their work will be subject to review.

2.1.23 CREDIT CONTROL

According to 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:

(I) the borrower complies with the stipulated conditions

(II) The facilities are utilized with the purpose for which they were approved

(III) Any deterioration or negative trends in the customers‟ business or prospects are determined and
corrective actions taken.

2.2. EMPERICAL REVIEW

This part of the study takes a closer look on empirical studies on the subject matter. Haron et al. (2012)
assessed credit management system on loan performance of micro finance institutes and to establish the
effect of credit term, client appraisal, credit risk control and credit collection policies on loan performance
of the institute. The researchers used primary data source and quantitative research design to test the
relationships of these selected variables. These researchers have found that credit term formulated by MFI
has an effect on loan performance, involvement ofclient on credit term formulation affects loan
performance, interest rate charged has a reverse effect on loan performance, credit risk controls adopted by
MFI has an effect on loan performance and collection policies of the institutes have high effect on loan
repayment performances. Therefore the research concludes that all the above mentioned variables have

36
relationship with loan performance and hence lenders should make their loan extension in considerations of
these

factors. Al Musharafa (2013), on his study has investigated some of the Bangladesh commercial banks to
evaluate credit assessment activities and to forward possible suggestions.

Up on his study the researcher used both primary and secondary data sources and both qualitative and
quantitative data analysis methods to evaluate the banks credit assessment using banks loan and advance
growth, income from loan, sector credit allocation and credit risk management and nonperforming loan
status of the bank as measuring parameters. The research has found that growth of loan and advances are
sustainable, better sector allocation of loans, better risk management and income from loan and advances
are increasing despite some banks need to improve their general loan policy. Afroz (2013), under his study
the researcher tried to specify and estimate necessity of credit portfolio management of Bangladesh Kirishi
Bank and describe present credit management practice of the bank along with his suggestions. The study
used primary and secondary data sources with descriptive data analysis techniques. The research has found
that: the framework of the bank’s function is not clear, agro business financing is risky for the bank, very
few activities on L/C and other purchase type financing has been made, poverty alleviation credit program
of the bank is successful but very little portion of the total portfolio (only 3%-4%). Agu and Basil (2013), on
their study of Credit Management and Bad Debts in Nigerian Commercial banks, in order to determine

Major causes of bad debts in Nigerian banks using both primary and secondary data like interview,
questionnaires other sources. The researchers also used both qualitative and quantitative data analysis using
time series and regression data analysis tools to identify nature and causes of bad debts in Nigeria.

Accordingly the researchers had found an overall inefficiency of the banks due to inadequate monitoring of
borrowers on their borrowed fund utilization, an increase in lending rate, and failure in appropriate follow-
ups, poor credit policy and weak credit administration practices.Omoijiode (2014), has made a comparative
research under the topic “Critical Assessment of Credit Management in Nigerian Bank Sector”.

This comparative study had been made between Union and Zenith banks of Nigeria for the objective of
establishing level of Union bank and Zenith bank advance and provision against doubtful debts, to evaluate
of Union bank net competitive advantage or disadvantage on credit management and to establish if United
bank net competitive advantage or disadvantage against Zenith bank of Nigeria in their credit management.

37
The researcher used secondary data collected from Nigerian Union and Zenith banks financial reports of
2005/2006, united bank’s loan and advance. The researcher also employed qualitative analysis techniques
and evaluate the two banks loan and advances (using balance score card map), financial perspective, loan
and advance mix (O/D and loans against doubtful accounts provision), customer perspectives (customer
service capability and geographic coverage), internal perspective(relationship management and credit
monitoring), and learn and growth perspective(knowledge, innovation technology and reward system) to
compare loan and advance of the two banks, against their provision for bad debts, to evaluate responsibility
for increasing NPL for Union bank and to analyze competitive strength of the two banks using some success
factors. The research findings show that there is an inverse relationship between Union bank’s loan
portfolios against provision i.e. loan and advance of union bank is lower than Zenith bank’s but the
provision for union bank is higher due to failure to monitor loan and advance efficiently. Success factor
evaluation shows Zenith bank is much better than Union bank of Nigeria.

Joseph ( 2014), on his study on the Effectiveness of loan portfolio management in Rural Saving and Credit
Cooperatives in Tanzania, the researcher has used both primary data in the form of questionnaire on seventy
microfinance officers in fourteen microfinance institutes, using multi regressive and descriptive data
analysis tools to identify factors that affect Credit Portfolio qualities, the finding has revealed that quality of
loan portfolio has strictly influenced by loan size, gender (Female have better repayment history than men),
loan type, borrower’s location, and insurance coverage and status of the loan. Hagos (2010), which is a case
study on “Credit Management Practice of the Wegagen Bank in Tigray Region” using both primary and
secondary data and qualitative and quantitative data analysis tools, has found that the bank was managing its
credit well in many aspects in this specific region. However the researcher has also indicated that very long
loan processes, in adequate credit policy in terms of customers aspect discouraging credit customers, The
researcher has also only short term credit facility resulted in repayment burden on the client within a short
period that leads the customers to termination.

Daniel (2010), focusing on management of non-performing loan on private commercial banks in Ethiopia.
The study employed the mixed type of research. The result showed that credit policy and supervision by the
management has less contribution to the NPLs and most of the NPLs are caused by factors after the loan
released, like Moral hazard of the borrower, ineffective monitoring, and operational loss of the borrower has
created high NPLs in private commercial banks in Ethiopia. Wondimagegnehu (2012), conducted a study on
determinants of NPL in Ethiopia Banks, focusing only bank specific factors that cause NLPs by using mixed
research method. The study conclude that poor credit assessment, failed loan monitoring, underdeveloped
38
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 ascribe to the causes of
loan default. Even if both studies are a very recent one, the gaps are there that are not touched by both
researchers and need further investigation by others

To the extents of my reviews of related research materials, did not find any general or specific study that
made on the assessment of credit management practice in Berhan International bank. Therefore, it is the
researcher’s belief that it is appropriate to carry on the research on the established topic. From the above
empirical review of literatures the researchers observed that there are no studies conducted mainly to
identify the problems related to lack of effective credit management assessed the bank and clients with
reference to Berhan International Bank Share Company.

2.3 Credit management procedure variables

Credit management variables are critical in determining the effectiveness of credit portfolios of financial
institutions. The variables are outlined as follows; The initial phase in restricting the risk involved in
granting a loan facility includes screening customers to guarantee that they have the readiness and capacity
to reimburse the advance.A lot of financial institutions tend to utilize the 5Cs model of credit also known as
credit standards to appraise a customer as a potential borrower (Abedi, 2000). The 5Cs act as a guide for
financial institutions to improve credit management procedure, as they get to know their customers better.
These 5Cs are: character, capacity, collateral, capital and condition.

This assesses the client's qualities in order to examine the willingness of the prospective client to meet the
credit commitments. Kakuru (2000) highlighted the accompanying variables to consider when investigating
applicant's character. This is carried out by factoring the client's savings conduct from the bank records, the
level of training, mental status, occupation dependability, contact, connection to government offices and the
past dealings with bank. The borrower who seeks to be a loan beneficiary of cash endowed to the bank by
its depositors must be very honest someone who will keep their word and who can be trusted. This assesses
the client's capacity to pay the obligation when given in the obliged time period. This is fundamental,
particularly for business, regardless of whether advances are included. This is determined by assessing the
estimation of client's capital and resource offered as guarantee against the advance.

39
The borrower must be, in any event, capable, if not a specialist at their employment or in their calling and
should be able to produce strong evidence to support the viability or otherwise of the business (Kakuru
2000). This alludes to the general state of the organization. “This is ascertained by the analysis of the
financial statements with special emphasis on the risks and the debt-equity ratios and also evaluating the
customer’s firm working capital positions” according to Floucks (2001).The budgetary supervisor can
likewise survey the accounting report to discover how much the proprietor has put into the business as his
own stake (BPP, 2000). A decent dependable guideline would be that a bank would not wish to put in more
cash than the borrower. This alludes to properties like lands, houses, business and private bequests or
whatever other property of quality offered as security of the estimation of the credit given out to the
borrower (Kakuru, 2001). It is obtained by a lender as a claim on the borrower and on the asset that is
secured, and provides a recourse that is available to a bank should the terms of the loan be breached by the
borrower.

The collateral ought to be secure, readily merchantable and that its quality ought to have the capacity to
meet the obligation when sold off in the event that the borrower defaults in payment (Van Horne, 2007).
Most major banking problems have been either explicitly or indirectly caused by weaknesses in credit
management procedure. As noted by Abebaw (2015), credit risk continues to remain the largest sources of
risk for banking institutions in the world. Effective credit management is therefore vital to ensure that the
banking institutions credit activities are conducted in a prudent manner and the risk of potential bank failure;
of which success of banks hinge on their ability to manage their credit effectively. also of the view that to
survive the numerous lending risks and to prosper, bankers must re-examine their bureaucratic tendencies in
order to become responsible to the financial need of the economy are no strictly laid down credit
management practice, most financial institutions practice the following in order to maximize profit as well
as to reduce credit risk. In this leitrecher different things are expressed i.e principle, processetcthese are
related to procedure. Therefore the researchers intend to make research on credit management procedure by
using these variables as they effectively affect these variables.

2.4. SUMMARY OF KNOWLEDGE GAP

Most studies which were conducted on credit management have been conceptual in nature and focusedon
performance. There are limited studies providing evidence to the credit management of emerging banks.
Even if the issue of credit management procedure is equally important for all banks, it is less focused on and
few studies are conducted on the credit management procedure on commercial banks. However, as per the
40
researcher’s knowledge, no study is conducted on private commercial Bank to assess the credit management
procedures. Hence, this study aims to fill the gap in the literature by concentrating on the assessment of
credit management procedure on private commercial Bank. Thus, the researcher felt it is appropriate to
assess the credit management procedure and thereby to recommend courses of action that are assumed to
promote quality loan growth and curtail non-performing loan.

2.5. Conceptualization of the Variables

This section presents the conceptual framework out of a critical review of existing literature on the
variables. The conceptualization in this study will be based on the following variables:
character,capacity,capital, collateral and condition(independent variable) and credit management procedure
(dependent variables).

According ‘Hennie van Greuning and Sonja BrajovicBratanovic ,2020‘ Credit is one of the risk of the bank.
When bank carrying out its duties on behalf of both depositors and shareholders, a board of directors must
ensure that a bank’s lending function fulfills three fundamental objectives, from these “Loans should be
granted on a sound and collectible basis”. The purpose of a credit management procedure capacity review is
to evaluate whether (a) the lending process is well organized (including whether policies are properly
described in internal procedures and manuals).

Therefore 5’c is important for this management “The five C's of credit is a system used by lenders to gauge
the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and
conditions of the loan, attempting to estimate the chance of default and, consequently, the risk of a financial
loss for the lender. But what are these five C's? The five C's of credit are character, capacity, capital,
collateral, and conditions. According ‘JANET BERRY-JOHNSON,onAugest, 26,2021

2.4: Conceptual Framework

Figure 1: Conceptual frame work of the study

Character

Credit management
procedure
Capacity

Positively
41
Influence
 Capital

Collateral

Condition

Source: Source: Developed by researcher

CHAPTER THREE

3. METHODOLOGY OF THE STUDY

In order to achieve the study objectives both primary and secondary data sources are used to undertake this
research. Primary data were collected through questionnaire and interview. The secondary data sources are
annual reports, manuals, credit policy and procedures of private commercial Bank S.C used to the identify
the implementation identification of 5c’c character, capacity, capital, collateral and condition through credit
management procedure.

3.1 RESEARCH DESIGN

42
This research has used descriptive research based on survey method. Descriptive research is basically used
to ascertain and describe the characteristics of variables of interest in some situation and subject of study.
This research design enables the researcher to describe the phenomenon of interest from individual or
organizational perspectives. It is a case study of specific bank and survey method enables the researcher to
have a designed data. Accordingly this study has found this research design appropriate to collects data from
sources and has used quantitative research approach to analyzes the data collected in order to asses and
describes the present practice of credit management procedure in private commercial Bank S.C.

3.1.1 Target Group

The population of interest consisted of all private commercial bank in Nekemte city. There are 9 banks that
are registered and known. The study targeted all these banks. The target population of this study is Banks
credit department employees who are involved in credit processing and administering and the other are
clients of these banks. From credit department employee’s staffs who are directly engaged in loan activities
this means senior bank professionals, Department heads, Branch managers, Assistant branch managers,
Loan section heads, Loan officers, Loan clerk, and Loan Committee members of all branches are in nine
banks in the Nekmete city 92 employees are selected purposively from the Bank and Similarly, 100 clients
those who are loan performance and non-loan performance of banks are engaged in the study. Accordingly,
all questioners were distributed to 9 banks evenly those have high number of client included in the study in
order to verify the bank response.

3.1.2 Sampling Technique

The sampling technique used for the purpose of this study is purposively selected sampling as it is assumed
to provide more efficient sample considering the sort of loan clients and staff of the bank. Moreover, the
sample is assumed to reflect accurately the population on the basis of the criterion used for stratification. As
the bank classifies its clients as performing and non-performing clients based on their repayment status as
per their repayment agreement and the regulatory body, National Bank of Ethiopia, (NBE) two stage
sampling procedure is employed to select the clients for the study. Considering the objectives of the study,
Proportionate purposively sampling approach is followed to select the number of respondents. All
employees who are involved in credit processing and administrating are considered as other additional target
group of the study. Data were collected from unpublished provision report of the Bank S.C. for the period of

43
(2009-2013) and also using questionnaires; the questionnaires formed the basis for generating the primary
data

3.1.3 Sample Size

Professionals working in the nine privet commercial banks in Nekemte city related to credit and credit
related operations as a whole were taken as participants of the study. These are Awash International Bank
S.C, Dashen Bank S.C, Bank of Abyssinia S.C, Wegagen Bank S.C, Oroia International Bank S.C, Oromia
cooperative bank,Buna bank and NIB International Bank S.C.

3.1.4 Data source and data Collection tools

For the purpose of this study, both primary and secondary data are used. Interviews and questionnaires are
used to collect primary data. Unstructured interview is prepared and administered to the staff working in the
loan area and branch managers and assistant branch managers of the Bank.

This helped to address the research questions more specifically or to concentrate more on the topic itself.
Interview is undertaken by the researcher himself in order to effectively gather pertinent information to the
study. Secondary data is collected from clients’ files, annual reports, manuals, credit policy and procedures
of private commercial banks.

3.1.5 Data Analysis Method

In order to evaluate the performance of credit management procedure of private commercial Bank, in
Nakemte city, more of qualitative method of analysis is employed in addition to quantitative method so as to
address the aforementioned problems of the Bank. Both methods of analysis used the data collected through
the unstructured questionnaires, interviews and secondary sources for all research objectives.

Findings, which reflect a high magnitude of problems, were selected from interview and questionnaires by
using lickert scale, the raw data were analyzed, presented, and interpreted to give solutions for the research
problem. Moreover, most of the data were summarized and presented in tables and Figures, by the help of
the Statistical Program for Social Sciences, Version 20, (SPSS, and V20). Percentages for these data were
calculated in order to facilitate the analysis and to make it presentable for the readers. The data collected are

44
more of qualitative in nature; thus, they were presented by using descriptive analysis. Hence, the nature of
the study is descriptive.

45
CHAPTER FOUR

4. DATA ANALYSIS AND INTERPRETATIONS

4.1 Introduction
This chapter presents the findings of the study. The chapter presents the background information of the
respondents, findings of the analysis based on the objectives of the study. The study targeted a sample of
192 respondents from which 165 questionnaires were successfully filled and returned the making a response
rate of 86%.The response rate was appropriate for the study to continue and provide reliable results as
guided by Mugenda and Mugenda (2003) who revealed that a fifty percent response rate is adequate, sixty
percent good and above seventy percent rated very well. This response rate was satisfactory to make
conclusions for the study.

4.2 Validity of Instruments

The validity is a judgment of how appropriate the instruments seem to a panel of reviewers who have
knowledge of the subject matter(Alvi, 2016) .Credit-Management-Credit-Policy-and-Financial-Performance

According to De Vos (1998), a valid instrument measures the concept in question accurately. To ensure
validity, the researcher will use accurate measuring instruments, standardize data collection procedures by
guiding the respondents appropriately and will carry out piloting to determine usefulness of instruments,
clarity in terminology, focus of questions, relevance and applicability, time required and methods for
analysis. The findings of the pilot study and the respondents’ comments were used to enhance the quality of
the questionnaires so that they adequately address the constructs of the study.

4.3 Reliability of Instruments

A questionnaire with a high reliability would receive similar answers if it is done again or by other
researchers (Bryman& Bell, 2007) Utilizing data from the pilot test, the reliability was determined through
the Cronbach alpha coefficient analysis. The Cronbach alpha reliability recommends a reliability coefficient
of α = 0.70 and above. Cronbach alpha provides a good measure of reliability because holding other factors
46
constant the more similar the test content and conditions of administration are, the greater the internal
consistency reliability. The reliability results are shown in Table

Reliability Statistics

Cronbach's Alpha N of Items

.834 47

Table2

The reliability test shown in Table 2 produced Cronbach alpha (α) values of greater than 0.70, making the
questionnaires largely reliable as recommended by Fraenkel and Wallen (2000)

4.4 Demographic Information

The section presents the background information of the respondents who took part in the study. This
information was critical in understanding and classifying the different responses according to the
respondents’ background information. The background information gathered includes the gender of the
respondents, age of the respondents, level of education, marital status and designation within the
organization and duration worked in Microfinance industry. The demographic character is categorized in to
respondents together and employees of banks separately.

4.4.1 Demographic Information of both banks employees and clients.

The section presents the background information of the respondents who took part in the study together
employee of the bank and clients. This information was critical in understanding and classifying the
different responses according to the respondents’ background information. The background information
gathered includes the gender of the respondents, age of the respondents, level of education and duration
worked in the bank industry.

4.4.2 Gender of the Respondents

47
 Frequency Percent Valid Percent Cumulative Percent

Male 110 66.7 66.7 66.7

Female 55 33.3 33.3 100.0

Total 165 100.0 100.0

Figure 4.1: Gender of the Respondents

The mix of gender of the employee in the loan area as The study sought to determine the gender
composition of the respondents, from the findings the study established that majority of the respondents
were males as shown by 66.7% whereas 33.3% of the respondents were females, this is an indication that
both genders were to same extent not equally well involved in this study and thus the finding of the study
did suffer from gender bias.

4.4.3 Age of the Respondents

Frequency Percent Valid Percent Cumulative Percent

18- 25 24 14.5 14.5 14.5

26-35 51 30.9 30.9 45.5

36-45 48 29.1 29.1 74.5

Above 45 42 25.5 25.5 100.0

Total 165 100.0 100.0

Figure 4.2: Age of the Respondents

48
The study requested the respondent to indicate their age category, from the findings as shown in figure 4.7
above the study established that majority of the respondents as shown by 30.9 were aged between 26 to 35
years, 29.1% of the respondents were aged between 36 to 45 and 25.5% of the respondents were aged
Above 45 to years and the remaining 14.5% of the respondents were aged between 18 to 25 years. This is an
indication that respondents were well distributed in terms of age.

4.4.4 Marital statas of respondants

Frequency Percent Valid Percent Cumulative Percent

Single 49 29.7 29.7 29.7

Married 108 65.5 65.5 95.2

Widowed/
8 4.8 4.8 100.0
divorced

Total 165 100.0 100.0

Figure 4.8: Marital status of the Respondents

By its nature the financial industry is very sensitive and risk exposed requiring human resources who are
responsible for loan, trust full, and accountable for the prudent responsible for loan activities of the finance.
Hence if the employee and clients working in such exposed activates is tied up with such social
responsibilities it adds value. In the table 4.8, 65.5 percent of respondents are married while 29.5 percent are
yet single the rest 4.8% are divorced.This is an indication that both genders were well involved in the bank
duty and thus the finding of the study did not suffer from gender bias to respond the question.

4.4.5 Education level Achieved of respondants

49
 Frequency Percent Valid Cumul
Percent Percen

Primary education 9 5.4

Secondary education complete 12 7.3

Diploma 45 27.3

Degree 85 51.5

Master 14 8.5

Total 165 100.0

Figure 4.3: Education level achieved

The study requested respondents to indicate their education level, from the findings, 51.5% of the
respondents indicated their highest education level as Bachelors’ degree,8.5% of the respondents indicated
their highest education level as masters ,27.3% of the respondents indicated their highest education level as
diploma level and 7.3% of the respondents indicated their Secondary education level whereas and 5.4 % of
the respondents indicated their Primary educationlevel . This is an indication that majority of the
respondents engaged in this research had university degree certificates as their highest level of education.So
that they can respond the question properly.

As it is known this chapter is concerned with the presentation, analysis, and interpretation of the data
gathered via primary sources both questionnaires and interviews and secondary sources collected from the
bank’s annual reports, manuals and data bases. The analysis of the below s five factors was used by four-
Point Likert scales published by Iowa State University Extension (2010) as follow:

1. Character

Most of the Some of the seldom Never Total

Time time

50
 Fr % Fr % Fr % Fr %

1 The bank staff visit business 70 42 26 10 18 11 50 30

site during loan request or
before loan approval?

2 The bank use of customer 100 61 20 12 33 20 12 8

credit application forms to
improves approval and credit
management as well

3 The bank look at relevant 55 33 10 6 14 9 86 52

experience of the loan applicant

4 The bank consider the past 50 30 15 9 24 15 76 46

repayment track record of
applicants

5 The Bank Checks the borrower 52 32 16 10 34 21 63 38

history before granting loans

1.1.In item Q4 of the above table 1, respondents were asked whether the bank assigned staff for visit site
during loan request or before loan approval . The majority of respondents, 70(42%) agree as most of the
time assign the staff , Specifically, 26 (10%) respondents response as some of the time, and 18(11%)
respond assigns seldom furthermore, the rest 50(30%) of respondents never assign respectively. This
implies however there is an assignment that the bank has not frequent monitoring visit to clients that lead to
non-performing loan.

1.2 .The use of customer credit application forms improves monitoring and credit management as well, as
shown by a 100(61) agree as most of the time use , 20(12)% some of the time12(8% ) never and the rest
33(20).seldom . The forms help to identify the character of customers. So the banks use customer
application forms improving monitoring and credit managements

1.3 In the same table 1.3 respondents were asked whether the bank look at the relevant experience of loan
applicants with this regard 55(33%) of the respondents agreed as most of the time look and 86(52% )agree
51
as never , and 10 as some of the time look the rest 14(9%) agree as seldom. As it can be seen on item of
table the majority of respondents disagreed as the bank properly carried out consideration of the customers
experience .

1.4 It is clearly seen and respondents witnessed on table 1.4 item being 50(30% )of them agreed as most of
the time consider the past repayment , 15(9%) agree some of the time consider the past
repayment ,76(46%) as never the rest 24(15%) seldom. So this indicate the bank did not properly consider
the past repayment track record of applicants.

1.5 As indicated in table 1.5 item respondents were asked whether the bank checks the borrower’s history
before granting loans or not. With this regard, 52(32%) of the respondents agree most of the time as the
bank checks, 16(10%) as some of the time, while 63(38%) of respondents never that the bank checks the
history of a borrowers and on the other hand 34(21%) respondents seldom the bank checks on the issue.
This denotes the banks not properly check borrower’s history, so there is a chance to increase the tendency
of non-performing loan since the history of the client not checked during assessment as it should be.

2. Capacity

Most of the Some of the seldom Never Total

Time time

52
 Fr. % Fr. % Fr. % Fr. %

1 Failure to assess customers 88 53 11 7 25 15 41 29

capacity to repay results in loan
defaults

2 The Bank properly assessed the 55 35 7 4 29 18 74 45

customer ability to meet
obligation

3 Banks conceder as customers 53 32 47 28 15 9 50 30

are having sufficient training
on loan usage

4 Lack of customer experience is 62 38 - - 22 13 81 49

analyzed by bank

5 Submission of incomplete data 50 30 14 9 41 25 60 36

by the prospective borrower is
analyzed

2.1 As indicated in table 2.1 item respondents were asked whether the bank failure to assess customers
capacity to repay results in loan defaults with this regard, 88(53%) of the respondents agree as most of the
time the banks failure to assess customers capacity to repay results in loan defaults,11(7% ) agree as some
of the time there is failure to assess and also as shown 41(29) respond as never and the rest 25(15%)
seldom . This indicate there is failures to assess customers capacity by banks.

2.2 In same table 2.2 respondents were asked whether the banks properly assessed the customer ability to
meet their obligations. The majority of respondents 74(45%) never agree with the idea. On the other hand,
55(33%) of respondents agree as most of the time the bank assess and 7% some of the time assess and the
rest 29 (18%) of respondents respond as the bank assess seldom. This infers that the bank has not properly
assessed the customers’ ability to meet their obligation in the credit granting process.

2.3 It can be seen from table 2.3 that 47(28%) of respondents have responded some whether the bank
conceder the customers have sufficient training on loan usage or not,53(32%) are agree as most of the time
53
 have training considered , 15% seldom have training considered and the rest 50(30%) of respondents
respond never. In this case clients have a training not properly considered before this might lead to default
loan diversion.

2.4 In table customer experience are considered, most of the time lack of experience analyst is agreed by
62(38%) by respondents, 81(49%) respondents never and while the rest 22(13%) seldom. This signifies
that the lack of experience of client on loan analysts is a factor to analysis as indicated above lack of
customer is not properly considered as expected customer experiences.

2.5 In table 2.5 submissions of incomplete data by the applicant is as a cause for defaults. Accordingly 50(30%)
of them agreed as most of the tme analyzed, 60 (36%) never, 14(9%) some of the time analyzed and
41(25%) seldom analyzed. This indicates that one factor for defaults on loan granting in the submission
of incomplete and irrelevant document by the clients. Therefore the banks did not analyzed properly as it
should be the submission of data by customers.

3. Capital

Most of the Some of the seldom Never Total

Time time

1 The bank demands a business 70 42 - - 29 18 66 40

plan from all clients to identify
risk exposure of having capital

2 The bank carried out credit 49 30 12 7 14 9 90 55

processing activities
independent of appraisals of
capital

3 Collateral coverage is 103 62 - - 14 9 48 29

regularly assessed and related
to the borrower’s financial

54
 positions or capital

4 The bank has appropriate 94 51 11 7 20 12 40 24

criteria for Credit classification
and provisioning

5 The bank assigns staff to visit 84 51 9 5 23 14 49 30

business capital during loan
request or before loan approval

3.1 Though; Solid loan appraisal process is considered as the foremost means to control loan quality.
Following this the researcher raised some questions. As indicated in table 3 respondents were asked whether
the bank analyze borrowers risk exposure of capital by inquiring business plan 70(42%) of the respondents
agreed as most of the time inquiring business plan while 66(40%) never inquiring business plan and the
rest 29(18%) in the mean time of the respondents as seldom. Therefore in addition of never with seldom the
banks partially identify business plan of the customers.

3.2 As of table 3 shows, 49 (30%) of respondents agree with the idea that the bank most of the time carried
out credit processing independent of the appraisal, 12(7%) as some of the time carried out credit processing
independent of the appraisal, 90(55%) never carried out credit processing independent of the appraisal and
the rest 14(9%) seldom respectively. These revealed there is segregation of duty in the credit department.
Therefore the bank carried out credit processing activities dependent of appraisals of capital.

3.3 In table 3.3, respondents were asked whether the collateral coverage is regularly assessed and related to
the borrower’s financial position or capital. The majority of respondents 103(62%) agree as most of the time
regularly assessed, 48(29%) never regularly assessed, Whereas 14(9%) of respondents are seldom regularly
assessed. This indicates that the bank uses assessing process on customers, their collateral coverage
regularly in considering capital of customers.

3.4 In same table respondents were asked whether the bank has appropriate criteria for credit classification,
provisioning and write-off. The majority of respondents 94(51%) agree as most of the time with the idea.
On the other hand,40(24%) of respondents never the bank has appropriate criteria for credit classification,
provisioning and write-off ,11(7%) respondents responded as some of the time and the rest 20(12%)

55
 respondents seldom. It denotes that the bank has appropriate credit administration criteria that help to abide
on its policy in identifying capital of clients.

3.5 In the above table 3.5, respondents were asked whether the bank assigned staff for visit business capital
during loan request or before loan approval. The majority of respondents, 84 (51%) agree as most of the
time, 9(5% )some of the time 49(30%) never the bank assigned staff and the rest 23(14%) seldom the bank
assigned staff respectively. This implies that the bank has partially monitoring visit to clients that lead to
non-performing loan in identifying capital.

4. Collateral

Most of the Some of the seldom Never Total

time time

1 The bank has enforcement of 95 58 10 6 20 12 40 24

guarantee policies provides for
loan recovery in case of loan
defaults

2 The bank look at collateral 81 49 15 9 19 12 50 30

whenever granting any loan

3 Bank make collateral estimation 60 36 - - 22 13 83 50

regularly in assessed & related
to applicants financial health

4 The bank has well-structured 86 52 - - 23 14 56 34

documentation tracking systems
for credit and collateral files

5 There is fair collateral 60 36 11 7 20 12 74 45

56
estimation of the banks

4.1 In table 4.10 above 95(58%) of respondents agree as most of the time that bank has enforcement
policies, the bank has enforcement of guarantee policies provides for loan recovery in case of loan defaults
while 10(6%) some of the time bank has enforcement policies ,40(24%) never bank has enforcement
policies and the rest 20(12%) seldom . It signifies that the policy is stringent enough to inhabit access to
credit, but there is the policy in concerning collateral but there is the problem in estimation as indicated in
interview. Therefore agreed that bank has enforcement policies to chances for loan recovery in case of loan
defaults as shown.

4.2 In the above table 4.2, respondents were asked whether the bank look at collateral whenever granting
any loan The majority of respondents, 81 (49%) agree as most of the time the bank look at collateral ,
15(9%) some of the time the bank look at collateral,50(30%) the respondents responded as never the bank
look at collateral and the rest 19(12%) seldom as the bank look at collateral respectively. This implies that
the bank has partially look collateral whenever granting a loan.

4.3 Also the Structured Questioners prepared were focusing on the monitoring and control of credits among
this in the aforementioned table 4.9 item (a) respondents were asked whether the bank do collateral
estimation regularly related to the borrowers financial health with this regard 60(36%) of the respondents
agree as most of the time bank do collateral estimation regularly related to the borrowers financial health,
83(50%) of them never and 22(13%) of the respondents were seldom as bank do collateral estimation
regularly related to the borrowers financial health . This indicates that the bank uses assessing its Collateral
coverage regularly not relate to applicants financial health.

4.4 In table 4.4 respondents were asked whether the bank has well-structured documentation tracking
system for credit and collateral files, their response suggest that 86(52%) agree as most of the time bank has
well-structured documentation tracking system, 56(34%) respondents responded as bank has never well-
structured documentation tracking system and the rest 23(14%) seldom. This revealed that as there is the
availability of tracking system on collateral files. But difficulty in the identifying submitted files.

4.5 In same table respondents were asked whether the bank properly assessed the customer collateral
estimation. The majority of respondents 60(36%) agree as most of the time with the idea. On the other hand,
57
 11(7% ) agree as some of the time 74(45%) of respondents never agree which means that almost
respondents were not comfortable with the collateral estimation of the bank and the remaining 20(12%)
were seldom collateral estimation . In the client’s responded denotes that the bank has lengthy of loan
granting process and unfair collateral estimation.

5. Condition

Most of the Some of the seldom Never Total

time time

1 Regular reviews have been 58 35 6 4 20 12 81 49

done on processing policies to
improve identification condition
of customers in credit
management

58
2 Does the bank do pre audit 58 35 7 4 17 11 83 50
before fund has been released to
the applicant

3 The bank implement the 44 26 15 9 26 16 80 48

condition & sanction set by
different approving organs

4 The bank monitor the business 51 31 10 6 14 8 90 55

condition of clients before
granting credits on regular
interval basis

5 Risk analysis and assessment 58 35 8 5 16 10 83 50

is done for identification of
the outcomes of customers

5.1 In table 4.4 respondents were asked whether the bank regular reviews on processing policies to
improve identification condition of customers in credit management , their response suggest that 58(35%)
agree as most of the time 6(4%) as some of the time , 81(49%) never and the rest 20(12%) seldom. This
revealed the regular reviews have not been done on as it should be in identification condition of customers
in credit management.

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5.2 Item (b) of table 4.9 assessed whether the bank do pre-audit before disbursement has been made to the
borrower 83(50)% of the respondents never the bank do pre-audit ,58(35) agree most of the time ,7(4%)
some of the time and the rest 17(11)with the statement are seldom. Therefore majority of respondents
answer the bank don’t properly do pre audit before fund has been released to the applicant.

5.3 As can be seen from table 5.3,the respondants are asked as the bank implement the condition & sanction
set by different approving organs, 44(26%) of respondents agree most of the time ,15(9%) as some of the
time and 80(48%) of respondents never with the proposition that the bank strictly implement the conditions
and sanctions set by different approving organs and the rest 26(16%) of respondents response seldom. This
is an implication that the bank has a less stand in implement the conditions and sanctions set by different
approving organs that help to monitor and control its loans provided to creditors and indentify condition of
customers.

5.4 The result presented in table 5.4 indicates that 51(31%) agreed most of the time the bank monitors the
business of clients before granting credits on regular interval basis,10(6%) as some of the time 90(55%)
never as the bank monitor the business condition of clients whereas the remaining of the respondents 14(8%
) seldom. As indicated this shows there is no satisfied monitoring on disbursed loans that help to mitigate
increasing trend of NPLs in understanding the condition of customers’ conditions.

5.5 The study sought to determine the extent to which the respondents the above statements risk analysis
and assessment is done for identification of the outcomes of customers. From the findings, majority of the
respondents 83(50) never risk analysis and assessment is done , 58(35) agree most of the time ,8(5%) agree
as some of the time and the rest 16(10%) seldom. This showed in table majority of respondents agree that as
there is less risk analysis and assessment is done for identification of the outcomes of customers.

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CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction
This chapter presents the discussion of key data findings, conclusion drawn from the findings highlighted
and recommendations made there-to. The conclusions and recommendations drawn were focused on
addressing the objective of the study. The researcher had intended to determine the assessment of credit
management procedure (a case study of private commercial banks S.C Nekemte city) and hence, the study
focused on

The “5 Cs of credit” is a conmen phrase used to describe the five major factors used to determine a
existence of credit management procedure refer to character capacity capital,collateral and condition with
loan performance

5.2. Summery

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

As far as the bank strives hard to assure the quality of its credit; the Bank implemented internal credit
management procedure factors character,capacity,capital,collateral and condition procedure majority of
respondents believed it is is not implemented as it should be at branch level to support the loan processes
and to classify customers on a risk level. The majority disagreed that it is supported by information systems
while the remaining are uncertain or agreed.

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According to ,(Tracy Sheppard )Written as it is known the researcher used 5’c for the assessment of credit
management procedure (a case study of private commercial banks S.C Nekemte city) because the “5 Cs of
Credit” is a common phrase used to describe the five major factors used to determine credit management
procedure in potential borrower’s creditworthiness. Financial institutions use credit ratings to quantify and
decide whether an applicant is eligible for credit and to determine the interest rates and credit limits for
existing borrowers. So if this fulfilled credit management procedure is properly applied.

Credit analysis by a lender is used to determine the risk associated with credit management procedure
factors. Credit analysis is governed by the “5 Cs:” character, capacity, condition, capital and collateral.
Therefore the researcher used 5’c as factors of credit management procedure. So the factors are analyzed in
credit management procedure as such:-

5CS of credit-Character

Character is the most comprehensive aspect of the evaluation of creditworthiness. The preise is that an
individual’s track of managing credit and making payments indicates their “character” as relevant to the
lender,i.e .., their propensity for repaying a loan on time.Past default imply negligence or irresponsiblility,
which are undesirable character traits owing to the degree of specialization required in complining a detailed
list on table

They will also ask about the licensing and whether or not they have a criminal record.As history is the best
predictor of the future, a lender will examine the personal credit of all borrowers and guarantors involved in
the loan. Sound business and personal credits are a must.

So,the researcher revealed that using different five questions related to Credit Management procedure
analysis. Those are,however there is an assignment of the staff ,but the majority of the respondents agreed
that staff of the bank has not frequent monitoring visit to clients that lead to non-performing
loan,concerning customer application forms ,the majority of the respondents agree that the banks use
customer application forms improving monitoring and credit managements it helps to identify the character
of customers, as it can be seen on item of table the concerning customers experience majority of
respondents disagreed the bank carried out consideration of the customers experience ,as indicate the bank
properly consider the past repayment, the majority of the respondents agreed thatthe bank did not properly
consider the past repayment track record of applicants and lastly the banks check borrower’s history,the
62
majority of the respondents agreed that the banks not properly check borrower’s history, so there is a chance
to increase the tendency of non-performing loan since the history of the client not checked during
assessment as it should be.

5Cs of credit-Capacity

As it is known a borrower’s capacity to repay the loan is a necessary factors for determining the risk
exposure for the lender. One’s incomen amount, history of employment, and current job stability indicate
the ability to repay outstanding debt. An entity’s Debt-to-Income (DTI) Ratio, the ratio of its current debt to
current income (before taxation ),may be evaluated. Collateral is not considered a fair metric for quantifying
one’s capacity it is only liquidated when the borrower fails to repay the principlal amount of a loan,

So the lender wants to know that your business is able to repay the loan. The business should have
sufficient cash flow to support its business expenses and debts comfortably while also providing principals’
salaries sufficient to support personal expenses and debts. So,the researcher examining capacity n using
different five questions related to Credit Management procedure analysis . concerning failures to assess
customers capacity by banks ,From the analysis it is clearly shown that majority of the respondents agree
that there is failures to assess customers capacity by banks this indicate there is failures to assess customers
capacity by banks,2 concerning the bank has assessed the customers’ ability to meet their obligation,the
majority of respondents agree that the bank has not properly assessed the customers’ ability to meet their
obligation in the credit granting process 3 concerning clients have training on loan before, in this case
majority of respondents agree that clients have not ta training this might lead to default loan diversion. 4
concerning lack of customer experience is considered, as this signifies that the lack of experience of loan
analysts is a factor to analysis as indicated above themajority of respondents agree that lack of customer
experiences not considered as expected ,5concerning submission of of incomplete data by customers is
analyzed by banks,the majority of the respondents agreed that the banks did not analyzed properly as it
should be the submission of incomplete data by customers.

5Cs of credit-capital

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Capital represents the overall pool of assets under the name of the borrower. It represents one’s investments,
savings, and assets such as land,jewelry, etc.Loans are primarily repaid using overall household
income;capital is additional security in case of unforeseen circumstances. Soothe lender will ask what
personal investment the customer plan to make in business. Not only does injecting capital decrease the
chance of default, but contributing personal assets also indicates that you are willing to take apersonal risk
for the sake of your business;it shows that you have ‘skin in the game So,the researcher examining capital
in Credit Management procedure in using different

question related to it. From the analysis it is clearly shown that thebanks identify business plan of the
customers,The majority of the respondents agreed that in addition of disagree with neutral the banks
partially identify business plan of the customers, The bank carried out credit processing activities
independent of appraisals of capital the majority of the respondents agreed that there is segregation of duty
in the credit department. Therefore the bank carried out credit processing activities independent of
appraisals of capital. concerning collateral coverage is regularly assessed and related to the borrower’s
capital, The majority of the respondents agreed that the bank uses assessing their collateral coverage
regularly in considering capital of customers.concerning the bank has appropriate criteria for Credit
classification and provisioning ,The majority of the respondents agreed that the bank has appropriate credit
administration criteria that help to abide on its policy in identifying capital of clients and concerning the
bank assigns staff to visit business capital during loan request approval, the majority of the respondents
agreed that the bank has partially monitoring visit to clients capital that lead to non-performing loan in
identifying capital when disagree add to neutral in analysis.
5Cs of Credit – Collateral
The banks will consider the value of the business’ assets and the personal assets of the guarantors as a
secondary source of repayment. Collateral is an important consideration, but its significance varies
depending on the type of loan. A lender will be able to explain the types of collateral needed for your loan.

So when being assessed for a secured product such as a car loan or home loan borrowers are required to pledge certain
assets under their name as collateral. They may include fixed assets such as the title of parcel of land or financial
assets and securities such as bonds the evaluation of the liquidity of collateral is also dependent on the type of asset,
its location and potential marketability.
64
So,the researcher examining that collateral in Credit Management procedure in using different question
related to it. From the analysis it is clearly shown the bank has enforcement of guarantee policies, the
majority of respondents agreed that there is enforcement of guarantee policies to provided chances for loan
recovery in case of loan defaults as shown the bank look at collateral whenever granting any loan, the
majority of respondents agree that the bank has partially looked collateral, so this describes that the
respondents agree that the bank look at collateral not as it is needed, concerning bank make collateral
estimation regularly in assessed & related to applicants financial health, the majority of respondents agree
that the bank uses assessing its Collateral coverage regularly not relate to applicants financial health as it
should be ,concerning the bank has well-structured documentation tracking systems for credit and collateral
files ,the majority of respondents agree that the availability of tracking system on collateral files, but
difficulty in the identifying submitted files in its reality, concerning there is fair collateral estimation of the
banks, the majority of respondents agree that almost majority of the respondents agree that there were not
comfortable with the collateral estimation of the bank. In addition of interview of respondents the client’s
responded denotes that the bank has lengthy of loan granting process and unfair collateral estimation.

5Cs of credit -Condition

Condition refers to the specifics of any credit transaction, such as the principal amount or interest rate. Lenders assess
risk based on how the borrower plan to use the money should they receive it other external features such as state of
the economy prevailing federal interest rates industry specific legislation and political change are also considered. The
features are not individualistic as they cannot be influenced by the borrower .Nevertheless they indicate the level of
risk associated with a certain investment.

So the lender will need to understand the condition of the business, the industry, and the economy, which is
why it is important to work with a lender who understands the WCB industry. The lender will want to know
if the current conditions of the business will continue, improve or deteriorate. Furthermore, the lender will
want to know how the loan proceeds will be used- working capital, renovations, additional equipment, etc.
So,the researcher examining the condition in Credit Management procedure in using different question
related to it. From the analysis it is clearly shown,1concerning regular reviews have been done on
processing policies to improve identification condition of customers in credit management, the majority of
65
respondents agree that the regular reviews have been done partially as it indicate condition of credit
management,2concerning does the bank do pre audit before fund has been released to the applicant,the
majority of respondents agree thatthe bank don’t properly do pre audit before fund has been released to the
applicant,3concerningthe bank implement the condition & sanction set by different approving organs,the
majority of respondents agree that the bank has a less stand in implement the conditions and sanctions set by
different approving organs that helps to monitor and control its loans provided to creditors and identifying
condition of customers,4 concerning the bank monitor the business condition of clients before granting
credits on regular interval basis,the majority of respondents shows there is no satisfied monitoring on
disbursed loans that help to mitigate increasing trend of LPNs in understanding the condition of customers
conditions.5 concerning risk analysis and assessment is done for identification of the outcomes of
customers, the majority of respondents show that as there is less risk analysis and assessment was done for
identification of the outcomes of customers

5.2 Conclusion
In this chapter, a conclusion of the research findings that has been discussed and analyzed in detail in the
previous chapters is briefly presented. In addition, general conclusions that are highly related with the
research objective of this paper are offered. Furthermore, possible recommendations based on the findings
are made. Lastly, implication for further research is indicated.
As qualified, socially responsible and experienced manpower enhances competence majority of employees
of the bank working in credit area are few are MA holder and majority are degree holders still updating
their educational status, married and less experienced, this enables the bank to accelerate its service
delivery and become competitive in the growing stiff competitive industry, to meet its vision of “Becoming
the most preferred Bank in Oromia.” And ,,number one bank in Ethiopia in 2030‟

The study identified the importance of those major factors in the of assessment credit management
procedure. It outlined that major factors identification in credit management procedure to ensured that the
management function is established throughout the whole operation, it helps to sort risk according to their
importance and assists the management to develop credit management procedure strategy to allocate
resources efficiently. This in turn helps the management of the bank in putting in place measures to curb the
risk and this enhances efficiency of services of the institutions.

66
The study established that major factors monitoring can be used to make sure that credit management
procedure practices are in line and proper risk monitoring. It also established that major factors monitoring
helps in the MFI’s management to discover mistake at early stage and that directors report on monitoring
enables the shareholders to assess the status of the corporation knowledgeably and thoroughly.

It can be concluded that there is a partially positive and less significant relationship between credit
management procedures and financial performance of the MFIs. This implies that it more needs increase in
major factors could help reduce credit risks management procedure in the institutions and further increase
the profitability the MFIs.
Hab The credit policy and procedures as well as other pertinent manuals and guidelines help to create
common understanding and uniformity among all employees and customers. The Banks is partially
compliant to all directions of national bank of Ethiopia in all of its activities of credit management. Hence
the way of categorizing and holding provisions for the non performing loans is bank strives as per the
direction and requirement of the National bank of Ethiopia.
As far as the banks strives to assure the quality of its credit; the Banks implemented internal credit
management procedure the majority of respondents believed that it is less implemented at branch level to
support the loan processes and to classify customers on a risk level. But the majority agreed that it is
supported by information systems while the remaining are uncertain or disagreed.

Submission of incomplete documentation and centralized credit decision mainly affects accurate and timely
decision which makes loan delivery time of the bank lengthy. The majority of the respondents agreed that in
the process there is less identification procedure document is taken

Most respondents revealed the credit analysis and appraisal of the major factors by banks is in a satisfactory
condition in addition to the matters that the credit granting and monitoring is influenced by influential
persons of the bank which makes decision subjective. It was an understanding of most respondents that
influential personnel‟s involve mainly when they found the client having a potential for the most part.
Hence, proper monitoring of major factors has assumed greater significance in the effective management of
leading yet most of the respondents have witnessed that the bank does not provide any advice on the usage
of loan and no per audit is made prior to disbursements which are critical factors. Most branches even

67
though it is clearly stated on the credit policy of the bank do not also undertake post disbursement visit
unless there is something wrong with the loan repayment
From the findings, the study found that client appraisal and major factors control had effect on financial
performance of MFIs. The study established that there was no strong relationship between financial
performance of bank and client appraisal and major factors control policy.

The study revealed that a unit increase in client appraisal would lead to increase in financial performance of
MFIs in Ethiopia; this is an indication that there was partial positive association between client appraisal and
financial performance of MFIs, this is an indication that there was a negative relationship between financial
performance of MFIs and major factors policy. Character, capacity, capital, collateral and condition are
significantly influence financial performance procedure of bank in Ethiopia.
The overall credit management procedure activity of the bank needs the attention of the management. The
main problem in credit management procedure (a case study of private commercial banks S.C Nekemte city)
is not lack of clear policy and procedure rather a problem in the implementation of the existing guidelines in
proper manner. The finding of the study also assures existence of poor credit management including
improper follow-up. The following conclusions are drawn.
-While the existing credit control activities of the bank and credit staff requirements are complied with the
stipulated policy in a little or poor manner. This indicates that the mentioned activities are performed in
deviation from the policy guideline.
-The bank does not undertake credit quality report so devising a strong credit management procedure
environment is mandatory.
The credit approval period shall be partially reasonable as soon as possible. Submission of incomplete data
by the applicant is a reason for delay the loan officer or branch manager should use a checklist as first
contact as the time of application and resolve the incompleteness. High dependability on collateral that leads
to skewness of loan therefore the bank should not properly reduce high dependability on collateral.

68
5.3 Recommendations
Credit management procedure based on the in-depth examination and subsequent findings from the study,
the following recommendations are forwarded; in the hope that they would help in order to curb the major
problems identified in the study and facilitate the overall credit related activities.
The study recommends that stiff measures should be put in place to run the credit management procedure in
order to enhance positive performance in the banks. The management in the banks should spearhead in
application of procedures which are applied in the credit management procedure of Microfinance
institutions

Effective CRM involves establishing an appropriate credit management procedure; operating under a sound
credit granting process; maintaining an appropriate credit administration that involves monitoring process as
well as adequate controls over credit risk. It requires top management to ensure that there are proper and
clear guidelines in managing credit procedure, that is, all guidelines are properly communicated throughout
the organization; and that everybody involved in CMP understand them.

Private commercial International Banks should formulate an appraisal process or procedures for loan
granting that would encompass matters with basic identification of credit worthy customers, comprehensive
credit analysis and authentic sanctioning process.
The appraisal process should also capture consideration of basic 5cs, including capital adequacy, capacity of
the applicant, value of the collateral (fair estimation), repayment history (character) and the overall business
conditions. PCB should also make use of approved and certified feasibility report of the proposed project
which was suggested by appropriate technical professionals before financing.
Frequent contact or business visit shall be conducted to minimize loan loss since it helps the bank to advise
the customers besides reduces diversion of the loan.

The study also recommends that there is need for MFIs to enhance their client appraisal techniques so as to
improve their financial performance. Through client appraisal techniques, the MFIs will be able to know
credit worth clients and thus reduce their nonperforming loans.
The Bank did not monitors the business of clients as it should be during granting credits on regular interval
basis besides customers are not advised regarding loans usage but it should be undertaken to control the end
use of the loan.

69
There is need for increased assessment of borrowers through the use of qualitative as well as quantitative
techniques. Clear established process for approving new credits and extending the existing credits is very
important while managing credit management procedure.

The bank advisable give more emphasize on its implementation on credit policy and procedure, in order to
have a better approach that will meet the objective of the bank.

The bank advisable frequently follow-up by visiting borrowers business to create long- lasting relationship
and assure future payment.
Hab The bank is advisable assess borrowers past financial history, credit worthiness and perform detail
financial analysis before extending loans to avoid non-performing loans. Requesting financial report is not
enough by itself.
Employment of experienced staff on critical areas (Loan analyst). Challenge faced by the bank includes
knowing the customer, dependency on collateral, lack of awareness of individuals work on credit about the
credit policy and procedure of the bank

Private commercial International Banks management has to formulate a mechanism for upgrading the
carrier of the employee’s thorough continuous training

The bank should assess the training need of the credit Department for both technical and management staffs
to give appropriate training that enables to conceptualize, design, and made operational an internal credit
rating system that suits the banks’ operations to control risk of Private commercial International Bank
exposures

The bank should perform periodic loan review which addresses all or at least majority of loans that are
currently outstanding this activity is the main internal control which enable the bank to know the credit risk
level of the total loan and to increase the effectiveness credit management procedure.

5.3. Area for future research

70
This study is under taken in private commercial banks S.C in a case study of credit management procedure
of the Bank it is only limited to private commercial bank in Ethiopia because of time limitation but if the
credit management procedure of other commercial bank in Ethiopia are considered all and a comparison
analysis is done.

4.3. In depth interview

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

First before I choose my interviewees profiled their position function in relation to the topic of my research.
Since they study is about credit management procedure of private commercial banks there is no better place
than credit portfolio management department the bank to conduct the interview with since the staff in that
department is solely engaged in the credit management process. The next step I took was setting a
requirement and from all the staffs I choose the manager of the department who has a long year experience
in credit management and loan work out and also interviewed clients of each banks. Since this is an
additional way of collecting primary data I set my priority to asking about the actual credit management
procedure practice to be my priority and only limited my question to that.
The summary of the questions asked with the response is shown below: -
A. Generally Perception about Credit Management procedure of private commercial banksby the
interviewees
Most of the respondents have so many in common as to what they believed the credit management
procedure practice of the bank. Loan processing and lending function is the core product of all banks in
general as it contributes the major shares of revenue to its profitability. In other words, loans and advances
are known to be the main stay of all banks. They occupy an important part in gross earnings and net profit of
the banks. The share advances in the total asset of the banks forms a lion share and as such it is known as
the back bone of banking sector. The strength and soundness of the banking system primarily depends upon
health of the advances. Therefore, in order to promote the lending function to the required level the Banks

71
should produce and follow up to date, convenient credit policies, and procedures to attract potential loan
clients so as to develop a long lasting two-way borrower and bank relationships

.B. Interviewed responses summary for factors that affect credit management procedure of private
commercial banks.
Respondents indicated that several factors affect credit management procedure of private commercial banks.
The fundamental aim of managing credit is to perk up the quality of business decision making at all levels
of the firm and thereby to maximize shareholder wealth. Thus Most of the respondents exposed the need of
improvement prevailing procedures in accepting loan applicants by the banks, underestimation of properties
offered for collateral, unfair estimation of collateral, length of loan processing time, excessive reduction of
loans requested and recommended by the branch and diversion of loan funds, over presenting of project
costs by borrowers, poor projects feasibility studies from the customer sides, Bank’s clients started new
businesses in which they had no experience, updated exchange of clients credit information are the major
ones and totally the factors are not properly implemented as it should be.
C. Summary of interviewed responses for how the bank asses credit worthiness of applicants
As per the interviewee’s response once a customer requests a loan, bank officers analyze partially available
information to determine whether the loan meets the bank’s risk-return objectives. Credit analysis is
essentially default risk analysis, in which a loan officer attempts to evaluate a borrower’s ability and
willingness to repay. The Banks assesses the creditworthiness of a loan applicant mostly by gathering
partially detail information Depending on the type of credit exposure and the nature of the credit
relationship with the borrower, the factors to be considered and documented in credit approval include:
Ø Interview and site visit
Interview
ü Purpose of the loan
ü Type of business
ü Financial need of the business
ü Liability of the business if there is any
ü Source of repayment
ü Customer and market base
ü Competency of the management
Site visit

72
ü This is important to get a broader of the applicants’ business to make a physical examination and
verification of items declared on financial statement.
ü To see future conditions of the business.
Ø Financial viability of the applicant‟s business and the applicant be classified as bankable
Ø Knowing customer (character, capacity, capital, Collateral and condition)
Ø Summary of borrower and affiliated credit relationship with UB and other banks. Are there any non-
performing loans with other banks?
Ø Fulfillment of documentation and compliance requirements such as renewed trade license, TIN, tax
clearance, memorandum and article of association, financial statements, due diligence and etc …
Ø Financial ratio analysis
Ø Credit information enquiry responses to check whether the applicant has any loan arrear with other banks
Ø Collateral identification and valuation are the major ones.
D. Summary of interviewed responses towards the bank preference of collateral based lending.
As per the interview conducted the Bank prefers the business type and applicant creditworthiness as first
way out and collateral is the second way out as basis for lending. In principle, loan can be provided both on
clean base and on collateral base. However, the Bank prefers collateral based lending because of the
following main reasons:
ØThe economic level of the country: the living standard of the society, poverty, etc;
ØThe culture of the society in lending is at its infant stage.
ØThe educational level of the society.
ØLimited resources of the bank
ØIt is believed to be the safest way of lending in minimizing credit risk and others. The other most
important issue to be continually reviewed related to character, capacity, capital, collaterals and condition.
E. Factors believed to cause occurrences of NPL by the interviewees Respondents indicated that several
factors contribute to loan default. As per the outcome of the interview the factors can be categorized as
banks‟ internal situations and borrowers related. The factors are organized and presented under the
respective subtitles.
Banks internal factors
These are factors relating to internal inefficiencies due to systems, governance, human resource issues and
the related. Under theme this most of the interview participants raised the following issues:
ØBankers lack of integrity,

73
Ø Relaxation in the follow up of loans,
Ø Credit analyst’s capacity limitation,
Ø Banks aggressive lending to maximize profit,
Ø Not conducting Know your customers (KYC) principles properly before lending,
Ø Mistakes on estimation of collateral and evaluating the borrower’s financial report
Ø Lack of credit information from other banks on a timely basis
Ø Lack of communication and consultation with the defaulter not after the loan is declared NPL but when
the applicant first applies for loan.

Customer related factors

These are factors that emanate from borrowers and have strong bearing on occurrences of Loan default.
Under this ground the following were raised:
Ø Fund being directed to unintended purpose,
Ø Unstable economic and political condition
Ø Borrowers not making competitive analysis before engaging in a particular sector,
Ø Excess government intervention in the applicant business/sector
Ø Business management problems- most of family owned businesses don’t have good management and
they also suffer from succession,
Ø Poor record keeping by businesses,
Ø Intentional or willful default,
F. Summary of interviewed response about portfolio management of the bank.
As per the interviewees view, the loan portfolio is typically the largest asset and the predominant source of
revenue for the Bank. As such, it is also one of the major sources of risk for the Bank’s safety and
soundness. Accordingly banks employs various risk assessment mechanisms is not done as it should be such
as customer grading, portfolio limit management, credit review and provisioning to effectively manage its
credit risk exposure.

74
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Agyman,K.(1987), Short term lending Policies, Journal of Chartered Institute of Bankers (Ghana),

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A major concern on microcredit repayment remains a major obstacle to the Micro Financial Institutions (MFIs) and
Financial Intermediaries (FIs) in Kenya. The health of MFI sector in Sub Sahara Africa (SSA) is a cause of concern
due to the increased portfolio at risk (PAR). This region records the highest risk globally. Its PAR 30 is greater than 5
percent. This study sought to investigate causes of loan default within MFIs and Financial Intermediaries (FIs) in
Kenya. The study addressed the following specific objectives; (1) to evaluate the influence of borrower’s
characteristics on loan default in MFIs and FIs (2) to investigate the relative influence of business characteristics on
loan default in MFIs. A target population of 294 MFIs institutions and 76 Financial Institutions was used. A
multistage sampling procedure was used to save time and cost by narrowing down on the regions and branches since
they were widely spread, a sample of 106 MFIs and 40 FIs was selected. Random sampling was used and primary
data collected by use of a questionnaire. Data was analyzed by quantitative methods by use of SPSS; Version 21.
Descriptive statistics and inferential statistics were employed to make generalizations while Factor Analysis was done
to reduce the high numbers of factors to a smaller number which were significant. A multiple regression model and
Pearson correlation were used to establish relationships among the variables. The findings of the study indicated that
two variables namely; borrower’s characteristics and business characteristics were significant among MFIs and FIs
but with some differences in the parameters measured for the two variables. Keywords: Microcredit Default, Micro
Financial Institutions (MFIs), Financial Intermediaries (FIs), Portfolio at Risk (PAR) 1. Introduction Microcredit is an
important strategy being used to reduce poverty among many countries across the globe. The world has over 7,000
Microfinance Institutions (MFIs) that serve over 25 million clients (Crabb and Keller, 2006). Microcredit is as an
‘extremely small loan given to impoverished people to help them become selfemployed’ (Nawal, 2010). Ruben
(2007) defines it as a ‘grant loan to the poorest of the poor without requiring collateral’ with an assumption that the
beneficiaries have the survival skills that facilitate for credit worthiness. The government of Kenya has introduced
various support initiatives for provision of credit to Micro and Small Enterprises (MSEs). These initiatives include
provision of Public Entrepreneurial Funds (PEFs) such as; Women Enterprise Funds (WEF), Youth Enterprise
Development Fund (YEF), Kenya Industrial Estates (KIE) Fund and Uwezo Fund. These funds are disbursed by some
Financial Intermediaries (FIs) that are willing to partner with the government and are set aside to; improve
competition of MSEs, to promote social-economic development, reduce poverty among entrepreneurs, increase
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financial accessibility, productivity and innovation (Gitau and Wanyoike,2014). The funds are disbursed to promote
economic empowerment among youth and women. Empowerment is a ‘process of obtaining basic opportunities,
encouraging and developing skills for selfsufficiency with a focus of eliminating the future for charity or welfare in
the individuals of a group’ (Wikipedia, 2014). It involves mobilization of poor or disadvantaged sections of the
population by increasing accessibility of resources and opening opportunities for income generation (SLE, 2010).
Microcredit is a tool that enhances economic development to the poor in the society. The health of MFI sector in Sub
Sahara Africa (SSA) is a cause of concern due to the increased portfolio at risk (PAR) {MIX, 2011}. The region
records the highest risk globally whose PAR 30 is greater than 5 percent, coupled by poor reporting, control systems,
poor information systems and credit management (ibid). Most countries in Sub-Sahara Africa face problems in
microcredit debt payment (Buss, 2005) and as a result most MFIs have unreliable financial and portfolio information
and are poorly equipped in managing their credit portfolio or protecting customers’ savings (CGAP, 2013). Most of
these MFIs in SSA, their financial performance recorded showed the following challenges; (a) falling returns
especially East Africa and South Africa, (b) high operating expenses as a result of high staff expenses, high
outstanding loans, high transaction costs and management costs (ibid). Kenya is rated the best in Africa and also the
second best in provision of a conducive business environment for MFIs and the top ten in the world (EIU, 2010).
Kenya’s borrower rate is rated the second largest Journal of Education and Practice www.iiste.org ISSN 2222-1735
(Paper) ISSN 2222-288X (Online) Vol.7, No.12, 2016 98 (Mix and CGAP, 2010). Kenya also has the largest
SACCOs (Johnson, 2006). However, the case of default is still raising concern in the MFIs and FIs sectors. The
default rate among MFIs’ sector is relatively higher compared to commercial banks with default rates ranging from
10% -20% while commercial banks have less than 5% default rate (Kiraka et al., 2013). In their study, the
constituency women enterprise recorded 20-30% default rate. Youth Enterprise Development Fund (Yedf) in 2009,
disbursed funds to 8586 youth groups totaling Ksh 376,923,810 only was 83,732,085 (22.2%) repaid while the
outstanding balances of 293,191,724 (77.8%) was not paid (YEDF, 2009). In Kenya, MFIs are supervised by a body
called Association of Microfinance Institutions in Kenya (AMFIK) which was registered in 1999 to ensure quality
service provision to the low income people and assists MFIs in building their capacity (AMFIK, 2013). These
institutions are rated internationally by an agency called Microfinanza Rating. AMFIK has four strategic pillars
namely; policy advocacy and lobbying, capacity building, networking and linkages, research and knowledge
management. These institutions have registered a gradual growth for the last three years amounting to 298.4 billion by
December 2012 (AMFIK, 2013). The active clients in the sector stand at 1,732,290 and excluding banks clients’ total
is 914,859 (ibid). The dominant banks are Equity bank which consists of 72 per cent total assets, the rest are K-REP,
Post Bank and Jamii Bora Bank. KWFT become a fully pledged bank named Kenya Women Finance Bank in 2014;
others are still Deposit Taking Microfinance (DTMs) such as SMEP, Uwezo, REMU and Faulu. The microfinance
institutions have received substantial support from both bilateral and multilateral donors (Chowdbury, 2009). By
December 2012, a report showed that MFIs had 669 branches across the country. According to the report, Nairobi has

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the highest (136 branches) followed by Rift Valley (112) and Central region (90) and the least branches are found in
Western (32) and North Eastern (5) branches. The sector has employed 12,377 staff and the sector without the banks
has 4,856 (AMFIK, 2013). According to ACCA (2011), management of information asymmetry to detect early signs
of those who are likely to default is paramount in avoiding serious cases of delinquencies. This calls for proper
investment in resources such as; management skills, human and capital. This in return facilitates the growth of
Microfinance Industry. By December 2012, the group lending model had a better portfolio than the individual lending
model as shown in Table 1.1. Portfolio at risk (PAR) shows all arrears of outstanding loans. Portfolio at risk 30 (PAR
30) are outstanding balance on loans with arrears greater than 30 days/Gross outstanding portfolio. It is an indicator to
the financial institution on the current losses likely to incur and also in the future if no payments are made at all
(Warue, 2012).This implies that loan default among the individuals at 13.7% is quite high compared to groups at
5.9%, any amount over 5 percent calls for concern (United Nations, 2011)

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