Police and practice of Compensation management in Ethiopia

commercial bank Hawassa district.

BY
GROUP NAME ID NO

1.ASRES GIZAW…………………………………………………….................. 0005/14

2. TIRUFAT TEMESGEN…………………………………………………….... 018/14
3. SEMENAWIT BELAY………………………………………………………. 015/14
4. ASEBE YAEKOB………………………………………………………………0004/14
5. ADAMU YUTAMO…………………………………………………………. 000/14

DEC, 2022
HAWASSA ETHIOPIA.
1.1. INTRODUCTION OF THE ORGANZATION

At this time, the banking Police business environment has get or face many universal
modernization changes, the most tangible of which are the facilitation of service trade, major
progress in the technological aspect, and a rise in competition whether it is within the bank of
between competent banks and other institutions.

Most of the time police and practice is unavoidable like the common death and taxes. It is one of
the few things in life that is inevitable. All businesses, whatever their size and shape, in whatever
markets they operate and no matter what products and services they provide, are constantly faced
with a multitude of risks, large and small. Indeed, businesses can only prosper by successful risk
taking. In banks and financial institutions, risk considered the most important factor of earnings.
Therefore, they have to balance the relationship between bank police and practice for bank
compensation for business institution. In reality, we can say that management of financial
institution is nothing but management of using different bank police and practice. Managing
financial risk systematically and professionally becomes an even more important task. Rising
global competition, increasing deregulation, introducing of innovative products and delivery
channels has pushed police management to the forefront of today's financial landscape. Ability to
measure the bank police and take appropriate position has been the key to success. It can be said
that compensation takers has survive, effective police and practice managers have prosper and
compensation are likely to perish.
In recent years, the Ethiopian financial industry has registered an encouraging growth in all
different part of Ethiopian Regions. The banking industry in the Ethiopia is making great
advancement in terms of quality, quantity, expansion and diversification and is keeping up with
the updated technology, ability, stability and thrust of a financial system.
This project had consistent with international standards and best police and practice of
compensation management in Ethiopia in general and specific commercial bank of Hawassa
district practices, expected to provide minimum police management standards for all banks
operating in the country. Therefore, the compensation police management practice of Private and
Public Banks in Ethiopia in general and specific commercial bank of Hawassa district is at its
growing stage, this study has been assessing the bank police management practice of Private and
Public Banks at Ethiopia in general and specific commercial bank of Hawassa district. These
necessity calls for an in-depth investigation on police and practice of compensation management
in Commercial bank Ethiopia in Hawassa district.

1.2. POLICY OF PHILOSOPHY ON THE ORGANIZATION

Police and practice of compensation management in like its definition, types, management and
others as well as empirical issues and works as to the police management practice in both Private
and Public banks have been discussed in this topic.

 Definition of police and practice of compensation management in Banking

Environment

The Banking sector has a pivotal role in the development of an economy. It is the key driver of
economic growth of the country and has a dynamic role to play in converting the idle capital
resources for their optimum utilization so as to attain maximum productivity (Sharma, 2003). In
fact, the foundation of a sound economy depends on how sound the Banking sector is and vice
versa. In another side police and practice of compensation management can be defined as an
unplanned event with financial consequences resulting in loss or reduced earnings (Vasavada,
Kumar, Rao & Pai, 2005).
An activity, which may give profits or result in loss, may be called a police and practice of
compensation management proposition due to uncertainty or unpredictability of the activity of
trade in future. In other words, it can be defined as the certainty of the outcome. As bank police
and management is directly proportionate to return, the more measure a bank takes, it can expect
to make more money. However, greater police and practice of compensation management in
Ethiopia general and specific also increases the danger that the bank may incur huge losses and
be forced out of business. In fact, today, a bank must run its operations with two goals in mind –
to generate profit and to stay in business (Marrison, 2005). Banks, therefore, try to ensure that
their bank police taking is informed and prudent. Thus, maintaining a trade-off between police
and return is the business of compensation management. Moreover, compensation management
in the banking sector is a key issue linked to financial system stability.

And also compensation defined as ‘’ a condition where there is a possibility of desirable

occurrence of a particular result, which is known or best quantifiable and therefore insurable,‟
(Periasamy, 2008). compensation may mean that there is a possibility of income, which, may
happen. Generally police and practice of compensation management in Ethiopia may be deal as
certainties resulting in adverse outcome, adverse in relation to planned objective or expectations
(Kumar, Chatterjee, and Chandrasekhar & Patwardhan 2005).

Although the terms police and practice of compensation management are often used
synonymously, there is difference between the two (Sharma, 2003). certainty is the case when the
decision-maker knows all the possible outcomes of a particular act, but does not have an idea of
the probabilities of the outcomes. Banking is the intermediation between financial savers on one
hand and the funds seeking business entrepreneurs on the other hand. As such, in the process of
providing financial services, banks assume various kinds of conpensation both financial and non-
financial. Moreover this compensation inherent in the provision of their services differs from one
product or service to the other (Adarkwa, 2011). Various writers have grouped these
compensation management in different ways to develop the frameworks for their analyses.

In general compensation management is all about certainty different things. That is ability to
precisely determine what will occur in the future. With regard to what is a compensation Osborne
(2012) has claimed that, what we all are talking about is a future problem- or, indeed,
opportunity or the potential future effect of a decision or an action that we take now. And every
decision we make or action we take contains some element of compensation management in
Ethiopia general. Osborne (2012) has indicated that, compensation management can arise as a
result of our business’s activities or as a result of external factors such as legislation, market
forces, and interest or exchange rate fluctuations, the activities of others or even the weather.
They can be a product of business environment, the natural environment, and the political or
economic climate or of human adequacies, saving or compensation.

The types and the degree of effect of compensation management defers among business bank
industry even within industry level as they might differ in their size, complexity of task, types of
service or product being offered or organizational structure.

Thus, police and practice compensation management in commercial bank that business takes
face are inherent to their operations or endeavors. As to the classification of compensation
management Jorion and Khoury (1996) argument has cited by Khan and Ahmed (2001)
discusses that, there are different ways in which compensation management are classified. One
way is to distinguish between business compensation and financial compensation. Business
compensation arises from the nature of a firm‟s business. It relates to factors affecting the
product market. Financial compensation arises from possible income in financial markets due to
movements in financial variables (Jorion and Khoury 1996). It is usually associated with
leverage with the compensation management that obligations and liabilities can be met with
current assets (Gleason 2000).

Compensation management is defined as “the possibility that the outcome of an action or event
could result in an qualified impact on a bank‟s earnings or capital, or it could affect a bank‟s
ability to meet its current or future objectives” Bessis (2002), “compensation management are
certainties that could result in qualified variations of profitability. Shafiq and Nasr (2009).

Kupper (1999) defines compensation management as “the volatility of a corporation’s market

value”. This definition is also quite broad as it encompasses any decision that may impact or
change the market value of a bank. compensation can be further broken down into systematic
and unsystematic risk. Systematic compensation is compensation associated with the overall
market or the economy whilst unsystematic compensation refers to compensation related to a
specific asset or firm. Implicit in each definition is the theme that compensation management is
detrimental to the financial health of the bank and could threaten its survival. Bank failures tend
to have a domino effect throughout the banking system, affecting solvent as well as insolvent
banks. Also, because of the nexus between finance and real development, other sectors within the
economy are affected when a bank. Therefore, the efficient management of compensation
management in the banking industry is vitally important for a sound and stable financial system,
and a successful economy. In recognition of the tremendous value of efficient compensation
management, Saunders and Cornett (2006) assert that managers should devote a significant
portion of their time to understanding and managing the various compensation faced by their
banks.

Another way of decomposing police and practice of compensation management is between

systematic and unsystematic components. While systematic compensation is associated with the
overall market or the economy, unsystematic compensation is linked to a specific asset or firm.
While the asset-specific unsystematic compensation can be mitigated in a large diversified
portfolio, the systematic compensation is non-diversifiable. Parts of systematic compensation
management, however, can be reduced through the using the compensation management or
mitigation and transferring techniques. In fact, the importance of compensation management of
banks has been elevated by technological developments, the emergence of new financial
instruments, deregulation and heightened capital market volatility (Mishra, 1997). In short, the
two most important developments that have made it imperative for Ethiopian Private and Public
Banks to give emphasize on police and practice of compensation management are discussed
below :-
(a) Deregulation: The era of financial sector reforms which started in early 1990s has
culminated in deregulation in a phased manner. Deregulation has given banks more autonomy in
areas like lending, investment, interest rate structure etc. As a result of these developments,
banks are required to manage their own business themselves and at the same time maintain
liquidity and profitability. This has made it imperative for banks to pay more attention to
compensation management.

(b) Technological innovation: Technological innovations have provided a platform to the banks
for creating an environment for efficient customer services as also for designing new products. In
fact, it is technological innovation that has helped banks to manage the assets and liabilities in a
better way, providing various delivery channels, reducing processing time of transactions,
reducing manual intervention in back office functions etc. However, all these developments have
also increased the diversity and complexity of compensation management, which need to be
managed professionally so that the opportunities provided by the technology are not negated.

 Different Types of police and practice of compensation management in

Banking Sector

Compensation management may be defined as ‘possibility of income’, which may be financial

income or other fixed asset to the image or reputation. Banks like any other commercial
organization also intend to take compensation management, which is inherent in any business.
Moreover this compensation management inherent in the provision of their services differs from
one product or service to the other (Adarkwa, 2011). Higher the compensation management
 taken, higher the gain would be. But higher compensation management may also result into
higher productivity. However, banks are prudent enough to identify measure and price
compensation management, and maintain appropriate capital to take care of any eventuality. The
major compensation management in banking business are;

Banking
compensation

Liquidity Interest Rate Market Credit Operational

compensation
compensation compensation compensation compensation

Source: Adopted from work of Adarkwa (2011) and Atakelt and P. Veni (2015).

 Liquidity compensation:
The liquidity compensation of banks arises from funding of long-term assets by short-term
liabilities, thereby making the liabilities subject to rollover or refinancing using compensation
management (Kumar, 2005) .It can be also defined as the possibility that an institution may be
able to meet its maturing commitments or may do so only by borrowing funds at prohibitive
costs or by disposing assets at rock bottom prices.
The fundamental role of banks in the maturity transformation of short-term deposits into long
term loans makes banks vulnerable to liquidity compensation, either looking at an individual
bank or the whole banking system. (Ivanović, 2009:383). Liquidity can also be defined as the
ability of the bank to provide funds for asset growth and to meet its obligations when they fall
due, without incurring an expected income. (Mishkin, 2006:125). A bank must manage its assets
and liabilities so that it can meet its obligations at any given moment and on an ongoing basis.
The most important obligations of a bank which usually reflect on its liquidity are:
• Commitment to timely execute orders from customers who have funds in accounts
• Commitment to the agreed terms released in the course of granted loans and advances
• Commitment to specific loan repayment deadlines that will granted to it by its creditors - the
central bank or any other bank or institution.
A bank is considered liquid if its available funds in cash are equal to accrued obligations
or higher than outstanding liabilities. If not, the bank is considered insolvent. In order to
effectively manage liquidity compensation, the competent authority is responsible for the
creation and implementation of policies for managing liquidity. Privacy liquidity management
involves planning the inflow and outflow of funds, liquidity monitoring and the adoption of
measures that would help prevent or resolve insolvency of the bank. A bank holds adequate
liquidity if it is able to obtain sufficient funds in short term and at an acceptable cost. In this
sense, the most important are those funds that can be easily replaced in cash (Tepavac,
2009:116).
These are the primary liquidity reserves. Primary liquidity reserves include:
• Cash-in-hand and treasury
• Balances in accounts with other banks (demand deposits and time deposits)
• Obligatory reserves with the central bank
• Cash in the process of collection - checks, interest coupons and other securities sent for
payment which will shortly be converted into cash. “The objective of managing this risk should
be avoiding situations that a bank has negative liquid assets, which is the cause of ALM (Asset
Liability Management).The ALM concept is based on cash flow forecasting and strategic
planning. If an outflow of liquid funds is expected, then certain changes in the balance
sheet must be made to retain equilibrium. A bank may provide liquid funds in two ways:
through asset management - sale of existing assets; and through liabilities management - lending
money to the market. Big banks opt to manage liabilities, while smaller banks generally decide
to sell parts of liquid assets because they cannot rely on it to borrow funds in the market easily
and at reasonable terms.
The framework for liquidity compensation management has three aspects:
 Measurement and management needs for net financing, which includes assembling the
maturity structure and daily, monthly, or date-agreed obligations, calculating a cumulative
net excess or shortage of funds.
 Market access, which includes three key business scenarios in terms of normal
operations (i.e. normal market situation), in the conditions of crisis situation for
 the bank and general market crisis (the whole sector is threatened). Liquidity
compensation management is based on the quality of disbursed funds.
 Contingency planning in the future, as well as their impact on a bank.
(Barjaktarović, 2009: 191)
The liquidity compensation management in banks manifest in different dimensions –
 Funding compensation management: Funding Liquidity compensation management
is defined as the ability to obtain funds to meet cash flow obligations. For banks, funding
liquidity compensation is crucial. This arises from the need to replace net outflows due
to anticipated withdrawal / non-renewal of deposits.
 Time compensation management: Time compensation arises from the need to
compensate for non-receipt of expected inflows of funds i.e., performing assets turning
into non-performing assets.
 Call compensation management: Call compensation arises due to crystallization of
contingent liabilities. It may also arise when a bank may be able to undertake profitable
business opportunities when it arises.

 Interest Rate compensation management:

Interest Rate Risk arises when the Net Interest Margin or the Market Value of Equity (MVE) of
an institution is affected due to changes in the interest rates. It is the exposure of a Bank’s
financial condition to qualified movements in interest rates. When managing interest rate
compensate, bank is obliged to align the scope and structure of assets and liabilities so as to able
an efficient management of this compensation management and to establish policies and
procedures for identifying and managing these measurements.
The essence of managing interest rate compensation management is that the exposure to interest
rate measure is maintained at a certain level. Fluctuations in interest rates affect the income,
capital and the cost of banks. The most commonly used models for interest rate
compensation management include (Cvetinović, 2008:114) Interest rate ability can take
different forms. The following are the types of Interest Rate compensation management
 Gap or Mismatch compensation management: A gap or mismatch compensation
management arises from holding assets and liabilities and Off-Balance Sheet items with
 different principal amounts, maturity dates pricing dates, thereby creating exposure to
expected changes in the level of market interest rates.
 Yield Curve compensation management: Banks, in a floating interest scenario, may
price their assets and liabilities based on different benchmarks.
 Basis compensation management: Basis compensation management is the
compensation that arises when the interest rate of different assets, liabilities and off-
balance sheet items may change in different magnitude.
 Embedded Option compensation management: Significant changes in market interest
rates create the source of compensation to banks’ profitability by encouraging
prepayment of cash credit.
 Reinvested compensation management: Reinvestment compensation is the risk arising
out of certainty with regard to interest rate at which the future cash flows could be
reinvested. Any mismatches in cash flows.
 Net Interest Position compensation management: Net Interest Position compensation
arises when the market interest rates adjust downwards and where banks have more
earning assets than paying liabilities.

 Default or Credit compensation management:

Credit compensation management is more simply defined as the potential of a bank borrower or
counterparty to fail to meet its obligations in accordance with the agreed terms. Credit
compensation is the most common cause of bank failure, and therefore credit compensation
management is of crucial importance for the survival of bank business. There’s a big
responsibility of bankers, mainly those employed in credit departments, to monitor the effects of
factors that can affect the quality of the loan portfolio of the bank and to promptly respond to
qualified developments that may lead to bank profitability.
In order to minimize credit risk organization using compensation management , it is
essential to devote attention to potential sources of origin of credit compensation management
. The bank management must monitor credit compensation, which includes: (Greuning Van H.,
Bratanovic Brajovic S., 2009:187-188).
There are two variants of Credit compensation management which are discussed below: -
(a) Counterparty compensation management: This is a variant of Credit compensation and is
related to non-performance of the trading partners due to counterparty’s refusal and or ability to
perform. The counterparty compensation is generally viewed as a transient financial
compensation associated with trading rather than standard credit compensation management.
(b) Country compensation management: This is also a type of credit compensation
management where nonperformance of a borrower or counterparty arises due to constraints or
restrictions imposed by a country. Here, the reason of nonperformance is external factors on
which the borrower or the counterparty has no control. Credit compensation management
depends on both external and internal factors. The internal factors include –
1. Deficiency in credit policy and administration of loan portfolio.
2. Deficiency in appraising borrower’s financial position prior to lending.
3. Excessive dependence on collaterals.
4. Bank’s failure in post-sanction follow-up, etc. The major external factors – 1. The state of
economy 2. Swings in commodity price, foreign exchange rates and interest rates, etc.

 Operational compensation management:

Basel Committee for Banking Supervision has defined operational compensation management
as ‘the compensation management of income resulting from adequate or successes internal
processes, people and systems or from external events’. Thus, operational loss has mainly three
exposure classes namely people, processes and systems. In 2003, the Basel Committee came up
with the basic practices for managing this risk. It is believed that it is best to manage operational
risks where they appear, and the planning, coordination and monitoring should be carried out
centrally by the department for operational risk management. According to the Basel Accord, the
management of this risk should be carried out through four steps: identification, assessment,
control and monitoring. (Fabris, 2006:67).
Managing operational risk has become important for banks due to the following reasons – 1.
Higher level of automation in rendering banking and financial services 2. Increase in global
financial inter-linkages Scope of operational risk is very wide because of the above mentioned
reasons. Two of the most common operational risks are discussed below-
 Transaction compensation management: - Transaction compensation is the
compensation arising from fraud, both internal and external, failed business processes
and the inability to maintain business continuity and manage information.
  Compliance compensation management: Compliance risk is the risk of legal or
regulatory sanction, financial loss or reputation loss that a bank may suffer as a result of
its failure to comply with any or all of the applicable laws, regulations, and codes of
conduct and standards of good practice. It is also called integrity risk since a bank’s
reputation is closely linked to its adherence to principles of integrity and fair dealing.

 Other compensation management

Apart from the above mentioned risks, following are the other risks confronted by Banks in
course of their business operations (Kumar, 2005).

 Strategic compensation management: Strategic Risk is the risk arising from adverse
business decisions, improper implementation of decisions or lack of responsiveness to
industry changes.

 Reputation compensation management: Reputation Risk is the risk arising from

negative public opinion. This risk may expose the institution to litigation, financial loss
or decline in customer base.

 Foreign Exchange compensation management: It is generally accepted that the foreign

exchange market is the largest of all the financial markets. Foreign exchange markets
usually involve at least four trading activities: the purchase or sale of foreign currency to
allow customers to complete commercial trade transactions, the purchase or sale of
foreign currencies that allow customers to take positions in foreign investments, the
purchase or sale of foreign currencies for hedging purposes and the purchase or sale of
foreign currencies for speculative purposes.

 Country or Sovereign compensation management: Saunders and Cornett (2006) define

country/sovereign risk as “the risk of a foreign government’s limiting or preventing
domestic borrowers in its jurisdiction from repaying the principal and interest on debt
owed to external lenders. Such government action might result from foreign exchange
shortages and adverse political events. In recent years U.S. banks suffered losses from
lending to Asian and Latin American countries, and other LDCs.
  Technology compensation management: Technology risk and operational risk are
closely related. Technology risk is “the risk incurred by a financial institution when
technological investments do not produce cost savings anticipated” Ibid1. Such risk can
result in major losses in the competitive efficiency of a financial institution and ultimately
its long-term failure. Conversely, gains from technological investments produce a
competitive advantage for the institution over its rivals.

 Off-balance Sheet compensation management: Off-balance sheet risk is the risk

incurred by a financial institution due to activities related to contingent assets and
liabilities. An example of an off-balance sheet activity is the issuance of a standby letter
of credit guaranteed by insurance companies and banks. Off-balance sheet risk is more of
a concern for larger banks.

 Insolvency compensation management: Insolvency risk is the risk that a financial

institution may not have enough capital to offset a sudden decline in the value of its
assets relative to its liabilities. It is a consequence or outcome of other risks including
interest rate, market, credit, off-balance sheet, technology, foreign exchange,
sovereign/country and liquidity risks. The larger the proportion of equity capital to
borrowed funds, the better is the financial institution able to withstand insolvency losses.
Thus, management of financial institutions and regulators normally place great emphasis
on capital adequacy.
In general risk is all about uncertainty. That is inability to precisely determine what will occur in
the future, as future is full of uncertain. With regard to what is a risk Osborne (2012) has claimed
that, what we all are talking about is a future problem- or, indeed, opportunity or the potential
future effect of a decision or an action that we take now.

2.3. Compensation Management in the Bank Industry

All Public and Private banking sectors are highly regulated industry with direct and indirect or
detailed and focused regulators. While banks struggle to keep up with the changes in the
regulatory environment, regulators struggle to manage their workload and effectively regulate
their banks.
The impact of these changes is that banks are receiving less hands-on assessment by the
regulators, less time spent with each institution, and the potential for more problems slipping
through the cracks, potentially resulting in an overall increase in bank failures mention in his
paper that the business of Banking is to manage risks associated with accepting deposits,
granting loans and trading portfolios (Jaiye,2009).
The changing economic environment has a significant impact on banks and thrifts as they
struggle to effectively manage their interest rate spread in the face of low rates on loans,
competition for deposits and the general market changes, industry trends and economic
fluctuations.

Andrea (2010) in his study mentioned that Management failure can be easily recognized in losses
resulting from over-aggressive lending practices and risk tolerances that will too high. However,
as one digs deeper, more subtle failures can be recognized in operational inefficiencies, weak
internal control environments, and lack of management attention to detail. A rising interest rate
environment may seem to help financial institutions, but the effect of the changes on consumers
and businesses is not predictable and the challenge remains for banks to grow and effectively
manage the spread to generate a return to their shareholders.
2.4. Compensation Management Practices and Processes in the Banking
Industry

The banking industry is no doubt a regulated sector as a result of the riskiness of its operation.
Consequently, risk management in banks is fast becoming a discipline that every participants and
players in the industry need to align with. As earlier noted, it is a process which involves:
 Compensation identification: In order to properly manage risks, an institution must
recognize and understand risks that may arise from both existing and new business
initiatives.
 Compensation Measurement: Once risks have been identified, they should be measured
in order to determine their impact on the banking institution’s profitability and capital.
Accurate and timely measurement of risk is essential to effective risk management
systems. An institution that does not have a risk measurement system has limited ability
to control or monitor risk levels.
  Compensation Monitoring: Institutions should put in place an effective management
information system to monitor risk levels and facilitate timely review of risk positions
and exceptions. Monitoring reports should be frequent, timely, accurate, and informative
and should be distributed to appropriate individuals to ensure action, when needed.
 Compensation Control: After measuring risk, an institution should establish and
communicate risk limits through policies, standards, and procedures that define
responsibility and authority. These limits should serve as a means to control exposure to
various risks associated with the banking institution’s activities.
2.4.1 Compensation Management Process and System

To control or eliminate the risk in banking industry and to make banking function well, there is a
need to manage all kinds of risks related with the banking. Risk management becomes one of the
main functions of any banking services and consists of identifying the risk and controlling them,
means keeping the risk at acceptable level. These levels differ from institution to institution and
country to country. In Risk Management system there is no single way fit for all banks.
Therefore, NBE requires each bank to develop its own comprehensive risk management system
fitted to its need and circumstances. Moreover, NBE in its risk management guideline for Public
and Private Banks has claimed that, the risk management activities takes place at different
hierarchical levels. Hence, it has indicated the following hierarchical levels of Compensation
management activities in every financial institution.
 Strategic level: Generally consist of definition of Compensation, ascertaining
institutions risk appetite, formulating strategy and policies for managing risks and
establish adequate systems and controls to ensure that overall risk remain within
acceptable level and the reward compensate for the risk taken.
 Macro Level: It encompasses Compensation management within a business area or
across business lines. Generally the risk management activities performed by middle
management or units devoted to risk reviews fall into this category.
 Micro Level: It involves “On-the-line” Compensation management where Compensation
are actually created. This is the Compensation management activities performed by
individuals who take Compensation on organization’s Behalf such as front office and
 loan origination functions. The Compensation management in those areas is confined to
following operational procedures and guidelines set by management.
 Techniques of Compensation Management

 GAP Analysis it is an interest rate Compensation management tool based on the balance
sheet, which focuses on the potential variability of net-interest income over specific time
intervals. The information on GAP gives the management an idea about the effects on
net-income due to changes in the interest rate.(Cumming and Beverly, 2001).
 Duration-GAP Analysis: It is another measure of interest rate risk and managing net
interest income derived by taking into consideration all individual cash inflows and
outflows. Duration is value and time weighted measure of maturity of all cash flows and
represents the average time needed to recover the invested funds. (Cumming and Beverly, 2001).
 Securitization: it is a procedure studied under the systems of structured finance or credit-
linked notes. Securitization of a bank’s assets and loans is a device for raising new funds
and reducing bank’s risk exposures. The bank pools a group of income-earning assets and
sells securities against these in the open market, thereby transforming illiquid assets into
tradable asset backed securities (Crouhy and Robert, 2001).
 Sensitivity Analysis: it is very useful when attempting to determine the impact, the
actual outcome of a particular variable will have if it differs from what will previously
assumed. By creating a given set of scenarios, the analyst can determine how changes in
one variable(s) will impact the target variable (ibid1).
 Internal Rating System An internal rating system helps financial institutions manage
and control credit risks they face through lending and other operations by grouping and
managing the credit-worthiness of borrowers and the quality of credit transactions
(Cumming and Beverly, 2001).
 Simulation - this model measures the sensitivity of net interest income and capital to
certain key variable risks, including changes in interest rates. The model is dynamic and
takes a long time until any significant results can be obtained.
 Analysis period - interest rate risk in this model is measured by calculating the present
value of assets, liabilities and off-balance sheet positions of banks to then measured
sensitivity of the net value of the interest rate changes. (Barjaktarović, 2009).
  Compensation Management Guidelines

Similar to other countries, the banks in Pakistan also face a very dynamic and compact
environment (Burki and Niazi, 2010). The SBP has also acknowledged the fact that the local
banks in Pakistan are exposed to different kinds of risks in order to achieve their business
objectives and an inadequate risk management may cause a negative impact on the continuity
and survival of these banking institutions (Fayyaz, 2006). Consequently, the SBP has imposed
risk management guidelines on the banking sector in 2003.

These risk management guidelines are arranged by the risk category and designed to give a brief
overview of all the important actions which might be required from the banking institutions. The
principles incorporated in this set of guidelines are intended to integrate the existing risk
management standards released by the Basel Committee (Tahir, 2006). However, these
guidelines are not designed to provide a detailed plan of actions for every control procedure that
might be put in place by these institutions and offer only a broad outline of all the important
actions.
 General Requirements

The Compensation management guidelines encompass a brief interpretation of the Compensation

management and an extensive explanation of main Compensation that might have in different
banking institutions (National Bank of Ethiopia, 2010).
According to these guidelines, the risk management in banks comprises of Compensation
identification, assessment, measurement, monitoring and controlling or mitigating all
Compensation innate in the banking business. Every banking institution has been directed to
apply the basic principles pertaining to Compensation management without considering its size
and complexity. The themes of these fundamental guiding principles include:
 The overall obligation of risk management rests with the board of directors of banks and
they are directed to formulate policies according to different areas of operations of their
banks. The top management of bank are responsible for designing risk management
strategies, explicit plans and procedures for controlling or mitigating risks and all these
plans and actions should be duly approved by the board of directors.
  The assessment of risk is needed to make on the basis of portfolios or business lines at
the operational level and the senior management are required to adopt a holistic approach
in measuring and managing the risk profiles of banks.
 All the individuals heading different portfolios or the business lines in banks are also
liable for the risk they take regardless to a separate management function or a risk review.
 All the potential risks are required to measure quantitatively, to report and to mitigate.
 An independent function is needed for the risk review irrespective of those who accept
and endure Compensation. The review function involves stress tests revealing the
portfolios to unexpected changes in the important variables or the key systemic shocks.
 Banks are directed to maintain contingency plans in order to deal with any unanticipated
or catastrophe case scenarios.

Besides above, all the banking institutions are instructed to develop an effective Compensation
management system to deal with the major risks such as credit, market, liquidity, and operational
Compensation based on the principles explained in the guidelines (National Bank of Ethiopia,
2010). A brief explanation of the same has been presented below:

 Guidelines on Credit Compensation management

According to the credit risk guidelines, the boards of directors are declared responsible for
developing an explicit credit policy and practice of compensation management. The boards are
directed to accept the credit risk strategy of their banks and important policies regarding to credit
risk management which are depended on the overall business strategy of their banking
institutions. The top management of banks are not only instructed to establish policies,
procedures and systems but also set up an approved organizational structure to evaluate, monitor
and control the credit.
This aspect is further strengthened by applying credit administration function. According to this
function, the banks in Pakistan are required to: ensure the activities harmonize with their policies
and procedures; maintain the loan documents, credit files; and observe the loan covenants
compliance. Banks are also encouraged to develop internal credit ratings and to allocate them
according to the credit exposures of each individual. A regular monitoring and preparation of
individual, aggregate and sector wise periodic reports of the loan portfolio are required from the
banks operating. Finally, banks are advised to establish strategies or plans of action to cope with
the problem loans
 Guidelines on Market Compensation management

The guidelines on market compensation management direct the board of directors and the top
management of banks to establish an adequate framework for the market Compensation
management in order to deal with the potential losses due to undesirable change in the foreign
exchange rates, interest rates, and equity or commodity prices. This framework encompasses an
organizational setup which is necessarily not only consistent with the size, scope and complexity
of business, but also aligns with the strategies, systems and procedures to measure, monitor and
control or mitigate market Compensation.
It is also recommended that Pakistani banks develop a middle office between the back and front
office functions to accomplish an independent market police and compensation management
unit. According to the guidelines on market compensation management, the independent function
needs to identify, measure and analyze market compensation management inherent in treasury
operations of banks and requires to report these compensation exposures directly to the top
management (Fayyaz, 2006).

It is also suggested that the banks in Pakistan can adopt different techniques ranging from the
static gap analysis to the sophisticated compensation models to estimate market measures
according to their own requirements. Finally, the local banks are required to make sure that they
have sufficient control mechanisms as well as pertinent setups such as periodic reviews or audits
for the market risk to monitor it.
 Guidelines on Liquidity compensation management

The guidelines on liquidity compensation emphasize that the top management of banks are
required to develop a comprehensive mechanism to identify, evaluate and control liquidity
compensation. These guidelines suggest the key prerequisites of a competent liquidity
compensation management contain a well-informed board, qualified management and staff
having the appropriate knowledge, and active systems and procedures. It is further directed that
the top management are needed to set up an efficient organizational structure to regularly
monitor the liquidity positions of banks.
All banking institutions are required to build a resourceful liquidity management framework
considering their overall as well as separate liquidity exposures on the basis of different types of
their account holders or deposits. For this purpose, banks are directed to identify their future
liquidity shortfalls and assume periodical cash flow analysis under different market conditions
and scenarios. These guidelines propose effective management information systems, contingency
funding plan and risk limits as the important components of the strong liquidity management
process.

 Guidelines on Operational compensation management

The guidelines on operational compensation management direct the banking institutions that they
are needed to contemplate the broad line of material operational risks influencing the banking
operations, containing the risk of loss caused by incompetent or poor internal processes,
procedures, people, controls, and systems or from external events. The board of directors are
required to make sure that the top management of their banks have established adequate process,
procedures, controls and systems for all the major areas of operations in addition to setting up a
tolerance level for the operational measurements.
For this purpose, every banking institution is directed to apply six basic principles pertaining to
the operational compensation management regardless of its size and complexity. Furthermore, it
is also required that the senior management of banking institutions forcefully communicate all
the laid down procedures and guidelines down the line and make necessary arrangements to
provide the essential training to their concerned staff. Finally, all the banking institutions are
needed to disclose information on timely basis in order to provide a reliable structure for
assessing their operational risk monitoring (National Bank of Ethiopia, 2010).
The risk management guidelines issued by the SBP have supported banking institutions to
develop an adequate risk management system (Tahir, 2006). The banks have been encouraged to
take necessary actions for the implementation of risk management guidelines (Fayyaz, 2006).
Besides the issuance of these guidelines, the SBP has also established a road map for the
implementation of Basel Accords in 2005 so as to strengthen their risk management systems and
to align the banks with the best international practices (Masood and Fry, 2012).
The above description of risk management guidelines indicates that it is necessary for the banks
to understand their risks exposures and to adopt a wide range of risk management practices for
their survival and success. For this purpose, a number of studies have been conducted in the area
of risk management practices and the next section provides a brief review of some relevant
studies (Ibid1).
 Review of Empirical Literature

Reviewing of Empirical literature will provides a summary of some of the published work on the
management of police and practice of compensation management by commercial banks in
developed and developing economies. Hassan, (2010) the researcher conducts this project with
the title of a comparative study of Handles banking and Swanbank; how compensation
management has been managed during the last decade. In this thesis the authors strive to
investigate the compensation management phenomena in the banking sector by conducting a
longitudinal comparative study in two different banks. In a broader perspective to understand the
phenomena the authors depart from theoretical framework that recognizes the social and cultural
elements of measurements.
Khalid and Amjad (2012) conducted a project on the police and practice of compensation
management in Ethiopia in general and specific hawassa district particularly. The authors use the
same model suggested by Al-Tamimi and Al-Mazrooei (2007) of compensation management
practices. The results indicate that Islamic banks are somewhat reasonably efficient in managing
measurement where understanding compensation and compensation management are monitoring
and credit risk analysis, are the most influencing variables in compensation management
practices.

Shafiq and Nasr (2009) examine the compensation management practices followed by Public and
Private Commercial Banks in Pakistan. The results reveal the following: (i) the greatest
exposures banks face are credit compensation, liquidity compensation, interest rate
compensation, foreign exchange compensation and operating compensation; (ii) significant
differences exist in the application of compensation management practices among public sector
and local private Public and Private Commercial Banks; and (iii) Public and Private Commercial
Banks‟ staff basically understand risk management but additional training is required to enhance
their expertise in the area.

Hassan (2009) seeks to identify the risks posing the greatest exposure for Islamic banks in
Brunei Darussalam and to examine the effectiveness of risk management techniques utilized in
these banks. The results of the study reveal that the three major risks affecting the banks are
foreign-exchange risk, credit risk and operational risk. Also, Islamic banks are reasonably
efficient in managing risk; and risk identification, and risk assessment and analysis are the most
influencing variables in risk management practices.
Wood (1994) reviews the lending behavior and examines credit compensation management
practices of banks in Barbados. The results of the study are as follows: (i) banks utilized
published and internally-generated information in the process of screening applicants; banks do
not use interest rates alone to allocate credit but resort to other means like varying the maturity
structure of loans, requesting collateral, and utilizing debt covenants and compensating balances
in order to offset credit risk; the role of monitoring by banks is essential given the absence of
credit rating agencies and lack of an active acquisitions market; monitoring activities of banks
are characterized by regular (formal and informal ) visiting (and telephone contact) between
banks and clients and by periodic reviews of clients‟ accounts; credit rationing in Barbados can
be usefully explained by the Stieglitz-Weiss “equilibrium-rationing model which emphasizes the
influence of imperfect or asymmetric information on bank behavior.

Rekha A. (2004) compensation management in Public and Private Commercial Banks (A case
study of public and private sector banks) Banks is in the business of managing risk, not avoiding
it. To the researcher, Risk is the fundamental element that drives financial behavior. Without risk,
the financial system would be vastly simplified. However, risk is omnipresent in the real world.
Financial Institutions, therefore, should manage the risk efficiently to survive in this highly
uncertain world. The future of banking will undoubtedly rest on compensation management
dynamics.

Christie-Veitch (2005) examines the status of operational compensation management in Trinidad,

Barbados and Jamaica; assesses its importance relative to the other compensation and reviews
the practices for managing operational compensation by the financial institutions. The findings
are analyzed based on the assessment of compliance with regard to Basel Core Principles for the
management of operational compensation. The study reveals a number of findings: (i) the
framework necessary to identify, assess, monitor and control operational compensation is still not
evident, (ii) the management of operational compensation is basically limited to implementing
and testing internal controls, (iii) operational profile is not currently reviewed and adjusted based
on specific strategies, (iv) the plans to handle business disruption are somewhat in place but are
not subject to testing or scenario analysis, (v) best practices with regard to operational risk are
not finalized or circulated, and (vi) operational compensation management methodologies are not
being disclosed by banks.

Fasika Firew (2012) analyzes the operational compensation management practices of CBE by
taking in to account the operational compensation factors (income events) and their effect on
entire banks performance. The results of the study reveals that the management should pay
attention to those contributory operational compensation so as to manage the operational
compensation effectively and efficiently, particularly, to operational compensation management
tools as the extracted factors has shown. Also the importance of awareness creation and accurate
on time capturing of internal loss data are in consistent with factor analysis findings of
management supervision and follow-up and capturing of internal loss data as both are among the
extracted factors.

Tsion Fekedesilasse (2015) analyzes the compensation Management Practice of selected branch
of Ethiopian Commercial Banks at hawassa district by taking into account the operational
compensation factors and their effect on entire banks performance. The results of the study
indicate that Ethiopian banks are utilizing some of the approaches/techniques traditionally used
to manage compensation today the findings suggest that banks operating in Ethiopia are
compensation management-focused.

 POLICY AND PRACTICE ARTICLES

 Service Quality
Service quality is formed when customers make a comparison between before-service
expectations with their actual-service expectations and with their actual-service experience
(Naik et al., 2010). In compensation management banking, e-service quality is important to
the banks because it will affect customer satisfaction. Zhao and Saha, (2005) have identify
the nine dimensions of e-service quality. According to Nupur (2010), a partial of the service
quality dimension showed a significant relationship with customer satisfaction - 17 -
  Web Design and Content
Web design is important elements to attract the usage of compensation management and
the importance of web design will be reflected in the customers ‟ satisfaction level (Ahmad
and Al-Zu‟bi, 2011). Thus, it will pose a positive significant impact on customer satisfaction.
Furthermore, the basic requirements for a good web design should include a good screen
layout and design, clear graphics and vibrant color configuration (Ahmad and Al- Zu ‟bi,
2011). Websites are an important factor in a bank’s marketing and communications
activities with customers. Hence, the content in the website is indeed important because it
will affect the customer satisfaction.

 Security and Privacy

Security can be defined as a form of protection to ensure the customers ‟ safety and to
prevent hackers from invading the customers‟ privacy (Dixit and Datta, 2010). Acoording to
Ahmad and Al-Zu‟ bi (2011), security had a significant influence on customer satisfaction.
Privacy is another importance element which always concerns customers. It is always the
customers hope that the banks can protect their personal and financial information
especially when they do transactions via Internet banking. Zhao and Saha (2005) in their
research have showed that privacy had a strong influence on customer satisfaction

 Convenience
Convenience is the main attraction and focus of the customers who use compensation for
banking (Shariq, 2006). Previous project showed that most of the customers focused on the
convenience of using compensation are banking (Lallmahamood, 2007). Kassim and
Abdullah (2010) found that ease of use was positively related to customer satisfaction.
Customers who used Internet banking were more focused on the easier ways to conduct
banking transactions (Ainin et al., 2005).

 Speed
Speed can be defined as the frequency of network connection breakdown, the time to
navigate the compensation banking website, the amount of time that the customer spend for
page response, and the rate that banks response to the complaint of customers (Ahmad and
Al-Zu‟ bi, 2011). - 18 -
Usually, the speed of compensation banking was affected by the wide-ranging and high-
resolution graphics and inefficient host server (Shariq, 2006). Speed was an important
factor to achieve the successful for e-banking (Haque et al., 2009). Speed had a positive
significant impact on customer satisfaction (Ahmad and Al-Zu ‟ bi, 2011).

 Customer Satisfaction
Customer satisfaction was related to people who paid for a products or services and used the
products and services. Customer satisfaction was known as user satisfaction whereas buyer
satisfaction was the individual who buy the products or services but he/she may non-users
of the products and services (Hom, 2000). Customer satisfaction was a major outcome of
marketing activity whereby it needed to fulfill the different phase of consumer buying
behavior (Jamal and Naser, 2002). Current customers gave more advantages and profitable
to the banks rather the new customers (Naik et al., 2010).

Conclusions of study undertaken for European Commission on public perceptions

(September, 2003) say that lack of trust has been frequently cited to be one of the key
factors that discourage customers from participating in e-commerce, while cultural
differences affect the formation of trust. Apart from trust, there are other variables which
influence the usage of Internet banking. They are intention, beliefs, and subjective norms,
trust in the bank, attitude, perceived usefulness and perceived ease of use
(Munusamy,2010).

Demography may also affect the usage pattern of Internet Banking. It is interpreted that the
female respondents are yet to get fully involved in Internet purchase (Beh,2009).

Therefore, enhancing the level of service performance acceptance is the major issue to get
competitive advantages. Service quality has received much attention because of its obvious
relationship with financial performance, customer satisfaction and retentions
(Haque,2009).

Munusamy(2010) conducted the review of Malaysian banking sites and revealed that all
domestic banks were having a web presence. Only 4 of the ten major banks had
transactional sites. The remaining sites were at informational level. There are various
psychological and behavioral issues such as trust, security of Internet transactions,
reluctance to change and preference for human interface which appear to impede the
growth of Internet banking Corrocher - 19 -
(2002) investigated the determinants of the Internet technology adoption for the provision
of banking services in the Italian context and also studied the relationship between the
Internet banking and the traditional banking activity, in order to understand if these two
systems of financial services delivery are perceived as substitutes or complements by the
banks. According to the results of the empirical analysis, banks seem to perceive Internet
banking as a substitute for the existing branching structure, although there is also some
evidence that banks providing innovative financial services are more inclined to adopt the
innovation than traditional banks. Technology has had a remarkable influence on the
growth of service delivery portions (Ahanger,2010).

Adams and Lamptey(2009) provide a theoretical analysis of Internet banking in India and
found that as compared to banks abroad, Indian banks offering online services still have a
long way to go. For online banking to reach a critical mass, there has to be sufficient number
of users and the sufficient infrastructure in place. I.T. has introduced new business
paradigms and is increasingly playing a significant role in improving the services in the
banking industry. Internet banking is becoming more and more popular today, as is banking
via digital television. Beyond doubt, a substantial part of the future of banking business lies
in a banking environment that is less and less branch-based and where customers are able
to access banking services remotely. The automated service quality research has been
limited to relationship management rather than service quality or its acceptance by
consumer. Even comprehensive definition of banking service quality is lacking Innovative
Marketing, Volume 3, Issue 4, 2007 Parasuraman et al., 2005). Only discusses automated
service quality within the service that is delivered through web sites. In addition to internet
banking, service quality, telephone banking and ATM service quality need to be addressed
in particular service environment.

Lallmehamood(2007) performed a qualitative study on the adoption of internet services and

found out that those with the highest income with a greatest use of information technology
were most likely to purchase financial services using internet channel. Education and
gender were not studied in this study.

Earlier studies (Barczak et al., 1997; Danniel& Strong, 1997; Lia et al., 1999;
Polatoglu&Ekin, 2001; Devlin &Yeung, 2003) report factors such as convenience, flexibility,
security concern, complexity, and responsiveness being associated with a higher propensity
to use internet - 20 -
banking. In the context of the above perspective, the paper will make an attempt to analyze
the evolving sphere of Internet banking and the innovations both technological and
conceptual which are sweeping the financial services industry in India in the context of the
changes that are taking place in this sector across the world. The regulatory and taxation
issues of Internet banking present formidable problems and the paper attempts to get an
insight into these two important issues.
  Summary of Knowledge Gap

Completely the above reviewed Project were focused on the Police and practice of
compensation management in commercial bank Ethiopia; based on their own specific sectors,
subsector, projects and kingdoms. However, the regulations and laws practice are different
from country to country. Comparing of their national Bank policies regarding financing of
project might not alike with that of National Bank of Ethiopia. It is to be noted that the role
and the mission of CBE is significantly different from commercial banks in other countries.
Thus undertaking the project on the Police and practice of compensation management in
Ethiopia commercial bank leads to different reliable finding that will contribute to existing
body of knowledge on similar studies in the world, Africa and Ethiopia.

Additionally, most of the undertaken studies conducted at micro finance institution were
touched determinants loan repayment from borrower’s point of view. While CBE in nature
has financed medium and long term project and have higher risk than short term financer.

When it comes to home country, studies done in Ethiopia have focused more on micro and
small enterprises as well as on banks, loan repayment problems are more series in the micro
finance institutions. However, in the literature review there is no indication of coverage of
loan repayment of CBEs are from borrower’s point of view. This study has focused on factors
affecting loan repayment practice from micro finance institution point of view. Therefore, this
study aims at addressing this research gaps by focusing on analyzing factors affecting loan
collection practice or Police and practice of composition management in Ethiopia commercial
bank which no study has been conducted so far.

SUMMERY, CONCLUSION AND RECOMMENDATIONS

The summary of major findings, conclusion and recommendations of the study were presented.
Starting from summary of major findings that are obtained from quantitative and qualitative
results, then it followed by presentation on conclusion. Finally, it forwards recommendations
for the identified gaps by this study.
Solution of Gap
The main purpose of this study was Police and practice of compensation management in Ethiopia
commercial bank in hawassa district.: A total of 11 sampled respondents were participated in
responding to the questionnaire and the collected data was analyzed using descriptive statistics
such as frequency, percentage, mean, and standard deviation. Moreover, inferential statistics such
as correlation and multiple linear regression analysis were applied. Based on the results of the
study, summary of the major findings was identified as follows:

 The ranges of values were presented as disagreeing if the mean score is between 1.00 and
2.60, neutral if the mean score is between 2.60 and 3.40 and agree if the mean score is
above 3.40. Therefore, the interpretations of all Likert scale items such as vague strategy,
finance related factors, communication related factors, leadership related factors,
alignment with administrative authority and strategic management plan implementation
items were done based on these classifications.
 Based on the result, respondents were agreed on vague strategy (M =3.44, SD = 0.507),
finance related factors (M =3.71, SD = 0.659), leadership related factors (M =3.70, SD =
0.453), and alignment with administrative authority (M =3.44, SD = 0.477). However,
they were disagreed on strategic management plan implementation (M =2.57, SD =
0.489) and have neutral response on communication related factors (M =3.19, SD =
0.718).
 The results of the correlation analysis indicated that vague strategy (r = 0.505, p<0.01),
finance related factors (r =0.689, p<0.01), communication related factors (r = 0.485,
p<0.01), leadership related factors, (r = 0.589, p<0.01), alignment with administrative
authority (r =0.595, p<0.01) has positive and statistically significant relationship with
strategic management plan implementation.
 The result of the model summary of multiple linear regression analysis indicated that the
overall relationship between the dependent and independent variables is strong (R=
0.826).
 The R2 value of the regression model was 0.682, indicating that 68.2% of variance in
strategic management plan implementation of commercial bank of Ethiopia in Hawassa
district was accounted by vague strategy, finance related factors, communication related
factors, leadership related factors, and alignment with administrative authority. The
 remaining 31.8% of variance in strategic management plan compensation of commercial
bank of Ethiopia in Hawassa district was accounted by other variables which needs
further research.
 The SPSS table indicated that the multiple regression model itself is statistically
significant or not significant.  Accordingly, it is found that the model is statistically
significant when strategic management plan implementation of commercial bank of
Ethiopia in Hawassa district were included (F=56.237, p<0.001). Therefore, the overall
equation was found to be statistically significant.
 The result of the multiple linear regression models indicated that five variables were
included in the model and all predictors have found to have significant effect on strategic
management plan implementation of commercial bank of Ethiopia in Hawassa district.
These variables are vague strategy, finance related factors, communication related
factors, leadership related factors, and alignment with administrative authority.
 Conclusion

The majority of employees agrees and satisfied with the actions. Such as that top management
commitment, the involvement of subordinate, role of communication, maintain an open police
and practice of compensation management process, clarify strategic goals during strategic plan
development, providing opportunity for participation, establishing creative working environment
to sustain implementing strategy management and also training. As we can see from the findings
the study concluded those action can reduce the challenges of compensation management
Compensation management to the execution of the measure and strategies, so as to accomplish
the long-term goals of the organization. The dominant variable that had an effect on strategic
management plan compensation was leadership related factors followed by alignment with
administrative authority and communication related factors. Finance related factors and vague
strategy had also effect on strategic management plan and policy makers.
Struggling with inappropriateness and vagueness of strategy to implement the plan, availability
of unplanned projects, the vagueness of the assignment of responsibility on strategic
management plan compensation and clarified strategic goals during strategic plan development
have a significant effect on strategic management measures. Therefore, this leads to low strategic
management issues.
Recommendations
Based on the finding and conclusion of the study, the following recommendations are forwarded.
 GAP Analysis it is an interest rate Compensation management tool based on the balance
sheet, which focuses on the potential variability of net-interest income over specific time
intervals. The information on GAP gives the compensation management an idea about the
effects on net-income due to changes in the interest rate.(Cumming and Beverly, 2001).
 Duration-GAP Analysis: It is another measure of interest rate risk and managing net
interest income derived by taking into consideration all individual cash inflows and
outflows. Duration is value and time weighted measure of maturity of all cash flows and
represents the average time needed to recover the invested funds. (Cumming and Beverly, 2001).
 Securitization: it is a procedure studied under the systems of structured finance or credit-
linked notes. Securitization of a bank’s assets and loans is a device for raising new funds
and reducing bank’s risk exposures. The bank pools a group of income-earning assets and
sells securities against these in the open market, thereby transforming illiquid assets into
tradable asset backed securities (Crouhy and Robert, 2001).
 Sensitivity Analysis: it is very useful when attempting to determine the impact, the
actual outcome of a particular variable will have if it differs from what will previously
assumed. By creating a given set of scenarios, the analyst can determine how changes in
one variable(s) will impact the target variable (ibid1).
 Internal Rating System An internal rating system helps financial institutions manage
and control credit risks they face through lending and other operations by grouping and
managing the credit-worthiness of borrowers and the quality of credit transactions
(Cumming and Beverly, 2001).
 Simulation - this model measures the sensitivity of net interest income and capital to
certain key variable risks, including changes in interest rates. The model is dynamic and
takes a long time until any significant results can be obtained.
 Analysis period - interest rate risk in this model is measured by calculating the present
value of assets, liabilities and off-balance sheet positions of banks to then measured
sensitivity of the net value of the interest rate changes. (Barjaktarović, 2009).
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National Bank of Ethiopia website: http://www.nbe.gov.et/aboutus/index.html.
Official site of Bank of International Settlement, www.bis.org.
www.Banksinethiopia.com
www.bank risk management.
www.types of bank risks. & www.Santomero (1995)
Source Robert L. Thorndike and Elizabeth Hagen: Measurement and Evaluation in Psychology
and Education, 3rd Ed., p. 1