...............................

ASSESSMENT OF CREDIT MANAGEMENT PRACTICE

(A CASE STUDY IN COMMERCIAL BANK OF ETHIOPIA
BEDDESA BRANCH)

ARBA MINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS,

DEPARTMENT OF ACCOUNTING &FINANCE

A SENIOR EASSY SUBMITTED FOR THE PARTIAL FULFILLMENT OF AWARD
OF BACHEOR OF ARTS DEGREE IN ACCOUNTING AND FINANCE

PREPARED BY: BERHANE GETAHUN

ID NO; RBE/------------------------

ADVISOR; DANIEL MEHARI (MSC)

SUBMITTED DATE JUNE, -------

ARBA MINCH- ETHIOPIA

 TABLE OF CONTENTS
TABLE OF CONTENTS ..................................................................................................... i

ACNOWLEDEGMENT .................................................................................................... iii

ABSTRACT ....................................................................................................................... iv

ACRONYEMS.................................................................................................................... v

CHAPTER ONE ................................................................................................................. 1

INTRODUCTION .............................................................................................................. 1

1.1 Background of the Study .......................................................................................................... 1

1.2 Background of the Organization ............................................................................................... 2

1.3 Statement of the Problem .......................................................................................................... 3

1.4 Research Questions ................................................................................................................... 5

1.5 Objective of the Study .............................................................................................................. 5

1.5.1 General objective 5

1.5.2 Specific objectives ................................................................................................................. 5

1.7 Significance of the Study .......................................................................................................... 6

1.8 Scope of the Study .................................................................................................................... 6

1.9 Limitation of the Study ............................................................................................................. 7

1.10 Organization of the Study ....................................................................................................... 7

CHAPTER TWO ................................................................................................................ 8

2.1 LITRATURE REVIEW ................................................................................................ 8

2.2.1 Introduction 8

2.2.2 Definition of Credit Management .......................................................................................... 8

2.2.3 Theoretical Review ................................................................................................................ 9

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2.2.4 Meaning and Types of Credit Management........................................................................... 9

2.2.5 Types of Credit ...................................................................................................................... 9

2.2.6 Dimension of Credit Management ....................................................................................... 10

2.2.7 Method of Credit Delivery and Repayment Method ........................................................... 11

2.2.8 Functions of Credit .............................................................................................................. 11

2.2.9 Components of Credit Policy ............................................................................................... 11

2.2.10 Credit Analysis................................................................................................................... 12

2.2.11 Credit Information ............................................................................................................. 14

CHAPTER THREE........................................................................................................... 17

3.1 METHODOLOGY OF THE STUDY ........................................................................ 17

3.6.1 Research Design................................................................................................................... 17

3.6.2 Target Group ........................................................................................................................ 17

3.6.3 Sampling Technique ............................................................................................................ 17

3.6.4 Data Collection Procedures.................................................................................................. 17

3.6.5 Data Analysis

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 ABSTRACT
The study focused on assessment of credit management practice in Commercial Bank of Ethiopia,
BEDDESA Branch. To achieve these objectives primary data source was used. Primary data
obtained by using questionnaires .After the collection of all data, the researcher analyzed by using
descriptive method. Finally, the main findings of the study that should maintain proper credit
management practice and should follow up as much as possible use clear credit collection
procedures and control payment.

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 CHAPTER ONE
INTRODUCTION

1.1 Background of the Study

Credit is defined as money provided by the bank for different activities that have
economic importance and with an agreement to pay back the principal with interest
within the specified in the loan agreement. Similarly, it is the power or ability to obtain
money by the borrowing process in return for a promise to pay the obligation in the
future. Futurity is thus a basic characteristic. Credit is sometimes defined as “means
confidence in man” (Jhingan, 2004).
Credit management is the process of collecting and controlling payment from
customers. A good credit management system will bee help every manager to reduce
the amount of capital tied up with debtors and minimize your exposure to bad debt
(Chandra, 2004).
Charles Mensah (1999) stressed the importance of credit management as follows:
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 performance of credit management and
protects 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

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 management is concerned with activities such as accepting application, loan appraisal,
loan approval, monitoring, recovery of non-performing loans, etc (Shekhar, 1985).

According to Hettihewa, 1997, Credit Management is extremely important as granting

credit is 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 steps
of loan processing using various parameters well bee significant effect on performance
of credit management.

Commercial Bank is one of the financial institutions engaged in providing short and
medium credit like other Private Banks in the country in general and in the region in
particular. In the last few years, both public and private sectors in the economy
underwent encouraging development in investment and business activities, thus
becoming the fertile ground for the banking industry. Since its establishment in
1942.Commercial Bank well bee striving to exploit such and all other opportunities
towards achieving its corporate goals. The bank well bee providing only short and
medium loans and advances to its customers because of its early stage of capital base
and liquidity position. The bank well bee playing a significant role in providing loans
and advances to its customers that enhances the investment need in the country and as
means of generating income for the country.

Hence, the purpose of this study is to assess the performance of credit management
problems and strengths of Commercial Bank of Ethiopia in Beddesa Branch from
different perspectives in light of the practices of modern credit management in financial
institutions.

1.2 Background of the Organization

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Commercial bank is the leading bank in Ethiopia, established in 1942.It is the Pioneer to
introduce modern banking to the country. It has more than 860 branches stretched across
the country. CBE is the leading African bank with assets of 242.72 billion Birr as on June
30th 2014.It plays a catalytic role in the economic progress & development f the country.
Commercial Bank is the first bank in Ethiopia to introduce ATM service for local Users.
Currently CBE has more than 8.5 million account holders.

Commercial Bank has strong correspondent relationship with more than 50 renowned
foreign banks like Commercial Bank A.G., Royal Bank of Canada, City Bank. It has a
SWIFT bilateral arrangement with more than 700 other banks across the world. CBE
combines a wide capital base with more than 20,000 talented and committed employees.
(www.combanketh.et)

Pioneer to introduce Western Union Money Transfer Services in Ethiopia early 1990s and
currently working with other 20 money transfer agents like Money Gram, Atlantic
International (Bole), Xpress Money. CBE has opened two branches in South Sudan and
has been in the business since June 2009.CBE has reliable and long-standing relationships
with many internationally acclaimed banks throughout the world. (www.combanketh.et)

1.3 Statement of the Problem

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

Hence, the issues of credit management well bee profound implication both at the micro
and macro level. When credit is allocated poorly it raises costs to successful borrowers,
erodes the fund, and it reduces banks flexibility in redirecting towards alternative activities.
Moreover, the more the credit, the higher is the risk associated with it. The problem of loan

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default, which is resulted from poor credit management, reduces the lending capacity of a
bank. It will bee denies new applicants' access to credit as the bank’s cash flow
management problems augment in direct proportion to the increasing default problem. In
other words, it may disturb the normal inflow and outflow of fund a bank will bee to keep
staying in sustainable credit market.

Hence, credit evaluation decisions are important for the financial institutions involved due
to the high level of risk associated with wrong decision. The process of making credit
evaluation decision is complex and unstructured. This complex and unstructured decision
making process of credit evaluation needs proper credit management by the concerned
banks.

Adequately managing credit in financial institutions (FIs) is critical for the survival and
growth of the FIs. In the case of banks, the issue of credit management is even greater
concern because of the higher levels of perceive risks resulting from some of the
characteristics of clients, business conditions and economic environment in which they find
themselves.

The very nature of the banking business will bee sensitive because more than 85% of their
liability is deposits mobilize from depositors (Saunders, Cornett, 2005). Banks use these
deposits to generate credit for their borrowers, which in fact is a revenue generating activity
for most banks. This credit creation process, if not manage properly, exposes the banks to
high default risk which might led to financial distress including bankruptcy. All the same,
beside other services, banks must create credit for their clients following prudent credit
management procedure to make some money, grow and survive in stiff competition at the
market place.

Even though a preliminary study is made in preparing the master business plan for the
opening of branches; little work is done in studying the performance of credit management

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of the branches that would alleviate the problems encounter and contribute to the growth
of market share and income generation of the bank. Hence the researcher is interested to
the proposal area in particular and to the contribution and object of the bank in general in
assessing the gaps in credit management performance which is crucial to be study in the
prevailing stiff competition in line of the modern financial measurements.
Therefore, the principal concern of this study will bee to assess the performance of credit
delivery and management in Commercial Bank of Ethiopia Beddesa Branch.

1.4 Research Questions

1. Does the Bank consistently comply with its policy and procedures in entertaining its
loan applicants, loan processing, and collecting?
2. To what extent does the Bank accelerate the performance of credit management in
line policy and national bank’s requirements?
3. Does loan customers of the Bank support the prevailing loan policy and procedures
that can result long lasting relationship?
4. To what level is the Bank building up quality loans arresting non- performing loans
in line to its policy and National Bank’s requirement?

1.5 Objective of the Study

1.5.1 General objective

The main objective of the study will bee assess the performance of credit management of
Commercial Bank of Ethiopia, Beddesa Branch as compared to Private Banks credit policy
and procedures.

1.5.2 Specific objectives

1. To assess the compliance of the Bank to its policies and procedures in processing loan
applications.
2. To evaluate the ability of the Bank in creating credit and collecting its loan on their
due date.

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3. To assess the perception of the customers towards the Bank’s policy in relation to its
loan provision.
4.To evaluate the Bank’s credit quality as compared to Private Bank’s requirements and its
credit policy.

1.7 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. Bank lending is very crucial
for it makes possible the financing of agricultural, industrial, construction, and commercial
activities of a country. The strength and soundness of the banking system primarily
depends upon health of the advances. Therefore the ability of banks to formulate and adhere
to policies and procedures that promote credit quality and curtail nonperforming loans is
the means to survive in the stiff competition. In ability to create and build up quality loans
and credit worthy customers leads to default risk and bankruptcy as well as hampers
economic growth of a country. However, little work is done to search the ways and means
that enable to quality loan creation and growth as well bee to determine the relationship
between the theories, concepts and credit policies both at country level or regional level.
Hence, this study will bee assumed to be significant in indicating best practice and
concepts for prudent lending to enhance the performance of credit management to all
managers and policy makers of the bank as well as to all financial institutions and banks.
Moreover, it may help as a benchmark for researchers will bee interested in the area to
extend it further.

1.8 Scope of the Study

The study is concentrated on Commercial Bank of Ethiopia Beddesa Branch. This study
focused on credit management practice. Therefore, the scope of this study was limited to
only discus the credit management practices, policies, procedures, and credit operations of

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the Bank. It assessed whether the loan growth and performance is to the required level of
the bank or not.

In addition, the study is concerned to identify the major reasons for best practices of credit
management, loan growth, and causes of loan default if any in the region. Since the lending
rules and procedures of the bank is the same in all its branches, the result obtained taking
case study of this specific region is assumed to reflect the situation of all branches of the
bank in the country under normal circumstance.

1.9 Limitation of the Study

During the collection of data for this study the researcher expected to face the prospect
difficulties:
- poor cooperation of the respondent.
-Because of the campus is far from my case area it was difficult to study effectively.
-Lack of depth results , limited answer .

1.10 Organization of the Study

This paper had five chapters; the first chapter deals with introduction, it includes;-
back ground of the study, statement of the problem, research questions, objective of the
study with general and specific, scope of the study, significance of the study and
organization of the study . The second chapter deals with literature review and third chapter
deals about research methodology includes; research design, type and source of data,
method of data collection, sampling techniques, method of data analysis. The fourth
chapter deals about data analysis, and data interpretation and finally the fifth chapter deals
about summary of major findings, conclusion and recommendation of the study.

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 CHAPTER TWO
2.1 LITRATURE REVIEW

2.2.1 Introduction
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
is 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 is the provision of facilities to collect deposits
and invest these deposits as credits. Provision of a sound payment mechanism is also the
other expected service from banks.

2.2.2 Definition of Credit Management

There are many definitions given for credit management by different scholars. Among
these some are here cited as follows: Credit management is implementing and maintaining
a set of policies and procedures to minimize the amount of capital tied up in debtors and to
minimize the exposure of the business to bad debts.
(http://www.smallbusiness.wa.gov.au/assets/Small- Business-Briefs/small-business-brief-
credit-management.pdf).

Credit Management, from a debtor’s point of view, is managing finances especially debts
so as not to have a tail of creditors lurking behind your back. Credit management is a
responsibility that both the debtor and the creditor should seriously take
(http://www.selfgrowth.com/articles/

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Tabije3.html). When it functions efficiently, credit management serves as an excellent
instrument for the business to remain financially stable.

2.2.3 Theoretical Review

Banks in today world have many functions. Lending is the most important one Credit or
loans cover the large portion of banks total asset and a backbone of every bank structure.
In formulating policies and procedures for the credit granting process several basic steps
must be taken by credit management (Fredric, 1998).
Step1: there must be determination of the grade or amount of risk that the firm is willing
to Accept.
Step 2: each credit application must be investigated.
Step 3: Credit management must analyze the information obtained in its investigation in
Order to establish in the applicants credit worthiness.
Step 4: the credit manager or another person to whom such responsibility has been
Delegated must decide whether to accept or reject the applicant.

2.2.4 Meaning and Types of Credit Management

Credit means money provided by banks for different activities that have economic
importance and with an agreement to pay back with interest within specific period in the
loan agreement (Jhingan, 2004).

2.2.5 Types of Credit

Credit can be classified according to different dimension. According to Theodore

N.Beckman and Ronald S.Foster (1996) credit is classified according to their purpose of
the loan borrowed and time they are borrowed. According to the purpose of the loan they
are borrowed the type of loan can be classified in to real estate loan, consumer loan and
agricultural loan. Real estate loan includes long-term mortgage on the provision of
properties and business enterprise. It is a loan build a real estate for which are generally

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paid off which the property is completed and sold. Consumer loan is one of the loans which
are granted by bank. Many consumer loans are mainly for the purpose of purchasing
durable goods like refrigerators, automobiles and etc. from the banks point of view
consumer loans are generally more liquid than other types of loans because most of the
time consumer loans are rendered as short term loan.

Agricultural loan is a credit financing vehicle, which is designed especially for agriculture
products. Typically this financing is used to fund operations, Purchase equipment or
acquire real estate. Based on the time they are borrowed credit can be short term loan,
medium term loan and long term loan. Short term loan is the loan that is provided for a
short period of time. Most of the time short term loan is provided for one year and less.
Medium term loan is the type of loan that is provided above one year and less of five year.
Long term loan is the loan that is provided for loan term times. Most of the time long term
loan is provided more than five year loans.

2.2.6 Dimension of Credit Management

According to IM Pandey (2010), credit management particularly performs the following
core concepts in related to credit policy:
i. Formulation of credit policy:- for firms with usual credit sale the prime
responsibility is formulation of credit policy which includes the decision about
three credit terms that is cash discount, discount period and credit period. Credit
term refers to the duration of credit and the term payment 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:
1. Collection of credit information
2. Analyzing and evaluating information
3. Making of credit decision

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iii. Implementation of credit policy: - Once credit policy is formulated and
evaluated the next step is adapting it and use it.
iv. Administering and controlling credit policy: - the purpose of this step is to
check and control whether implemented policy is properly working or not.

2.2.7 Method of Credit Delivery and Repayment Method

Methods of credit delivery can be generally divided in to two broad categories according
to Joanna Ledgerwood (1998). These are individual loans and group based loan. Individual
loans are delivered to individuals based on their ability to repay the loan within an
agreement period. Group base lending involves the formulation of groups of people who
have a common wish to assess financial service. In other way repayment methods of credit
is divided in to two methods according to Theodore N Beckman and Ronald S Foster
(1996), Installment Method and Lamp Sum. Installment Method is the way in which the
borrower repays the loan periodically. Lamp Sum is the other way of repayment method in
which the borrower repay the loan once totally.

2.2.8 Functions of Credit

According to Mill Jhingan (2004), credit performs functions which may be classified as
economic, social and managerial.
The first economic function of credit is to secure as a medium of exchange in the economy.
Money exchange is cultural stage ahead of barter, but a credit economy is a step in advance
of mere money economy. The second function of credit explained by this book is to make
independence of thought and action for social purpose. Credit bridges the gap between
capital and labor enabling the letter to secure assistance in attempt at independent
enterprise. The other function is managerial function. For business manager credit performs
several functions. It is a tool of business promotion with which he may expand his business
to customers who want to buy their merchandize on credit.

2.2.9 Components of Credit Policy

There are three components of credit policy. They are credit standard, credit terms and
collection policy (IM Pandey, 2010).

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 i. Credit Standard:-Is the guidelines issued by a company that are used to determine
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 payment or defaulting on loaned money.
ii. Credit term:- 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 is offered a 2% discount if payment is made within
10 days of the invoice date. Otherwise the full amount of the receivables is due in 30
days. The stated terms of credit extension will have a strong impact on the eventual
size of the accounts receivable balance.
iii. Collection Policy:- refers to the procedures that firms follow to obtain payment of
past due account. As a general rule, the more quick account receivable is converted
in to cash the greater will be the profit. Collection policy is final element in credit
policy. It involves to spot trouble in obtaining payment of past due account.
Collection Period=Receivable X 365 days/Amount of order sales
This formula shows how many days, sales amount are tied up in receivables.

2.2.10 Credit Analysis

Credit analysis is 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 is
essentially default risk analysis, in which a loan officer attempts to evaluate a borrower’s
ability and willingness to repay.

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Similarly Compton (1985) identified three distinct areas of commercial risk analysis related
to the following questions: 1) what risks are inherent in the operations of the business? 2)
What have managers done or failed to do in mitigating those risks? 3) How can a lender
structure and control its own risks in supplying funds? The first question forces the credit
analyst to generate a list of factors that indicate what could harm a borrower’s ability to
repay. The second recognizes that repayment is largely a function of decisions made by a
borrower. Is management aware of the important risks, and has it responded? As Tomothy
(1995:665) 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 creditworthiness. Lawrence (1997:776-777), identified five
C’s of credit. They include; Character, Capacity, Capital, Collateral, and Conditions.

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.
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 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.

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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 may be
willing to sell on more favorable terms or to less creditworthy applicants.

Analysis of the general economic and business conditions, as well as special circumstances
that may affect the applicant or firm is performed to assess conditions. The credit analyst
typically gives primary attention to the first two C’s-character and Capacity-because they
represent the most basic requirements for extending credit to an applicant. Consideration
of the last three C’s-Capital, Collateral, and Conditions- is important in structuring the
credit management and making the final credit decision, which is affected by the credit
analyst’s experience and judgment.

According to Golden and Walker (1993), there are five Cs of bad debt; which represent
things to guard against in order to help prevent problems. They include: Complacency,
Carelessness, Communication breakdown, Contingency, and Competition.
Complacency refers to the tendency to assume that because things were good in the past
they will be good in the future. Common examples are an over reliance on guarantors,
reported net worth, or past loan repayment success because it’s always worked out in the
past.
Carelessness involves poor underwriting, typically evidenced by inadequate loan
documentation, a lack of current financial information or other pertinent information in the
credit files, and a lack of protective covenants in the loan agreement. Each of these makes
it difficult to monitor a borrower’s progress and identify problems before they are
unmanageable.
Loan problems often arise when a bank’s credit objectives and policies are not clearly
communicated. This is communication breakdown. Management should articulate and
enforce loan policies, and loan officers should make management aware of specific
problems with the existing loans as soon as they appear.

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A contingency refers to lenders’ tendency to play down or ignore circumstances in which
a loan might in default. Competition involves following competitors’ behavior rather than
maintaining the bank’s own credit standards.

2.2.11 Credit Information

Adequate and timely information that enables a satisfactory assessment of the
creditworthiness of borrowers applying for a bank loan is crucial for making prudent
lending decisions. Prudent lending decisions made on the basis of adequate information on
the creditworthiness of borrowers are one of the principal factors in ensuring the financial
soundness of banks. But, there has been serious difficulty in Ethiopia of getting accurate
and timely information on prospective borrowers that facilitates the making of such prudent
lending decisions. One of the means for alleviating this difficulty of getting accurate and
timely information on prospective borrowers is the establishment of a Credit Information
Center (CIC) where relevant information on borrowers is assumed to be pooled and made
available to lending banks.

According to article 36 of the Licensing and Supervision of Banking Business

Proclamation No. 84/1994, the National Bank Ethiopia (NBE) has issued these directives
to establish such a Credit Information Center (CIC). Though there is still serious limitations
in the accuracy of the credit information extracted the summary of the directive is as
follows:
 Banks shall provide, alter and update credit information on each and every one of
their borrowers using online system.
 Upon written request by banks, the Supervision Department of the NBE shall
provide to the requesting bank, in writing, all credit information available in the
Central Database on a prospective borrower within three working days from the
date of receipt of the request;

 Access to the Central Database shall be restricted to the user group;

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

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 CHAPTER THREE
3.1 METHODOLOGY OF THE STUDY

3.6.1 Research Design

The researcher will be used descriptive method of research design, because the main
purpose of the research are to describe, the assesement of credit managment practice in
commercial bank of ethiopia beddesa branch. Descriptive data analysis it address major
objective and research question proposed in the study adequately in addition it help to
describe and summarize the data using to describe the present status of research area of
investigation descriptive type of research design is suitable to assess the credit managment
practice in commercial bank of ethiopia beddesa branch.

The researcher will be uses both qualitative and quantitative methods. Qualitative method
is used in order to find out impacts on questioners xtract an accurate sentimental
understanding based on interview and related source.

The quantitative is the most important one the reason for quantitative research approach is
because it is the fastest way to receive my target answers and olso to be able to present the
results of the research by using figures and in writing. Measuring the answers would be
quite easy since alternatives will be given for the respondent to choose their answers.
Qualitative method is the researcher study reflection in the natural setting attempting to
make sense of interpret phenomena in terms of the meaning people brings to them.

3.6.2 Target Group

The target groups of this study will be the loan clients of the bank and the employees
directly involve in credit processing and administering. This means, senior bank

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professionals, Department heads, Branch managers, Assistant branch managers, Loan
section heads, Loan officers, Loan clerk, and Loan Committee members of all branches
will be included in the target group.

3.6.3 Sampling Technique

The sampling techniques will bee used for the purpose of this study are stratified random
sampling and stratified judgmental sampling. Random sampling are used to select
respondents from among loan clients and stratified judgmental used to select respondent
from among staffs of the Bank. Stratification 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 criteria used for stratification.

3.6.4 Data Collection Procedures

For the purpose of this study,will bee both primary and secondary data 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 will bee help to address the proposal questions more
specifically or to concentrate more on the topic itself.

3.6.5 Data Analysis Method

In order to assess the performance of credit management problem of Commercial Bank of

Ethiopia, Beddesa Branch, more of qualitative method of analysis employed in addition to
quantitative method will bee as to address the aforementioned problems of the Bank. Both
methods of analysis used the data to be collect through the semi-structured questionnaires,
interviews and secondary sources.

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The data collected through interview and questionnaires analyzed, presented, and
interpreted using descriptive statistical tools like percentages, tables, and figures.

CHAPTER FOUR

4.1 DATA ANALYSIS AND INTERPRETATION

In this chapter the researcher analyzed data collected through questionnaire to

identify and investigate the major problems related to The assesment of credit
managment practice in commercial bank of Ethiopia beddesa branch . The
researcher has distributed questionnaire for 10 employees including manager of
the organization and all questionnaires are filed and returned back from all of
my respondents . The result gained from the data helped the investigator to
support part of research deals with presentation, analysis and interpretations of data
gathered from the respondents.

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 Table4.1 To summarize sex structure of respondents:

Sex Response Respondents

In%

Male 6 60%

Female 4 60%

Total 10 100%

Source: Questionnaire 2019)

According to the above table we can understand that from the total respondents 60 %are
male and 40% are female. From this we can understand that majority of respondents are
male. This showes that most of the employees of the bank are male.

Table4.2: summarizing the educational level of respondents:

Qualification Response Respondents in %

Diploma 2 20%

BA degree 8 80%

MSc -

Total 10 100%

Source: Questionnaire (2019)

According to the above table we understand that 80% of the respondents have BA
degree and 20% have diploma.

Respondents who have diploma may not have enough knowledge about credit collection
management of the bank this shows they may not give accurate or relevant data for the
study.

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Respondents who have BA degree may have good knowledge about credit collection
management this is useful for collection process of the bank.

Table 4.3 summarizing work experience of employees

Work experience Frequency Respondents in%

Less than 1 year 1 10%

Between 1-5 year 3 30%

Between 5-10 year 5 50%

Above 10 year 1 10

Total 10 100%

Source: Questionnaire (2019)

From table 3 work experiences of employees 10% of the respondents has less than
1 year experience, 30% of respondents has between 1-5 year experiences and 50%
of respondents have 5-10 year experiences and 10% of respondents have above 10
year. From this table we can understand majority of employees has between 5-10
year work experiences.

Table4. 4: Summarizing the types of loan term mostly customer use.

Types of loan Response Response in

Term %

Short term 8 80%

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 Medium-term 1 10%

Long term 1 10%

Total 10 100%

Source: Questionnaire (2019)

As shown from table 4 from the total respondents 80% answered that the loan terms
mostly used by customers is short term loan, 10% said the loan term used by
customers is medium term and 10% of the respondents answered that the loan term
used by the customers is long term.

Using short term loan is good for the borrowers because of low interest rate than
long term loan and it is also useful for the bank by increasing the liquidity of the
asset and it also decrease the risk of uncollectability of the loan from the borrowers.

From this data we can conclude that most of loan of the branch are classified under
short term loan. Which enable the branch to maintain liquidity and help the branch
to minimize risks associated with the advancement of loan. The second part of the
table presents the possible reasons behind the preference of short term loan by
customers. Here again all of the respondents select the interest rate associated with
the term of loan as the reason behind the preference of the term. It is known that
short term loan have low interest rate. This shows that customers of the branch are
sensitive to the interest rates associated with specific loans.

Table 4.5 .What is the method of loan repayment should the customer follow?

Method of loan repayment No. of Respondents Percentage (%)

Installment method 3 30%
Lamp Sum method 7 70%

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 Other - -
Total 10 100%
Source: Questionnaire (2019)
As indicated in the above table 70% of the respondents replied that the major part
of the loan was repaid by lump sum method on the maturity date while the
remaining 30% is on installment method.

Table 4.6 How could you rank the credit repayment habit of your customers?

Response No. of Respondents Percentage (%)

Excellent 2 20%
Very Good 6 60%
Good 1 10%
Poor 1 10%
Total 10 100%
Source:Questionnaire (2019)
The above table shows that among 10 respondents 20% of the respondents ranked
Excellent, 60% of them Very good ,10% of the respondent Good and the rest of
respondent poor. This indicated that the credit repayment habit of the customers needs
some improvement.

Q 4.7 regarding customers what kind of sequence the bank

follows if a chance of customer payment got over due?

The bank sends out delinquency letter information to the customer of the past due
status of the account. An account receivable become overdue a certain number of
days. The bank normally sends a polite letter reminding the customer of its

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 obligation. It makes phone call to the customer if letter proves successful; a
telephone call may be made to the customers to request immediate payment. Such
a call is typically directed to the customer accounts payable department where the
corresponding employee acts on institution of his/her boos. It employed collection
agency: a firm can turn collectable accounts over a collection agency or an attorney
for collection. It takes a legal action against the customer, which is the most
stringent step in the collection process. It is an alternatives collection agency not
only indirect legal action but it may force the debtor into bankruptcy, thereby
reducing the possibility fortune business out granting the ultimate receipt of the
over.

Tabel 4.8:what is the extent of your bank in acclarating the

performance of credit mamagement in its policy?

Response No of respondent Percentage (%)

Very good 6 60%

Good 3 30%

Low 1 10%

Very low - -

Total 10 100%

Source: Questionnaire (2019)

The above table shows that among 10 respondents 60% of the respondents ranked
very good 30% of them good and 10% respondantes low . This indicated that
the performance of credit management policy habit of the bank is encouraging

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 Tabel 4.9 How would you describe the credit quality of the
bank in comparsion with the requirement and credit policy?

Response No.of respondent Percentage

Good 7 70 %

Fair 3 30%

Poor - -

Very poir - -

Totale 10 100%

Source Questionnaire (2019)

As shown in the above table 70% of respondent says good ,30% of respondent says
fair and there is no respindent who give poor and very poor response.

This show that the bank describe the credit quality bank with requirement and
credit policy underestanding about credit quality and credit policy.

Table 4.10 The banks policy and procedure complince?

Response No.of respondent Percentage

Strongly agree 5 50%

Agree 3 30%

Dis agree 2 20%

Strogly dis agree - -

Total 10 100%

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 Source : Questionnaire (2019)
The above table 50%of the total respondent are response strongly agree and 30%
of the total respondent are agree that the banks policy and procedare and 20% of
the total respondent are response dis agree and there is no respondent strongly dis
agree. This implies the bank policy and procedure complince with some derivation.

Table 4.11 how would you rate whether the customer

perception to wards bank policy is clear and understandable
acceptable?
Response No.of respodent Percentage

Good 6 60%

Fair 2 20%

Poor 2 20%

Very poor - -

Total 10 100%

Source :-Questionnaire (2019)

As indicated in the above table 60%of the total respondents are good and 20% of
the total respondent are fair that about the rate whether the customer bank policy
clear and understandable and 20%of the total respondent responses poor on idea
whether the custemer perception words banks policy is clear and understandable.

Table 4.12 Granting loan services are?

Response No.of respondent Percentage

Extemly important 6 60%

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 Very important 3 30%

Some what important 1 10%

Not very important - -

Total 10 100%

Source:- Questionnaire (2019)

As indicated in the above table 60% of the total respondents are extermly important
and 30% of respondent are very important that about granting loan services and
10% some what important.

Regarding the collateral accepted by the bank of Commercial Bank of Ethiopia bedesa
branch respondents’ response as the bank evaluates 5 C's before they give the loan to
applicants

Identifying the business type.

Identifying the purpose whether for existing business or new business.

Location of the business.

Whether the borrower have collateral as pledge for granting loan.

Assess if the business is market oriented.

Evaluating the credit worthiness of the borrowers.

This implies that the bank use effective and efficient criteria to evaluate the debtors
if they fit with bank policy and terms of loans.

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 Table 4.13 How wold you describe service of bank?
Response No.of respondent Percentage

Reliable 7 70%

Un reliable - -

Fast 2 20%

Slow 1 10%

Total 10 100%

Source: Questionnaire, 2019

The above table 70% of the total respondent are response reliable and 20% of
respondent are fast that the service of bank and 10% of respondent are slow and
there is no respondent unreliable this implies the bank may have the responsibility
of service. This is because the responsibility of bank are reliable and fast service in
bedessa branch.

Q 4.14, Does the bank provide additonal professional services

to customer? What are those?

Banks in today world have many functions. Lending is the most important one
Credit or loans cover the large portion of banks total asset and a backbone of every
bank structure. In formulating policies and procedures for the credit granting
process several basic steps must be taken by credit management.

The bank provide additonal professional services to customer

-accepting deposits.

-rendering loan service to their customer.

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 -transfering of money from one branch to another branch.

-buying and selling of gold and silver,financial securities

-buy and sell foregin exchange.

-financing industry sector.

-provide loans to retailers and wholesalers

Q4.15, Extra ideas you want to provide about the banks

performance in credit management?

According to the response of the respondents all of them said the bank performance
theoretical forms in to credit management.

In this case the advantage of this to know the bank have effective credit
management procedure and maintaining good credit management in
operational activities.

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 The process of credit management begins with accurately assessing the credit
worthiness of the customer base and his/her business viability. This 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
management.

Proper management of financial institution service operation means the quality of work or the standard
of the business or industry. But,failure to maintain the quality or if the quality of loan is poor. Low loan
performance could lead to the liquidity problem if some of the loans are not maintaining repaid.
Institution could able to repay their debts. Unless there is some form of protection, depositors will be at
risk and will be affected. Profitability is also significantly affected as consequences. To minimize
possible failure of the financial institutions service operation clear working policies and procedures
should be designed & implemented accordingly. This policy and procedures are in targeting the client
management and supervision and follow up issues.

CHAPTER-FIVE

5.1 CONBVFTYRUYT

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