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CHAPTER ONE

1. Introduction

1.1. BACK GROUND OF THE STUDY

A banking institution various types of service are providing among those credits is one of
the most important core businesses of most banks. The word credit itself is derived
from the Latin word “credere” to believe to put confidence in some one trust same one(
Conant 1899, baltnsperger 1987)
Bank is financial institution that are established for lending , borrowing, issuing,
exchanging, taking deposit, safe guarding or handling money under the law and
guidelines of respective country. Among their activities credit provision is the main
product which bank provides to potential business entrepreneur as main source of
income. While providing credit as main source of income bank takes in to account many
considerations as factor of credit collection management which helps them to minimize
the risk of default that result in financial distress and bankruptcy. This is due to the
reason that while a bank providing credit they are exposed to risk of default( risk of
interest & principal payment) which needs to be managed effectively to acquire level of
loan growth and performance (bass, 1991)
In competitive environment more lines of business which need huge environment are
being opened. Some of this investment is financed through commercial bank loan. With
this respect bank play major role in the overall economy development of the country.
However, in this process of extending credit to customers. A bank should have a way
securing its borrowers so that it will minimize the risk of default (Bas, 1998 fundamental
of risk 3rd edition).
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1.2. STATEMENT OF THE PROBLEM

Credit collection management is one part of the bank service. But it has wide
approaches. There is high demand of borrowing money used for different purposes.
Investors, individuals and government itself needs money for their own purposes. Most
of the time the economic units needs to satisfied the banks. The previous studies
focused their attention only on credit collection management of lion international bank
of Ethiopia. Thus study focus on determining efficiency and effectiveness of assessing
credit collection of the company. Thus study will try to investigate the problem of lion
international bank due to the fact that some of loans and advances grant to its users
turned to be bad loans. Because level of loans that grant by lion international bank to its
uses to be bad loans (probability that loan returned by the customer is low) is increased
year to year.
RESEARCH QUESTIONS
Therefore it is necessary to raise the following research questions to identify the
problems.
1. How the bank evaluated the credit worthiness of the debtors?
2. What are the criteria used by lion international bank credit worthiness of
the borrowers?
3. What are the causes of customer in ability to pay the loan to the bank?
1.3. OBJECTIVES OF THE STUDY
1.3.1. GENERAL OBJECTIVE

The main objective of the study will examine and assess the credit collection of
management procedures and performance in the lion international bank in jackros
branch
1.3.2 SPECIFIC OBJECTIVE
1. To assess the insolvency of the customer or the borrowers.
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2. To identify the criteria used to evaluate and estimate the collateral used
as pledge for granting loan.
3. To identify the causes of customers default in repaying loan
1.4. SIGNIFICANCE OF THE STUDY
 The study on assessment of credit collection management on lion international
bank jackros branch has a vital role.
 This role to contribute the organization i.e. banks is to get interest and to attract
the new customers and to satisfy the existing customers because it provides
information that will enable effective measures to be taken to improve the
performance of credit collection process of lion international bank jackros
branch.
 This study is useful in bringing in to light the strong and weak point in managing
credit risk. This research will be a reference for further study.

1.5 SCOPE OF THE STUDY

Lion international bank is privately owned Share Company which is currently has 170
branches both in Addis Ababa and regional towns. This study focus on assessing credit
collection management in lion international bank jackros branch.
1.6. LIMITATION OF THE STUDY

1. Lack of skill and experience of the researcher about the research.

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CHAPTER TWO

2.1 Review of the literature

Credit management is a serious threat to banks; therefore various researchers have

examined the impact of credit management on banks in varying dimensions. Ahmad
and Ariff (2007) examined the key determinants of credit risk of commercial banks on
emerging economy banking systems compared with the developed economies. The
study found that regulation is important for banking systems that offer multi-products
and services; management quality is critical in the cases of loan-dominant banks in
emerging economies. An increase in loan loss provision is also considered to be a
significant determinant of potential credit risk. The study further highlighted that credit
risk in emerging economy banks is higher than that in developed economies. Ahmed,
Takeda and Shawn (1998), in their study found that loan loss provision has a significant
positive influence on non-performing loans. Therefore, an increase in loan loss provision
indicates an increase in credit risk and deterioration in the quality of loans consequently
affecting bank performance adversely. Ben-Naceur and Omran (2008) in attempt to
examine the influence of bank regulations, concentration, financial and institutional
development on commercial banks‟ margin and profitability in Middle East and North
Africa (MENA) countries from 1989-2005 found that bank capitalization and credit risk
have positive and significant impact on bank‟s net interest margin, cost efficiency and
profitability. Berger and De Young (1997), poor management in the banking institutions
results in bad quality loans, and therefore, escalates the level of non-performing loans.
They argue that bad management of the banking firms will result in banks inefficiency
and affects the process of granting loans. The banks” management might not thoroughly
evaluate their customers”credit application due to their poor evaluation skills.
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Therefore, banks” inefficiencies might lead to higher non-performing loans. Kargi (2011)
evaluated the impact of credit risk on the profitability of Nigerian banks. Financial ratios
as measures of bank performance and credit risk were collected from the annual reports
and accounts of sampled banks from 2004-2008 and analyzed using descriptive,
correlation and regression techniques. The findings revealed that credit risk
management has a significant impact on the profitability of Nigerian banks. It concluded
that banks” profitability is inversely influenced by the levels of loans and advances, non-
performing loans and deposits thereby exposing them to great risk of illiquidity and
distress. Pyle (1997), in his study on bank risk management held that banks and similar
financial institutions need to meet forthcoming regulatory requirements for risk
measurement and capital. However, it is a serious error to think that meeting regulatory
requirements is the sole or even the most important reason for establishing a sound,
scientific risk management system. It was held, managers need reliable risk measures to
direct capital to activities with the best risk/reward ratios. They need estimate of the
size of potential losses to stay within limits imposed by readily available liquidity, by
creditors, customers and regulators. They need mechanisms to monitor positions and
create incentives for prudent risk taking by divisions and individuals. Girma (2011)
investigated the relationship between bank performance and credit risk management. It
could be inferred from their findings that return on equity (ROE) and return on assets
(ROA) both measuring profitability were inversely related to the ratio of non-performing
loan to total loan of financial institutions thereby leading to a decline in profitability.
Tekele (2011) studied the reasons behind the problem of loan recovery and
determinants of loan default and summarized some of the causes for loan defaults as
improper selection of an entrepreneur, poor analysis of project viability, inadequacy of
collateral. He further discussed that factors affecting loan recovery can be categorized
as pre-establishment problem, implementation, and operational problem.
Wondimagegnehu (2012) on “The determinants of Nonperforming loan on commercial
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banks of Ethiopia” also found as poor credit assessment, failed loan monitoring,
underdeveloped credit culture, lenient credit terms and conditions, aggressive lending,
compromised integrity, weak institutional capacity, unfair competition among banks,
willful defaults by borrower and their knowledge limitation, fund diversion for un
expected purposes and overdue financing has significant effect on NPLs. The above
empirical review of literature emphasizes that all the studies so far conducted are
mainly discussing the loan recovery problems, determinant factors for default of
borrowers, the effect of Credit risk on bank performance and profitability in financial
institutions in general at Macro-level and micro level. Nagarajan (2001) in his study of
risk management for financial institutions in Mozambique found that risk management
is a dynamic process that could ideally be developed during normal times and tested at
the wake of risk. It requires careful planning and commitment on part of all
stakeholders. It is encouraging to note that it is possible to minimize risks related losses
through diligent management of portfolio and cash-flow, by building robust institutional
infrastructure with skilled human resources and inculcating client discipline, through
effective coordination of stakeholders. As to the knowledge of the researcher there are
no studies conducted mainly to identify the problems related to lack of effective credit
management with reference to united Bank Share Company. credit management
problems and thereby to recommend courses of action that are assumed to promote
quality loan growth and curtail non-performing loans.
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CHAPTER THREE

3.1. METHODOLOGY OF THE RESEARCH

3.1.2 RESEARCH DESIGN

The research is more of descriptive type of research design. Because descriptive
research method is easy to describe what the researcher can do.

3.1.3 DATA TYPE AND SOUURCE

The necessary data will be collected from both primary and secondary data (source).
The primary source will be collected through questionnaire from employees of lion
international bank in jackros branch.

3.1.4 METHOD OF DATA COLLECTION

The data will be collected mainly from credit collection management department of lion
international bank. Necessarily primary data will be collected through questionnaire of
lion international bank employees and secondary data will be collected from internet,
and relevant written documents.
3.1.5 METHOD OF DATA ANALYSIS

The data gather interview and questioner method and try to analysis descriptive
methods that are percentage and appropriate explanation of the table.
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3.1.6 SAMPLING TECHNIQUES

The sampling technique that will be used for the purpose of this study is stratified
random sampling the technique of stratification is often employed in the preparation of
sample designs because it generally provides increased accuracy in sample estimates
without leading to substantial increases in costs.

3.1.7 SAMPLING SIZE

The branch will be chosen as a sample because one of the most important and primary
activities in the credit management process i.e. Credit analysis takes place at branch
level.

3.1.8 ORGANIZATION OF THE PAPER

The paper contains five chapter the first chapter is introduction which include
background of the study, statement of the problem, objective of the study, significance
of the study, scope and limitation of the study.
The second chapter deals with literature review, the third chapter consists of
methodology of the study, the fourth chapter is data analysis and interpretation, and
the final chapter is conclusion and recommendation of the study.