ASSESSMENT OF CREDIT MANAGEMENT IN MICRO FINANCE

INSTITUTION (A CASE STUDY ON OROMIA CREDIT AND SAVING

SHARE COMPANY OF NEKEMTE BRANCH)

A RESEARCH PAPER SUBMITTED TO ACCOUNTING AND FINANCE

DEPARTMENT FOR THE PARTIAL FULFILLMENT OF BA DEGREE IN
ACCOUNTING AND FINANCE

SUBMITTED BY:-LOKO MATHEWOS

ADVISOR: - ALEMAYEHU TADDESE (Msc)

JIMMA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

JUNE, 2016

JIMMA, ETHIOPIA

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 ABSTRACT

The major purpose of the study is to assess credit management in case of Oromia credit
and saving Share Company of Nekemte branch. In addition to this, the study has tried to
dig out major areas of problems in relation to credit management & challenges pertaining
to credit provision as per the company. For this study, sample respondents were selected
judgmentally from the total employees of the branch institution to provide the researcher
accurate information about the institution. The researcher has used up more of primary
and less of secondary source of data to analyze the stated problems in the branch in order
to arrive at possible conclusion and recommendation. The question type elected for this
study is closed ended question type to collect the data. The scope of the study is delimited
to Oromia credit &saving Share Company of Nekemte branch. For this study, qualitative
research design was elected. Finally, the researcher has used descriptive data analysis to
analyze and present the data and recommended the institution to correct the discovered
problems for future effective performance of the branch institution.

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 ACKNOWLEDGMENT

“If you find something very badly, you can achieve it. It may take patience, very hard work, a real
struggle, and a long time but, it can be done. That much faith is a prerequisite of any undertaking.”
Margo Jones (1913-1955).

First and for most I would like to thank the Almighty God for His help in all walk of my life. I am
heartily thankful to my advisor; Mr. Alemayehu Taddese whose Encouragement, and support from
the preliminary to the concluding level of this research paper enabled me to develop an
understanding of the subject. He shared his knowledge and research experiences with me along
with his time to help and ensure successful completion of my academic journey.

Finally, I would like to thank Jimma university social library IT room from which I have generated
much more of information related to my research to be done and costless typing of this research
paper.

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Table of content

Contents Page

ABSTRACT………………………………………………………………………………….…...I
ACKNOWLEDGEMENT………………………………..………………………………………II
TABLEOFCONTENT…………………………………………………………………………...III
ACRONYMS………………………………………………….……………………………….…V
LIST OF TABLES……………………………………………………………..……………...…VI
CHAPTERONE
INTRODUCTION……………………………………………………………….……….……….1
1.1Back ground of the study………………………….……....................…………………….…..1
1.2BackgroundoftheOrganization………………………………………….………………….…..2
1.3statementoftheproblem………………………………………………………............................3
1.3.1Research question………………………………………........................................................4
1.4Objectiveofthe study……………………………………...........................................................4
1.4.1General objective.....................................................................................................................4
1.4.2Specific objective…………………………………………….................................................4
1.5Significanceofthe study…………………………………………...............................................4
1.6Scope of the study………………………………….….……………………………...……..…5
1.7Limitation of the Study…………………………………………………………..………….....5
1.8Organizationofthe study………………………………..………………….…...........................5
CHAPTER TWO
LITRATURE REVIEW………………………………………………….......................................6
INTRODUCTION……………………………………………………………………………...…6
2.1Overview of credit…………………………………………...…….………..............................6
2.1.1Advantage of credit……………………………………..........................................................6
2.1.2Disadvantageof credit………………………………………….…….....................................7
2.1.3Featuresof credit……………………………………………………………………………...7
2.2 Credit period………………………………………………………………………..…………8
2.2.1 Factors influencing credit period……………………………………………………………8
2.3Credit instruments…………………………………………………………...............................9
2.4Credit policy…………………………………………………………………………… ……10
2.4.1Components of credit policy………………………………………..………………………11
2.4.2Creditpolicy effects……………………………………………………………....................11
2.5Credit analysis……………………………………………………………...…………………12
2.5.1Analysis of credit file…………………………………….....................................................12
2.6Credit information…………………………………………………………………………….13
2.7Credit evaluation and scoring……………………………………………………...…………13
2.8Screening and monitoring…………………………………………………………………….14

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2.9Collection policy and procedures……………………..............................................................16
CHAPTER THREE
3. RESEARCH METHODOLOGY………………………….…..................................................17
3.1Research design……………………………………...…………………………….…………17
3.2Data type…………………………………………………………………………………...…17
3.3Datacollection methods and Source…………………….…………………………………….17
3.4 Sampling techniques and size…………………………………..............................................17
3.5Method of data analysis………………………………………................................................18
CHAPTER FOUR
4. DATA ANALYSIS AND PRESENTATION………………………………………………….….19

CHAPTER FIVE
5. CONCLUSION AND RECOMMENDATION……………………………………………….28
5.1 Conclusion……………………………………………………………………………...……28
5.2 Recommendation………………………………………………………….............................29
Reference…………………………..…………………..…………………………………...……30
Appendix………………………………………………………………………………………....31

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 ACRONYMS

MFIS=Micro finance institutions

OCSSC=Oromia credit and saving share company

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 LIST OF TABLES

Table 4.1Demographic Characteristics of respondents…………………………………….……19

Table 4.2 Credit collection effort of the institution…………………………………………...…20
Table:4.3 Credit provision requirements of the institution………………………………………21

Table:4.4 Borrowers delay in returning credit taken on time at maturity…………………...…...21

Table 4.5 Credit management problem of the institution………………………………………..22
Table 4.6Transaction recording system of the institution……………………………..…………22
Table 4.7 maximum and minimum limit of credit the institution provides………………...……23
Table 4.8 supervision and Follow up of client operation ……………………………………….24
Table 4.9 Evaluation of clients history……………………………….…….................................24

Table 4.10 Credit beneficiary of the institution………………………………………………….25

Table 4.11 The role of the institution in financing small and micro enterprises…………...……26
Table 4.12 The time of providing financial service to agriculturalists…………………………..26
Table:4.13 Availability of finance the institution provides to small enterprises………………..27

CHAPTER ONE

1. INTRODUCTION

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1.1. Back of ground of the study

Most of the time economic problems are common to all poor society in the world even if its type
and degree differ from time to time. Economic problems are present in both urban and rural areas.
However, people may take different mechanisms to overcome this problem. Credit is one
mechanism of overcoming economic problem for society (Begley Brigham, 2008 )

MFI is type of banking service that is provided to unemployed or low income individuals or group
who would otherwise have no other means of gaining financial services. Ultimately the goal of
micro finance is to give low income people an opportunity to become self sufficient by providing
a means of saving money, borrowing money and insurance (Begley Brigham, 2008).

To undertake proper mobilization of funds, financial institutions practices credit management.

Credit management means the total process of lending starting from inquiring potential borrowers
up to recovering the amount granted. In banking sector and other financial institution, credit
management is concerned with activities such as accepting application, loan appraisal, loan
approval, monitoring, recovering of non performingloans (Charles Smithson, 2003)

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

considered to have equivalent of investing in a customer .However,[payment of 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
has significant effect on performance of credit management.

Currently there are many licensed MFI in Ethiopia specifically around 305 micro finance intuition
branches in Oromia regional state working in both rural and urban areas.Oromia credit and saving
share company was founded in 1995(OCSSC manual, 2015) in the Oromia regional state
.Therefore, this study was conducted on Oromia credit and saving share company of Nekemte
branch which was founded in 2009 to assess credit management issue in the branch.

1.2 Background of the Organization

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In developing countries, including Ethiopia, Micro Finance Institutions (MFIs) emerged with
unique opportunity to poor people who do not have access to commercial Banks. Microfinance
involves the provision of micro-credit, savings, and other services to the poor that are excluded by
the commercial banks for collateral and other reasons. Microfinance is relatively new to Ethiopia
and came to appear in1994/95 with the government’s Licensing and Supervision of Microfinance
Institution Proclamation. As of 2010, there were30 MFIs operating in the urban and rural parts of
the country and have tried to reach more than 2.3 million poor clients (OCSSCmanual,2015).
Indeed, the figure seems large in absolute term; however, it is small in relation to the potential
poor clients.

Oromia Credit and Saving Share Company /OCSSC/ is one of the largest MFis in Ethiopia. It has
been providing MF services mainly in Oromia National Regional State. Besides Oromia, it has
branches in Harari National regional state and Addis Ababa City Administration, which is the
capital of the federal states in the country. OCSSC also opened branches in Dire Dawa City
Administration particularly to provide loan for women entrepreneurship in collaboration with
Women Entrepreneurship Development Program /WEDP/. The number of full-fledged branches
of the company reached 305 in 2015. Out of 305 branches, OCSSC of Nekemtebranch is one of a
successful self-sustained MFI which is recently providing financial services to
farmers,womens,and Entrepreneurs’(business man’s).OCSSC of Nekemte branch was founded in
2009 having a distance of 331km from Addis Ababa in the west of Oromia regional estate East
wollega (Oromia credit and saving share company manual, 2015).

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1.3 Statement of the problem
According toCharles Smithson 2003, credit plays an important role in the lives of many people
and in almost all industries that involve monitory investment in some form. When credit is
allocated poorly it raises costs to successful borrowers, erodes the fund, and reduces financial
institutions flexibility in redirecting towards alternative activities. More over the more credit the
more the higher the risk associated with it.

The problem of loan default, which is resulted from poor credit management, reduces lending
capacity of financial institutions (MFIS).the issue of credit management has a profound
implication both at the micro and macro level. When credit is allocated poorly it raises costs to
successful borrowers, erodes the fund, and 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 default, which is resulted from poor credit management, reduces the lending
capacity of a MFIS. It also denies new applicants' access to credit as the MFIS’s cash flow
management problems augment in direct proportion to the increasing default (Shekhar K.C. ,1985)

In the case of developing countries such as our country Ethiopia, most of the population depends
on traditional agriculture practice(hand to mouth farming) with very low know how on returning
the credit taken MFIS on time and with few or no income generation on their activity. Besides of
this, there might be arise various reasons such as lack of good credit management policy,
difficulties of determining the credit worthiness or gathering of information about the debtors by
the creditors to extend credit, Creditors weak supervision process, weak collection efforts after
loan by creditors may arise in most MFIS.

The factors listed above initiated or motivated the researcher to focus on finding the most important
and simplest method of avoiding these challenges if any in case of OCSS of Nekemte branch.
However, manyresearchers have conducted their assessment on this title, they did not consider
assessing credit worthiness of the borrower and transaction recording (whether manual or
computerized) system of micro finance institutions yet. Therefore itmakes this research to differ
from other researches in this consideration having done on the same title.

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1.3.1Research questions

 What measurements are taken by the branch if there is a problem during collection of the
credit back at maturity?
 What kinds ofrequirements (criteria) aredemanded by the institution to provide credit?
 What are the main reasons for delaying to returnthe credit taken on time by the customers?
 What are the major problems related to credit management in the branch institution?

1.4Research objectives

1.4.1 General objective

The main objective of this study was to assess credit management in OCSSC of Nekemte branch.

1.4.2 Specific objectives

In order to achieve the general objective, the study considered the following specific of objectives.
The specific objectives of the study were:-

 To assess measurements taken by the branch institution to collect credit back at maturity
(credit collection efforts of the branch institution).
 To understand credit provision requirements(criteria)of the branch institution
 To assess the reason for delaying of customers to return the credit taken on time
 To know the major problems related to credit management in the branch institution

1.5 Significance of the study

The importance of this study was essentially to narrow the gap between the borrower and lender
in returning the credit on time. It helps the party that lends its money to the borrower not to fall
under the punishment of credit default by receiver. In addition to this, it serves as a source of
information for further research. It relates the theory with practice, provides knowledge and

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information about the issues of credit management and provides valuable information to decision
maker including the institution.

1.6 Scope of the study

Geographically the study was conducted on OCSSC ofNekemte branch. Besides, it was also
conceptually delimited on the assessment of credit management policy, procedures and system of
credit management in this branch. The time coverage of this study was from 2005-2007.

1.7 Limitation of the study

This study was faced by some constraints in collecting of the data. Some of the constraints when
collecting the data by the researcher were:- Shortage of previously conducted researchesrelated to
credit management in the branch institution for reference and unwillingness of respondents to
provide information as needed even though there had been enough time and cost of doing the
paper.

1.8 Organization of the study

This research paper incorporated five chapters. The first chapter contains background of the study,
back ground of the organization, statement of the problem, objective of the study, significance of
the study, scope of the study, limitation and organization of the paper. Chapter two deals with the
literature review. The third chapter is about research methodology and it include research design,
data type, method of data collection and source, sampling techniques and size and method of data
analysis. The fourth chapter is about data analysis and presentation. The final chapter is conclusion
and recommendation of the study.

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CHAPTER TWO

LITRATURE REVIEW
2. INTRODUCTOIN

2.1 Overview of Credit

The term credit comes from Latin word credo meaning; I believe and usually defined as the ability
to buy with a promise to pay. Credit is contractual agreement in which borrowers receives
something of value now and agree to pay the lender of some later date. When a customer purchase
something using a credit card, they are buying on credit (receiving the item at that time and paying
back the credit card company month by month) any time when individual finance something with
a loan (such as an automobile or a house they are using credit in that situation as well and it is the
borrowing capacity of individuals or companies. (Prasanachandra, 1988)

In other words, credit is sale goods, service and money claims in the present in exchange for a
promise to in a money in the future. The debtor and creditor can agree, of course to settle their
transaction in something else of value. (Begley Brigham, 2008)

2.1.1 Advantage of credit

The credit system benefits both society and individuals for idle goods and services are transferred
from creditor to debtor and put to work increasing business and national income, Specialization
and division of labor stimulated by already flow of goods and services from creditor to debtor, and
Consumptive credit broadens in industry market, increase production and so help reduce and raise
the general living standard.(Richard A. and Stewrat C. ,1996)

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2.1.2 Disadvantages of credit

Perhaps the greatest disadvantage using credit is the temptation to overspend, especially during
periods of inflation it seems easy to buy today and pay tomorrow using cheaper dollars. But
continual over suspending con lead to serious treble whether or not credit involves security (sum
thing of value to back the loan), Failure to repay a loan may result in loss of income, valuable
property, and your good recitation. It even lead to court action and bankrupts, misuse of credit can
create serious long term financial problems damage to family relationship, and slowing of progress
towards financial goals (Ross,westorfield,Jordan,1998)

2.1.3Features of credit

The followings are the essential Features of credit:

Trust and confidence- Trust is the fundamental element of credit the lender will leaned
his money or good on the at least and confidence that the borrower or buyer will pay back
the money or price in time.
Time element- All credit transaction involve time element. Money is borrowed or goods
are brought with a promise to repay the money or pay the price on some future data.
Transfer of goods and services- credit involves transfer of goods and service by the seller
to the buyer on the pay- back promise of the buyer on some future date.
Willingness and ability- credit depends in a person willingness and ability to pay the
borrowed money. In fact, credit of a person depends on his character, capacity and capital.
It is these three C’s on which a man credit depend, A person who is honest and fair in his
dealings possesses the capacity of making his business and success such a person can get
credit easily.
Purpose- Bank and financial institutions gives large amount of credit for productive
purpose rather than for consumption purposes (Charles Mensah ,1999).

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2.2 Credit period

The credit period refers to the basic length of time for which credit is granted to the customers
.The credit period varies widely from industry to industry, but it is almost always between 30 &
120 days. If cash discount is offered then the credit period has two components. These are the net
credit period and the cash discount period. The net credit period is the length of time the customer
has to pay. The cash discount period is the time during which the discount is available. With 2/10,
net 30, forexample, the net credit period is 30 days and the cash discount period is 10 days(Charles
Smithson, 2003)

If a firm allows credit for 30 days, with no discount to induce early payments, its credit terms are
stated as net 3 .lengthening of the credit period pushes sales up by inducing existing customers to
purchase more and attracting additional customers. This is how ever: accompanied by a larger
investment debtor and high incidence of bad debt loss shortening of credit period would have
opposite influences: it tends to lower sales decrease investment in debtors and reduce the incidence
of bad debt loss(Hettihewa S., 1997).

Since the effects of lengthening the credit period are similar to that of relaxing the stand order, we
may estimate the effect on profit of change in credit period in a similar manner.
(prasanaChandra,1988).

2.2.1Factors affecting credit period

 Perish ability and collateral value:-perishable items have relatively rapid turnover and low
collateral value. Credit period are thus shorter for such goods. examples of perishable goods
are foods, fresh fruits,etc
 Consumer demand:-products that are well established generally have more raped turn over.
Newer or slow moving products will often have longer credit period associated with them to
entice buyers.
 Cost, profitability and standardization:-Relatively in expensive goods tend to have shorter
credit period. These all tend to have lower mark ups and higher turnover rates.
 Credit risk;-The greater credit risk of the buyer, the shorter credit period is likely to be.

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 Size of the account:-If the account is small, the credit period may be shorter because small
accounts are more costly to manage and the customers are less important.
 Competition:-When the seller is in highly competitive market, longer credit period may be
offered as a way of attracting customers(Horne V. ,1995)

2.3 Credit instruments

The credit instrument is the basic evidence of indebtedness through which most trade credit is
offered. This means that the only formal instrument of credit is invoice, which is sent with the
shipment of goods and which the customer signs as evidence that the goods have been received.
After wards, the firm and its customers record the exchange on their book of account (Lawrence J
Gitman,2009)

At times the firm may require that the customer sign a promissory note, this is the basic IOV and
might be used when the order is large, when there is not cash discount involved, or when the firm
anticipate a problem in collections promissory note are not common, but they can eliminate
possible controversies later about the existence of debt. One problem with promissory notes it that
they are signed after the delivery of the goods one way to obtain a credit commitment from a
customer before the goods are delivered is to arrange a commercial draft. Typically, the firm draws
up a commercial draft calling for the customer to pay a specific amount by specified date. The
draft then sent to customer’s bank with the shipping invoice. If immediate payment is required on
the draft is a time draft when the draft is presented and the buyer “accept” it meaning that the buyer
promise to pay it in the suture, then it is called trade acceptance and is sent back to the selling firm.
The seller can then keep the acceptance or sell it to someone else(Lawrence J Gitman ,2009).

If bank accept the draft meaning that the bank guaranteeing payment, then the draft become a
banker’s acceptance (Prasanna Chandra ,1988)

Sure, the discount is not regarded as a means of cutting price and by previous loan and other
services naturally expected to have their loan approved more readily than application and
continued relation with a customer gives that bank information about the borrower that is not easily
available to others. The cost of obtaining and verifying such information makes it impractical for

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little known firms to public security offering and make it economical to maintain ongoing relation
with banks (Richard A. and Stewrat C. ,1996)

No matter conscientious the loan evaluation process is there is always the possibility of that an
expected development the illness of key person, an earthquake and unfavorable legislation will
undermine the financial viability of a company or household. When substantial sums involve the
bank may try to identify the most important risk and take measures to protect its loan. It may insist
an adequate insurance against natural disasters and on the development of strategic plan to
response to changes in customer tests to congressional (Ross A., et al, 2000).

Legislation to competition from other companies, if the business depends on the single supplier,
purchase or product, the bank may encourage it to diversify. If the company business is vulnerable
to technology change, the bank may insist that more effort may be spent on the research and
development (Ross A., et al, 2000)

2.4 Credit Policy

Credit policy often referred to as a standing decision made in advance to cover a prescribed set of
condition. It provides guidelines to select the customers and how much credit to extend. A bank
may adapt either liberal or sight credit policy. Liberal credit policy involves extending credit to
more risky class whose credit worthiness is not known exactly(Shekhar K.C. ,1985)

This policy increase profit by increasing the level of loans extended to customers but in curs high
risks of bad debt losses and faces the problem of liquidity. Tight credit policy involves extending
credit to those who have proven credit worthiness. This policy is very selective in extending credit
and results a low profit but it has maximum cost and chance of bad debt losses. Thus managers
should develop credit policies which make tradeoff between risks and return (Begley and Brigham,
2008)

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2.4.1Components of credit policy

If a firm decides to grant credit to its customer than it must establish procedures for extending
credit and collecting. In particular, the firm will have to deal with the following components of
credit policy:

 Terms of sale: the terms of sale establish how the firm proposes to sale its goods and services.
A basic decision is whether the firm will require cash or will extend credit. If the firm does
grant credit to customer the terms of sale will specify (perhaps implicitly) the credit period, the
cash discount and discount period and the type of credit instruments.
 Credit analysis; in granting credit a firm determines how many efforts to expend trying to
distinguish between customers who will pay and customers who will not pay. Firms use a
number of devices and procedures to determine the probability that customers will not pay and
put together those are called credit analysis.
 Collection policies: after credit has been granted the firm has the potential problem of
collecting the cash when it becomes do for which it must establish a collection policy(Stanley
B. and Geoffrey A. ,1996)

2.4.2Credit policy effects

In evaluating credit policy, there are five factors to consider:

Revenue effect: If the firm grants credit than there will a delay in revenue collections as some
customers take advantage of the credit offered and pay later. However, the firm may be able to
charge a higher price if edit grant credit and it may be able to increase the quantity sold. Total
revenue may then increase.

 Cost effects: Although the firm experience delayed revenue if it grants credit, it will still have
to incur the cost of sales immediately. Whether the firm sales for cash or credit, it will still
have to acquire or to produce the merchant descend pay frit.
 The cost of debt: When firm credit, it must arrange to finance the resulting receivables. As a
result of firms cost of short term borrowing is a factor in decision grant credit.

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 The profitability of nonpayment: If the firm grants credit some percentage of the credit
buyers will not pay. This cannot happen of course, if the firm sells for cash.
 The cash discount: When the firm offers a cash discount as a part of its credit terms, some
customers will choose to pay early to take advantage of the discount(Ross,westorfield
,Jordan,1998)

2.5 Credit Analysis

Thus for we have focused on establishing credit farms once a firm decides to grant credit to its
customers, it must then establish guidelines for determining who will and who will not allowed
buying on credit. Credit analysis refers to the process of deciding whether to extend credit to a
particular customer, it usually involve two steps; gathering relevant information and deforming
credit worthiness. Credit analysis is important simply because potential losses on recordable can
be substantial (Ross et al, 2000).

2.5.1 Analysis of credit file

The firm should maintain a credit file for each customer. It should up date with the information
about the customer collected from the report of sales man, bankers and directly from the customers.
The firm’s trade experience with the customer and his performance report based on financial
statement submitted by him should also record in his credit file. A regular examination of credit
file will reveal to the firm credit standing of the customer .Whenever the firm experience’s a
change in the customers paying habit or receive a request for extended credit terms or large order
on credit, his credit file should thoroughly scrutinized . The intensity and depth of credit review
investigation will deepened up on the quality of customers account and the amount of credit
involved. A litter review will be required in case of the customer who has had clear deals with the
firm in the past (Ross et al, 2000).

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2.6 Credit information

In affirm does want credit information on customers, there are a number of sources. Information
sources commonly used to assess credit worthiness includes the following:

Financial statement: A firm can ask a customer to supply financial statements such as balance
sheet and income statements, minimum standards and rules of thumb based on financial ratios.
Credit reports on the customer’s payment history with other firms: Duties a few
organizations sell information on the credit strength and credit history of business firms. The
best known and largest firm of this type is Dun and Bradstreet, which provides subscribes with
a credit reference book and credit reports on individual firms. TRW is another well-known
credit reporting firm. Ratings and information are available for a huge number of firms
including very small one.
Banks: generally provide some assistance to their business customers requiring information
on the credit worthiness of other firms.
 The customer’s payment history with firm: The most obvious way to obtain information
about the livelihood of a customer’s not paying is to examine whether they have settle past
obligations and how quickly met these obligations (Ross,westorfield ,Jordan,1998)

2.7 Credit evaluation and scoring

There are no magical formulas for assessing the probability that the customer will not pay.in every
general terms the classic five c’s of credit are the basic factors to be evaluated .These are:-

 Character:-customers willingness to meet credit obligation. banks want put their money with
clients who have the best creditable and references. The way you treat your employees and
customers and the way take responsibility, your time lines in fulfilling obligation that is called
character.
 Capacity:-The customers willingness to meet credit obligation out of operating cash flows.
what is your company’s borrowing history and track recorded of repayment. How much debt
you can company handle? Will you able honor the obligation and repay the debt? There are

20
 numerous financial bench marks such bas debt and liquidity ratios that banks use before
advancing loan.
 Capital:-The customers financial reserves. How well capitalized is your company? How much
money has invested in the business?
 Conditions:-General economic conditions in the customers line of business. What are the
current economic conditions and how does your company fit in? If your business is sensitive
to economic down turns, the bank wants to know that you are good at managing productivity
and expenses.
 Collateral:-Asset pledge in case of default. Collateral represent assets that the company
pledges as an alternative repayment source for loan. Most collateral is in the form of real estate
and office or manufacturing equipment’s. Your accounts receivable and inventory can also be
pledge as collateral. Unless you are a business a proven repayments track record, you will at
most always be required to pledge collateral.
 Character: banks want put their money with clients who have the best creditable and
references. The way you treat your employees and customers and the way take responsibility,
your time lines in fulfilling obligation that is called character.

As Ross (1998), Credit scoring is the process of quantifying the probability of default when
granting customer’s credit. Credit scoring involves calculating a numerical rating for customer
based on information collected. Credit is then granted or refused based on the result.

2.8 Screening and Monitoring

As Walter Winston stated systematic information is a common problem in the loan market because
lenders have less information about the investment opportunities and activities of borrowers
do.The business of banking is the production of information banks engaged in to the information
– producing activity, screening and monitoring. Credit risk form the good ones, so that loans are
profitable to perspective borrowers the principle of credit risk management requires effective
screaming and information collection (Prasanna Chandra ,1988).

The information requires for consumer and commercial loans are almost similar I.e. the accessory
occupation bank account material statues and sailors to business information asset and liabilities.

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The information can be gathered through different about personal information , it may also gather
information the collected information so judge whether the borrower is good credit risk or not on
the decision process the loan officer may use some personal judgments even by the observing the
borrower appearance(Richard A. and Stewrat C. ,1996)

Specialization in leading: most of the banks specialize leading of local firms or to firms in
particular industries. In one sense , this behavior seems surprising because it means that the bank
is not diversifying its portfolios of loan and that is exposing itself to more risk, but from another
perspective such specialization make perfect sense, it is easy to collect information about loan
firm then. Firms that are for always to determine their credit worthiness. The same is true for
specialization in leading to specific firms, since the bank becomes more knowledgeable about
these firms and able to predict the repayment capacity of the firm(Shekhar K.C. ,1985)

Monitoring and enforcement of restrictive, covenant once a love has been made the borrower has
an intensive to engage in risky activities that make it less likely that the will be repaid off. To avoid
this moral hazard banks should try restrict borrowers to engaging in risky activities to see wither
they are complying with the restrictive covenants and by enforcing the covenants if they are not,
leader con make sure that borrows are not taking on risks at their expense. The accedes of banks
to engage in screeching and monitoring explains why they are seed too much money on auditing
and information collection activities (Richard A. and Stewrat C. ,1996)

22
2.9 Collection policy and procedures

A collection policy is needed because not all customers pay the firms bills in time; some customers
are slow payers while some are non-payers. The collection effort should, therefore, aim at
accelerating collections from slow payers deducting bad debt losses. A collection policy should
ensure and promoted collection needed for fast over working capital, keeping collection costs and
bad debts with in limit and maintaining collection efficiency. Regulatory in collections keeps
debtors alert and they tend to pay dues promptly. The collection policy should lay down clear-cut
collection procedures for past dues (Hettihewa S., 1997)

A firm usually goes through the following sequence of procedures for customers whose payments
are overdue. These procedures are:-

 It sends out a delinquency of letter informing the customer of past due status of account.
 It makes telephone call to the customer
 It employs a collection agency
 It makes legal action against customer. At times, a firm may refuse to grant additional
credit to customers until past over dues are cleared up.(Ross,westerfield,Jordan,1998).

23
CHAPTER THREE

3. RESEARCH METHODOLOGY

As most other research do, the study under this consideration attempted to apply research design
and data collection method, which are assumed to be suitable for the accomplishment of this
research paper.

3.1Research Design

Research design of this paper was constructed from qualitative information in gathering data that
were presented in different methods. The researcher has prepared closed ended question to collect
the data from sample respondents. Then, thedata were analyzed by using descriptive data analysis.

3.2Data type

In this study, the researcher has used almost primary type of data and lesser amount of secondary
data to collect sufficient data that helps him to obtain accurate information about the institution.

3.3 Method of data collection and source

Primary data were obtained through making an interviewwith the branch managerand through
spreading questionnaires to employees of the branch institution. Secondary data werecollected
from the document that provides statistical information and explanation such as: credit manual
(credit providing manual) of the institution, and operational reports (financial statements) of the
branch institution.

3.4 Sampling techniques and sampling size

24
Regarding sampling method, for this study the researcher has elected purposive sampling or
judgmental sampling. Purposive sampling is one type of non-random sampling which is also
called judgmental sampling. In this method of sampling; the researcher does not need to consider
all the entire population to obtain the needed information. For this study, the
researcherselectedsubjects from the branch employees to ask them for provision of information.
Criteria of representative’s selection were: consideration of employees professional career
(professional experience) in the branch, consideration of position (for those personnel’s having
administrative power) starting from the vice manager to top manager in the branch, and
consideration of employee’s level of formal education in that branch. The above all criteria were
drawn for selection of representatives in a sense that everyone who employed in the branch has
his/her own potential knowledge about the branch to provide accurate information that enables
the researcher to give effective conclusionand recommendation. For this purpose, since the
branch institution has thirty employees, the researcher purposely selected 15 employees out of
the total 30 employees of the branch institution including top manager.

3.5 Method of data analysis

After gathering all required qualitative information, the researcher has had analyzedthecollected
dataandpresented it through tables, percentages andfrequencies.

25
CHAPTER FOUR

4. DATA ANALYSIS AND PRESENTATION

The following data show characteristics of the respondents thatwere collected to have a clear
picture about personnel’s involved in the study. The following table deals with these issues in
categories of gender, age, educational level, and position of the staff members in the branch
institution and each of sub categories were expressed in percentages.

Table 4.1Demogrraphic characteristics of the respondents

No Item Alternatives Frequency Percentage

1 Male 10 66.67%
Sex Female 5 33.33%
Total 15 100%
2 Age 20-25 4 26.67%
26-30 10 66.67%
31-35 1 6.66%
>35 - -
Total 15 100%
3 Education 12th completed 3 20%
Diploma 4 26.67%
BA Degree 8 53.33%
Others - -
Total 15 100%
4 Position Manager 1 6.67%
Vice manger 1 6.66%
Accountants 6 40%

26
 Others 7 46.67%
Total 15 100%
Source: questionnaire, 2016 (primary data)

According to the above table the personal data regarding sex of the employee 5(33.33%) of the
respondents are females and 10(66.67%) of them are males. Concerning their age, item of the
above table show that the majority of employees 10(66.67%) are between the range of 26-30years,
4(26.67%) are found between 20-25 years, &1(6.66%) of them is found between 31-35 years.
Regarding to their educational status the majority 8(53.33%) are respondents are graduate of
degree, 4(26.67%) of them diploma and 3(20%) are 12th completed and the manager and vice
manager of the branch institution holds 1 frequency each. accountants of the branch possessed
40%,and others have 46.67% each in the branch.

Table 4.2:- Credit collection effort of the institution

No Item Alternative Frequency Percentage

5 How do you describe High 3 20%
collection of loans back at Medium 4 26.67%
maturity by the Poor 8 53.33 %
institution? None - -
Total 15 100 %

Source: questionnaire of 2016(primary data)

From the above table 4.8, 3(20%) of the respondents replied that the collection of loans back at
maturity is high, 4(26.67%) of them have said that the collection is medium and 8(53.33%) of the
respondents expressed that the collection of credit back at maturity is poor. depending on
majority’s point of view the researcher concluded that the institution collection of credit after
granting is poor. For instance, the company’s cash collection out of disbursed cashfor the three
consecutive years were:4896747/5784867(84.6%)in2005,5475432/7985642(69%) in 2006,and
6547865/9764532(67%) in 2007 respectively(source: annual report of the branch institution).As
the report indicates the collected cash from the total disbursement(loan)made had been reducing

27
dramatically this reduction in collection was resulted from under application of collection
procedures such as: assigning collection agency, sending delinquency of letter informing the
customers of past due status of account and making telephone call to the customers by the
company as most respondents view point.

Table: 4.3 Credit provision requirements (criteria) of the institution

No Item Alternatives Frequency Percentage

6 Does the Yes 9 60%
institutioneffectively No 6 40%
apply credit provision
requirements to provide
credit service to Total 15 100%

borrowers?

Source: primary source of data (questionnaire,2016

As the above table indicates, most of the respondents 9(60%) of them replied that that the
institution doe not effectively apply credit provision requirements to provide credit
service.However, 6(40%) of them answered that the branch institution apply effectively credit
provision requirements to prove loan. Depending on majority’s point of view, the researcher
concluded that the branch institution does not effectively apply credit provision requirements.In
order to provide credit service, the institution need only simple necessities such as:
personalbehavior, reputation, ID card.this mean that there is no further study of borrowers working
capital.

Table:4.4 Borrowers delay in returning the loan received on time

Item Alternative Frequency Percentage

Do borrowers of the Yes 15 100%
company make delay in

28
 returning the loan received No _ _
at maturity?

Total 15 100%

Source: questionnaire 2016( primary data)

All 15(100%) of the sample respondents stated that there are some reasons for clients that obliged
them not to return their loan on time. those are: -non standardized interest rate imposed on all
borrowers. For instance the interest rate that the institution expects on its loan annually from small
enterprise is 17%, 13% for women’s and 15% for farmers. The reason for imposition of varied
interest rates on each borrower is resulted from their difference in generating income. Additionally
the death, fluctuation of market affairs or market seasons (related to inflation), bankruptcy (if
business), negligence (most of time the debtors make the borrowed money for their personal
consumption are assumed to be the main reasons for delaying of the borrowers to return back the
borrowed funds on time as the views of selected respondents show.

Table 4.5 Credit management problem in the institution.

No Item Alternative Frequency Percentage

8 Is there any problem related to Yes 15 100%
credit management in the No _ _
institution?
Total 15 100%

Source: primary source of data (questionnaire 2016)

As indicated in the above table, all 15(100 %) of the sample respondents replied that the institution
has credit management problem because of no periodic training to employees and imbalance
number of existing employees and customers.

29
Table 4.6 Transaction recording system of the institution

9 Item Alternatives Frequency Percentage

Does the branch institution Yes _ _
uses computerized
No 15 100%
transaction recording
Total 15 100%
system?

Source; primary source of data (questionnaire of 2016)

From the above table, all of 15 (100%) respondents justified that the branch institution does not
utilize computer to record its transactions. This indicates that the institution undertakes its
recording system manually having many customers.

Table 4.7 maximum and minimum limit of cash amount the institution provides
for a single new client.

No Item Minimum cash Frequency Percentage

10 How much cash 2000 15 100%

amount the Total 15 100%
institution
provides for a
single client?

Maximum cash Frequency Percentag

e
30000(this may 15 100%
differ based on
the nature of
business)
Total 15 100%

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Source: major source of data (credit manual of the institution)

As the above table indicates that 15(100%) of the respondents justified that the minimum cash the
institution offers for one client is birr 2000 and the maximum cash given for one client is 30,000
but the maximum cash balance that allowed for client is differed based on the nature activity or
business which can reach until birr 1.5million in some case.

Table 4.8 supervision and Follow up of client operation

No Item Alternatives Frequency Percentage

11 Does the institution Yes 5 33.33%
conducts supervision No 10 66.67%
and follow up to
review the operation
of its customers after
granting credit?
Total 15 100%

Source: primary source of data (questionnaire of 2016)

From the above table indicate that 5(33.33%) of the sample respondents justified that the institution
conducts supervision and follow up and 10( 66.67%) of them replied that the institution does not
conducts the supervision and follow up after granting loan to review of its customers operation.
From this the researcher analyzed that the institution does not conduct supervision and follow up
to review its customers operation from majorities’ points of view.

Table 4.9 Evaluation of client’s history

No Item Alternative Frequency Percentage

31
 12 Does the institution evaluate client Yes 2 13.33%
history before granting credit? No 13 86.67%
Total 15 100%

Source: primary source of data (questionnaire of 2016)

The above table shows that 13(86.67%) of the respondents replied that the institution does not
evaluate client history before grant credit, but 2(13.33%) of them have said the institution does
evaluate the client history before granting credit. From the majority point of view, the institution
does not evaluate the client history before granting credit and this may affect the general activities
of the branch institution even can enforce it to liquidate.

Table: 4.10 Creditbeneficiary of the institution

13 Alternatives Frequency Percentage

Entrepreneurs

7 46.67%
Farmers 5 33.33%

Women’s 3 20%

Total 15 100%

Source: questionnaire (primary source of data 2016)

As the above table indicates the institution provides credit service to women,entrepreneurs,and
farmers.7(46.67%) of respondents replied that the institution in maximum amount provides credit
service to entrepreneurs,5(33.33%) of respondents replied that the institution gives credit service
to farmers and the rest 3(20%) of respondents assured that the institution fund goes to women’s.

32
The major disparities in the percentage each group hold is that more loans are provided to
entrepreneurs since their returning ability of the credit is high as a result of their business size and
earning ability .Therefore the researcher concluded that the institution serves more the
entrepreneurs in expecting its loan not be tied up because there is high probability that women’s
and farmers are unable to return the loan on time.

Table 4.11Role of the institution in financing small and micro enterprises.

No Item Alternative Frequency Percenta

ge
14 As compared with other intuitions do you Yes 13 86.67%
think that Oromia credit and saving share No 2 13.33%
company of Nekemte branch micro finance Total 15 100%
is playing a significant role in financing the
small and micro enterprises?

Source: questionnaire, 2016(primary data)

From the above table 13(86.67%) of the respondents replied that micro finance institutions has a
significant value to finance or in financing small, and micro enterprises. however ,2(13.33%) of
the respondent said that the institution has no significant value in financing small and micro
enterprises.

Table 4.13Thetime of providing financial services to agriculturalists (farmers).

No Item Alternative Frequency Percentage

15 When does the institution Yearly - -
provides financial service Semi annually 2 13.33%
to rural areas particularly Quarterly - -

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 to Throughout the 13 86.67%
agriculturalists/Farmers)? year(Continuousl
y)
Total 15 100%

Source: primary source of data (questionnaire 2016)

In the above table , 2(13.33%) of the respondents said that the organization provides financial
service semi annually to the rural areas especially for small agriculturalists to improve their living
standards, and increase their productivity, 13(86.67%) of the respondents replied that the
institution provides financial service to rural areas especially for small agriculturalists
continuously(throughout the year).From this, since majority of the respondents replied that the
institution provides financial service to small(poor)agriculturalists continuously, the researcher
concluded that the institution is giving financial service to agriculturalists continually(throughout
the year).The reason of providing credit service to farmers throughout the year is related to
financial incapacity of most farmers to do their best on time.

Table 4.Availability of finance amount to small enterprises to start their

business

No Item Alternative Frequency Percentage

16 Does the amount of finance Strongly agree 3 20%
the institution provides to Agree 8 53.33%
small enterprise is available Disagree 4 26.67%
to start their business? Strongly disagree - -
Total 15 100%

Source: primary source of data (questionnaire 2016)

From the above table 3(20%) of the respondents were strongly agree to the amount of finance that
small enterprises get from the institution is satisfactory and majority of respondents i.e. 8(53.33%)
of the respondents agreed to the amount of finance that small enterprise get from the institution is
satisfactory and the left 4(26.67%) of respondents disagreed to it. From this, the researcher

34
concluded that the amount of finance that the enterprises get from the institution is satisfactory
somewhat. Even though there is a maximum and minimum limit to borrow, it is enough for small
enterprises at least to start their business and the institution needs not to liquidate as a result of
default pertaining to over loan.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1Conclusion
 Discovered problems by the study were as follows,

 As it can be seen from the analysis, theloan collection effort of loans back at maturity by the
institution has beenpoor. This is related to negligent providing of funds by the institution
without carefully observing client’s monthly salary (if government employee), the wealth
(capital on hand of the client whether in cash or in kind), productivity ( if farmers), profit ( if
entrepreneurs),etc in advance before granting a loan and under application of credit procedures
such as: assigning collection agency, sending delinquency of letter informing the customers of
past due status of account, and making telephone call to the customers at maturity(after credit).
 The institution only require Id card of the client, reputation of the client and provide the loan
as a criteria to the one who lacks fund and ask for it without a thorough study of clients
beginning capital on hand whether in cash or in kind I’e no further need beyond simple
necessities to provide the loan as per the institution.
 There is no standardized annual interest rate charge imposed on all borrowers by the institution
which disabled them to repay the fund taken at once and the institution does not give a due
attention to inform the borrowers to repay back the fund when collection having assurance to
the court of law.

35
 The branch institution has a credit management problem pertaining to no periodic training
given to employees and imbalance number of customers and employees. Still now, the branch
institution is using manual system of recording transactions even though it has many customers
and economic events. This headed the institution not to provide flexible and quick services to
its customers. The branch institution provides the loan not as per the need of the clients. Rather,
it limited the amount of loan each new client can access between two thousand and thirty
thousand except in special case up to 1.5 million likewise, The institution does not make
supervision and follow up control system after granting credit.

5.2. Recommendation

 Possible suggestions and recommendations for identified problems are as follows:

 To improve poor collection of loans back at maturity, the institution should carefully see the
client’s monthlysalary (if government employee), the wealth (capital on hand of the client
whether in cash or in kind), productivity ( iffarmers), profit ( if entrepreneurs),etc in advance
before granting a loan. furthermore, it should perform/apply collection policy procedures such:
as assigning collection agency, sending delinquency of letter informing the customers of past
due status of account, and making telephone call to the customers beyond single procedure of
making legal action against customers at maturity/when collection.
 The institution uses reputation (good name), behavior and ID card of the new clients as
criteriato accept them for a loan. But, thecompany doesn’t consider workingcapital (whether
in cash or in kind) of the new clients as a criteriafor loan. Therefore it should have to scrutinize
wealth of the clients in advance to make loan to thembeyond simple necessities of ID card,
reputation, and behavior of new clients should be taken in to account.
 In order to reduce the borrowers delay to return the loan received so far at maturity, the
institution had better to impose standardized interest rate on its loan as much as possible on
every borrowers to enable them to be ready for payment at the same time and should inform
them in advance strictly to repay back the amount on time rather to rely on existence of court
of law for nonpayment.
 To improve credit management problem in the branch, the institution should give periodic
training to its employees and should additionally hire employees since the existing employees

36
 and the customer number is imbalance.likewise, to provide a flexible &quick service to its
large number of clients, the branch institution is recommended to introduce computerized
system of recording transactions. It is better for the institution to provide the loan as per the
need of the clients rather than limiting amount of the loan each new client can access between
specified intervals. Concerning to poor supervision and follow up control system,
theinstitution should conduct proper supervision and follow up to review its customers
operation after granting the loan to the clients if it needs not to shut down as a result of credit
default by debtor.

REFERENCES

Begley Brigham, (2008) Essentials of Managerial Finance, 12 edition, University of Florida.

Charles Mensah (1999) Financial Management Analysis, U.S.A., CARLOS.

Charles Smithson, (2003) Credit Portfolio Management, Canada: John Wiley & Sons, Inc.

Hettihewa S., (1997) Introduction to Financial Management, Oxford University, Uk.

Horne V. (1995), Financial Management and Policy: 10th edition Simon & Schuster

37
Lawrence J Gitman (2009), Principles of Managerial Finance, 11th edition, United States,

Prasanna Chandra (1988) Financial Management: Theory and Practice, New Dehli: Tata

McGraw-Hill Publishing Company Limited.

Richard A. and Stewrat C. (1996) Principles of Corporate Finance, 5th edition, London,

McGraw-Hill

Ross A., et al (2000), Fundamentals of Corporate Finance, 5th edition, New York, McGraw-Hill.

Shekhar K.C. (1985) Banking Theory and Practices, New Delhi: Vikas Publishing house pvt,

Ltd.

Stanley B. and Geoffrey A. (1996) Foundations of Financial Management, 8th edition, USA.

Ross,westorfield,Jordan(1998). Corporate finance .7th edition,New York, McGraw-Hill.

Oromia credit and saving share company manual,2015

JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

QUESTIONNAIRE

38
This questionnaire is designed to collect data on the role of micro finance institution in financing
micro and small enterprise, women’s and small agriculturalists.i.e. in Oromia credit and saving
Share Company of Nekemte branch. Your cooperation in providing genuine answers to the
following questions is highly important for the success of this study. I care for your opinion!
Please, take a few minutes to answer the questions. Your responses will be kept confidential. It is
only for academic purpose. Thank you for your response in advance

Instruction

 There is no need to write your name

 Please put a tick on appropriate blank
I. Personal data
 Sex : Male Female
 Age: 20-25 25-30 31-35 above 35
 Education level 12th completed Diploma BA degree others
 Position manager vice manager accountants others
II. Topic related to educated respondents

5. How do you describe collection of loans back at maturity by the institution?

High Medium poor none

6. Does the institution effectively apply credit provision requirements (criteria) to provide credit
service to borrowers?

Yes No

7.If your response to the above question #6 is no why you have said that it does not apply
effectively credit provision requirements? list the reasons below

8. Do borrowers make delay in returning the loan received on time at maturity?

Yes No

39
9. Is there any problem related to credit management in the institution?

Yes

10. What kind of transaction recording system the branch institution uses?

Manual system computerized system both

11. How much cash amount the institution provides for a single client?

(Minimum __________maximum____________________)

12. Does the institution conduct supervision and follow up to review the operation of its customers
after granting credit?

Yes No

13. Does the institution evaluate client’s history before granting credit?

Yes No

14. To which group of society the institution makes credit service provision?

Farmers Women entrepreneurs all

15. As compared with other institution do you think that Oromia credit and saving Share Company
of Nekemte branch micro finance institution is playing a significant role in financing the small and
micro enterprise?

Yes No

16. When does the institution provides financial service to rural areas particularly to

Agriculturalists/Farmers? Annually semi annually thought the year

Quarterly

40
17. Does the amount the institution provides to small enterprise is available to start their business?

Yes No

41