ASSESSMENT OF CREDIT MANAGEMENT PRACTICE

OF DASHEN BANK S.C IN ETHIOPIA (IN THE CASE OF

ADAMA DISTRICT)

BY

FEKADU ZENEBE

ID NO 0180/12

SUBMITTED TO: Abdi D(Phd)

March 2021

ADAMA, ETHIPIA
 TABLE OF CONTENTS

Contents
LIST OF ACRONYMS AND ABREVIATIONS.........................................................................III
ABSTRACT....................................................................................................................................IV
CHAPTER ONE..............................................................................................................................1
INTRODUCTION...........................................................................................................................1
1.1. Background of the study...................................................................................................1
1.2 Statement of the problem.......................................................................................................1
1.3 Objectives of the study...........................................................................................................2
1.3.1The General Objective of the Study.................................................................................2
1.3.2 Specific objective of the study........................................................................................2
1.4 Research Questions................................................................................................................2
1.5 Significance of the study /Importance of the study.........................................................3
1.6 Scope of the study..................................................................................................................3
1.7 Limitation of the Study..........................................................................................................3
1.8 Organization of the study.......................................................................................................3
CHAPTER TWO.............................................................................................................................4
REVIEW OF RELATED LITERATURE.......................................................................................4
2.1. Definitions, and functions of credit/Introduction..................................................................4
2.2. Definition and concepts of credit management.....................................................................4
2.3. Credit management process..................................................................................................5
2.3.1. Credit initiation...............................................................................................................5
2.3.2. Documentation and disbursement..................................................................................6
2.3.3. Credit administration......................................................................................................6
2.4. Credit management practices................................................................................................7
2.4.1. Lending...........................................................................................................................7
2.4.2. Cost of borrowing (interest rate)....................................................................................7
2.4.3. Assessment of borrowers credit worthiness...................................................................7
2.5. Implications of loans on banking institutions.......................................................................8
2.5.1. Performing loans............................................................................................................8
2.5.2. Non-performing loans....................................................................................................9
2.6. Debt recovery strategies........................................................................................................9
2.6.1. Monitoring......................................................................................................................9
2.6.2. Collateral......................................................................................................................10
2.6.3. Frequent contact...........................................................................................................10
2.7. Addressing risk associated with credit management..........................................................10
2.7.1. Establishing an appropriate credit risk environment....................................................10
2.7.2 Operating under a sound credit granting process..........................................................11
2.7.3. Maintaining appropriate credit administration through measurement and monitoring
process....................................................................................................................................11
2.7.4. Ensuring adequate controls over credit risk.................................................................11
2.8. Conceptual Framework.......................................................................................................12
CHAPTER THREE.......................................................................................................................13
RESEARCH DESIGN AND METHODOLOGY.........................................................................13
3.1. Introduction.........................................................................................................................13
 3.2. Research design...................................................................................................................13
3.3. The Research Method/Approach........................................................................................13
3.4. Data Source.........................................................................................................................14
3.4.1. Primary Data.................................................................................................................14
3.4.2. Secondary Data Source................................................................................................14
3.4.3. Procedure of Data Collection....................................................................................14
3.5 Population of Study..............................................................................................................14
3.6 Sample Size and Sampling Techniques፡..............................................................................14
3.7 Data Collection Instruments.................................................................................................14
3.7.1 Questionnaires...............................................................................................................14
3.7.2 Interview........................................................................................................................15
3.7.3. Methods of Data Analysis............................................................................................15
3.8 Reliability and Validity of Data gathering Instruments.......................................................15
3.8.1 Reliability......................................................................................................................15
3.8.2 Validity..........................................................................................................................15
3.9 Time Schedule and Budget Frame.......................................................................................16
REFERENCES..............................................................................................................................17
LIST OF ACRONYMS AND ABREVIATIONS

DB Dashen bank

MFIs Micro Finance Institutions

NBE National Bank of Ethiopia

NPL Non-performing loan

LAF Loan Approval Form

III
ABSTRACT
Sound credit management is a prerequisite for a financial institutions stability and continuing
profitability, while deteriorating credit quality is the most frequent cause of poor financial
performance and condition. These researches assess the practice and effectiveness of credit
management in Dashen bank s.co. Therefore, the purpose of undertaking this study is to explore
the credit management practice in Dashen bank s.co and to see the possible factor that
influence the credit management activity of the bank and to suggest possible solution for those
factors affecting the bank credit management process negatively. For the purpose of the study
both primary and secondary data is used. Primary data is collected using semi structured
questionnaire and interview. The secondary data is collected from the bank’s credit policy and
procedure manual. Based on the nature of the study the research design is descriptive with a
qualitative research method. Descriptive statistical tools are used to analyze the data collected.
Hence, the nature of the Study is descriptive. The research found that lack of credit follow-up by
branches, lack of information system to support the credit risk grading system of the bank,
branches negligence to the credit policy and procedure of the bank when exercising their
discretionary lending limit, will full default by borrower, borrower lack of knowledge on loan
usage, fund diversion for unintended purpose, and centralized decision making by the bank
influence the attainment of successful credit management at Dashen Bank s.co. Also on a
positive note the banks credit policy and procedure is in line with NBE’s rules and regulation.
Finally based on this findings recommendations are given. These includes keeping up with the
current portfolio quality, to strictly adhere & implement the banks credit policy and procedure,
to take up pre-audit a part of the credit analysis process, managing the length of hour it takes to
process one loan request.
Key words: Credit management, Credit portfolio, NPL, NBE’s rules and regulation.

IV
 CHAPTER ONE

INTRODUCTION

1.1. Background of the study

The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust in
a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. For a bank, it
is the main source of profit and on the other hand, the wrong use of credit would bring disaster
not only for the bank but also for the economy as a whole (Edwards ,2004).

Banks as financial intermediaries are very significant in the economy of every nation. Currently,
in Ethiopia the banking system dominates the financial system. As of June 2019, there are
eighteen registered banks in Ethiopia (of which two are owned by government), seventeen
insurance companies (of which one is government owned), and 35 micro-finance institutions
(MFIs), (NBE, 2018/2019).

The objective of the credit management is to maximize the performing asset and the
minimization of the non-performing asset as well as ensuring the optimal point of loan and
advance and their efficient management. Credit management is a dynamic field where a certain
standard of long-range planning is needed to allocate the fund in diverse field and to minimize
the risk and maximizing the return on the invested fund.
Dashen Bank was incorporated as a share company on 20 September 1995 in accordance with a
commercial code of Ethiopia of 1960 and supervision of banking proclamation No.84/1994.the
bank obtained a banking service license from the National Bank of Ethiopia and is registered
with trade industry and tourism bureau of the Addis Ababa city administration. At the end of
June 2020 Dashen bank reported total asset of birr 68.3 billion, total capital of birr 8.32 billion
and a profit of (before tax) 1Billion 790 million with earning per share of 49%. Currently Dashen
bank is a full service bank that offers its customers a wide range of services with a network of
above 423 branches, Annual Report of 2019/2020.

1
1.2 Statement of the problem
The Ethiopian banking industry is one of the service industries crucial to the growth of its
emerging economy. Banking is important in the role it plays in capital mobilization and granting
of financial facilities that is crucial to business development and growth. For a bank, credit is the
main source of profit and misuse of credit and its policy would consequently make the economy
to be instable and perhaps become the cause for financial crises.

The following problem has been observed in the pilot survey:

 Non-effective risk assessment and control policies in banks, leading to poor credit
administration, which resulted in an increase in the NPL position of the bank.
 Failure of operators of the bank to comply with safety rules and regulations in the
process of credit administration-.
 Poor loan portfolio management.

Therefore, it becomes a matter of compelling urgency to evaluate Dashen bank’s credit

management practice so as to provide for a close analysis and monitoring of the approved credits
with a view to evaluate its impact on the banks credit decisions. In this manner, the research fills
the gap in credit risk management practice by studying the case of Dashen Bank.

1.3 Objectives of the study

1.3.1The General Objective of the Study
The main objective of the study is the assessment of credit management practice of Dashen bank
in Ethiopia.

1.3.2 Specific objective of the study

In line with the above general objectives, the specific objectives are.

 To identify the factors that affect credit access, evaluate the credit approval process,
analyze the collection procedure and identify the factors that contribute for the
increasing trend of NPL in Dashen bank.
1.4 Research Questions
In order to accomplish the objectives of the research, the study seeks answer the questions.

2
  What are the factors that affect access to credit in Dashen bank?
 What credit approval processes are adapted in the management of credit in Dashen bank?
 What credit collection procedures are adopted in the management of credit in Dashen
bank?
 What are the factors which contribute to the increasing trend of NPL in Dashen bank?

1.5 Significance of the study /Importance of the study

After the research has been completed; the findings will add knowledge to management of
credit department and will help to minimize the causes and problems associated with non-
performing loans. In addition to these, the following will be the possible significance of the
research output.

 It helps the Bank to give insight on various component of credit management practice.
 It will be used as an input for credit management procedure formulation for Dashen
Bank.
 It will be used as source of information for a secondary data for those who wish to
undertake future study on similar issues.
 It helps in enhancing the practical knowledge of the researcher through creating a link
between the theoretical knowledge of credit management with its actual
implementation
1.6 Scope of the study
Since the term management in bank is a broad area. The study ignores other areas such as fund
management, control management and the like, because it is difficult to cover all such areas and
all banks in Ethiopia due to finance, and resource constraints. Besides, the study is conducted
only in Dashen bank and respondents are targeted from HO and Adama district Office credit
administrators and managers and credit officers of Branch staff under the districts.
1.7 Limitation of the Study
The study will be limited in Dashen bank. This limitation is due to finance, which is the cost of
the implementation of the study. There will be also lack of obtaining and collecting of variety of
secondary sources due to easily unavailability of the source documents. Even though the above
listed constraint is available, the necessary precautions is made so as those limitations not to
3
affect the findings of the study by taking appropriate size and implementing appropriate data
collecting methods.
1.8 Organization of the study
The organization of the paper will have five chapters. The first chapter deals with introductory
part consisting of introduction/background of the study and the organization, statement of the
Problem, objectives of the study, scope of the study, and significance of the study. The second
chapter will be theoretical concepts and empirical literatures that relates with credit
management. The third chapter deals with research methodologies which consists description of
the study area, the research design that will be adopted for the study, source of data collection,
the study population and sample size, as well as the sampling techniques and data analysis
procedure. The main body of the study which is the results and discussion of statistical data will
be practiced in this chapter. And the last chapter will consist summaries of major findings, the
conclusions and possible recommendations.

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1. Definitions, and functions of credit/Introduction

Credit, in commerce and finance, is a term used to denote transactions involving the transfer of
money or other property on promise of repayment, usually at a fixed future date. According to
Basel committee on banking supervision (1999), credit can be define as a transactions between
two parties which one (the creditor or lender) supplies money or monetary equivalent goods and
service, etc in return for a promise of future payment by the other (the debtor or borrower) from
the bankers point of view credit is the confidence of lender on the ability and willingness of the
borrower to repay the debt as per schedule of repayment.

The principal function of credit is to transfer property from those who own it to those who wish to
use it, as in the granting of loans by banks to individuals and corporate bodies who plan to initiate
or expand their business ventures. The transfer is temporary and is made for a price, known as
interest, which varies with the risk involved and also with the demand for, and supply of, credit,
(Stiglitz and Weiss, 1981).

4
 2.2. Definition and concepts of credit management

Credit management is the method by which you collect and control the payments from your
customers. Myers and Brealey (2003) describe credit management as methods and strategies
adopted by a firm to ensure that they maintain an optimal level of credit and its effective
management. It is an aspect of financial management involving credit analysis, credit rating,
credit classification and credit reporting. Sound credit management is a prerequisite for a
financial institution’s stability and continuing profitability, while deteriorating credit quality is
the most frequent cause of poor financial performance and condition. According to Gitman
(1997), the probability of bad debts increases as credit standards are relaxed.

Credit management is defined as the efficient control and co-ordination of loan able funds so as to
keep credit and the investment in credit at optimal level (Hempel, 1994).

Proper credit management calls for setting specific criteria that a customer must meet before
receiving the type of credit arrangement.

According to Agyeman, (1987) several factors are used as part of the credit management process to
evaluate and qualify a customer for the receipt of some form of commercial credit. These factors
include;

 Gathering data on the potential customer’s current financial condition.

 The current ratio between income and outstanding financial obligations will also be
taken into consideration.

 Competent credit management seeks to not only protect the vendor/bank from possible
losses, but also protect the customer from creating more debt obligations.

When the process of credit management functions becomes efficient, everyone involved benefits
from the effort. The vendor/bank has a reasonable amount of assurance that invoices issued to a
client will be paid within terms.

2.3. Credit management process

Before a loan becomes bad, it needs to be granted. Moreover, as we referred to so far, the poor

5
quality of a loan is sometimes due to factors not attributable to the lending bank such as
adverse selection and moral hazard (Stiglitz and Weiss (1981) or any other external shock
that may alter the borrower's ability to repay the loan(Minsky, 1982 & 1985).

According to Edwards, Banks credit management processes can be summarized in three main
stages. These stages are:

i. Credit initiation

ii. Documentation and disbursement

iii. Credit administration

2.3.1. Credit initiation

The credit initiation is a process that starts from a market analysis and ends at the credit application
approval. The steps involved in credit initiation processes are listed below:

 Surveys and industry studies: Loan officers/ Customer relationship Officers/branch

managers scan the market and economic sectors to identify key players and potential
business for the Bank.

 Prospect lists: some prospects (companies and individual customers) identified as the
main role players are short listed in accordance with the industry studies and the
minimum risk criteria. This prospect list is ranked in order of preference.

 Customer solicitation: at that stage, although the primary source of target is the
prospect list, the initiation of a credit comes either at the bank request in the frequent
contact with existing customers or at the clients request if they have a need for
financing.

 Negotiation: the Loan officer /relationship officer / branch manager scan identifies the
financing needs of the borrower and gathers background information such as the latest
financial statements, project details, projections over the loan life.

 Presentation: the conformity of information given with the market and industry

6
 analysis is the reliability of the information once again verified by consulting other
sources.

 Credit committee approval: loan approval form (LAF) is submitted to each member of
the credit committee. The members review and approve or decide on the request.

 Advice to customers: once the credit is approved, the customer is advised in writing
with details concerning the terms and conditions.

2.3.2. Documentation and disbursement

The documentation and disbursement refers to the compliance of documents provided with the law
applicable and the requirements of the Bank's legal department. Documentation provided must
satisfy the Bank's legal department and afford maximum protection to the Bank.

Once the credit application satisfies all these conditions, a thorough analysis is done and if the
application complies with the Bank's conditions, instruction is given to the Credit administration
for disbursement.

2.3.3. Credit administration

The credit administration refers to the credit support, control systems and other practices necessary
for the effective monitoring of credit risks taken by the Bank. Some of the important points of the
credit administration are:

 Control of Credit files and Safekeeping of credit & documentation files.

 Follow-ups for expirations of essential documents like insurance.

 Monitoring of collateral inspections, site visits and customer calls.

 Monitoring of repayments under term credits and reporting the status of loan

2.4. Credit management practices

Credit risk continues to remain the largest source of risk for banking institutions in the world
(Credit Bank Negara Malaysia, 2001). Effective credit management is therefore vital to ensure that

7
a banking institutions credit activities are conducted in a prudent manner and the risk of potential
bank failures reduced. The success of banks (in the view of the researcher) depends on their ability
to manage their credit effectively. Even though there are no strictly laid down credit management
practices in most financial institutions, most financial institutions are practicing the following in
order to maximize profit as well as to reduce credit risk.

2.4.1. Lending

Lending is one of the core pillars of financial intermediation and for that matter a significant
activity in the operations of banks. It is at the same time highly risky. This is asserted by
McNaughton (1992), who emphasized that risk taking is central to banking and banks are
successful when the risk they take are reasonably controlled and within their financial reserves
and credit competence.

Lending is perceived as an art because it involves imagination and creativity (Rouse, 1989). The
appropriate judgment depends on the skills, knowledge and foresight of the manager.

Olashore (1988) has identified four interested parties in bank lending and these are the depositor,
the borrower, the lending bank and government.

2.4.2. Cost of borrowing (interest rate)

Stieglitz (1981) asserted that interest rates on lending would be higher if the probability of default
is higher. In this regard ventures with high risk of success attract higher interest rates.

The level of lending interest rates is also influenced by the availability of loanable funds and the
competing ends. The interest Rate of the National Bank of Ethiopia seemingly becomes the
benchmark but it takes time for the banks to adjust appropriately to it especially when there is
downward revision of the rate.

2.4.3. Assessment of borrowers credit worthiness

The assessment of the credit worthiness involves the gathering, processing and analyzing of
information on the loan applicant. National bank of Ethiopia launched a new on line based credit
information system in august 12, 2011 which was said would help address the problems of
information’s asymmetry and build reputational capital.

8
The factors underlying the assessment of pre-lending safeguards, in the opinion of Rose (1989)
are; character, capacity, cash, collateral, conditions and control (i.e. the 6Cs).

The dimension of each of the factors outlined by Rose (1989) is as follows:

Character: Customers’ past payment records; experience of other lenders with the customer;

Capacity: identity a guarantor, a business borrower and management quality.

Cash: adequacy of past and projected cash in and out flow; availability of liquid reserves,

Collateral: ownership of assets; vulnerability of assets to obsolescence and liquidation of assets.

Conditions: Customers current position in industry and expected market share of the business

Control: applicable banking laws and regulations regarding the character and quality of loans;

Security: Securities for loans and overdrafts are to ensure recovery of the funds lent to the
borrower in the event that the borrower becomes unwilling or incapable of meeting his
commitments.

Dunkman (1996) outlined reasons for security as: safeguarding against some doubts about
borrowers repayment ability, basis for increasing amount of loans over and above existing
facilities, and as a last resort to recover loan in the face of default.

It should be also noted that the provision of security just provides secondary source of repayment
and therefore to ensure sustained relations with customers in their business endeavors, it is
pertinent to consider the viability of the project being financed to generate sufficient cash flows to
liquidate the credit facility.

2.5. Implications of loans on banking institutions

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

9
According to Bloem and Gorter, (2001), though issues relating to non-performing loans may affect
all sectors, the most serious impact is on financial institutions such as commercial banks and
mortgage financing institutions which tend to have large loan portfolios.

2.5.1. Performing loans

Legally, a loan or credit facility refers to a contractual promise between two parties where one
party, the creditor agrees to provide a sum of money to a debtor, who promises to return the said
amount to the creditor either in one lump sum or in installments over a specified period of time.

A loan may be considered as performing loan if payments of both principal and interest charges
are up to date as agreed between the creditor and debtor.

National Bank of Ethiopia classifications of loans indicates that loans that are passing are those for
which the borrower is up to date in respect of payments of both principal and interest.

2.5.2. Non-performing loans

The term bad loans as described by Al-Zubaidi (2002), is used interchangeably with non
-performing and impaired loans as identified in Fofack (2005). Berger and De Young, (1997) also
considers these types of loans as “problem loans”. Thus these descriptions are used
interchangeably throughout the study.

Generally, loans that are outstanding in both principal and interest for a long time contrary to the
terms and conditions contained in the loan contract are considered as non-performing loans.

Alton and Hazen (2001) described non-performing loans as loans that are ninety days or more past
due or no longer accruing interest. This includes loans captured within substandard, doubtful and
loss categories. (National Bank of Ethiopia).

2.6. Debt recovery strategies

It is inevitable that any business owner, big or small, is going to encounter clients that are just not
willing to pay. This is especially prominent in the banking industry, as services are ongoing
processes and not a one-time product purchase. It is no surprise that many small businesses do not
survive the first two years, and the inabilities to collect from nonpaying clients are likely a large

10
contributor of this failure. The following strategies are recommended.

2.6.1. Monitoring

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

The researcher believes that monitoring of loans should be total by following events right from
the disbursement of the facility, ascertaining the deployment of funds on the intended project,
following up and reviewing progress of the project, identifying shortcomings for possible advice
through field visits and discussions.

2.6.2. Collateral

The granting of credit facilities is underpinned by the risk of being repaid when due. Williams and
Heins (1985) indicated that risk identification is the process by which a business systematically and
continuously identifies property, liability, and personnel exposures as soon as or before they
emerge. The first step in business risk management in their view is to identify the various types of
potential losses confronting the firm, and secondly, to measure these potential losses with respect
to such matters as their likelihood of occurrence and their probable severity.

2.6.3. Frequent contact

A lack of continued contact is a common mistake in bank debt recovery. While initial contact
brings the debt to the attention of the delinquent client, without continuous, friendly reminders,
you lose the benefit of the first courtesy call. Frequent contact is the key to assuring successful
bank debt recovery efforts. When keeping in touch with delinquent debtors, you want to remain
on good terms, which require a careful, gentle approach.

2.7. Addressing risk associated with credit management

Credit risk has the consequence of liquidity risk, which in the extreme instance can lead a bank to
severe financial crisis, resulting in erosion of capital, insolvency and could ruin the bank. To

11
identify and address risk associated with credit management, the Basel Committee on Banking
Supervision in its Publication No. 54 issued in September 2000 outlined the following measures:

 Establishing an appropriate credit risk environment and Operating under a sound

credit granting process

 Maintaining an appropriate credit administration, measurement and monitoring

process;

 Ensuring adequate controls over credit risk and the role of supervisors.

The highlights of the above issues raised by the Basel Committee on Banking Supervision
(2000) are as follows:

2.7.1. Establishing an appropriate credit risk environment

The Board of Directors should have responsibility for approving and periodically (at least
annually) review the credit risk strategy and significant credit risk policies of the bank.

Senior Management should have responsibility for implementing the credit risk strategy approved
by the Board of Directors and for developing policies and procedures for identifying, measuring,
monitoring and controlling credit risk.

Banks should ensure that risks of products and activities new to them are subject to adequate risk
management procedures and controls before being introduced or undertaken, and approval in
advance by the Board of Directors or its appropriate committee.

2.7.2 Operating under a sound credit granting process

Banks must operate within sound, well-defined credit granting criteria. These criteria should
include a clear indication of the banks largest market and a thorough undertaking of the borrower
or counter-party, as well as purpose and structure of the credit, and its source of payment; Banks
should establish overall credit limits at the level of individual borrowers and counter-parties, and
groups of connected counter-parties that aggregate in comparable and meaningful manner different
types of exposures, both in banking and trading book and on and off balance sheet; Banks should
have a clearly established process in place for approving new credit as well as the amendment.

12
2.7.3. Maintaining appropriate credit administration through measurement and
monitoring process

According to Theodore N. (1962), this process entails the following:

Banks should have in place a system for the ongoing administration of their various credit risk
bearing portfolios and a system for monitoring conditions of inadequate credits, including
determining the adequacy of provisions and reserves. Banks are encouraged to develop and
utilize an internal risk rating system in managing credit. The rating system should be consistent
with the nature, size and complexity of a banks activities.

Banks must have in place a system for monitoring the overall composition and quality of the
credit portfolios and take into consideration potential future changes in economic conditions.

2.7.4. Ensuring adequate controls over credit risk

Theodore N. (1962) stated that banks must establish a system of independent, ongoing assessment
of the bank’s credit risk management process and the results of such reviews should be
communicated directly to the Board of Directors and senior management.

Banks must ensure that the credit granting function being properly managed and the credit
exposures are within levels consistent with prudential standards and internal limits; and must
further have a system in place for early remedial action on deteriorating credit, managing problem.

2.8. Conceptual Framework

Wikipedia defines conceptual frame work as an analytical tool with several variations and
contexts. It is used to make conceptual distinctions and organize ideas. It is particularly
important in organizing devices in empirical research. According to Miles and Huber man
(1994), “a conceptual frame work explains, either graphically or in narrative form (both much
preferred), the main thing to be studied, the factors, constructs or variables, and the presumed
relationships among them”. The whole purpose of developing conceptual frame work is to make
research findings meaning full. From the previous empirical works the dependent and
independent variables and their effect on one another is put as follow. The center of the study is
credit management.

13
 Independent Variable Dependent Variable

Factory Credit access

Credit approve process

Credit Collection Procedure

Credit
Increasing of NPL Management

CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY

3.1. Introduction
The methods used in assembling data and information for this research is shown and justified in
this chapter. This stage is about how research was executed and how respondents were
approached, as well as how the research was completed. Therefore in this section the research
identifies the procedures and techniques that were used in the collection, processing and analysis
of data. Specifically the following subsections are included; research design, data collection
instruments, data collection procedures and finally data analysis

3.2. Research design

The study will use the survey methods by employing qualitative instruments for data collection
and analysis. The survey method will be used because the variables to be studied are qualitative
in nature. According to Trochin (1999), survey methods are used for non- experimental and

14
descriptive research methods. He further indicated that, survey can be useful when a researcher
wants to collect data on phenomena that cannot be directly observed. Qualitative research is not
intended to test a predetermined theory or hypothesis; instead, it is exploratory in nature,
McDonald and Daly (1992) noted that this approach is particularly essential when the
researchers have little knowledge about the area of investigation. Also it explores issues which
are not studied in the past. But it is criticized by bias because of researcher‘s interference. So,
Based on Torching assertion, the researcher will adopt the survey method for the study.

3.3. The Research Method/Approach

For the purpose of this study, both primary and secondary data are used. Interviews and
questionnaires are used to collect primary data. The interviews are conducted with the
management of the credit portfolio and management as the topic of the research relates directly
to them and the

Questionnaire is distributed to branches to loan offices and branch assistant or managers, and to
members of credit management & analysis department.

3.4. Data Source

3.4.1. Primary Data
Primary data will collect through questionnaire, and informal discussion with professionals.

3.4.2. Secondary Data Source

The secondary data sources will include manuals, credit policy and procedures of Dashen Bank
S.C. To identify the implementation, supervision, monitoring and repayment practice-
questionnaire with the staff and extensive study of documents will conducted.
3.4.3. Procedure of Data Collection
Since the number of respondents are few and could be managed easily, all staff who works on
credit area in Addis Abeba at Head Office and Adama district will consider for the study. And a
questionnaire is distributed to branches of Adama district and head office credit department.

3.5 Population of Study

The study units will be limited to members of staff and management of Dashen Bank S.C (DB)

15
who has exposure on credit and who is working in 30 branches of Adama district. The numbers
of respondents are few and could be managed easily. So, Number of targeted population which
is only 80. Thus, a total population of 80 will be considered for the study.

3.6 Sample Size and Sampling Techniques፡

Department Populations
Head Office staffs 10
Adama District 7
Branch 33
Total 80

3.7 Data Collection Instruments

3.7.1 Questionnaires
The questionnaires will include both open ended and close ended types. The open-ended
questions offered the respondents the opportunity to freely express themselves on the issues under
consideration while the close-ended questions restricted the respondents on the options provided.

Structured questionnaires in the form of both open and close-ended will be focused on factors
influencing access to credits, procedures for improving credits approval process, credit collection
processes and factors influencing occurrence of NPL will prepare and conducts to the respective
employees so as to get relevant data

3.7.2 Interview
This is a face to face encounter with a purpose. In undertaking this research, face-to-face was used
to gather information from the member of credit portfolio and management staffs of the bank.
Even though data is collected from branches and other departments at head office level involved in
credit service the credit portfolio and management department is chosen for an interview since it is
directly involved with credit management. As it is centered on the objective of the study and the
research questions Interview affords a follow up questions to respondents for clarity.
3.7.3. Methods of Data Analysis

After collecting the qualitative data the researcher will summarize and present by means of

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tables. This offered a pictorial presentation to enhance the understanding of the data. The data
presented will also be analyzed through descriptive statistics. Such as tables, frequencies, graphs
and percentage.

3.8 Reliability and Validity of Data gathering Instruments

3.8.1 Reliability
The reliability measures to which extent the instrument is without bias (error free) and offers
consistent measurement across time and across the various in the instrument (Cavana et al.,
2001). Inter item consistency is a test of consistency of respondents answers to all the items in a
measure. According to Cavana et al., (2001) the most popular test of inter item consistency
reliability is the Cronbach’s coefficient alpha, which is used for multipoint scaled items.
Several authors such as Alwadaei (2010), Filed (2005), and Kothari (2004), state that even
though, there is no predetermined standard; an instrument that provides a reliability coefficient of
0.70 is usually considered as a reliable instrument. Hence, the study will inter consistency for all
items of the instrument will tested using Cronbach’s alpha method.

3.8.2 Validity
Validity is the extent to which data accurately reflects what they are meant to reflect. There are
some factors which can affect the validity of data, for example, if a respondent is in a haste to
complete the questionnaire, the validity of this response could be affected; also misinterpretation
of questions by the respondents will also affect validity.

According to Creswell (2003) there are three forums of validity: (1) content validity, (2)
concurrent validity and (3) construct validity. Koigi (2011) states that among the three forms of
validity, content and construct validity are the most sophisticated and rigorous types of validity
and the most recommended types of validity for social studies. Even though the adapted
instrument is valid by itself, to further re-examine, the researcher will tested the construct
validity test.

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3.9 Time Schedule and Budget Frame
Tables on research work plan, budget break dawn, Stationeries, Sundries expenses and summary
of all the above

Table 1.1 Research work plan

Phase Activities Time Frame Place

Preparation and design stage I

One

Reviewing related literatures and preparation of research March 2021.

proposal and get it approved by and then send it to and
Adama
getting research fund to start research work officially.
Preparatory and Design Stage II A.A&
Two

Adama
Thr

Organizing the primary and secondary data May 2021 up to Adama

ee

June 2021
Writing Work & Writing the first draft May 2021 up to Adama
June 2021
Four

Rewriting, polishing and preparing final draft ″

Finalizing and submitting research report to Research and ″

Table 1.2 Summary of budgets break down

S. no Expense category TOTAL (ETB)

1 Stationery 1,008.00

2 Miscellaneous expense 1,100.00

3 Other expenses 10,000.00

Grand-total 12,108.00

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