Adigrat University College of Business and Economics Department of Accounting and Finance

ADIGRAT UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
ASSESSMENT OF CREDIT MANAGEMENT

(A CASE STDUY ON DEDEBIT CREDIT AND SAVING INSTITUTION
SHARE COMPANY, ADIGRAT BRANCH)
A SENIOR ESSAY SUBMITTED TO DEPARTMENT OF ACCOUNTING &

FINANCE IN FOR PARTIAL FULFILLMENT OF THE REQUIREMENT
OF DEGREE OF ARTS IN ACCOUNTING & FINANCE
PREPARED BY: HAILEMARIAM GEBREANENIA
ID No. 757/2004
ADVISOR: Haftu A. (MSc.)
June, 2014
ADIGRAT, ETHIOPIA
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ACKNOWLLEDGMENT
First and for most I thank to the charity kindness help and forgiveness of the almighty God and
his mother saint marry who gives me a great value in my life.
Secondly, I would like to express my heartfelt appreciation and special thanks to my advisor
HAFTU A who played a great role in providing his valuable guidance and continua assistance
until the end accomplishment of this written this senior essay paper.
Thirdly, besides my heartfelt appreciation and special thanks goes to my MOTHER who had
been support in what she have which made me successful in my academic life.
Finally, I would like to thank for all my teachers works who so hard to share their knowledge
during my stay here on the campus from beginning until now.
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ABSTRACT
The major purpose of the study is to assess credit management in case study of dedbit
credit and saving institution. In addition to this the paper identify the major area of
problem in relation to credit management, the limitation and the come up with possible
suggestions to fill the gap and to overcome the stated credit management problems . The
researcher was taken sample from the staff members, to provide accurate information for
the study, and the researcher selected 14 employees out of 23 staff members. The
researcher was used primary and secondary source of data to analyze the stated
problems about credit management and to achieve the objective of the research. The
scope of the study is in Adigrat branch dedebit credit and saving institution share
company. In conducting this research the researcher face some constraints like time, cost
and language constrains are the most common problems. Finally the researcher expects
the study will help the company to make corrective measurement and improvement
regarding collection and granting loan or credit
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ACRNOMY
MFIS = Micro finance institution service
REST = Relief Society of Tigray
DESCI =Dedebit saving and credit institution
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TABLE OF CONTENT
Contents page
ACKNOWLLEDGMENT...................................................................................................................................i
ABSTRACT....................................................................................................................................................ii
ACRNOMY...................................................................................................................................................iii
iv
LIST OF TABLES............................................................................................................................................vi
CHAPTER-1..................................................................................................................................................1
INTRODUCTION...........................................................................................................................................1
1.1.Back ground of the study.......................................................................................................................1
1.2 Background of the organization.............................................................................................................2
1.3 Statement of the problem.....................................................................................................................3
1.4 Research objectives...............................................................................................................................4
1.4.1 General objective................................................................................................................................4
1.4.2 Specific objectives..............................................................................................................................4
1.6.2 Sampling method................................................................................................................................5
1.6.3 Method of data collection..................................................................................................................5
1.6.4 Data analysis procedures....................................................................................................................5
1.7 Significance of the study........................................................................................................................5
1.8 Scope of the study.................................................................................................................................6
1.10 Organization of the paper....................................................................................................................6
RELATED LITRATURE REVEIW......................................................................................................................7
INTRODUCTOIN...........................................................................................................................................7
2.1 DEFNITION OF CREDIT...........................................................................................................................7
2.1.2 Types of credit....................................................................................................................................7
2.1.2.1 Closed – End Credit..........................................................................................................................7
2.1.2.2. Open- end credit.............................................................................................................................8
2.1.3 Historical background of micro finance institution.............................................................................9
2.1.4 Development of Micro Finance Institution in Ethiopia.....................................................................10
2.1.5 Factors influencing the Volume of Credit.........................................................................................11
2.1.6 Significance of Credit........................................................................................................................12
2.1.7. THE FIVE Cs OF CREDIT....................................................................................................................13
2.1.8 Advantage of credit..........................................................................................................................14
2.1.9 Disadvantages of credit....................................................................................................................14
2.2. CREDIT TERM......................................................................................................................................15
2.2.1. CREDIT INFORMATION.....................................................................................................................15
2.2.2CREDIT INSTURMENTS.......................................................................................................................16
2.2.3. CREDIT LIMIT...................................................................................................................................17
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2.3. CREDIT POLICY....................................................................................................................................17
2.3.1. CREDIT POLICY EFFECTS...................................................................................................................18
2.3.2. OPTIMAL CREDIT POLICY.................................................................................................................19
2.3.3. CREDIT ANALYSIS.............................................................................................................................19
2.4. CREDIT INVESTIGATION AND ANAALYSIS............................................................................................19
2.4.1 ANALYSIS OF CREDIT FILE.................................................................................................................20
2.5. CREDIT EVALUATION AND SCORING...................................................................................................20
2.5.1 CREDIT PERIOD.................................................................................................................................21
2.6 CREDIT RISK.........................................................................................................................................21
2.6.1 SCREENING AND MONITERING.........................................................................................................22
2.7 COLLECTION POLICY AND PROCEDURES..............................................................................................24
DATA ANALYSIS AND INTERPRETATION.....................................................................................................25
3.2 Objective of credit...............................................................................................................................27
3.7 Credit Collection effort of the institution.............................................................................................31
3.8 Supervision and follow up the institution............................................................................................32
3.9 Credit management policy if the institution........................................................................................33
3.10 Evaluation of clients’ history..............................................................................................................33
3.11 Credit management procedures........................................................................................................34
Table 3.15 attitude of the society towards the institution........................................................................37
3.15 Loan collection...................................................................................................................................37
4.1 Conclusion...........................................................................................................................................39
4.2. Recommendation...............................................................................................................................41
REFERENCE................................................................................................................................................42
APPENDIX..................................................................................................................................................43
LIST OF TABLES
Table 3.1 Characteristics of the respondents………………………………………………………….…..31
Table 3.2 Response the value loan in financing small and micro enterprise……………………………...32
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Table3.3 The amount of finance…………………………………………………………………………..32
Table 3.4 The time providing financial service…………………………………………………………...34
Table 3.5 Mechanism of credit Granting ………………………………………………………….…...…34
Table 3.6 Problem in granting credit……………………………………………………. ……………….35
Table 3.7:- collection of credit…………………………………………………………………….……....35
Table 3.8:- Credit collection effort…………………………………………………………………..........37
Table 3.9 supervision and Follow up of client operation …………………………………………….…...37
Table 3.10 credit management policy………………………………………………………………….….38
Table 3.11 evaluation of client history…………………………………………………………….……....38
Table3.12 management procedure……………………..………………………………………………….39
Table 3.13 maximum and minimum limit of the credit…………………………………………..……….40
Table 3.14 the beneficiary of the credit………………………………………………………………..….40
Table 3.15 attitude of the society towards the institution……………………………………………...….41
Table 3.16 the amount of loan disbursed and collected………………………………………………..….42
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CHAPTER-1
INTRODUCTION
1.1. Back 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. Ho ever people may take different mechanisms to cover come this problem from those
mechanism credit the one. In our society this phenomena is common. (Mengstu Bediye1998)
Micro finance is the process of lending money without collateral to help poor people to become
entrepreneurs. Providing group based lending using compulsory saving and joint liability. It is
about the provision of the usual range of banking service including credit and loan facilities to
the society with unmet demand for accessible affordable appropriate structured credit and other
service (Mengstu Bediye1998). (MFIS) is an organization that offers financial service to the very
active poor.
However, poor people serve badly by adverse selection and moral hazards due to systematic
information (poor people have insufficient physical assets (they are often excluded from
traditional market). (www.wise.geck. retrieved on Dec, 13, 2013).
Poor people are often discovering age and simply do not seek loans they believe that they will
not be to fulfill bank loans. Due to these nongovernmental organizations has started to fill the
gap by providing credit to the poor. This practice imitated new technology on credit provisions
which included groups based lending that was believed to reduce produce problem of screening
incentives and enforcement (www.investor word.com retrieved on Dec, 13, 2013).
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The field of credit management is more challenging as its offer relatively of greater scope to
bankers for judgment and the selecting their loan portfolios. Credit management includes loan
and advance (an over view of Ethiopian financial sector, 2000).
The process of credit management begins with accurately the credit worthiness of the customer
base. Several factors used as a part of the credit management process to evaluate and quality for
the receipt of some form of commercial credit. This includes gathering data on the potential
customer current financial condition including the credit score (www.wise.geck).
1.2 Background of the organization
Micro finance is a tool crucial for our country. Because it was suffered with long civil war and
aggressive invasion which is highly inflation and the major part of the country is based on is
backward agriculture traditional (an over view of Ethiopian financial sector, 2000).
The new governmental of federal democratic republic of Ethiopia introduces various suitable
policy to prevent of poverty considering the large number of population who engage in
agricultural practice. To prevent poverty and to increase population micro finance institution
play a great role (an over view of Ethiopian financial sector, 2000).
Dedebit credit and saving institution is one of the micro finance institution granting accredit
service to farmers in Tigray region root in relief society of Tigray (REST) its establishment aims
at helping the poor people of Tigray. The tigray people to attain self sufficient and its main
programs were environmental rehabilitations and agricultural water supply and credit saving
services. These were out line on the basis that to outcome the rooted course of poverty and
consequence of poverty through promoting sustainable rural development (an over view of
Ethiopian financial sector 2000).
In 1993 REST carried out as study assess the availability use of and demand for credit facilities,
following on the form this study, which identify a considerable credit facilities (REST 1993) it in
1993. REST launched a rural credit saving program in tigray initially known as the REST credit
scheme in micro finance. REST was loyally registered as financial service institution called the
dedebit saving and credit institution (DESCI). Dedebit saving and credit institution was
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established by proclamation number 40/1996 under the umbrella of REST. Later on it comes a
new independent institution with the name of dedebit saving and credit institution a share
company since as loyal entity in 1997.It has more than 2000 employees and initial capital 6
million birr of share capital and donation capital from nongovernmental organization(an over
view of Ethiopian financial sector 2000).
Vision of the company
The vision of dedebit saving and credit institution is to see poverty eradication in tigray through
provision of quality and sustainable banking service by a strong and well developed micro
banking micro finance.
Mission of the company
The mission of dedebit saving and credit institution is to improve the well being of those
individuals who are not getting service from these formal sector banks by increase this income
and wealth through the provision of quality and sustainable financial service.
Objectives
The objectives of dedebit saving and credit institution are
 The program of requires massive capital investment strong policy effective and stars their
economic stability
 Improve credit to enhance the production of small producer
 To increase employment and raise standard of living client and their families
 To increase institution efficiency and effectiveness
1.3 Statement of the problem
Most of the time dedebit saving and credit institution provide financial service to rural areas
particularly to small agriculturalist, poor woman and small enterprise. In the case of developing
countries such as our country Ethiopia, more than 80% of total population depends on traditional
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agriculture practice there will be very low know how on return the credit taken. Besides of this
there might be arise varies reasons such as luck of good credit management policy, difficulties of
determines the credit worthiness or gathering information about the creditor by granting credit
service, weak supervision process and weak collection efforts after providing a credit also the
absence of infrastructure for managing their branches in regulation(Mengstu bediye 1998). The
factors listed above were initiated the researcher to focus Adigrat branch. Hence, to the best of
knowledge of the researcher no previous work had been done in relation to credit management in
this branch.
1.4 Research objectives
1.4.1 General objective
The main objective of this study was to assess the credit management of dedebit saving and
credit institution.
1.4.2 Specific objectives
In order to achieve the general objectives, the study was considered the following specific
objectives.
 To understand the credit guaranting mechanism of the institution

 To assess the credit collection efforts of the institution
 To ascertain whether or not the institutions properly follow the procedure of credit
management system
 To assess the reason for delaying of customer to return the credit taken
 To give some constructive suggestions and recommendation based on the finding of the
study
1.5 Research question
The researcher was anticipated responding the following questions;
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 What kind of systems are the institution implemented to provide credit?
 What are the main reasons for delaying in return the credit?
 What are the major problems of credit in the branch?
 What measurements are taken if there is a problem during collection of the credit?
1.6. Research methodology
1.6.1 Data type and source
Both primary and secondary type of data was used by the researcher, to collect sufficient data
and accurate information, through primary and secondary source of data.
1.6.2 Sampling method
The researcher was taken sample from the staff members, to provide accurate information for the
study, and the researcher selected 14 employees out of 23 staff members. These employees were
selected by using simple random sampling technique of probability sampling method to give
equal chance to the respondents.
1.6.3 Method of data collection
The researcher was collected primary data through questionnaires. The secondary data have been
used in the study was collected using different documents that provide statistical information and
explanation, such as credit manuals, operational reports and manual the of the institution.
1.6.4 Data analysis procedures
The researcher was analyzed the collected data through collection instruments to final reliable
data. Thus, data was obtained from questionnaire analyzed by describing these with possible
ground and used table and data obtained from secondary source of data analyzed by using
tabulation and percentage for each four consequent years.
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1.7 Significance of the study
The importance of this study will essentially in narrowing the gap between the borrower and
lender in returning the credit. In addition to this, it will serve as a source of information for
further researcher, it relates the theory with practice, providing knowledge and information about
the issues and provides valuable information to decision maker including the institution.
1.8 Scope of the study
Geographically this study was conducted on Dedebit Saving and Credit institution sharing
company Adigrat branch. Besides, it also conceptually delimited on the assessment of credit
management or policy, procedures and system of credit management on this branch. The time
coverage of this study is from October-may 2014.
1.9 Limitation of the study
This study was faced some constraints in collecting of data. Some of the constraints because of
the manuals are written in local language.
 Time constraint.
 Cost constraint.
 Shortage of previously conducted research in our library.
1.10 Organization of the paper
This research was incorporated four chapters. The first chapter contains back ground of the
organization, back ground of the study, statement of the problem, objective of the study, research
methodology, and significance of the study, scope of the study, limitation and organization of the
paper. Chapter two was described the literature review. The third chapter was discussed the
methods and techniques that the researcher was applied in the research. The final chapter was
dealing with conclusion and recommendation of the research study.
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CHAPTER TWO
RELATED LITRATURE REVEIW
INTRODUCTOIN
2.1 DEFNITION 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. (Prosanna cuandra, 1998)
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. (Prosanna cuandra, 1998)
2.1.2 Types of credit
Two basic type of consumer credit exist; closed – end credit and open- end credit closed – end
credit, poll pay bank one time loans in a specified period of time and in payment of equal
amounts. With open- and credit, loans, are made on a continuous basis and you are billed
periodical for at least peril payment.
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2.1.2.1 Closed – End Credit
Closed end credit is used for a specific purpose and involves a specified amount mortgage loans,
automobile loans, and installment loans for purchasing furniture or appliances are examples of
closed end credit. An agreement/or contract. Lists the repayment terms; the number of payment,
the payment amount, and how which the credit will cost eloped end credit payment plans usually
involve a written, agreement for each credit porches. A down payment or trade in may be
required, with the balance to be repaid in equal weekly or monthly payments of closed end over a
period of time generally, the sale holds title to the merchandise until the payment have been
completed. .
The three most common types of closed–end credit are instrument sales credit, installment cash
credit, and single wimp-sum credit, installment sales credit is a loan that allows you to received
merchandise usually high priced items such as large appliance, or further you make a down
payment and usually signed contract to repay the balance plus interest & serves charges, in equal
installment over specific period. (Prosanna cuandra, 1998)
Installment cash credit- is a direct loan of money for personal proposes, home improvements, or
vacation expenses you make no down payment and make payments in specified amounts over a
set period. Single lump-sum credit is a loan that must be repaid in total on a specified day,
usually within 30 to 90 days for a single item (Prosanna cuandra, 1998)
2.1.2.2. Open- end credit
Using a credit card issued by a department store, using bank credit card (visa, master card to
wake purchased at deferment stores, changing a meal at a restaurant, and using overdraft
protection are examples of open- end credit. As you will see you don’t apply for open-end credit
to wake a single purchase, as you do with closed end credit. Rather, you can use open credit to
make any purchase you wish if you do not exceed your line of credit; the maximum dollar
amount of credit the lender has made a viable to you. You may have to pay interest, a periodic
charge for the use of credit, or other finance charge. Some creditors a low you agree period of 20
to 25 days to pay a bill full before you incur any interest charge. (Prosanna cuandra, 1998)
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. 2.1.2.3 Features of credit
The following are the essential Features of credit:
1. 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.
2. Time clement- All credit transaction in valve time element. Money is borrowed or goods
are brought with a promise to repay the money or pay the price on some future data.
3. 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.
4. 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 of credit- Bank and financial institutions gives large amount of credit for productive
purpose rather than for con gumption purposes. (Prosanna cuandra, 1998)
2.1.3 Historical background of micro finance institution
Micro finance is the propulsion of broad range of financial services such as–deposits, loans,
payment service, money transfer and insurance products–to the poor and low income households,
for their micro enterprises and small businesses, to enable them to raise their income and
improve their living standards. Micro finance is a form of financial development that has
primarily focused on alleviating poverty through providing if at all as being about micro credit
i.e. lending small amounts of money to the poor.(Mengstu bediye over view of Ethiopian
financial sector 1998)
Micro finance is the process of lending money without collateral to help poor people to become
entrepreneurs. It is about the provision of the usual of range of the banking services including
credit and loan facilities to segment of the society with un meet demand for accessible
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affordable appropriately structure that offer financial service to very active poor. Micro finance
institution is an organization that offers financial service to the very active poor.
In fact most micro finance institutions are nongovernmental organizations committed to helping
some part of low income population. Now days the world micro finance institution in the micro
finance industry has become refer a wide range of organization dedicated to providing service,
these organizations includes credit union corporative, private commercial banks and other
financial institutions.
On wider context micro finance institution to organization that provide different kinds of
financial service like saving, loan, insurance etc. Micro finance institutions are considering as
important all eviction tools.(Mengstu bediye over view of Ethiopian financial sector 1998)
2.1.4 Development of Micro Finance Institution in Ethiopia
The culture of credit and saving in semi-formal way emerged in Ethiopia during 1960s with
credit and saving cooperatives (1999/2000 Annual Report on the Ethiopian economy Vol. I)
though people in the country have had long history of torturing money and asset to carry out
economic activities, build asset and mange unfortunate events. In the real work, many NGOs
have also including saving and credit aimed at creating employment and generating income with
the view to improving the lives of people affected by recurrent droughts in the country during the
past two deceases. Governmental intuition like commercial and development banks have also
been providing credit rural house hold for porches of agricultural inputs and tools more formal
micro financing step, avoiding to the (1999/2000 Annual Report on the Ethiopian Economy). In
1990 when an urban micro financing scheme was initiated at not national level with credit
agreement signed between Ethiopian government and international Development Association
(IDA). The credit scheme implemented since 1994 in 59 towns of Amhara, Tigray, Oromia, and
SNNPR has dispersed up to the end of 1997, a total of 17.3 million birr, no percent contributed
by the Ethiopian government and 8% covered by IDA, among more than 34,000 beneficiaries of
which percent were women. The reported recover of referrer 1996/97 of the success group
lending and specified MFIs was percent (personal finals). The legal foundation for the micro
finance industry was laid in the country with the issuance of proclamation no, 40/1996 on
10
licensing and super vision of micro financing institution in 1996. Micro Finance institutions
established in all or dance with the proclamation can provide a loan amount of not more than five
that ands birr on the basis of group guarantee and to borrowers who have joined a membership
arrangement as well as lend on limited scale to non-members on the basis of physical or other
collaterals. The minimum annual interest rate on saving is 3% while interest rate charged on
loans extended by micro institutions is determined by respective boards of the Annual Report,
(2011p3-8)t. Dedebit Credit and Saving Institution (DECSI) (2011p3-8)
2.1.5 Factors influencing the Volume of Credit
Sometimes credit expends when borrowing and lending go on briskly. At other times, credit
contracts when borrowing and lending take place slowly. We discuss bellow the factor on which
the volume of credit depend on country.
1. Boom and Recession – under boom condition when industry and trade are expanding, the
demand for credit increases the creditor land more because the interest rate is rising, they also
know that the money will be returned do to high rate of profit in the industry. But when there
is recession the quantity of credit contracts, Business are not prepared to borrow even
through interest rate is low.
2. Politician condition – credit expands when there is political stability in the country. It
encages investment which increases the demand for credit. On the other hand, political
instability and in security of life and property, business and investment are discharged.
3. Currency conditions- The volume of credit expands or contracts depending up on the
currency Condition of the country. If the currency system is table the quantity of credit will
in cease on the other hand, a UN stubble currency system which leads to deprecation or
hyper inflation will bring un certainty. This leads to constriction of credit.
4. Credit policy of the central bank- when the central bank follows cheap credit policy, it
lowers the interest rate and the demand for credit increase. On the country, a dear credit
policy by rising interest rate contracts the quantity of credit in the country.
5. Economic development credit expands in a developing country in which new banks and
financial institution are being set up such institution provide credit to tiny, smell medium and
large industry, to agriculture, etc. in a poor country which lacks financial institutions, the
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volume of credit is low because trade, business industry, agriculture, etc are back
ward(Jhingan, 2006, p170)
2.1.6 Significance of Credit
Modern economy is said to be a credit economy. Credit is of vital importance for the working
of any economy. It is the oil of the wheel of trade and industry and helps in the economy
prosperity of a country in the following wakes.
A. Economic- credit instrument economies the use of national currency. They are cheaper than
coinage the metal used for other productive purpose.
B. Increase productivity of capital- credit increases the productivity of capital people having idle
money deposit it in banks and with non – bank financial institution which is went to trade
and industry for productive uses.
C. Convenient credit instruments are a convenient mode of national and international payments.
They help intern suffering payments with little cost and without they use of actual money from
one place to another quickly.
D. Encouraging investment- According to Keynes, credit is the payment along which production
travels and that bankers provide facilities to man facture to produce to full capacity. Credit in car
ages investment in the economy. Financial institutions help mobilizing savings of people through
deposits banks, etc. there are, in turn, given as acre ditto trade, industry, agriculture, etc which
lead to more production and employment.
E. Increase Demand- Availability of cheap and easy credit increase the demand for goods and
service in the country, this leads to increase in the production of such durable consumer goods as
a motor vehicles, refrigerators, TV etc. These raise the standard of living of the people when they
consume more goods and services. Consumption loans by banking and non banking financial
institution coupled with the use of credit cards have made these possible.
F. Utilizes Resource: credit helps in the proper utilization of a country’s manpower and other
resource, cheap and easy credit encages people to start their own business which provide than
employment. Agriculture development when farmers get seeds, fertilizers pumping sets, tractors,
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etc on credit, similar transportation, communication, in dusters, mines; plantation, power etc
develop with the help of credit.
G. Help full to Government credit hips in main ting price stability in meeting exigencies or
emergency when the usual fiscal measures fail to fill the financial need of the government.
Government restores to deficit financing for economic development by creating excess credit
(Jhingan, 2006, p. 170).
2.1.7. THE FIVE Cs OF CREDIT
It is most common question business owner asks their banker “what are you looking for from me
and my business it i need to borrow"?
While each lending situation a bank reviews a unique, most banks utilize some valuation of
“The five Cs credit" when making a credit decision
 Character
 Capacity
 Capital
 Conditions &
 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.
Capacity: 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 numerous financial bench marks such bas debt and liquidity ratios that banks use
before advancing loan.
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Capital: How well capitalized is your company? How much money has invested in the
business? Banks wants to see that you have a financial commitment: that have put yourself at
risk in the company.
Conditions: 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: While cash flow will nearly always the primary source of repayment of loan, baker
look at what they call secondary source of repayment. 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. (WWW.PNC.COM Retrieved on 04/04/2014)
2.1.8 Advantage of credit
The credit system benefits both society and individuals for:
1. Idle goods and services are transferred from creditor to debtor and put to work increasing
business and national income.
2. Specialization and division of labor stimulated by already flow of goods and services from
creditor to debtor.
3. Consumptive credit broadens in industry market, increase production and so help reduce
and raise the general living standard.(prosanna cuandra, 1998, pp(20))
2.1.9 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
14
can create serious long term financial problems damage to family relationship, and slowing of
progress towards financial goals (prassanna charadna pp20.4)
2.2. CREDIT TERM
Credit term involves both length 0f credit period and discount given. Credit period is a means by
which a firm may be able to affect product demand hopping to increase demand by extending the
credit period. Discount given involves an attempt to spend up the payment of receivable to be
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 little known firms to public security offering and make it economical to maintain
ongoing relation with banks.
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.
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. (I m pandey, 2010)
2.2.1. 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:
15
1) 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.
2) 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.
3) Banks generally provide some assistance to their business customers requiring information on
the credit worthiness of other firms.
4) 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. Westfield. Jordan, 2011, pp64).
2.2.2CREDIT INSTURMENTS
The credit instrument is the basic evidence in datedness most trade credit is offered account. 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.
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
16
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.
If bank accept the draft meaning that the bank guaranteeing payment, then the draft become a
banker’s acceptance. (Ross, Westorfield, Jordan, 2011, pp 606-607)
2.2.3. CREDIT LIMIT
A credit limit is maximum amount of credit which firm will extend at a point of time. It indicates
the extent of risk taken by the firm by supplying goods on credit to customer. Once the firm has
taken a decision to extend credit to applicant, the amount and duration of the credit have to be
decided. The decision on the magnitude of credit will, depend up on the amount of contemplated
sole are the customers financial strength.
In the case of customers who are frequent buyers of the firms goods a credit limit can be
established. Depending on the regularity of payment the line of credit of a customer can fixed on
the basis of his normal bugging pattern. For example, it customer buys a goods of $ 25000 per
month on the average for the line of credit can be fixed at this level.
The credit limit must be reviewed periodically. If tendencies of slow paying are found, the credit
con is revised downward. At times a customer may ask for the amount of credit in the excess of
his limit. The firm at such times agrees to his request if the product has agrees to his request if
the product a right margin or if additional sales help to the unutilized capacity of the firm , and
the cost of expected deluged payment or bad debt loss than the expected incremental profit.
The firm not only to determine the amount of credit but also the duration of credit keeping in
view the industry norm the normal collection period should be determined (I m pandey ,
2010,pp613-614 ).
17
2.3. CREDIT POLICY
Credit policy after referred to as a standing decision made in advance to cover a prescribed set of
condition.
It provides guidelines for deterging whether the extent to customers and how much credit to
extend. A bank may adept either liberal or sight credit policy. Liberal credit policy involves
extending credit to more risky class whose credit worthiness is not known exactly.
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 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).
2.3.1. CREDIT POLICY EFFECTS
In evaluating credit policy, there are five factors to consider:
1. 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.
2. 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.
3. 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.
4. 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.
18
5. 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 et.al 2010)
2.3.2. OPTIMAL CREDIT POLICY
So far we discussed how to compute net present values for as which in the credit policy. We
have not discussed the optimal amount of credit or the optimal credit policy. In principle, the
optimal amount of credit determined by the point of which the incremental cash flow from
increased sales is exactly equal to the incremental costs of the increase in investment in accounts
receivable(Ross et.at,2011) .
2.3.3. 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, 2011).
2.4. CREDIT INVESTIGATION AND ANAALYSIS
After having observed the credit information the firm will get an idea regarding the matters
which should be further investigated. The factors that affect the extent of credit investigation of
individual customers are:
 The type of customer whether new or existing
 The customers’ business line back ground and related trade risks
 The nature of the product perishable or seasonal
 Size of the customer’s order and expected future volume of business with him
 Company’s credit policies and practices (I m pandey, 2010).
19
2.4.1 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 firms trade experience with the customer and his performance report based on
financial statement submitted b 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 (A swath Demos, 2000).
2.5. CREDIT EVALUATION AND SCORING
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:
1. 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.
2 .Credit analysis; in granting credit a firm determines how much 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.
3 .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.(Ross,
Westerfields Jordan 1998, pp615
20
2.5.1 CREDIT PERIOD
The credit period refers to the length of time customers are allowed to pay for their purchases. I t
generally varies forms 15 days to 60days.When affirm does not extend any credit, the credit
period would obviously be zero.
If a firm allows 30 days, say, of credit , with no discount to induce early payments, its credit
terms are stated as net 30 : lengthening of the credit period pushes sales up by inducing existing
customers to purchase more and attractive 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.
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. An example
may give to illustrate this: Excel limited presently has an annual turnover of $100 million and
average collection period of 30 days.
The marketing director of the company believes that a longer credit period will simulate
additional soles of course, it is likely to be accompanied by higher desalts, (prassanna charadna
pp20.4)
2.6 CREDIT RISK
Credit risk also arise from contingent liabilities and balance sheet exposure banks assume such as
derivative securities services to assist customers in copying with the greater volatility that exists
in today’s financial markets.
Credit risk is managed by operational limits on credit lines, loan provisioning in portfolios
diversification and collateralization, loan securitization, separately, capitalized derivatives
vehicles and credit derivatives.
21
The use of these methods should lead to greater efficiency in portfolios management, more
refined pricing and to better allocations of capital. J.P Morgan’s credit matrix model for
evaluating credit risk enable a bank to consolidate credit risk across its entire organization and
provides statement of value at risk (VAR) due to credit caused by upgrades down grades and
default.
Credit matrices evaluates the VAR resulting from credit exposure to abroad range of individual
and derivative assets, modification in credit in credit quality caused by change in credit ratings,
defaults and credit concentration assessed by constructing a transition matrix giving the
probability of change in the credit ratings over a certain period. The change in market followed
by aggregation of individual value distribution of potential losses for the whore ours olio of
asset.
Credit risk launched by credit Suisse financial products bases it analysis on the volatility of
default rates associated with particular rating levels.
A default rate is allocated to each risk category and the volatizing of default rate is corrected
across asses, the model attempts to capture it without calculating it explicitly. Finally, these
variables are related to the various credits in the in the portfolio. The model requires four types
of variables, exposures recovery rate, default rate and default rate volatiles major difficulties in
making these methods operation are limited availability of historical and cross sectional data.
Internal data on loan defaults and recovery aren’t shared by banks (H.R Maharaja, p168-169).
2.6.1 SCREENING AND MONITERING
As Walter Winston stated systematic information is a common problem in the loan market
because leaders 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.
22
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.
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.
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.
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 (Fredric misk kin pp 246, 1997)
2.6.2 LOAN COMMITMENT
A loan commitment arrangement is a power full method for reducing the bank cost screaming
and information collection. A loan commitment is a back committee to provide commercial loans
up to a given amount at an interest rate than is field to some market interest rate. The advantage
of for bane is it promotes along term customer relationship, which turn facilities information
collection (Fredric misk kin p 247, 1997).
23
2.7 COLLECTION POLICY AND PROCEDURES
A collection policy 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 or delinquent accounts should also establish in unambiguous
terms the slow paying customers are needed to be handle very tact fully, some than may be
permanent customers . The collection process initiated quickly, without giving lay chance to
them, may antagonize them and the firm may lose them to competitors. The responsibility for
collection and follow up should be explicitly fixed; it may interest to the account or sales
department, or to a separate credit department. The coordination between account and sales
department is necessary and must ensure for money. The accounting department maintains the
credit records and information. If it is responsible for collection it should consult the sales
department before initiating an action against non-paying customers. Familiarly the sales
department must obtain past information about a customer form the accounting department
before granting credit to him. However, collection procedure should firmly establish individual
causes should be dealt with on merits. Some customers may be temporally in tight financial
position and in spite of their intensions may not be able to apply on due date. This may be due
to recessionary conditions, or other factors beyond the control of the customers such case need
special consideration. The collection procedures against them should initiated only after have
overcome their financial difficulties and do not intend to pay promptly the firm should decide
about offering cash discount for prompt payment . In practice companies may take certain per
caution vies-a-vise collections, some companies require their customer to give per signed
chigoes’ billing discounting is another practice in India. Unfortunately, it is not very popular
with a number of companies some companies provide for peal rate of interests for debtors who
fails to in time (I m Pandey, 2010)
24
CHAPTER-3
DATA ANALYSIS AND INTERPRETATION
This chapter deals with the presentation, analysis and interpretation of data by using primary
source which is collected in the form of questionnaire and secondary data from the office
documents.
14 questionnaires were prepared and distributed to dedebit saving and credit institution share
company staffs. All the 14 questionnaires were filled out by the staffs members who were
directly involved in the process of related tasks. As shown in Table 3.1, of the total respondents
10 found to be male and the rest 4 were female. It is also shown that, most of the respondents
were Accountants.
As shown in table 3.1, the number of females is less than the number of male. This shows that
the participation of male employee is low.
3.1 Analysis and presentation of primary data
This data on the characteristics of the respondents collected to have clear picture about persons
involved in the study. The following table deals with these issues
25
Table 3.1Characterictics of the respondents
No Item Alternatives Frequency Percentag

e
1 Male 10 71.43%
Sex Female 4 28.57%
Total 14 100%
2 Age 20-25 6 42.84%
26-30 2 14.29%
31-35 2 14.29%
>35 4 28.57%
Total 14 100%
3 Education 12th completed _ _
Diploma 6 42.86%
BA Degree 4 28.57%
Others 4 28.57%
Total 14 100%
4 Position Manager 1 7.14%
Vice manger - -
Accountants 8 57.14%
Others 5 35.72%
Total 14 100%
Source: questionnaire, 2014 (primary data)
According to the above table the personal data regarding sex of the employee 10 (71.43%) of the
respondents were males and 4(28.57%) of them are females. Concerning their age item of the
above table show that the majority of employee 6(42.85%) were between the range of 20-
25years, 4(28.57%) of them above 35, 2(12.29%) were found between 31-35 years. Regarding to
their educational status the majority 6(42.86%) of the respondents have been graduate of
diploma, 4(28.57%) of them were degree and 4(28.57%) were others.
3.2 Objective of credit
5. What is the objective of credit?
All 100% (14) of the respondent replied that the objective of credit was to maximizing the
economic value of the social economy, supporting lower level, medium and small business
communities in order to get income, deceasing unemployment rate and increasing job creativity,
26
improving living standard of the people and ensuring fair distribution of income among the
society. From this the researcher can analyzed that granting of loan or credit was important to the
society in maximizing of social economy, decreasing unemployment and ensuring fair
distribution of wealth among the people.
3.3 Financial service of the institution
Table 3.2 Response the value loan in financing small and micro enterprise
No Item Alternative Frequency Percentage

6 As compared with other intuitions do you Yes 13 92.85%
No 1 7.15%
think that that dedbit micro finance has
Total 14 100%
significant value in financing the small and
micro enterprise?
Source: questionnaire of 2014(primary data)
From the above table 13(92.85%) of the respondents replied that micro finance institutions have
significant value to finance or in financing small micro enterprise, 1(7.15%) of the respondent
said that micro finance institution have not significant in financing small and microenterprise.
Table3.3 The amount of finance

7 The amount of finance that Strongly agree 4 28.57 %
Agree 10 71.43%
the enterprise gets from the
Disagree - -
institution is satisfactory? Strongly disagree - -
Total 14 100%
27
From the above table 4(28.57%) of the respondents were strongly agree by the amount of finance
that get from the institution was satisfactory and the majority 10(71.43%) of the respondent
agreed by amount of finance that get from the institution was satisfactory. From this the
researcher was agreed by the amount of finance that the enterprise satisfactory.
Table 3.4 The time providing financial service

8 When the institutions Yearly 2 14.29%
Semi annually - -
provide financial service
Quarterly - -
to rural areas Throughout the 12 85.71%
particularly to small year(Continuously)
agriculturalist?
Total 14 100%
Source: primary source of data (questionnaire 2014)
In the table3.4., 2(14.29%) of the respondents said that the organization providing financial
service yearly to the rural areas especially for small agriculturalists to improve their living
standards to increase their productivity, 12(85.71%) of the respondents replied that the institution
was providing financial service to rural areas especially for small agriculturalist
continuously(throughout the year).From this the researcher has concluded that from the majority
of the respondents the institution is giving financial service to small agriculturalists continually.
3.4. Mechanism of the intuition to grant credit
Table 3.5 Mechanism of credit granting

9 How do express the credit Excellent 3 21.43 %
mechanism of the institution to very good 4 28.57 %
grant the credit? Good 7 50 %
Poor - %
28
Total 14 100 %
From the above information 3(21.43%) of the respondents replied that the institutions
mechanism of granting credit was excellent, 4(28.57%) of them believed that the mechanism of
granting credit was very good 7(50%) of the respondents said that it was good. From this the
researcher can understand that from the majority of the respondent’s response the grant credit
mechanism was good. Because the number of employee who said good was greater than the
others.
3.5 Problems of the institution in granting credit

Table 3.6 Problem in granting credit

10 Is there any problem in Yes 14 100
No _ _
granting credit in the
institution?
Total 14 100%
29
As indicated in the above table, all 14(100 %) of the sample respondents replied that there was a
problem in granting of credit in intuition. According this data the researcher can sum up the
institution has a problem in granting the credit
11. If your answer for question number 10 is yes what the problems?
All 14(100%) of the sample respondents replied that the main problem the institution is still now
the institution was used manually system even though currently it introduces computerized
system in little manner. Because of this financial services takes or consume much times.
3.6 Credit collection
Table 3.7:- collection of credit

12 Does the institution collect the Yes _ _
No 14 100 %
credit within the credit time?
Total 14 100 %
Source: questionnaire of 2014(primary data).
30
From the table all 100% of the respondent replied that the institution does not collect the credit
within the credit time. This shows that the institution does not collect the credit within credit
time.
3.7 Credit Collection effort of the institution
Table 3.8:- Credit collection effort

13 How do you describe the High 3 21.43 %
collection effort after Medium 4 28.57 %
granting loan? Poor 7 50 %
None - -
14 100 %
From the above table 3.8, information 3(21.43 %) of the respondents replied that the collection
efforts after granting loan was high, 4(28.57 %) of them were said that the collection effort after
granting loan was medium and 7(50%) of the respondents expressed that the collection after
granting loan was poor.The researcher concluded from majority’s point of view the institution
was in collection of loan after granting loan and this was created problem for the institution.
14. To whom credit service provided?
As all 14(100%) of the sample respondent said that this organization was given financial services
to females, to lower level community, medium level community, and small enterprise.
15. Why your organization selected this group?
As the total sample respondent stated that there were several reasons for selecting of these
selected groups. As their explanation this organization select females because of females have
better saving habit than male, females were also have family responsibility and to own
properties. And this organization the other groups because to help them to generate income, and
to survive strongly in social economy.
31
3.8 Supervision and follow up the institution
Table 3.9 supervision and Follow up of client operation

16 Does the institution Yes 6 42.86%
conducted No 8 57.14%
supervision and
follow up to review
the operation of its
customers?
Total 14 100%
Source: primary source of data (questionnaire of 2014)
From the above table indicate that 6 (42.86%) of the sample respondents justified that the
institution was conducted supervision and follow up and 8 (57.14%) of them replied that the
institution does not conducted the supervision and follow up after granting loan to review of its
customers operation. From this the researcher can analyzed that from the majority of point of
view the institution does not conduct supervision and follow up to review its customers
operation.
3.9 Credit management policy if the institution
Table 3.10 credit management policy

17 How do you describe the High 4 28.57%
credit management Medium 6 42.86%
policy in your Low 4 28.57%
None - -
organization
Total 14 100%
32
From the indicated table 4(28.57%) of the respondents said that high credit policy have been in
the organization, 6(42.86%) of them replied that in our organization there a medium credit
management policy while 4(28.57) of them said that there was low credit management policy.
From this point of view the researcher have understand that there was a medium credit
management policy in the organization and it needs higher priority from the management to
improve the credit management policy.
3.10 Evaluation of clients’ history
Table 3.11 evaluation of client history

19 Does the institution evaluate client Yes 3 21.83 %
history before granting credit? No 11 78.57%
Total 14 100%
The above table shows that 11(78.57%) of the respondents replied institution evaluate client
history before grant credit, but 3(21.83%) of them have said the institution does not evaluate the
client history before granting credit. From the majority point of view, the institution does not
evaluate the client history before grant credit and this may affect the general activities of the
institution.
3.11 Credit management procedures
Table3.12 management procedure

20 Is your organization using procedures Yes 8 57.14%
No 6 42.86%
for credit management system?
Total 14 100%
Source; primary source of data (questionnaire of 2014)
33
From the above table 8(57.14%) of the respondent justified that the institution used procedures
for credit management system to do different activities, 6(42.86%) of them said that no
procedure was used for credit management system in the institution.
The researcher analyzed that the institution used a procedure for credit management system in
order to make the institution profitable and stable.
21. What are the selection criteria for credit client?
All 14(100%) of the respondents stated that the selection criteria for the client are: identity card,
positive attitude (behavior and any one free from any bad habit, the one who repay with the rule
and regulation of the organization, anyone who create job(creativity), and any who have an
ability to work but lower income(poor).
3.12 The maximum and the minimum limit of cash allowed to one customer
Table 3.13 maximum and minimum limit of the credit
No Item Minimum cash Frequency Percentage
2 How 500 14 100%

many Total 14 100%
cash
given
for one
client?
Maximum cash Frequency Percentage
34
30000(this may 14 100%
differ based on the
nature of business)
Total 14 100%
Source: major source of data (questionnaire of 2014)
As the above table indicates that 14(100%) of the respondents justified that the minimum cash
given for the client was birr 500 and the maximum cash given for one client was 30,000 but the
maximum cash balance that allowed for client is differ based on the nature activity or business
which reach until birr 1.5million.
3.13 The beneficiary of the institution
Table 3.14 the beneficiary of the credit

No Item Alternatives Frequency Percentage
23 Are woman’s Yes 14 100%
benefited from the No - -
credit
Total 14 100%
As the above table shows 14(100%) of the sample respondents replied that women were
benefited from the credit given by this organization. From this the researcher can conclude that
the organizations were give financial service to benefited women.
24. What is your institution credit interest rate?
35
According to the sample respondents currently the interest rate of this institution is 15 it is
decline but it may vary from time to and based on the nature of the business.
25. Why customers delay in retuning their loan?
All 14(100%) of the sample respondent stated that there are some reason for returning of their
loan those are some time fluctuation of market affaires or market seasons, drought, death,
loss( this most of time the debtors are used for their personal consumption and changing of
residence.
3.14 Attitude of the society towards the institution
Table 3.15 attitude of the society towards the institution

26 What is the impact of credit Positive 7 50%
Negative 3 21.43%
in the social and economy
Both 4 28.57%
of the society? No effect - -
Total 14 100%
Source: major source of data (questionnaire of 2014)
As the table indicates that 7(50%) of the respondents describe that the credit have a positive
impact in the social and economy of the society, 3(21.43%) of the respondents describe that
credit have a negative impact on the social and economic of the society and the remain
4(28.57%) of the respondents replied that credit have both positive and negative impaction
36
society’s social and economic life. The researcher can analyzed credit have a positive impact on
the social and economy of the society if their used properly.
3.15 Loan collection
Table 3.16 the amount of loan disbursed and collected
Year( E.C) Amount disbursed Amount collected Percentage

2002 14154982 12958852.12 91.5%
2003 17559585 15516474.96 88.4%
2004 208890000 18332139.96 87%
2005 27191550 2257677.51 83%
Total 79795017 57720494.5 72%
Source: secondary data (annual report), 2002-2005
The above table shows that computation of loan collection based on operation report of dedbit
saving and credit institution Adigrat sub branch in the fiscal year of 2002-2005.
Based on the data collected and summarized in table above the amount of birr cumulatively
collected for four fiscal year has been birr 57,720,494.5 which is out of the total disbursement
birr 79,795,017. From this collection the share of trade, agriculture, handcrafts and service are
included.
The above table indicates that the loan collections of each year were declining as compare to
their previous year collection. In fiscal year of 2002, the total collection was 91.5% of the
disbursement. However, the rest three years loan collection decrease from time to time i.e. in
2003(88.4%), in 2004 (87.5%) and in 2005(83%).As the branch manager explained and form my
personal observation drought has significant impact on loan collections from agriculture sectors,
lack of work force of follow up and control declining the collection effort as compared to the
previous year.
37
CHAPTER-4
CONCLUSION AND RECOMMENDATION
4.1 Conclusion
The study of finding conformed that the credit management in dedebi saving and credit
institution share company affected by several factors.
The major discovered factors categorized as follows
As the researcher has seen from the study, the number of females is less than the number of
male. This shows that the participation of male employee is low.
As we can see from the analysis the company cannot evaluate the client’s history before granting
credit customer, this leads the company to face a problem in returning loan.
Absence of good credit granting in the company is strong problem, which force to incur
unexpected loss. This point is supported by ascertain percentage in the analysis of data.
38
From the observation, there are large numbers of customers, but the institution still used manual
system, so the company cannot provide quicker service to its customer. This is the main problem
of the company.
In addition, this branch serves for both the rural and urban people at one time due to this the
institution have lack of employee.
As the researcher has seen from the study, the institution does not conduct the supervision and
follow up after granting loan to review of its customers operation.
The above major findings were the results of the reported analysis, despite of the above
mentioned factors that contributed to the credit management. The finding of this study is
imported in hating favorable condition for future studies in this area.
4.2. Recommendation
The researcher conducted not only to point out the problems, but also to suggest some solutions
that help alleviate the stated problems, which related to credit management
Regarding poor collection effort of the institution should study the client’s history before
granting loan, the monthly salary, the wealth and others. In addition, this institution should have
strong credit management mechanism to increase its collection effort.
To improve the credit management the organization should employee trained and educated and
computer access to facilitate the management. The total amount of loan collected within the four
consecutive years is less than the amount disbursed and this initiated there is a poor collection
effort. This institution should improve the collection of loan by improving its collection
mechanism and taking necessary action against creditors to recover the full amount.
Dedebit gives credit for different activities the operation report does not show how much
collected from each activity. Therefore, there should be a report that shows how much is
collected for each activity.
39
Relating to poor supervision and follow up system the institution should conducted proper
supervision and follow up to review its customers operation before and after granting of loan
40
Regarding to loan collections, loan collected of each year was declining as compare to their
previous year collection. So the researcher can recommend that to the institution to improve their
loan collection effort
The number of females was less than the number of male, relating to this the researcher wants to
recommended the company to encourage female participation
The company have large numbers of customers, but the institution still used manual system, so
the company cannot provide flexible service to its customer, the institution should have introduce
computerized system.
41
REFERENCE
 Annual Report, (2011p3-8)t. Dedebit Credit and Saving InstitutiSon (DECSI) (2011p3-8)
 Annual Report on the Ethiopian Economy. (2000)
 An overview of Ethiopian sector,2000
 (Directive No MFI/13/2002 of National Bank of Ethiopia).
 Fundamental financial management 3rd ED P Chandra 1998 An overview of
Ethiopian sector,2000
 Fundamental of corporate finance 4th ED prassanna charadna, 1998
 Fundamental of financial management 8th ED loves Delhi 1997
 Pandy financial management 9th ED R sswerter field Jordan
 Mengistu, B. (1997). Determinants of Micro Enterprise Loan Repayment and
Efficiency of Screening Mechanism in Urban Ethiopia. The case of Bahir Dar and
Awassa town. Addis Ababa University.
 Www.wise.geck (retrieved on December 13,2013)

 Www.investorworld.com (retrieved on December 13,2013
 WWW.PNC.COM ( retrieved on December on04/04/2014
42
APPENDIX
43
ADIGRAT UNVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
QUESTIONNAIRE
This questionnaire is designed to preparing a senior essay paper on the role of micro finance
institution in financing micro and small enterprise i.e. in Dedebit saving and credit share
company Adigrat 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
1. What is the objective of credit?
A
2. As compared with other institution do you think that dedebit micro finance significant
value in financing the small and micro enterprise?
Yes No
3. If your answer for #1 is not what is the reason?
4. How do express the credit mechanism of the institution to grant credit?

Excellent Very good Good Poor
5. Is there any problem in granting credit in the institution?

Yes No
6. Does the institution collect the credit within the credit time?
Yes No
7. The amount of finance that the enterprise gets from the institution is satifactory
Strongly agree agree Disagree Strongly

Disagree
8. How do you describe the collection effort after granting loan?
High Medium poor none
9. To who credit service provide?
________________________________________________________________________
___________________________________________________________________________
B
_________________________________
10. Why your organization selected this group?
11. What is the attitude of the customers towards the institution?

positive Negative
12. Does the institution company conducted supervision and follow up to review the operation
of its customers
Yes No
13. How do describe the credit management policy in your organization

High Medium Low None
14. When the institutions provide financial service to rural areas particularly to small
agriculturalist?
Yearly semi annually quarterly monthly
15. Does the institution evaluate client before grant credit?

Yes No
16. Does the institution face problems related to good credit management?
Yes No
17. Is your organization using procedure for credit management system?

Yes No
18. What are the selection criteria for credit client?
19. How many cash given for one client
C
(Minimum __________maximum____________________)
20. Are women benefited from the credit?
Yes No
21. What is your institution credit interest rate?
22. . What are the obstacles that your institution has faced in implementing credit and
Saving activities?
______________________________________________________________________
____________________________________________________________________________
_______________________________
23. Why customers delay in returning their loan? ________________________________
______________________________
24. What are the impact of credit in the social and economy of the society?
Positive Negative Both Specify other
24. Additional information that you can provide

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ADIGRAT UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

ASSESSMENT OF CREDIT MANAGEMENT

A SENIOR ESSAY SUBMITTED TO DEPARTMENT OF ACCOUNTING &

PREPARED BY: HAILEMARIAM GEBREANENIA

ADVISOR: Haftu A. (MSc.)

MFIS = Micro finance institution service

REST = Relief Society of Tigray

DESCI =Dedebit saving and credit institution

Table 3.4 The time providing financial service…………………………………………………………...34

Table 3.5 Mechanism of credit Granting ………………………………………………………….…...…34

Table 3.6 Problem in granting credit……………………………………………………. ……………….35

Table 3.7:- collection of credit…………………………………………………………………….……....35

Table 3.8:- Credit collection effort…………………………………………………………………..........37

Table 3.9 supervision and Follow up of client operation …………………………………………….…...37

Table 3.10 credit management policy………………………………………………………………….….38

Table 3.11 evaluation of client history…………………………………………………………….……....38

Table3.12 management procedure……………………..………………………………………………….39

Table 3.13 maximum and minimum limit of the credit…………………………………………..……….40

Table 3.14 the beneficiary of the credit………………………………………………………………..….40

Table 3.15 attitude of the society towards the institution……………………………………………...….41

Table 3.16 the amount of loan disbursed and collected………………………………………………..….42

1.1. Back ground of the study

1.2 Background of the organization

Vision of the company

Mission of the company

The objectives of dedebit saving and credit institution are

1.3 Statement of the problem

1.4 Research objectives

1.4.1 General objective

1.4.2 Specific objectives

 To understand the credit guaranting mechanism of the institution

1.5 Research question

The researcher was anticipated responding the following questions;

1.6. Research methodology

1.6.1 Data type and source

1.6.2 Sampling method

1.6.3 Method of data collection

1.6.4 Data analysis procedures

1.8 Scope of the study

1.9 Limitation of the study

1.10 Organization of the paper

RELATED LITRATURE REVEIW

2.1 DEFNITION OF CREDIT

2.1.2 Types of credit

2.1.2.2. Open- end credit

The following are the essential Features of credit:

2.1.3 Historical background of micro finance institution

2.1.4 Development of Micro Finance Institution in Ethiopia

2.1.5 Factors influencing the Volume of Credit

2.1.6 Significance of Credit

2.1.7. THE FIVE Cs OF CREDIT

2.1.8 Advantage of credit

The credit system benefits both society and individuals for:

2.1.9 Disadvantages of credit

2.2. CREDIT TERM

2.2.1. CREDIT INFORMATION

2.2.3. CREDIT LIMIT

2.3.1. CREDIT POLICY EFFECTS

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

2.3.2. OPTIMAL CREDIT POLICY

2.3.3. CREDIT ANALYSIS

2.4. CREDIT INVESTIGATION AND ANAALYSIS