Professional Documents
Culture Documents
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JIMMA UNIVERSITY
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ABINET ALEMU RU1515/13 JIMMA
ADVISOR: MOHAMMED A.
APRIL,2015E.C
JIMMA,ETHIOPIA
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TABLE OF CONTENTS
Contents Page
1.INTRODUCTION................................................................................................................1
1.1.Background..............................................................................................................1
1.2.Statement problem..................................................................................................3
1.3.Objective ..................................................................................................................4
1.4Research Questions and/Hypotheses.....................................................................4
1.4.1Research questions:..........................................................................................4
1.4.2 Hypotheses:.......................................................................................................4
1.5. Significance of the Study/Benefits and Beneficiaries..........................................4
1.6. Delimitation/Scope .............................................................................................5
2. LITERATURE REVIEW ...................................................................................................4
3. RESEARCH METHODOLOGY..........................................................................................5
3.1 Description of the Study Area................................................................................5
3.2 Ethical Consideration.............................................................................................6
4. WORK PLAN....................................................................................................................6
4.2 BUDGET ...................................................................................................................6
6.REFERENCES ..............................................................................................................7
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Acknowledgement
The first and most great thanks given to God for made some body from nothing and helping one in every aspect of our life.
Second, a great and pleasure hearted thanks given to our advisor MR.MOHAMED A. for supporting ,advising, answering for every
questions and for valuable suggestion that made this work possible and also moral support during our stay the study.
Thirdly, a great hearted thanks given to Dashen bank manager for answering every questions and for valuable suggestion that made
this work possible and also moral support during our stay in the study.
Finally, we are also great full in the staff member of Dashen bank Jimma branch which has assisted we in giving the necessary data.
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ABSTRACT
The paper is the result to the researcher project which would be at the Dashen bank share company in jimma branch under the take of
assessment of credit management practice one of the key element in ensuring business success into build a strong and efficient credit
management practice organized an effective credit management system for safeguarding resources of management at any organization
cannot achieve its own objective regarding the credit goal. The main objective of this study is to assess the overall credit question of
the bank regarding the existence and applicable of audit standards. Hence this research has come out with the major trends with some
correction action that the management credit activities of the bank. This study was conducted on assessments of credit management
system of the Dashen bank. In general this research paper uses sequential and mixed methodology. During the collection of data was
use both primary and secondary data. Primary data was obtained through structured questionnaires and interview. Secondary data
sources were the selected: from annual report. The researchers were uses a non-probability sampling (Purposive sampling) The
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questionnaire was distributed to 10 employees of the organizations and also use Qualitative and quantitative data was used for
analyzed and interpreted. This research paper briefly organized into four chapters. The first chapter is introduction part. Chapter two
consists of reviews of the related literature which support the core idea of the study. The third chapter is the research
design/methodology. The fourth chapter has work plan and budget.
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CHAPTER ONE
INTRODUCTION
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Credit can be considered as heart of commercial banking business. In almost every commercial bank, the majority of its asset holds in
the form of loan and practices all of these face inherent risk. Invading and assessing the risk factor involved in the bank loan portfolios
are part of principle credit management concern. Credit management is the process of controlling and collecting payments from
customers. This is the function within a bank or company to control credit policies that will improve revenues and reduce financial
risks. A credit manager is a person employed by an organization to manage the credit department and make decisions concerning
credit limits, acceptable levels of risk and terms of payment to their customers (Edwards, 1990).
The credit managers are responsible for Controlling bad debt exposure and expenses, through the direct management of credit terms
on the company’s ledgers. Assessment of credit standing of both new and existing customer.
Monitoring and control of customer balance. The finance that made available to borrowers or customers in this manner is required to
be collected by bank after a specific period of time. In order to make effective collection, however, the bank is expected to establish
efficient credit management. It is worth mentioning that the credit management system that is designed in adequately and applied
improperly is one of the
possible cases which may expose bank to credit risk where the borrower might fail to pay the loan on due date. The effective
management of credit is critical component of a comprehensive approach to loan term success of any banking organization. Currently,
the Dashen bank offers the following credit products: short term loan, medium term loan, long term loan, merchandise loan and
agricultural loan.
The beneficiaries of the bank credit facility are business people who are engaged in domestic and foreign trade. In order to get loan
these customers are expected to satisfy certain criteria which are set by the bank. Also borrowers are obliged to provide the bank with
accurate information about their business. Finally the loan contract will be signed between the customer and the bank as to release the
required loan amount. A nonperforming loan is a loan is default or close to being in default. Many loans become nonperforming loan
after being in default for three months, but this can depend on the contract ( According to IMF).a loan is nonperforming when
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payment of interest and principal past due 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced
or delayed by agreement of payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be
made in full.
Thus, in their day to day activities banks are under exposure to various types of banking risks among which credit risk is this most
imports one. Nonperforming loan can be considered as ones of the major source of credit risk, where a borrower will fail, to meet
his/her obligation in accordance with agreed terms. The practice of credit management of the Dashen Bank of Ethiopia assessed in
particular from the point of view of the nonperforming loan which is a potential credit risk area of the bank.
Hence, the purpose of this study is to assess the strength and weakness of the bank and system of releasing of the credit oriented to
costumer and to review different types of credit management of Dashen bank Jimma branch.
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process exposes the loan provide bank to high default risk which might lead to financial distress including bankruptcy. Dashen bank
Share Company is the private bank playing an important role in the country’s economy and social life. However, most private
company faces poor credit management and application of non performing loan in Ethiopia as it has been assessed through
preliminary studies (yigremachew,2008).implying that these loan losses have produced lower return to the bank and over all economy.
thus,Dashen bank share company is one of the private company in Ethiopia with regard The researcher aims to assess the credit
management of the bank which contribute to the nonperforming loans that are , inadequate applicant screening criteria ,diversion of
loan and poor credit follow-up that affect the loan recovery performance of the Dashen bank. The researcher formulates the following
guide line research questions.
1.3Research questions
• What mechanism is being used by the bank to give credit to its customers?
• What is the sequence of procedure for borrower whose payment is over due?
• What type of loan is advanced by the Dashen bank to the borrowers?
• What is the loan recovery rate from 2014 to 2015?
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1.5 Significance of the study
• The study helps the Dashen bank share company in Jimma branch to recognize its weakness in the credit service and to take
correct measures that enables to strengthen the service.
• It is hoped that the finding and recommendation suggested in this study will be helpfull for Dashen bank to identify problem
areas and to solve it
• To make lesson and corrective measures for the bank itself
• As a reference for these who need to make a research on similar areas
• The study is helping the student researcher to have experience in conducting research
• It also help other service sectors( financial to solve problems of credit management)
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CHAPTER TWO
Review of Related Literature
The word credit is derived from the Latin word credit which means to believe or trust. In economics the term credit refers to a promise
by one party to pay another for receive money or goods or services received. It is a medium of exchange to receive money or goods on
demand at some future date. credit as the right to receive payment or obligation to make payment on demand at some future time on
account of the immediate transfer of goods[ R.Pkent].
Credit can be considered as heart of commercial banking business. In almost every commercial bank, the majority of its asset holds in
the form of loan and practices all of these face inherent risk. Invading and assessing the risk factor involved in the bank loan portfolios
are part of principle credit management concern. Credit management is the process of controlling and collecting payments from
customers. This is the function within a bank or company to control credit policies that will improve revenues and reduce financial
risks. A credit manager is a person employed by an organization to manage the credit department and make decisions concerning
credit limits, acceptable levels of risk and terms of payment to their customers (Edwards, 1990).
credit management of a bank is believed to be a good indicator of the quality of the bank. Credit management is a perquisite for
financial institutions stability and continues profitability. Credit management from debtor point of view is managing finance especially
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debts so as to not have of credit or lucking behind your bank credit management is a responsible that both the debtor and the creditor
should seriously take (http//:www.growth.com)
There are many definitions given for credit management by different scholars among these some are here cited as follows. Credit
management is implementation is and maintains assists of policies and procedures to minimize the amount of capital field up in
captors and to minimize the exposures of the business brief (http//www.small business wa gov all)
Credit management from debtor point of view finances especially debates so as not to have of creditors lurking behind your bank
credit management is a responsibility that both the debaters and the creditors should seriously take when its functions affectivity.
Credit management serves an excellent instrument for the business to remain functionality stable (http//:www.self groth.com)
• service credit it is smoothly payment for utilities such as telephone, gas ,electricity and water you often have to pay deposit and
you may a lot charge if you payment is not one time.
• Loans can before small or large amount and for short or long period’s loans can be rapid in none lump sum. Or in several
regular installment payments until the amount borrowed and the finance charges are paid.
• Installment credit it is described as buying on time financing through the store or the easy payment plan.
• Credit cards are issued by individual retail, bank, or business using a credit card (http//www.or benes illcnoise all)
2.1.2.Future of credit
• Trust and confidence, trust is the fundamental element of credit. The leader will lend his money or good s on the trust and
confident that the borrowers or buyers well back the money or price in time.
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• Time element all credit transaction involves time element money is borrowed or goods are bought with a promise to repay the
money or pay the price on some future date.
• Transfer of goods and service credit involves transfer of goods and service by the seller to the buyer on the ray back promise at
the buyers on some future date.
• Willingness and ability. Credit depends in person willingness and ability to pay the borrower money. In fact creditor depends
on his character, capacity and capital. It is these three co’s which a man’s credit depends.
• Purpose of credit for banks and financial institution gives large amount of credit for productive purpose rather than for
consumption purpose.
• Security in the form of property, goods silver, bones or shares on important element for raising credit (www.abcom
HYPERLINK "http://www.abcom.coop/". HYPERLINK "http://www.abcom.coop/"coop)
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• Check; - a check is an order on the bank written by the trawler who has deposit with that bank, the pay on demand the stated
sum of money to the person named in the check cacique may be bears check or an order check or crossed check the bearer
check can be cashed by the payee 9 whose name appears on the check or by any other person who holds it.
• Speculation:- speculation and credit expansion or contraction goes to gather when speculative activity is high credit expands
when speculators lose credit contracts.
• Economic development:- credit expands in developing country in which new banks and financial institutions are being set up.
Such institution provides credit to tiny, small medium and large industries to agriculture etc in poor country which lack
finances as institution. The volume of credit is law because trade, business, agriculture etc are back word.(http//www.abcom
coop )
2.1.4. Significance of credit
Modern economy is said to be a credit economy credit vital is importance for the working of an economy.
• Economical credit instruments economies the use of metallic company. They are chapter them coinage.
• Increase productivity of capital credit increase the productivity of capital. People having money deposited tin banks and with
non bank financial institution which is lent to trade and industry for productive losses.
• Covenant: - credit instrument are covenant made of national and international payment. They help in transferring payment with
little cost and without the use of actual money from one place to other quickly.
• Internal and external trade: of a country to the above by facility payment quickly credit helps in the explanation of internal
trade and external trade of a country.
• Encourages investment: according to Keynes credit is the payment along which production travels and those bankers provide
facilitate to manufactures to produce full capacity. The bank in case of a crossed change the amount of the change must be
credit to the account of the payee in this bank.
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• Draft: a draft also called demand orate is the form of achieve and is an order of a bank to its branch in authority for making
payment of the amount specified into the person of firm or organization.
• Hound: hound is an internal billet exchange which has been in use in India from ancient times.
2.1.5. Factors influencing the volume of credit
Some time credit expands when borrowing and lending goon briskly. At other time credit contracts when borrowing and lending two
place slowly.
• Boom and recession: under boom condition when in duster and trade are expanding because the in fenestrate is rising. They
also know the money will be returned due to high rate of profit in the industry.
But when there is recession the quality of credit contracts. Business man are not prepared to borrow even thought the in tersest rate
is law.
• Political condition: credit expands when there is political stability in the country. Encourages investment in which increase the
some and for credit on the other hand political instability and insecurity of life and prosperity business and investment are
discouraged.
• Currency condition: the volume of credit expands or contracts depending up on the currency condition of the country.
• Banking system: if the banking system is fully developed credit encourage investment in the economy financial institution
help mobilization selling of the people thrush deposits bonds etc.
• Increase demand availability of cheap and easy credit the reuse the demand for goods and service in the country. This leads
to increase in the production of such durable customer goods as rooter, vehicles, refrigerators, TV etc.
These vesicles standers of living of the people when they consume more goods and service. Consumption loons by banking
and non banking financial institution coupled with the use of credit card have made these possible.
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Banking is the management of risk: banks accept strategies in terms of their risk return characteristics with the gold of maxi making
share holder wealth. In doing so banks recognize that there are deferent types of risk and that the impact of a particular investment
stratum on share organization depends on the impact on the risk of organization.
Credit risk
Credit risk is the risk to earning and capital that an obligate may rail omit the terms of any contract with the bank. It is usually
associated with lone and investment but it can also arise in connection with derivatives foreign exchange and other extension of bank
credit.
Reputation
Reputation risk is the risk to earning or capital arising from negative public opinion of the bank. Negative public opinion can arise
from poor service failure to serve the credit needs to their communities and for other reason .A recent survey revealed that consumer
rank telephone companies ahead of bank in terms of service. Regulation feared that negative public opinion would contribute to also
of market share and be a potential source of litigation.
Credit control
A central bank is basically different from commercial bank. The central bank does engage itself in ordinary banking activities like
accepting deposits and advancing loan to the public. It does not aim at making profit like commercial rather it aims at controlling
commercial bank and implementing the economic policies of the government according to layers the central banks the organs of the
government that undertakes the major financial operation of the government.
Methods of credit control
Methods of credit control the central bank adopt two types of methods they are qualitative and quantitative methods. Qualitative
methods aim at control the use and direction of credit. However quantitative methods are deeply discuss the following
Bank rate policy
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The bank rate or discount rate is the rate fixed. But the commercial banks at which if rediscount first class bills of exchange and
government secretes held by commercial bank.
Market operation
Open market operation is other method of credit control used by central bank. It refers to a sale and purchase of secretes bills and bond
of government as well as private financial institution by the central bank.
Although banks fail for many reasons the single most important reason is bad loans. Banks of coarse don’t have more bad loans. They
make loans that go bad of the time the loans were made the decision seemed correct. However unforeseen things in economic
condition and other factors such as interest rate socket changes in tax lows and soon have resulted in credit problems. Credit is the
primary cause of failures and it is the most visible risk taking bank manager.
Interest rate risk is the risk of earning and capital that market rate of interest may change unfortunately. This risk arises from
difference in timing of rate changes and the timing of cash flows (repining risk) from things in the shape of the field curve (yield
curves risk) and from option values embed in the bank ( product option) increase in the market value of a bank’s assets will tall with
increases in the rest rate.
Operational risk
Operational risk also refers to as transaction risk is the risk to earning or capital arising from problems associated with the delivery
or derives of a product.
Liquidity risk
Liquidity risk is arise to earnings or capital related to a bank stability to meet its obligation to depositors and the needs of
borrowers by turning assets into cash quickly with minimal loss being able to borrow fund when need and having fund available to
execute profitable crudities trading activates given the larger amount of bank deposit that must be paid on demand or within a very
short liquidity risk is of crucial importance in banking.
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Variable reserve ratio Variable reserve ratio or regal minimum requirement as a method of credit control was first suggested by
Keynes in his treaties on money.
Selective credit control Are a means to regulate and control the supply of credit among many its possible users and users. It does
not affect the total amount of credit but the amount that is used in particular section. (Www. Preservearticles.com)
Objectives of credit control
Credit control means to control the lending policy of commercial bank by the central banks. Central bank control to achieve the
following objectives:-
To establish the internal price level
One of the objectives of controlling credited is to establish the price level in the country. Frequent changes in the prices adversely
affect the economy inflationary trend need to be prevented.
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Classification credit loan
Pendey (1990) states the credit can be classified on the time, purpose, security lender and borrower.
Time classification
A. short term loans: - it is expected that loan plus interest would be repaired from the income received through the enterprise in
which it was invested. The usual time to repay such loans is year at most 18 month.
B. medium term loam:- where the return according from increasing in farm asset is repaid over more than one production period.
The usual repayment period for such types of loan is from fifteen month to five years.
C. long term loans: - would normally very difficult to accumulate funds sufficiently to repay the internal loans plus interest from
income generated through assets in less than five years. The normal repayment period for these loans. Therefore ranges from five
to fifteen years or in a few cases up to 20 years.
Purpose of classification
The purpose classification can facilitate the profitability of specific loan it proper report on income and expense are kept. It also
provides information about the destination of different types of credit use which significantly influences the repayment capital of
the former.
Security classification
The security classification obtained provides another basis for classification the loans. The secure loans are advanced as against
the security of the same tangible personal property such as land, livestock other capital assets i.e. medium and low term loans.
Lender classification
Credit also classified on the basis of lender such as:-
• Institutional credit example cooperative loans, commercial bank loans and government loans.
• Non institutional credit example professional and agricultural money lenders traders and commission against relatives and
friends etc
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Borrower classification
Credit also can be classified on the basis of types of borrower (i.e. production or business activity as well as size of business) such as
crop farmers, dairy farms poultry farmers and rural artisans etc. According to Koch (1995) also indicated in his bank different types of
loans. These includes:-
• Commercial loans: - bank lends large amount of manufacturing company’s service companies. Farmers and security dealers
and to other financial institutions. Because many commercial loans finance current asset they include working capital
requirement short farm commercial loans. Seasonal working capital loans open credit lines asset based loans etc.
(KIDUELZ,2006)
• Real estate loans: - real estate loans can be highly superlatives however if banks lend against property that do not generate
predictable cash flows. Real estate can be classified short term real estate loans and long term real estate loans.
(KIDUELZ,2006)
• Agricultural loan and long term real estate loans: - agricultural loans are similar to commercial bank and industrial loans in that
short term credit finances seasonal operating expense in this case these associated with planting and harvesting crops. Long
term loans finance livestock equipment and purchase the fundamental source of repayments is cash flow from these livestock
and harvested crops in operating expenses.( KIDUELZ)
• Consumer loans:- non marketing consumer loans different substantially from commercial loans their purpose of finance
education medical care and other expanses mass of these loans have maturates from 1 to 4 years.( KIDUELZ,2006)
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Credit security is the use of statistical operational research and data mining models to determine the credit risk of prospective
borrowers. The credit score is number that is calculated by a credit bureau or other company such as the Fair Isaac corporation Flco
score that is used in making credit decision and for another purpose. The most advantage of using credit scoring models are that they
reduce the cost of evaluating credit and increase the speed , consistency and accuracy of credit decision. Credit scoring technologies
are also used to assess risk adjusted profitability of account relationships, for delinquency intervention for fraud detection and for
other purpose. They are widely used in making consumer loans, home mortgage loans and some commercial banks.
(KIDUELZ ,2006).
Credit rating
Credit rating is agencies such as standard and poor moody’s investor’s service Fitch and Duff and Phelps provide credit rating that
reflects opinions about the general credit worthiness of debate and equity issuers in the capital markets. The rating also takes into
account the type of security collateral and other factor (paresh shah...) final management
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CHAPTER THREE
3. Research Design & Methodology
3.1 Research design
Designing a research is making a road map to a study which leads all functions and steps undertaken. Kothari (2004) defines research
design as the conceptual structure with in which research is conducted; and it consists of the blue print for the collection, measurement
and analysis of data. It is also a strategy of describing procedures about sample size, data sources, means of collection & methods of
data processing, analyzing and presenting based on available time and resources. This study were design as a descriptive research
method with qualitative and quantitative data analysis approaches. The rational behind the selection of the design would that it helpes
the researcher to assess the credit management of Dashen bank of branch.
In this study, both qualitative and quantitative data would used. The data would be obtained from primary and secondary sources. The
reason of using qualitative and quantitative data types will gathers from primary and secondary data sources is to increase validity and
reliability of the research result. The basic tools/instruments during primary data collection system is structured interview,
questionnaires would prepare with open-ended and closed-ended questions for the collection of qualitative and quantitative data from
the respondents and The secondary data sources collected from annual financial reports and documents.
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3.4 Data gathering tools
In order to collect significant data from our participants, the researcher would used questionnaire including open ended and closed
ended questionnaires. Besides the researchers would used document analysis as a tool for finding out valuable information.
The data collected through structured interview, survey questionnaire and from annual report. The quantitative data will analyze
trough descriptive statistics such as percentages and tabular representations. Whereas, the qualitative data will analyze by reading,
understanding and interpreting the raw data gathered from the respondents in to words.
After the data have been collected and edited, the researchers would used narrative and interpretive techniques of data analysis.
Onwards this analysis summary, conclusion and recommendations would be drawn.
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Chapter four
1 Title
selection
2 Proposal
writing and
Review
Literature
3 Observation
study area
4 Data
collection
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5 Data entry
6 Data
analysis
7 Submission
and
presentation
of research
proposal
1 Pen No 2 20 40
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2 Pencil No 1 5 5
3 Paper No 20 2 40
4 Ruler No 1 10 5
5 Note Book No 1 50 50
7 Transport Km _ _ _
9 Total 650
References
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• IMpanady, (1990) . Financial management.( 8th edition)
• Internet:www.Investopedia.com
• Internet: www.small business wagov.all.
• Internet : www.preservearticles.com
• Internet: www.abcom.coop
• Internet; www. Self growth.com
• kiduilze (2006) financial management
• Kidwell, (2006). Finical intuition markets and money.( 9th edition ).
• Koch (1995). Money banking
• kohtary (2004). Financial institution and banking
• M,LJhiangan,(2004). Money banking international trade and public finance. ( third edition.)
• Nuihitton, (1992) financial management (6 edition).
• Pareshshah, (2009). Finical management . (2nd edition),
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