Second EDITTED YIRGA FINAL RESEARCH

ARBAMINCH UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
AN ASSESSMENT OF LOAN RECOVERY PERFORMANCE IN CASE OF

COMMERCIAL BANK OF ETHIOPIA, ARBA MINCH DISTRICT
A RESEARCH SUBMITTED TO THE DEPARTMENT OF ACCOUNTING AND

FINANCE FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENTS OF
BACHELOR OF ARTS DEGREE IN ACCOUNTING AND FINANCE FROM
ARBAMINCH UNIVERSTY.
BY: Yirgalem kusse
ID No. EBE/513/11
ADVISOR:Bizuneh Girma (M.Sc.)
JUN, 2022
Arab Minch, Ethiopia
DECLARATION
Declaration I, the undersigned, declare that this thesis is my original work and has not been
presented or submitted partially or in full by any other person for a degree in any other
university, and that all sources of materials used for the purpose of this thesis have been duly
acknowledged.
Declared by: ______________________
Signature ______________________
Date______________________
I
APPROVAL SHEET
ARBA MINCH UNIVERSITY
TITLE: ASSESSMENTS ON THE LOAN RECOVERY PREFORMANCE AT

COMMERCIAL BANK OF ETHIOPIA, ARBA MINCH DISTRICT
Submitted by: ------------------
Approved by:
Advisor Name: Date Signature
------------------------------------ ------------------- -----------------------
Examiner Name: Date Signature
------------------------------------ ------------------- -----------------------
II
CERTIFICATION
This is to certify that prepared by Yirgalem Kusse entitled Assessment of loan recovery
performance and submitted in partial fulfillment for requirement for the degree of bachelor art
(BA) in Accounting and finance complies with the regulation of the university and meets the
accepted standards with respect to originality and quality.
APPROVED BY THE ADVISOR
Advisor Signature Date
_______________________ ______________________ _______________
Examiner Signature Date
_______________________ ______________________ _______________
III
ACKNOWLEDGEMENT
First and foremost, I have to begin with thanking God from whom I have received strength and
endless love.
Secondly, I would like to thank Arba Minch University, College of Business and Economics,
Department of Accounting, for giving us opportunity to do this Research.
Thirdly, My special gratitude goes to My Advisor Mr. Buzuneh Girma (MSc), for his unreserved
constructive comments and suggestion throughout the proposal development up to the final
research paper.
Last but not the least; I would like to extend my gratitude to Commercial Bank of Ethiopia, Arba
Minch District for providing relevant baseline information and cooperation. And special thanks
to study participant.
IV
Table of content
Table of Contents
DECLARATION............................................................................................................................................I
APPROVAL SHEET....................................................................................................................................II
CERTIFICATION.......................................................................................................................................III
ACKNOWLEDGEMENT...........................................................................................................................IV
Table of content............................................................................................................................................V
List of tables..............................................................................................................................................VIII
List of figures...............................................................................................................................................IX
LIST OF ACRONYM...................................................................................................................................X
ABSTRACT................................................................................................................................................XI
CHAPTER ONE............................................................................................................................................1
1. INTRODUCTION.................................................................................................................................1
1.1 Background of the study................................................................................................................1
1.2 Statement of the Problem...............................................................................................................3
1.3 Research Questions........................................................................................................................5
1.4 Objectives of the Study..................................................................................................................5
1.4.1 General objectives..................................................................................................................5
1.4.2 Specific objectives.................................................................................................................5
1.5 Significance of the Study...............................................................................................................6
1.6 Scope of the Study.........................................................................................................................6
1.7 Limitation of the Study..................................................................................................................6
1.8 Organization of the study...............................................................................................................7
CHAPTER TWO...........................................................................................................................................8
2. LITERATURE REVIEW......................................................................................................................8
2.1 Introduction....................................................................................................................................8
V
2.2 Theoretical foundation of the study...............................................................................................8
2.2.1 Relationship Lending and Credit Repayment Performance...................................................9
2.3 Factors of loan Repayment Performance.....................................................................................11
2.4 Empirical studies on determinant of loan performance...............................................................16
2.4.1 Studies in other countries.....................................................................................................17
2.4.2 Empirical Studies in Ethiopia..............................................................................................17
2.5 Conclusions and identification of knowledge gap.......................................................................18
CHAPTER THREE.....................................................................................................................................20
3. RESEARCH METHODOLOGY.........................................................................................................20
3.1 Introduction..................................................................................................................................20
3.2 Research Design and Approach...................................................................................................20
3.3 Source of data and method of data collection..............................................................................21
3.3.1 Source of data......................................................................................................................21
3.3.2 Method of data collection....................................................................................................21
3.4 Population, sample size determination and sampling method.....................................................21
3.4.1 Population............................................................................................................................21
3.4.2 Sampling frame....................................................................................................................22
3.4.3 Sample size determination and sampling method................................................................22
3.5 Method of data analysis...............................................................................................................22
CHAPTER FOUR........................................................................................................................................24
4. DATA ANALYSIS..............................................................................................................................24
4.1 Introduction..................................................................................................................................24
4.2 Response Rate..............................................................................................................................24
4.3 Demographic data of respondents................................................................................................25
4.3.1 Sex of Respondents..............................................................................................................25
4.3.2 Age Distribution...................................................................................................................25
4.3.3 Educational Level of Respondents.......................................................................................26
VI
4.3.4 Work Experience of Respondents........................................................................................27
4.4 Loan recovery related problems...................................................................................................27
4.4.1 The biggest obstacle of bank loan recovery.........................................................................27
4.4.2 The procedure used to adopt to retrieve credit.....................................................................30
4.4.3 The debtor defaults and action taken...................................................................................32
4.4.4 The loan default affects the bank.........................................................................................34
4.4.5 Cause of loan defaults in banks...........................................................................................36
4.4.6 4.8 Measures to reduce loan default....................................................................................40
CHAPTHER FIVE.......................................................................................................................................44
5. CONCLUSIONS AND RECOMMENDATIONS..............................................................................44
5.1 Introduction..................................................................................................................................44
5.2 Conclusions..................................................................................................................................44
5.3 Recommendations........................................................................................................................45
REFERENCES............................................................................................................................................46
APPENDIX ONE.........................................................................................................................................48
VII
List of tables
Table 4.1: Response Rate.............................................................................................................................24
Table 4.2: Customer going bankrupt...........................................................................................................28
Table: 4.3 Debtors delaying in making loan repayment..............................................................................28
Table: 4.4 Customer falling out of business unexpectedly..........................................................................29
Table: 4.5 Develop a payment plan.............................................................................................................30
Table: 4.6 written communication...............................................................................................................31
Table: 4.7 reschedule the debt.....................................................................................................................31
Table: 4.8 legal warning..............................................................................................................................33
Table: 4.9 reposition of security..................................................................................................................33
Table: 4.10 higher lending rate....................................................................................................................34
Table: 4.11 Reduction in lending ability......................................................................................................35
Table: 4.12 capital diminishes.....................................................................................................................35
Table: 4.13 improper selection of borrower................................................................................................37
Table: 4.14 Lack of follow up measures......................................................................................................38
Table: 4.15 inadequate collateral.................................................................................................................39
Table: 4.16 flexible payment plan...............................................................................................................40
Table: 4.17out sourcing bank recovery to collection agencies....................................................................41
Table: 4.18 proactively reaching customers................................................................................................41
Table: 4.19 Extend or lower interest rates...................................................................................................42
VIII
List of figures
Figure: 4. 1 Sex of respondents....................................................................................................................25
Figure: 4. 2 Age Category of Respondent...................................................................................................26
Figure: 4. 3 Educational level......................................................................................................................26
Figure: 4. 5 Work Experience......................................................................................................................27
IX
LIST OF ACRONYM
CBE Commercial Bank of Ethiopia
KYC Know Your Customer
NBE National Bank of Ethiopia
NPL Non-Performance Loans
SNNPR Southern Nation Nationalities People Region
X
ABSTRACT
The objective of the study was to assess loan recovery in banks. The research was centered on
finding out the loan recovery problems that banks face when it comes to loan recovery, the loan
recovery procedures that banks use to retrieve their money, to find out the causes of loan default
in banks, as well as the effects that loan recovery has on the bank an finally offer possible
solutions to the problems of loan recovery. The study was conducted at Commercial Bank of
Ethiopia, Arba Minch District. A probability simple random sampling technique was used and it
was aided by use of a questionnaire. Data collection was done through primary and secondary
sources; it was analyzed to assist with the findings and recommendations. In the study it was
found that despite the loan recovery obstacles that banks face, possible solutions would greatly
assist in the management of loan. Based on the major findings of the study, the recommendation
made included, the bank carefully selecting its borrowers, strict monitoring of loans, reminders
to borrowers, use of collection agencies and payment plan for borrowers who have difficulties
repaying their debts.
Keywords: Loan, Recovery, Commercial Bank
XI
CHAPTER ONE
1. INTRODUCTION
In this chapter, the overall background of the study, the statement of the problem, the
significance of the study, scope of the study, the objective of the study, and the
limitations of the study were discussed in details.
1.1 Background of the study
Banks have always played a vital role in the country’s economy. Moreover, it plays a
decisive role in the development of the industry and trade. Banks are acting not only as
the custodian of wealth of the country but also as resource of the country, which are
necessary for the economic development of a nation. In this modern time money and its
necessity is very important. Therefore, a modern bank plays a vital role in the socio-
economic matter of the country. Delivering/facilities/ loan for the organization and
peoples, promote saving habits of the peoples, capital formulation and promote industry,
smoothing of trade and commerce functions, generate employment opportunity and
support agricultural development (Garhwali’s, 2003).
As stated by Genet, (2018), empirical evidence worldwide confirms that countries with
well-developed financial systems tend to have better economic performance, while
countries with weak financial systems are associated with low economic performance.
Financial institutions transform financial assets acquired through market and constitute
them in to a different and more widely preferable type of assets. Financial intermediaries
include depository institutions (commercial banks, saving & loan associations, savings
banks & credit unions, insurance companies, pension funds and finance companies).
These intermediaries obtain funds by issuing financial claims against themselves to
market participants, then investing those funds. The investment made by financial
intermediaries can be in the form of loans and/or in securities (John, 1984).
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Among the depository institutions, banks are the most important financial institutions in
the economy. They are the principal source of credit for many households, for most local
units of government and businessmen. The principal economic function of banks is to
make loan. For most banks, loan accounts for half or more of their total assets and about
two thirds of their revenue. Commercial Banks are so named because they specialize in
credit to commercial and industrial businesses. Commercial banks are owned by private
investors, called stockholders or by companies called bank holding companies
(Encyclopedia Deluxe, 2004).
The term credit may be explained as the provision of financial accommodation to a

person, in return for a promise to repay it at some future date. Credit may be extended as
a cash loan, or through the medium of deferred payment for the supply of goods and
services. Credit transactions may also be classified according to the purpose for which
they were extended, method of repayment and whether security is taken. Whatever the
classification may be, the economic function of credit remains the same, i.e. it enables a
person to spend in excess of his current or actual receipts, and to facilitate the present
enjoyment of goods and services other wise beyond his means (Bonin and Yiping Huang,
2001).
According to Selma (2020), repayment performance is critical feature of credit because

persistent poor repayment performance ultimately leads to financial failure in any lending
institution. Financial failure is defined in hard term as the inability to cover cost out of
the interest income and fees, or in soft term as a failure to attract fund sufficient to
maintain the institution in a nut shell. If there will be low repayment performance for a
continuous period, it exposes the financial position of the lending institution It also
undermines public confidence in formal financial market and causes savers to withdraw
their funds In addition, it increases staff turnover due to doubt on the capacity of the
institution. If a bank neglects to do so or the recovery process is unduly protracted, the
impact on it may be severe. The bank may end up with a large loan portfolio in amount
overdue, which in turn would affect the bank's capital ratios. In such circumstances, the
bank may find itself having to offer higher than average deposit rates to attract more
capital. Inevitably, these higher rates will be reflected in the bank's lending rate. Higher
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lending rates may in return adversely affect the average quality of future lending, forcing
the bank to lend high-risk borrowers. If the bank is to lend to the more credit worthy
borrowers, it may be forced to cut margins to levels, which would be insufficient to
generate profits (Meghana, 2020). Evidence from many countries in recent years suggests
that collateral values and recovery rates can be volatile and, moreover, they tend to go
down just when the number of defaults goes up in economic downturns (Chakraborty,
2015).
The first step in a successful loan recovery is to put a dollar value on the loan recovery
that will hold up in litigation. For example, the objective of liquidating real estate secured
loan by foreclosure or mutual agreement is to change a mortgage into a loan recovery. A
set of lender documents-promissory note, real estate security, environmental indemnity,
standby letter of credit, and possibly other agreements collectively represent an “asset’’
in accounting terms called a receivable. In the same light, the loan recovery represents a
“prospective” asset, that is, a set of other property that will replace the mortgage on the
lender’s balance sheet, consisting of title to real estate (the collateral), cash, other
receivables such as a judgment for damages against recourse parties, or a new promise to
pay from take-out parties (Stillman, 2003).
Nevertheless, most banks financial statement shows that the collections of loans from
borrowers are not satisfactory. This result shows a huge amount of non-performing loans
(NBE, Annual Report, 2019).
1.2 Statement of the Problem
The loan extended to various sectors of the economy must be recovered in full if the
objective of circulating more and more financial resources to meet the increasing demand
for credit and to keep the bank in sound financial health is to be achieved. The major
source of income for the banking industry is interest on loans. Both the principal and
interest must be recovered. The bank collects the principals and interest from the clients
on the due date. But default may occur on the side of the client due to various reasons. If
there is high incidence in the deficit of client, this leads the bank to be insolvent and weak
3
in its financial position. Finally this situation will paralyze the investment program as
well as the economy as a whole (Genet, 2020).
Various studies have been conducted to assess the non-performing loan in different
countries. A set of studies have been conducted in relation to NPLs and its implication for
the economy. The high level of non-performing loan in the banking industry has been a
hindrance to economic stability (Kwambai, 2013). According to (Hossain, 2017), if the
invested funds in an economy are not recovered, it limits the recycling of the funds is
reduced by the amount of classified loans which may lead to economic stagnation. NPL
affects banks' profitability adversely because of the provision of classified loans and
consequent write-off as bad debts, reduces return on investment (ROI), and disturbs the
capital adequacy ratio (CAR). It also increases the cost of capital, widens assets and
liability imbalance and upsets the economic value additions (EVA) by banks. EVA is
equal to the net operating profit minus cost of capital. Banks may face liquidity problem
due to high rate of NPL amount.
In our country case there are a research conducted on other commercial banks. According
to (Feyisa, 2009) the amount of fund that is being lent by the bank is being decreased
which has a negative impact up on its profit. These research was classifies the recovery
performance by sectorial out of eight loan sectors of CBE under study five of sectors’
recovery rates are less than 22%.And out of the total loan demand of CBE during the
period, on average only 34% was recovered. This implies on average 66% of the total
loan demand was not recovered. Also, according to Abraham, (2002) the repayment
problem can arise from different factors. Such as change in lending policy, change in
structure of the bank, failure in properly appraising the project document (technical
capability, marketability, financial and economic viability of the project) and lack of
responsibility of the staff members on the supply side. The borrowers age, sex,
educational level, loan utilization, bank credit experience, household size, management
capacity, availability of other source of income and specific situation of the lenders
(market condition, technical capability, specific location etc.) on demand side.
4
Therefore, this study was find out the loan recovery performance and investigates the
major factors affecting loan recovery performance of the bank. Factors such as associated
with lack of obtaining potential creditors, estimating and checking appropriate values of
collateral and loan documentation of creditors, preparing customer’s disbursement
instruction and follow up their periodic loan repayments was assessed in depth. When
comes to studies done on loan recovery in banks specifically in Ethiopia. There are very
few studies that have been done on loan recovery in banks. This made the study a little
difficult as there was no way of gaining a point of view from the Ethiopian perspective.
A study conducted by Genet, 2020 in Ethiopia looked at the loan recovery in banks. The
researcher gave detailed loan recovery procedures for banks but there was not enough
information on how best banks can recover loan. Also, Selam, 2018 conducted a study on
the recovery management system in Ethiopia. The study gave detailed information on the
causes of or reasons for loan default in banks which proved to be of great help to the
Ethiopia. They gave little to no information on the ways in which banks can reduce loan
default. Finally, there is no research done on Loan recovery performance in CBE Arba
Minch District so far to my knowledge is concerned, therefore, this study will fill this
gaps by taking the case of CBE Arba Minch District.
1.3 Research Questions
This study was aimed to answer the following basic research questions:
 What are the loan recovery procedures of banks

 What are the problems facing loan recovery in banks?
 What are the effects of loan default on commercial banks?
 What mechanism does the bank follow to enhance loan repayment of the clients?
1.4 Objectives of the Study
1.4.1 General objectives
The general objective of this study was to assess the loan recovery performance of
Commercial Bank of Ethiopia, Arba Minch District.
5
1.4.2 Specific objectives
The following points are the specific objectives of the study: -
 To understand the loan recovery procedures of banks

 To explain the loan recovery problems in banks
 To establish the effect loan default has on commercial banks
 To determine measures to help reduce defaults on loan
1.5 Significance of the Study
The study was helping lessen problems of loan recovery by offering possible solutions.
The results of the study will be of enormous importance to bankers in the industry as well
as Arba Minch District Commercial Bank of Ethiopia in particular. It were help Arba
Minch District Commercial Bank of Ethiopia to be mindful when paying out loans and to
help them to determine better the people that they will grant loans to. It were also help
improve the revenue status of the bank in question and other banks as well and the
function of the banking industry as a whole. It was also provide useful information to
those who want to embark on future research on the topic as it were add to literature
available and finally it was also play an important role in the partial fulfillment of a
Bachelor’s Degree in Accounting and Finance.
1.6 Scope of the Study
The study was delimited both geographically and conceptually. Concerning geographical
delimitation, it was scoped to Arba Minch District Commercial Bank of Ethiopia.
Conceptually, the study was to assess the loan recovery of Commercial Bank of Ethiopia,
Arba Minch District. These delimitations was because of the topic is broad and couldn’t
addressed within a specific time; it was need deep investigation from time constraints and
data availability.
1.7 Limitation of the Study
Undeniably, every study has its own limitation. No study can be perfect and carried out
as expected to recurring change in the environment. This study was carried out with the
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following limitation facts. While conducting the study there may be certain problems
associated with data collection. The study covers only one district in the Gamo Gofa
Zone. Due to shortage of time and material resources, the study could not cover many
local districts that would have given a more tangible data that can contribute more for the
accuracy of the research. Nevertheless, researcher belief that this district would represent
the other districts and the findings were gave solutions for problems related with loan
recovery.
1.8 Organization of the study
The paper was organized in five chapters. The first chapter was highlight introduction of
the study. The second chapter consists of related literature review and the third chapter
deals about methodology and the fourth chapter was present about data analysis and
interpretation. The fifth chapter was provides major finding, conclusion and
recommendation.
7
CHAPTER TWO
2. LITERATURE REVIEW
2.1 Introduction
In this section, the review of related literature presented. It starts on the theoretical
foundation of the study. Subsequently the relationship between lending and credit
repayment performance types of loan, and factors of loan repayment performance were
present respectively. At the end, empirical evidence that shows the determinants of loan
repayment performance in Ethiopia and outside the country was also presented.
2.2 Theoretical foundation of the study
This part of the paper takes a closer look on theoretical foundations and contributions on
the subject matter. A bank exist to perform a number of functions chiefly, accepting
deposits and granting credits (loans and advances) categorically provided as primary or
banking functions; in fact banking means accepting for the purpose of lending of
investment of deposits of money from the public. Granting of credit facilities by
commercial banks which is the primary function as pointed out earlier, expose them to
credit risk. Credit is a device for facilitating transfer of purchasing power from one
individual or organization to another. As indicated by (Oyatoya,1983) credit provides the
basis for increased production efficiency through specialization of functions thus bringing
together in a more productive union the skilled labor force with small financial resources
and those who have substantial resources but lack entrepreneurial ability.
In more explicit analysis of the association between finance and economic development
(Schumpeter, 1933) treated the banking system and entrepreneurship as the two key
enabling agents of development The banking system’s capacity to supply initiative and
entrepreneurship in addition to credit creation enabled it to transfer resources from less
productive uses to more economically rewarding uses because those who control existing
resource or have claims on current wealth are not necessarily those best suited to use
these resources. Banks in many developing countries hold a truly alarming volume in
8
non-performing assets. Differences between promised and actual repayments on loans are
the result of uncertainty concerning the borrower’s ability or willingness to make the
repayments when they are due which creates the risk of borrowers default (Pischke,
2006), (Vigano, 2010) , ( Kitchen, 2009). The inapplicability of the standard demand and
supply model for credit market give rise to credit rationing phenomena.
There are those who argue that the failure of lending agencies in playing their roles in
loan disbursement and recovery process is a major contribution to loan default (Vigano,
2010). They contend their view that determining credit worthiness requires investment of
time and resources to evaluate firm specific and industry wide variable, structural or
cyclical, by analysts with specific professional skills. A mistake on the evaluation of the
borrowers’ characteristics or the introduction of inappropriate loan conditions may
increase the total risk of the transaction (Vigano, 2010).
2.2.1 Relationship Lending and Credit Repayment Performance
One of the primary objectives of financial institutions is to provide financial services

(credit and saving) to people in order to release financial constraints and help alleviate
poverty. Each financial institution tries to maximize its repayment performance, whether
or not it is profit oriented (Han, 2008). High repayment rates are indeed largely
associated with benefits both for the financial institution and for the borrower. They
enable the financial institution to cut the interest rate it charges to the borrowers, thus
reducing the financial cost of credit and allowing more borrowers to have access to it
(Kon and Storey, 2003).
Improving repayment rates might also help reduce the dependence on subsidies of the
financial institution, which would improve sustainability. It also argued that high
repayment rates reflect the adequacy of financial institutions services to client’s needs.
They limit the incidence of cross subvention across the borrowers. Related also,
repayment performance is a key variable for donors and international funding agencies on
which many financial institutions still depend for their access to funds. The first-best
level of repayment performance is a perfect (100%) on-time repayment rate (Ongena and
David, 2001).
9
Information asymmetries arise when gaining information on the characteristics or on the
behavior of the borrower are costly for the financial institution. Information asymmetries
generate problems of adverse selection, allocation of loans to borrowers with undesirable
characteristics such as a high level of risk or inability to take advantage of the loan as
well as moral hazard the borrower may behave in an undesirable way make little or
insufficient effort to take advantage of his loan or used it for unproductive purposes
(Lown and Morgan, 2003.)
Adverse selection and moral hazard increase the proportion of borrowers who cannot
repay their loans on time. Borrowers that have enough money to reimburse their loan
might also default strategically. The cost of strategic default might indeed be low if the
lending institution has low collateral requirements and if the legal system gives little
power to the financial institution to enforce contracts. NBE, (2009) financial institutions
try to restrict the occurrence of those three types of situations in designing appropriate
credit schemes. The theoretical foundations of relationship banking are found in the
modern literature of financial intermediation that acknowledges the special role of banks
in alleviating the informational asymmetries in the credit markets. Early works of (Brow
and Zehnder, 2006) stress the information production function of banks. Screening and
monitoring procedures give an information advantage to banks that allow them to
overcome information and incentive problems between the bank and the borrower.
Therefore, the main benefit attributed to bank financing with respect to other sources of
finance is that banks help overcome problems of asymmetric information by producing
and analyzing information and by designing loan contracts that improve borrowers'
incentives. Bank financing may also entail some costs.
Degryse and Cayseele, (2000) develop a model of loan pricing in which firms bear search
costs to find a new bank. They show that loan rates offered by the relationship bank are
higher than those offered at competing banks, because the latter are willing to offer an
interest lower than their funding cost in order to capture the firm. The critical assumption
in that model is the existence of exogenous search costs. In the early nineties, two
influential papers warned about the potential costs of bank lending even when there are
no exogenous costs of starting a relationship (Elsas and Krahnen, 2000.)
10
Present a model in which relationships arise endogenously. A bank that lends to a firm
learns more about that borrower's characteristics than do other banks. This generates an
asymmetry of information among banks. Therefore, a distinction is made between
relationship (informed) banks and transaction (uninformed) banks. Informed lenders can
capture some rents generated by their older costumers, while the uninformed competitors
face a winner's curse problem. In a competitive world, the implication for loan pricing is
increasing interest rates with the duration of the relationship. In the model of (Kano,
Uchida, Udell, & Watanabe 2006), Bank debt is provided by an informed bank that
monitors the firm and exerts some control on the owner's decision to continue a project
only if it has positive net present value. However, informed bank debt generates
distortions on the owner's incentives to exert effort.
In contrast, arm's length debt guarantees that the owner exerts the optimal level of effort
but lenders do not have control over the owner's continuation decision. It shows that
borrowing from multiple sources is a way to restrict the bank's ability to extract surplus.
In a later contribution, (Kon&Storey2003) derived the optimal loan contract that avoids
the lock-in costs with a single lender: a long-term debt contract consisting in a line of
credit that the lending bank may terminate at any point in time, but if it chooses to
continue financing it should do so at ex ante specified terms. This arrangement can
optimally limit the informed lender's bargaining power without the need for multiple
bank relationships.
2.3 Factors of loan Repayment Performance
Loans and advances constitute the primary source of income by banks. As any business
establishment, a bank also seeks to maximize its profit. Since loans and advances are
more profitable than any other assets, a bank is willing to lend as much of its funds as
possible. However, banks have to be careful about the safety of such advances
(Radha .M, et al, 1980). Bankers naturally try to balance the issue of maximizing profit
by lending and at the same time manage risk of loan default as it would impair profit and
thereby the very capital .Generally, in developing and under developed countries, the
reasons for default have multidimensional aspect. Various researchers have concluded
11
various reasons for loan default. Literature categorizes determinants of loan repayment
performance. The following paragraphs were discussed about determinants of
nonperforming loans.
1. High Interest Rate
Banks that charge high interest rate would comparatively face a higher default rate or
non-performing loans. Study by (Sinkey&Greenwalt, 2001) on large commercial Banks
in US depict that a high interest rate charged by banks is associated with loan defaults.
(Rajan& Dhal 2003)who used a panel regression analysis indicates that financial factors
like cost of credit has got significant impact on NPLs. Study by (Waweru&Kalini , 2009)
on the commercial banks in Kenya using statistical analysis indicates that high interest
rate charged by the banks is one of the internal factors that leads to incidence non-
performing loans. Besides, studies by (Berger and DeYoung, 1997), for the US; (Jimenez
G. & J. Saurina.2006), for Spain; (Quagliariello, 2007), for Italy; Pain, 2003, for the UK;
and (Bikker and Hu, 2002), (for 29 OECD countries) banks profit margin exhibited by
high interest rate affects occurrence of NPLs.
2. Merciful Credit Terms
Credit sanctioning that has not duly considered the credit terms would potentially lead to
occurrence of poor loan performance. In their study conducted on the Spanish banking
sector from 1984 to 2003 evidence that NPLs are determined by lenient credit terms.
Cause for the lenience is attributed to disaster myopia, herd behavior, moral hazard and
agency problems that may entice bank managers to take risk and lend excessively during
boom periods as per this study. (Rajan and Dhal 2003) Who studied the Indian
commercial banks also found out terms of credit determines occurrence of
Nonperforming loans.
Rajan, R.G. (2004) Hypothesizes that bank managers have short-term decision horizons
because their reputations are strongly influenced by public perceptions of their
performance, as evidenced by short-term earnings. Managers’ reputations suffer if they
fail to expand credit when the economy is expanding and bank earnings are improving.
12
This herd behavior will result in some loans going to customers with higher default risk
than would occur otherwise. (Weinberg, J. A. 1995) also suggests that bank managers
adjust lending standards as market conditions change, seeking to smooth overall lending
risk. The Office of the Comptroller of the Currency (OCC, 2008) concludes that the
dominant reason for bank failure in the early 1980s was poor bank management, which
encompasses lax lending standards. An FDIC study of the causes of the banking crises of
the 1980s and early 1990s (FDIC, 1997) finds that a combination of factors economic,
legislative, managerial, and regulatory - led to the banking crises.
Training is one of the important requirements for the success of microfinance institution
(Assefa, et al, 2005). If the lender provide various training, the clients will able to
understand the rule and regulation easily. They also develop skill on how to do business
and money utilization. Training is needed not only for clients but also for loan officers. In
both case it has a positive contribution to the repayment rate. (Norell D. 2001) Also agree
on the importance of training for the decreasing of default rate. Form of Disbursement:-If
the loan is released in cash directly to the loan, the borrower could have an incentive to
divert the loan other than the intended purpose because money is fungible. Thus, a
negative sign is expected.
3. Loan Reputation
The borrower is repeated one he may have acquired more experience on the banks rules
and regulations, hence could efficiently utilize the loan for the intended purpose.
Therefore, a negative sign is expected.
4. Rapid Loan Growth
Studied indicate that loan delinquencies are associated with rapid credit growth.(Keeton
1999) Who used data from commercial banks in the United States (from 1982 to1996)
and a vector auto regression model indicate this association between loan and rapid credit
growth. (Sinkey & Greenwalt1991)Who have also studied large commercial banks in the
US and found out that excessive lending explain loan -loss rate. (Salas Vincente& Jesus
Saurina 2002) Who studied Spanish banks found out that credit growth is associated with
13
nonperforming loans. Similarly (Weinberg 1995 ) uses data on the growth rate of total
loans and loan charge-offs in the United States from 1950 to 1992 to show a pattern of
increases in lending preceding increases in loan losses (Weinberg .1995).
5. Collateral
Collateral (also called security) is the assets that the borrower pledges to the bank to
mitigate the bank’s risk in event of default (Sinkey, 2002).It is something valuable, which
is pledged to the bank by the borrower to support the borrower’s intention to repay the
money advanced. Security is taken to mitigate the bank’s risk in the event of default and
is considered a secondary source of repayment (Koch & MacDonald, 2003). Supporting
of the aforementioned, (Rose & Hudgins 2005) define secured lending in banks as the
business where the secured loans have a pledge of some of the borrower’s property (such
as home or vehicles) behind them as collateral that may have to be sold if the borrower
defaults and has no other way to repay the lender. The purpose of security is to reduce the
risk of giving credit by increasing the chances of the lender recovering the amounts that
become due to the borrower. Security increases the availability of credit and improves the
terms on which credit is available. The offer of security influences the lender’s decision
whether or not to lend, and it changes the terms on which he is prepared to lend, typically
by increasing the amount of the loan, by extending the period for which the loan is
granted and by lowering the interest rate Norton and Andenans, (1997).
According to Peters, (1998) in the banking environment, security is required for the
following three reasons:
To ensure the full commitment of the borrower to its operations, provide protection
should the borrower deviate from the planned course of action outlined at the time credit
is extended, and to provide insurance should the borrower default.
6. Loan Follow up (Monitoring)
Lending decision is made on sound credit risk analysis/appraisal and assessment of

creditworthiness of borrowers. Nevertheless, past records of satisfactory performance and
integrity are no guarantee future, though they serve as useful guide to project trend in
14
performance. Loan granted based on sound analysis might go bad because of the
borrower may not meet obligations per the terms and conditions of the loan contract. It is
for this reason that proper follow up and monitoring is essential.
“A stitch in time saves nine” Follow-up measures taken regularly and systematically keep
the borrowing unit under constant vigil of the banks. Many ills are often checked through
such follow-up measures by keeping the borrowing units on their alertness and guiding
them to rectify their mistakes within the first opportunities or extending them a hand
(Shodhganga, 2020) Performance of the borrowing units, if carefully and systematically
monitored through regular inspections by scrutiny of returns, annual record and
inspection of site, are often significantly improved. Naturally, such inspections prevent
the borrowers from deviating from the terms and conditions of the loan or from diverting
any fund for purpose aside from those earmarked n the sanction letter and keep the
financial health of the units in good orderThere are three types of loan follow up systems.
These are: Physical follow up, (Fredrick O, Nyasak) financial follow up and legal follow
up. Each was discussed in section that follows.
Physical Follow -up

Physical follow-up helps to ensure existence and operation of the business, status of
collateral properties, correctness of declared financial data, quality of goods, conformity
of financial data with other records ( such as taxes ,register books), availability of raw
materials, labor situation, marketing difficulties observed, undue turnover of key
operating personnel, change in management set up among others.
Financial Follow- up
Financial follow up is required to verify whether the assumptions on which lending
decisions was taken continues to hold good both in regard to borrowers’ operation and
environment ,and whether the end use is according to the purpose for which the loan will
given.
Legal Follow- up
The purpose of legal follow up is to ensure that the legal recourse available to the Bank is
kept alive at all times. It consists of obtaining proper documentation and keeping them
15
alive, registration, proper follow up of insurances. Specific issues pertaining to legal
follow up include: ascertaining whether contracts are properly executed by appropriate
persons and documents are complete in all aspects, obtaining revival letters in time
(revival letters refer to renewal letter for registration of security contracts that have
passed the statutory period as laid down by the law), ensuring loan/mortgage contracts
are updated timely and examining the regulatory directives, laws, third party claims
among others Hable Asratp, (2001).
7. Loan Amount
(Von Pischke, 2001) noted that efficient loan sizes fit borrowers’ repayment capacity and
stimulate enterprise. If the amount of loan released is enough for the purposes intended, it
will have a positive impact on the borrower’s capacity to repay. On the other hand, in
case of over and under finance, the expected sign is negative. If the amount of loan
exceeds what the borrower needs and can handle, it will be more of a burden than help
and extra funds may go toward personal use (Norell, 2001), thereby undermining
repayment performance. If the loan is too small, it may also encourage borrowers to
divert the loan to other purposes (Vigano. L1993) therefore, over finance is not a problem
as such. Moreover, the loan usage is also affecting the repayment rate. If the entire loan
used for the intended activities, the repayment will be enhanced. By putting the whole
loan for running business, it is possible to generate income and performing the business
in a better way. While, if the loan used for unintended purpose like consumption, it will
hinder the repayment performance of the clients.
2.4 Empirical studies on determinant of loan performance
A number of socio-economic and institutional factors affect loan repayment performance.

While some of the factors positively influence the loan repayment, the other factors are
negatively affecting the repayment rate. Regarding to the loan repayment performance of
borrowers several studies have been conducted in many countries by different authors.
Some of the studies are summarized below.
16
2.4.1 Studies in other countries
Bhatt and Tang (2002) studied the determinants of loan repayment in microcredit
evidence. Their study showed that women has low repayment rate because some women
entrepreneur in the study might have been engaged in high risk and low return activities.
Godquin (2004) also examined the micro finance repayment performance in Bangladesh.
His result is female borrowers did not proven to have a significant better repayment
performance. The size of loan and the age of the borrower showed the negative impact on
the repayment performance. On the contrast, Abreham (2002) showed in his study male
borrowers are the undermining factors for repayment.
Zeller (1996) analyzed the determinants of repayment performance of credit groups in

Madagascar. His finding is groups with higher level of social cohesion have a better
repayment rate. Moreover, the programs that provide saving service to their members
have a significantly higher repayment rate. Olagunju (2007) also analyzed the
determinants of repayment decision among smallholder farmers in southwestern Nigeria.
The result showed that the number of visits made by loan officers to the borrowers,
higher level of education, and time of loan disbursement would have a better repayment
performance. Moreover, borrowers with lower number of household members would
meet their repayment obligation better than those with high number of household
members. And having access to business related information and providing training to the
clients are increasing the loan repayment rate of the borrowers.
2.4.2 Empirical Studies in Ethiopia
Abafita (2003) analyzed the microfinance repayment performance of Oromia credit and
saving institution in Kuyu, Ethiopia. According to his finding; sex, loan size and number
of dependents are negatively related to loan repayment. On the other hand age was found
to be positive, while age squared turned to be negative. Income from activities financed
by loan, repayment period suitability and loan supervision are positively and significantly
related to loan repayment performance. Moreover, loan diversion is significant and
negatively related to loan repayment rate. The negative sign implies that the use of
diverted funds for non-income generating purposes.
17
Assefa, (2002) employed a logit model to estimate the effects of hypothesized
explanatory variables on the repayment performance of rural women credit beneficiaries
in Dire Dewa, Ethiopia. Out of the twelve variables hypothesized to influence the loan
repayment performance of borrowers, six variables were found to be statistically
significant. Some of these variables are farm size, annual farm revenue, celebration of
social ceremonies, loan diversion, group effect and location of borrowers from lending
institution.
Retta (2000) employed probability model for loan repayment performance of women fuel
wood carriers in Addis Ababa. His finding is frequency of loan, supervision, suitability of
repayment period and other income sources are found to encourage repayment hence
reduce the probability of loan default. While educational level is negatively related to
loan repayment.
Girma, (2011), examined “credit risk management and its impact on performance in
Ethiopia Commercial Banks” and his finding revealed that is a significant impact on the
profitability of the bank performance and he concluded that the bank with good or sound
credit risk management policy have lower loan default rate (bad debt loan) and higher
interest income (profitability). Girma, (2011) Suggests Possible Causes of Loan Defaults
like fund Diversion, sickness or inability to work, loss of a job, failed of Business & over
committed by high interest debts.
Abay, (2015) who conduct study on “assessment of loan recovery performance in

construction & business bank” considered the bank must have to develop a strong credit
assessment and follow up to facilitate the control of NPL status of loan and improve its
service delivery.
18
2.5 Conclusions and identification of knowledge gap
In this section the researcher summarizes more of studies done in our countries because
of more specifying the case was important for this study. A study conducted by Migwi
Mwangi in Kenya looked at the debt recovery procedures in banks. The researcher gave
detailed debt recovery procedures for banks but there was not enough information on
how best banks can recover debt. Genet, (2018) conducted a study on the loan recovery
management system. The study gave detailed information on the causes of or reasons for
loan default in banks which proved to be of great help to the Ethiopia. She gave little to
no information on the ways in which banks can reduce loan default. Also Girma, (2011)
shows the bank with good or sound credit risk management policy have lower loan
default rate and higher interest income. He also suggests possible pauses of loan like
defaults fund diversion, loss of a job & failed of business. This is what the researcher of
this study agrees. And also according to Abay Zembelachew, (2015), the bank must
considered and develop a strong credit assessment and follow up to facilitate the control
of NPL status of loan and improve its service delivery.
Factors such as associated with lack of obtaining potential creditors, estimating and
checking appropriate values of collateral and loan documentation of creditors, preparing
customer’s disbursement instruction and follow up their periodic loan repayments was
not looked by the above researchers. Therefore, this study was find out the loan recovery
performance and investigates the major factors affecting loan recovery performance of
the bank specifically the case of Arba Minch Branch Commercial Bank of Ethiopia.
19
CHAPTER THREE
3. RESEARCH METHODOLOGY
3.1 Introduction
This part of the study covers the methods that this study can use in the process from the
process of data collection to the method of data analysis. To solve the research problem
the researcher, attempt to apply research design, research approach, sampling technique
and sample size, data type, source of data, method of data collection, and Method of data
analysis.
3.2 Research Design and Approach
A research design is a plan for study that provides arrangement of procedures to be

followed by the researcher in order to achieve the research objective as well as, to test the
hypothesis Creswell (2004). In order to answer the basic research question raised the
researcher was use descriptive type of research method. The major purpose of descriptive
research is to describe the state of affairs as it exists. It gives a brief description of the
statistical units under the investigation. To present a profile of group of people and
relevant events and to identify the event, characteristics of the phenomenon and this type
of study is an appropriate and measure the attitudes of employees and department
management towards loan recovery performance and also for collecting original data
from target population. Also, in order to attain the objective of the study and answer the
20
research questions, the study were adopt mixed research approach. So this study was
using both qualitative and quantitative research approach. Because achieve the objective
and address the research questions the researcher used mixed research approach. The mix
of qualitative and quantitative research methods enabled the researcher to consolidate,
triangulate and cross-check the data collect, which in turn allow formulating a holistic
interpretive framework of the study.
3.3 Source of data and method of data collection
3.3.1 Source of data
In general, the data sources are primary and secondary. Hall (2008) stated that primary
data is original data that has not been previously collected. Questionnaire, interviews and
observations yield primary data. Hall (2008) further states that secondary data is data that
has been previously collected, usually for another purpose. It includes administrative
records, existing statistics and previous research studies. The study was utilizing both
primary and secondary sources of data. Primary data are the data collected from
respondents through questionnaires and interviews. While secondary data collected from
texts, reports, publications, written documents, internets and others.
3.3.2 Method of data collection
To answer research questions raised, the researcher was engaged through serious
procedures of data collection. As the sources are identified earlier, primary data was
obtained from the employees of the bank and manager of the bank. Primary data that are
related with quantitative and qualitative was collected using; structured questionnaire
interview because it helps in sorting out information relevant to the study.
Secondary data was collected from bank’s manuals, policies, and procedures and some
other written documents of the bank. These documents are published magazines, annual
and semi-annual reports, manual showing the overall activities of the bank and relevant
books concerning disbursement and recovery of the loan. These written documents was
seen and evaluated in great depth whether they are reliable, suitable and adequate to
21
provide the necessary information or not and then the information was taken from these
documented sources was analyzed.
3.4 Population, sample size determination and sampling method
3.4.1 Population
This research was conducted to study the loan recovery performance in banks and using
Commercial Bank of Ethiopia Arba Minch District as a case study. Population of study
was limited to the staff and managers of Commercial Bank of Ethiopia Arba Minch
District (43 employees).
3.4.2 Sampling frame
The sampling frame is the list of all elements in the population from which the sample is
drawn (Kothari, 2004). The sampling frames of this study were the list of all staff and
managers of the bank obtained from human resource department of the bank.
3.4.3 Sample size determination and sampling method
The researcher was collected data by using simple random sampling technique because
which gives every eligible respondent in each enumeration area of employees an equal
chance of being selected. It is the most popular method for choosing a sample among
population for a wide range of purposes. In simple random sampling each member of
population is equally likely to be chosen as part of the sample. In this study, the target
population was employees of CBE Arba Minch District at different level of credit process
(loan officers, credit analyst, branch managers& loan recovery/NPL follow up managers).
There are 43 total employees in selected department and by using Taro Yamane (1967)
simplified formula, the total sample size became 39.
n= N
1+N (e) 2
Whereas: n= sample size;
N= the number of employees in the bank;
e= level of precision (e = 0.05).
22
Therefore n = N = 43 = 39
1+N (e) 2 1+ 43 (0.05)2
3.5 Method of data analysis
Data analysis is the process of inspecting, cleansing, transforming, and modeling data
with the goal of discovering useful information, suggesting conclusions, and supporting
decision-making. The data was checked for completeness. Then compiled and coded, it
was entered in excel for analysis. Both quantitative and qualitative data analysis
techniques were used to analyze the data gathered through questionnaire and structured
interviews as data gathering tools. The data gathered through close ended questionnaire
was establish and analyzed with the help of descriptive statistical techniques mainly
using percentage and frequency and the data was presented using table, graphs and
diagrams. Finally, the data gathered through structured interview questionnaires will be
analyze using qualitative description.
23
CHAPTER FOUR
4. DATA ANALYSIS
4.1 Introduction
The main objective of this research was to assess the loan recovery performance of Commercial
Bank of Ethiopia Arba Minch District. The research data is presented according to the objectives
of the study and hence, the chapter is organized into the following sub-sections: demographic
data of respondents, loan recovery related questions ( obstacle of bank loan recovery, procedure used
to adopt to retrieve credit , action taken by the bank when debtor defaults, loan default affects the
bank, cause of loan defaults in banks and measure to reduce loan defaults in banks).
4.2 Response Rate
To determine the total number of the respondents who participated in the study, the analysis of
the response rate was conducted as shown in the Table 4.1
Table 4.1: Response Rate
Frequency Percentage
Category
Response 35 89.74%
Non response 4 10.26%
Total 39 100
Source: Own Survey, 2022
As presented in the table 4.1 the response rate comprised of 39 respondents who were 89.74% of
the total response rate. The non-response comprised of 4 respondents who were 10.26% of the
total response rate. The response rate of 89.74% of the respondents indicates that the gathered
data met the generalization standards since according to Cooper & Schindler (2003) a response
rate above 50% of the total sample size can be generalized to represent the opinions of the entire
24
population. The gathered data was hence enough to explore the loan recovery performance of
Commercial Bank of Ethiopia Arba Minch District.
4.3 Demographic data of respondents
The data collected regarding age, sex, educational level and work experience numbers of
selected respondents (employee) obtained from primary data for the purpose of the study were
analyzed and presented below.
4.3.1 Sex of Respondents
Figure 4.1 represents the sex distribution of the respondents. From the figure, 25(72%) of
respondents were male while 10(28%) of respondents were female. this indicates high number of
male employees in the bank.
Figure: 4. 2 Sex of respondents
4.3.2 Age Distribution
Figure 4.2 shows the respondents age brackets. The study was represented by respondents with
the age bracket of between 20 to 29 years accounted for 14(40%), and 30 to 39 years accounted
for 21(60%). Therefore, majority of the respondents were ≤39 years of age.
25
Figure: 4. 1 Age Category of Respondent
4.3.3 Educational Level of Respondents
The respondents were asked to provide information on their levels of education. Figure 4.3
clearly depicted that, the majority of the respondents were first degree holders 18(51%), 7(20%)
were diploma holder respondents and the remaining 10(29%) were second degree holder
respondents.
Figure: 4. 3 Educational level
26
4.3.4 Work Experience of Respondents
In a similar vein, respondents were sub-categorized in terms of their working experience in

years. Accordingly, figure 4.4 a considerably big number i.e. 45.7% of the respondents served
for 6-10 years. This was followed by 37.1% and 17.1% which corresponded to the respondents
who had served the bank above 10 years. This could be interpreted to mean that most of the
respondents were young employees with less than 10 years of experience and they have better
exposure on.
Figure: 4. 2 Work Experience
250
200
100
150 45.71428571
42857 17.14285714
37.14285714 28572
100 28572
50
0
0
1-5 year 6 to 10 year Above ten Total
year
Experience in banking Valid
4.4 Loan recovery related problems
4.4.1 The biggest obstacle of bank loan recovery
Customer going bankrupt
Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on customer going
bankrupt as a biggest obstacle of bank loan recovery in the bank. The findings were represented
below.
27
Table 4.2: Customer going bankrupt
Customer going bankrupt
Frequency Percent Valid Percent Cumulative Percent

Valid Disagree 5 14.3 14.3 14.3
Neutral 2 5.7 5.7 100.0
Agree 17 48.6 48.6 62.9
Strongly Agree 11 31.4 31.4 94.3
Total 35 100.0 100.0
Source: Author (2022)
The Table 4.2 shows that most of the respondents with a highest percentage of 48.6% agreed that
customer going bankrupt as one of the biggest obstacle of bank loan recovery, 31.4% strongly
agreed, 14.3% disagreed and 5.2% were neutral.
The study revealed that banks need to halt their collection efforts, once a customer (person or
business) declares itself bankrupt. Because bankruptcy may be a detailed and lengthy process, it
can sometimes take years for a bank to receive money, if in the least it does. Several bad loans
are suffered by banks because of this reason. (Chakraborty, 2015)
Debtors delaying in making loan repayment
Strongly disagree, respondents were asked to express how they agreed on debtors delaying in
making loan repayment as a biggest obstacle of bank loan recovery in the bank. The findings were
represented below.
Table: 4.3 Debtors delaying in making loan repayment
Debtors delaying in making loan repayment
Neutral 3 8.6 8.6 100.0
Agree 18 51.4 51.4 91.4
Total 35 100.0 100.0
28
Table 4.3 above shows that a debtors delaying in making loan repayment is one of the obstacles
of loan recovery shown by 51.4% agree, 28.6% strongly agreed, 11.4% disagreed and 8.6% were
neutral.
The result of the study shows that a debtors delaying in making loan repayment is one of the
obstacles of loan recovery and banks are finding it increasingly difficult to recover their money
from defaulting borrowers as bad loans still pressurize their capital base and threaten their ability
to grow during a competitive environment. Customers failing to pay due to genuine reasons are
few, whereas people who use tactics to delay or flout payment are many. Banks are breaking
their backs over these customers, trying hard to access them and to get them tell the bank their
reasons.
A customer falling out of business unexpectedly
Strongly disagree, respondents were asked to express how they agreed on a customer falling out
of business unexpectedly as a biggest obstacle of bank loan recovery in the bank. The findings were
represented below.
Table: 4.4 Customer falling out of business unexpectedly
A customer falling out of business unexpectedly

Neutral 5 14.3 14.3 20.0
Agree 27 77.1 77.1 97.1
Total 35 100.0 100.0
Table 4.4 above shows that most of the respondents with a highest percentage of 27(77.1%)
agreed that customer falling out of business unexpectedly as one of the biggest obstacle of bank
loan recovery, 5(14.3%) neutral, 2(5.7%) disagreed and 1(2.9%) were strongly agreed. The result
of the study and managers supported that debtors in recent three year take heavy loans as
business investment then fall through different natural and human made problems (covide-19,
29
war, drought..etc) and therefore the business collapses hard. This engenders the debtor helpless
and unable to pay off any loans. The study revealed that customer falling out of business
unexpectedly is often a cardinal obstacle that the bank face
Looking at the problems of loan recovery in banks, the study revealed that majority of
respondents agreed that a customer falling out of business unexpected to make loan repayments
is problem to loan recovery in the bank. Also most of the respondents agree in favor of debtors
delaying as a loan recovery problem a customer is said to be bankrupt when a customer is unable
to repay their debts and on favor of a customer going bankrupts as a loan recovery problems.
4.4.2 The procedure used to adopt to retrieve credit
Develop a payment plan
Strongly disagree, respondents were asked to express how they agreed on developing a payment
plan as a procedure used to adopt to retrieve credit in the bank. The findings were represented
below.
Table: 4.5 Develop a payment plan
Develop a payment plan

Valid Neutral 4 11.4 11.4 22.9
Agree 23 65.7 65.7 88.6
Total 35 100.0 100.0
According to Table 4.5 above, the finding indicates a developing a payment plan is one of the
procedure adopt to retrieve credit shown by 23(65.7%), 8(22.9%) and 4(11.4%) agree, strongly
agree and neutral respectively.
Written communication
30
Strongly disagree, respondents were asked to express how they agreed on written communication
as a procedure used to adopt to retrieve credit in the bank. The findings were represented below.
Table: 4.6 written communication
Written communication
Cumulative
Frequency Percent Valid Percent Percent
Agree 23 65.7 65.7 94.3
Strongly Agree 10 28.6 28.6 100.0
Total 35 100.0 100.0
According to Table 4.6 above, the finding indicates a written communication is one of the
procedure adopt to retrieve credit shown by 23(65.7%), 10(28.9%) and 2(5.7%) agree, strongly
agree and neutral respectively.
Reschedule the debt
Strongly disagree, respondents were asked to express how they agreed on reschedule the debt as
a procedure used to adopt to retrieve credit in the bank. The findings were presented below.
Table: 4.7 reschedule the debt
Reschedule the debt

Neutral 9 25.7 25.7 37.1
Agree 22 62.9 62.9 100.0
Total 35 100.0 100.0
31
Table 4.7 above, the findings indicates a reschedule the debt is one of the procedure adopt to
retrieve credit shown by 4(11.4%) disagree, 9(25.7%) neutral, and 22(62.9%) agree. A financial
organization should consider rescheduling a debt when it’s determined that the rescheduling is
within the government's interests which recovery of all or a share of the debt is fairly assured.
With installment payments, before rescheduling a debt, the agency should reassess the debtor's
financial position and the flexibility to repay the debt if rescheduled. The agency should also
determine if it should in the least require the debtor to use pre-authorized debit for making
payment. In reference to any repayment arrangement, the terms and conditions of the
rescheduling, including the acceleration clause, must be in writing and signed by the debtor. The
bank shouldn't encourage informal workout arrangements with debtors. Each bank should
establish uniform policies, procedures and criteria for rescheduling. Its policies and procedures
should leave the popularity of gains and losses on rescheduled accounts in accordance with the
provisions of credit management standards
Per the first objective of study which was to understand the loan recovery procedures of banks,
the study revealed that the written communication and developing a payment guide proved to be
the best option for loan recovery amongst most of respondents are agree. Written communication
and developing a payment guide is simply the bank changing the terms of a loan to suit the
debtor.
4.4.3 The debtor defaults and action taken
Legal warming
Strongly disagree, respondents were asked to express how they agreed on legal warning as an
action taken by the bank when debtor defaults. The findings were presented below.
32
Table: 4.8 legal warning
Legal warning

Neutral 5 14.3 14.3 17.1
Agree 22 62.9 62.9 80.0
Total 35 100.0 100.0
According to Table 4.8 above, the findings indicates that when a debtor defaults, the bank can
issue a legal warning to the customer shown by 22(62.9%) agree, 7(20%) strongly agree,
1(2.9%) disagree and 5(14.3%) neutral.
Reposition of security
Strongly disagree, respondents were asked to express how they agreed on reposition of security
as an action taken by the bank when debtor defaults. The findings were presented below.
Table: 4.9 reposition of security
Reposition of security
Valid Agree 28 80.0 80.0 80.0
Total 35 100.0 100.0
According to Table 4.9 above, the findings indicates a reposition of security is one of the debtor
defaults and action taken shown by 28(80%) agree and 7(20%) strongly agree.
Generally, when it came to the action taken by banks when a debtor defaults, the study revealed
that 100% of the respondents were in favor of the bank issuing a reposition of security. When a
33
debtor defaults, 82% of the respondents agree were in favor of legal warming by the bank when a
debtor defaults. This is aimed toward recovery of dues and not in any way to deprive the
borrower of the property. The recovery process through repossession of security will involve the
repossession, valuation of security and the attainment of security through appropriate means.
These would be administered in a very just and transparent manner. Repossession is done only
after issue of the notice as detailed above. The due process of law of law is going to be followed
while taking repossession of the property. The bank will take all due care for ensuring the
protection and security of the property after takes custody, within the ordinary course of the
business.
4.4.4 The loan default affects the bank
Higher lending rate
Strongly disagree, respondents were asked to express how they agreed on higher lending rate as
loan default affects the bank. The findings were presented below.
Table: 4.10 higher lending rate
Higher lending rate

Agree 29 82.9 82.9 91.4
Total 35 100.0 100.0
According to Table 4.10 above, the result indicates higher lending rate is one of the loan default
affects the bank shown by 3(8%) disagree, 29(83%) agree and 3(9%) strongly agree.
Reduction in lending ability
34
Strongly disagree, respondents were asked to express how they agreed on reduction in lending
ability as loan default affects the bank. The findings were presented below.
Table: 4.11 Reduction in lending ability
Reduction in lending ability

Valid Neutral 18 51.4 51.4 51.4
Agree 17 48.6 48.6 100.0
Total 35 100.0 100.0
Table 4.11 above, the findings indicates a reduction in lending ability is one of the loan default
affects the bank shown by 18(51.4%) neutral and 17(48.4%) agree.
Capital diminishes
Strongly disagree, respondents were asked to express how they agreed on capital diminishes as
loan default affects the bank. The findings were presented below.
Table: 4.12 capital diminishes
Capital diminishes

Valid Agree 32 91.4 91.4 91.4
Total 35 100.0 100.0
Table 4.12 above, the findings indicates a capital diminishes is one of the loan default affects the
bank shown by 32(11%) agree and 3(8.6%) strongly agree.
35
In regards with to the effect that loan default has on commercial banks, the study revealed that
most of the respondents agreed that when a loan or debtors default the capital of the bank is at
reduction in lending ability, this is basically the capital of the bank reducing due to the number of
debtors that have not repaid their loans. Again majority of the respondents agreed that higher
rates are an effect of loan default on banks this is simply when the bank increases its lending
rates in order to make up for the loss due to loan default. Finally, some respondents have not
information on the view that reduction in lending ability is an effect that loan default may have
on the bank this is when the bank cannot lend to the capacity they would like due to loan default.
Defaults are inevitable, but once they occur a bank should take appropriate remedial action or,
failing that, recover the outstanding interest and capital promptly. If the bank neglects to try and
do so the recovery process is said to become lengthy, the impact on the bank could also be
severe. The bank may find itself with very large outstanding loan portfolio, which in turn would
affect the bank’s own capital ratios. In such circumstances, the bank may find itself having to
supply above average deposit rates to draw in more capital. Inevitably these higher rates are
going to be reflected within the bank’s lending rate. Higher lending rates may as a result
adversely affect the typical quality of future lending, forcing the bank to lend to high risk
borrowers (Development Report, Oxford University Press, New York, 2017). As a bank’s capital
diminishes, the incentives, which its owners need to preserve solvency are reduced because with
indebtedness, they would need to bear only a proportion of the losses incurred to creditors the
matter grows out of hand and regulators begin to question a bank’s capital adequacy ratios it's
going to also affect that bank’s ability to lend further or maybe threaten its very existence
4.4.5 Cause of loan defaults in banks
Improper selection of borrower
Strongly disagree, respondents were asked to express how they agreed on improper selection of
borrower as a cause of loan defaults in banks. The findings were presented below.
36
Table: 4.13 improper selection of borrower
Improper selection of borrower

Valid Neutral 10 28.6 28.6 28.6
Agree 10 28.6 28.6 57.1
Strongly Agree 15 42.9 42.9 100.0
Total 35 100.0 100.0
According to Table 4.13 above, the result indicates improper selection of borrower is one of the
cause of loan defaults in bank shown by 15(42.9%) strongly agree, 10(28.6%) agree and
10(28.6%) neutral. The study revealed that single biggest contributor to bank failures and or
distress is poor management of lending. This is often where the bank’s staff fails take particular
note and analyze their customers/ borrower’s information before they approve and release loans
to them and also fail to observe and follow abreast of how the borrowers are faring on with
repayments causing poor return on assets. In at most half the bank failures, poor management of
the loans and quick approval of loans to unqualified borrowers accounted for a considerable
proportion of reduced return on assets as a consequence of high default rates on payment of bank
loans Karanja (2010). The study confirmed that client appraisal was a crucial process that needed
to be done whenever a member requested for a loan to avoid extending credit facilities to clients
who were financially incapable to repay credit borrowed as per the terms and conditions
stipulated considering qualities like credit history of the member, income of the client, collateral
substitutes, and other loan delinquencies that were key in credit appraisal process. The results
concluded that if a case is appraised properly, default rate is low thus reduced provision on bad
debts translating to higher performance.
Lack of follow up measures
Strongly disagree, respondents were asked to express how they agreed on lack of follow up
measures as a cause of loan defaults in banks. The findings were presented below.
37
Table: 4.14 Lack of follow up measures
Lack of follow up measures

Agree 13 37.1 37.1 57.1
Strongly Agree 15 42.9 42.9 100.0
Total 35 100.0 100.0
According to Table 4.14 above, the result indicates lack of regular follow up is one of the cause
of loan defaults in bank shown by 15(42.9%) strongly agree, 13(37.1%) agree and 7(20%)
neutral. “A stitch in time saves nine” Follow-up measures taken regularly and systematically
keep the borrowing unit under constant vigil of the banks. Many ills are often checked through
such follow-up measures by keeping the borrowing units on their alertness and guiding them to
rectify their mistakes within the first opportunities or extending them a hand. This result is
consistent with the findings of Shodhganga, 2020. He found that the performance of the
borrowing units, if carefully and systematically monitored through regular inspections by
scrutiny of returns, annual record and inspection of site, are often significantly improved.
Naturally, such inspections prevent the borrowers from deviating from the terms and conditions
of the loan or from diverting any fund for purpose aside from those earmarked n the sanction
letter and keep the financial health of the units in good order.
Inadequate collateral
Strongly disagree, respondents were asked to express how they agreed on inadequate collateral
as a cause of loan defaults in banks. The findings were presented below.
Table: 4.15 inadequate collateral
Inadequate collateral
38
According to Table 4.15 above, the result indicates inadequate collateral is one of the cause of
loan defaults in bank shown by 26(74.3%) agree, 6(17.1%) strongly agree and 3(8.6%) neutral.
Collateral Security by way of mortgage of immovable property or other fixed assets, thereby
creating a charge, trains the mind of the borrower to be prepared to pay the dues to the lenders.
But when he's free from this fear of losing his encumbered asset within the event of his
defaulting within the payment of dues to banks, he often takes the freedom, and tends to weigh
the pros and cons vis-à-vis default. Security against loan, though sometimes may fall harsh on
the borrower serves a worthwhile purpose therein it creates promoters’ stake within the
borrowers and thus, disciplines the borrower to be more committed in paying the dues to Banks.
Generally, when we came to the causes of loan default in bank the study revealed that majority
of the respondents agreed that inadequate collateral by the bank to make sure that borrowers
repay the loan, lack of follow up measures of a borrower as a cause for loan default this is simply
when strict measures are not taken to make sure that the borrower is indeed able to repay the loan
and improper selection of borrower was a cause of default.
4.4.6 Measures to reduce loan default
Flexible payment plan
Strongly disagree, respondents were asked to express how they agreed on flexible payment plan
as a measure to reduce loan defaults in banks. The findings were presented below.
Table: 4.16 flexible payment plan
Flexible payment plan
39
Neutral 6 17.1 17.1 37.1
Agree 22 62.9 62.9 100.0
Total 35 100.0 100.0
According to Table 4.16 above, the result indicates flexible payment plan is one of a measure to
reduce loan defaults in banks shown by 22(62.9%) agree, 6(17.1%) neutral and 7(20%) disagree.
This result is consistent with the findings of Gatimu et al. (2018) proclaim the existence of
relationship between loans restructuring practices and performance of the Bank in recovering the
loans. According to them, the problem of failure to repay the loan would be minimized if the
Bank restructures the loan concern by discussing with the borrower flexible ways of making
payments. Similar results were reported by Sakilu (2006) during assessment of the factors
influencing default in a group lending model among Micro-Finance Institutions (MFIs) in
Tanzania. According to Sakilu (2006), in order to assure good repayments, banks should
restructure the loans by providing borrowers a grace period.
Out sourcing bank recovery to collection agencies
Strongly disagree, respondents were asked to express how they agreed on out sourcing bank
recovery to collection agencies as a measure to reduce loan defaults in banks. The findings were
presented below.
Table: 4.17out sourcing bank recovery to collection agencies
Out sourcing bank recovery to collection agencies
Valid Cumulative
Frequency Percent Percent Percent
Valid Neutral 18 51.4 51.4 51.4
Agree 17 48.6 48.6 100.0
Total 35 100.0 100.0
40
According to Table 4.17 above, the findings indicates out sourcing bank recovery to collection
agencies is one of the measures to reduce loan default shown by 18(51.4%) neutral, 17(48.6%)
agree.
Proactively reaching customers
Strongly disagree, respondents were asked to express how they agreed on proactively reaching
customers as a measure to reduce loan defaults in banks. The findings were presented below.
Table: 4.18 proactively reaching customers
Proactively reaching customers

Agree 17 48.6 48.6 57.1
Strongly Agree 15 42.9 42.9 100.0
Total 35 100.0 100.0
According to Table 4.18 above, the findings indicates proactively reaching customers is one of
the measures to reduce loan default shown by 17(48.6%) agree, 15(42.9%) strongly agree and
3(8.6%) neutral.
Extend or lower interest rates
Strongly disagree, respondents were asked to express how they agreed on extend or lower
interest rates as a measure to reduce loan defaults in banks. The findings were presented below.
Table: 4.19 Extend or lower interest rates
Extend or lower interest rates

Agree 23 65.7 65.7 91.4
41
Total 35 100.0 100.0
According to Table 4.19 above, the findings indicates extend or lower interest rates is one of the
measures to reduce loan default shown by 23(65.7%) agree, 3(8.6%) strongly agree and
9(25.7%) neutral.
Therefore, the researcher concluded Banks that charge high interest rate would comparatively
face a higher default rate or non-performing loans. The study coincide with the study of (Sinkey
& Greenwalt, 2001) on large commercial Banks in US depict that a high interest rate charged by
banks is associated with loan defaults. Similarly, study by (Waweru & Kalini, 2009) on the
commercial banks in Kenya using statistical analysis indicates that high interest rate charged by
the banks is one of the internal factors that lead to incidence non-performing loans or loan
defaults.
Looking at the measures to help reduce loan default, the study revealed that most of the
respondents agree were in favor of extend or lower interest rates, flexible payment for a debtor,
out sourcing bank recovery to collection agencies and proactively reaching customers as a
measure for reducing loan default.
Interview with Branch managers were used to solicit the backup information on the observed
results. The concerns among two interviewed Branch managers was that loan recovery efficiency
was one of the challenge faced the bank because loan recovery practices utilized by the Bank
were not to ensure that loan repayment value equals to the expected value in the particular
period of time. Rather, it was almost below the expected loan repayment values over period of
time. It was noted that:
Getting loan collection the same or above expected loan collection levels from clients is
something very challenging not only for in my Bank branch, but elsewhere you go. For those
who are outside the Bank not involved in this business would see this situation (low repayment)
as the weaknesses of the Bank, staff or the whole system.
42
But experiencing loans repayment value below expected repayment value in a given repayment
period is something very common and is being caused by multifaceted involvements into lending
business. This is because loan recovery level is dependent on a number of factors such as
business health of the borrowers. Once the business faces unhealthy situation, the repayment is
highly affected and value of loan repayment would be below the expected repayment value in a
given repayment period. (Interview extract with one of Branch managers of the Bank, 2022).
The extract by interviewed Branch manager reflected claims by Ayder and Amanuel (2022)
which warned that it is not an easy task to maintain 100 percent recovery rate, since some of the
borrowing clients may create a number of problems with different circumstances. Also, the note
reflected report by Sinkey and Mary (2013) pointing inefficiency of loan recovery measures such
as rigid payment plan, lack of out sourcing bank recovery to collection agencies, unproactively
reaching customers, higher interest rates, loans restructuring measures, credit monitoring
practices and loan characteristics among the factors of loan repayment below expected
repayment level.
CHAPTHER FIVE
5. CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
This chapter is looks at the conclusion on the study and recommendations of study which was
useful to Commercial Bank of Ethiopia Arba Minch district, the banking sector at large.
5.2 Conclusions
This study was carried out to assess loan recovery in banks. The study established loan recovery
procedures of banks, effects loan default has on the bank, causes of loan default as well as
solutions to the problem of debt recovery. Overall, the study revealed that, despite loan recovery
43
being inevitable banks need to put in place more strict measures in order to control the process of
loan recovery.
The study established that the bank has various strategies of debt recovery; it as well established
there are various challenges experienced by CBE in reference to loan recovery. The procedure
adopted by the bank to retrieve credit were developing a payment plan, written communication
and reschedule the debt as 65.7%, 65.7% and 62.9% agreed respectively.
From the study finding the researcher concludes that with the aim of finding out the problems
that banks face when it comes to debt recovery was customer going bankrupt, debtors delaying in
making loan repayment and a customer falling out of business unexpectedly were the biggest
obstacle that the bank faces which majority of respondents agreed.
The study also, established that higher lending rate and capital diminish with 83% and 91%
respondent’s agreement as the biggest loan default affects the bank.
From the loan recovery assessment practice aspect, the researcher concluded that improper
selection of borrower, lack of regular follow up and inadequate collateral as a major cause for
loan default in the bank
Finally, the conclusion drawn by this study is that loan recovery was very important factor for
the performance of banks. However, the Bank was not yet to achieve efficiency in loan recovery
because loans repayment value was below the expected repayment value in a given period.
While loans recovery practices examined revealed flexible payment plan, proactively reaching
customers and extend or lower interest rates among the major measures taken by the bank to
reduce loan default
44
5.3 Recommendations
In order the Bank to maximize its performance in loan recovery, researcher recommended that
the Bank should strengthen implementations of loan restructuring practice and loans
characteristics practice. The best action to ensure that were
 Commercial banks select borrowers carefully and making sure the information, they
provide is also carefully looked at to avoid borrowers misleading loan officers on their
loan applications.
 Commercial bank should further make sure that once a loan or loans are given out, they
are monitored from the beginning. This will help the bank to keep an eye on all the
existing loans as well as give them a better picture of the debtors that are likely to default
and those that are not.
 Commercial bank should give timely reminders to all debtors. It can greatly improve the
debt recovery process as it allows the debtor or borrower to stay committed to repaying
the loan.
 Commercial bank should also hire collection agencies to help the bank with debt
recovery as they are trained and can recover debt for the banks with ease.
 Commercial bank finds itself in a position where a debtor is unable to repay a debt,
banks should sit and plan with a debtor on a better way in which they can pre pay the
loan in order to avoid default and make it easier.
REFERENCES
Abafita2003.(n.d.). ‘Microfinance and loan repayment performance: A Case Study of the Oromia
Credit and Savings Share Company (OCSSCO) in Kuyu’, MSc thesis, Addis Ababa
University, Addis Ababa.
45
Abel A, Eberly JC 2004. (n.d.).Investment, valuation and growth options.
Abreham G.2002. (n.d.).A ‘Loan repayment and its Determinants in Small-Scale Enterprises
Financing in Ethiopia: Case ofprivate borrowers Around ZewayArea’, M. Sc. Thesis,
AAU.
Annual Credit Report of Commercial Bank of Ethiopia /CBE) Dicha Branch (2007-2008)
Armendariz, A. and Morduch, J. 2010. (n.d.).The Economics of Microfinance’, (2nd ed. ed.).The
MIT Press Cambridge, Massachusetts London, England.
Aryeetey E 1995). (n.d.)..Filling the niche-informal finance in Africa, East.
Assefa B.A. (2002). Factors influencing loan repayment of rural women in Eastern Ethiopia.
Ethiopia, : the case of Dire Dawa Area’, A Thesis presented to the school of graduate
studies, AlemayaUniveristy,.
Berger and DeYoung, 1997. (1997). Problem loans and cost efficiency in commercial banks.
Journal of Banking and Finance, 21, 849-870.
Berhanu A. (2005). Determinants of formal source of credit loan repayment performance of
smallholder farmers.Ethiopia, the case of north western Ethiopia, North Gondar’, M.Sc.
Thesis, AlemayaUniveristy, Ethiopia.
Bhatt N. & Tang S. 2002. (n.d.). ‘Determinants of Repayment in Microcredit: Evidence from
Programs in the United States’,.International Journal of Urban and Regional Research,,
26 , pp.360-76.
Bikker, J. A. & H. Hu. 2002. (n.d.). Cyclical patterns in profits, provisioning and lending of
banks and procyclicality of the new Basel capital requirements. .BNL Quarterly Review,,
55, 143-75.
Commercial Bank of Ethiopia Credit Policy Manual July 1999.
Commercial Bank of Ethiopia (CBE) Credit Policy Directive Dec, 2002.
Commercial Bank of Ethiopia (CBE) New Letter June 2018.
Credit Policy of Commercial Bank of Ethiopia 2002.
De Lucia, R. & Peters, J. 1998.(n.d.).Commercial Bank Management.(4th Edition ed.). Sydney,
Country: LBC Information Services.
Diamantopoulos, A. &Schlegelmilch, B.B. 2006.(n.d.). Taking the Fear Out of Data Analysis. (6
th edition ed.). Singapore: Thomson Learning.
46
Fry M1995. (n.d.)MoneyInterest and Banking in Economic Development, (Second
Edition,ed.).the John Hopkins University Press.
Garhwalis, (2003).General role of commercial bank of Ethiopia. Addis Ababa, Ethiopia
Lee Jim Roger Leroy, Miller and David Van House, Money Banking And Financial Markets, 2 nd
Edition 2004.
Lioyed Brewster, Money Banking and Financial Markets, 1996.
APPENDIX
ARBAMINCH UNIVERSITY
47
Dear respondent:
This questionnaire is prepared to collect data about the effectiveness of recovery of loans in CBE
in Arbaminch District. This study is to be conducted by a student of Arbaminch University in
partial fulfillment of the requirements for the award of Bachelor of Arts (BA) degree in
accounting and finance. The information that you are going to provide will help the researcher to
identify the issues in the study and will be used for academic purpose only. Each of your
responses will have high value for this study and it will be kept strictly confidential. Therefore,
you are kindly requested to give your genuine response.
N.B You are kindly requested to respond sincerely to the questions for warded below and
provide your opinion whenever necessary.
SECTION 1: RESPONDENTS BACKGROUND
1) Gender
☐Female ☐Male
2) Age
☐20-29 ☐30-39
☐40-49 ☐50 and above
3) Level of education
☐Diploma ☐Bachelors ☐Masters
4) Experience in banking:
☐Less than one year ☐1-5 year
☐6 to 10 year ☐Above ten year
SECTION 2: LOAN RECOVERY PROBLEMS AND PROCEDURE
2.1. Question related to factors associated with obstacles of bank loan recovery
001 Customer going bankrupt is the ☐1. Strongly disagree Remarks

biggest obstacle of bank loan ☐2. Disagree
recovery. ☐3. Neutral
48
☐4. Agree
☐5. Strongly Agree
002 Debtors delaying in making loan ☐1. Strongly disagree
repayments are the biggest obstacle ☐2. Disagree
of bank loan recovery. ☐3. Neutral
☐4. Agree
003 A customer falling out of business ☐1. Strongly disagree
unexpectedly is the biggest obstacle ☐2. Disagree
of bank loan recovery. ☐3. Neutral
☐4. Agree
2.2. Question related to procedure used to adopt to retrieve credit.

001 Developing a payment guide is a ☐1. Strongly disagree 001
procedure used to adopt to retrieve ☐2. Disagree
credit. ☐3. Neutral
☐4. Agree
002 Written communication is a ☐1. Strongly disagree 002
procedure used to adopt to retrieve ☐2. Disagree
credit. ☐3. Neutral
☐4. Agree
003 Reschedule the debt is a procedure ☐1. Strongly disagree 003
used to adopt to retrieve credit. ☐2. Disagree
☐3. Neutral
☐4. Agree
2.3. Question related to debtor defaults and action taken
001 Legal warning letter is an action ☐1. Strongly disagree 001

taken whenever a debtor defaults ☐2. Disagree
☐3. Neutral
☐4. Agree
002 Reposition of security is an action ☐1. Strongly disagree 002
☐2. Disagree
49
taken whenever a debtor defaults ☐3. Neutral
☐4. Agree
SECTION 3: EFFECT OF LOAN DEFAULT ON THE BANK AND CAUSES OF LOAN

DEFAULT
3.1. Question related to how loan default affects the bank
001 Higher lending rate affects loan ☐1. Strongly disagree 001
default of the bank ☐2. Disagree
☐3. Neutral
☐4. Agree
002 Reduction in lending ability affects ☐1. Strongly disagree 002
loan default of the bank ☐2. Disagree
☐3. Neutral
☐4. Agree
003 Capital diminishes affects loan ☐1. Strongly disagree 003
default of the bank ☐2. Disagree
☐3. Neutral
☐4. Agree
3.2. Question related to cause of loan defaults in banks
00 Improper selection of borrower ☐1. Strongly disagree

1 causes loan default in banks ☐2. Disagree
☐3. Neutral
☐4. Agree
00 Lack of follow up measures causes ☐1. Strongly disagree
2 loan default in banks ☐2. Disagree
☐3. Neutral
☐4. Agree
50
00 Inadequate collateral causes loan ☐1. Strongly disagree
3 default in banks ☐2. Disagree
☐3. Neutral
☐4. Agree
SECTION 4: MEASURES TO REDUCE LOAN DEFAULT
4.1. Question related to measure to reduce loan default
001 Flexible payment plan is a measure ☐1. Strongly disagree

that can help to reduce loan default ☐2. Disagree
☐3. Neutral
☐4. Agree
002 Out sourcing bank recovery to ☐1. Strongly disagree
collection agencies is a measure that ☐2. Disagree
can help to reduce loan default ☐3. Neutral
☐4. Agree
003 Proactively reaching customers early ☐1. Strongly disagree
is a measure that can help to reduce ☐2. Disagree
loan default ☐3. Neutral
☐4. Agree
004 Extend or lower interest rates is a ☐1. Strongly disagree
measure that can help to reduce loan ☐2. Disagree
default ☐3. Neutral
☐4. Agree
Section 5: Interview-based question for bank managers

I. What is the loan recovery problem in your bank?
II. Is the trend of loan recovery performance in your bank satisfactory by sector?
51
III. What mechanism does the bank follow to enhance loan repayment of the clients?
Thank you for your participation!
52

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ARBAMINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

AN ASSESSMENT OF LOAN RECOVERY PERFORMANCE IN CASE OF

A RESEARCH SUBMITTED TO THE DEPARTMENT OF ACCOUNTING AND

BY: Yirgalem kusse

ADVISOR:Bizuneh Girma (M.Sc.)

Declared by: ______________________

ARBA MINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

TITLE: ASSESSMENTS ON THE LOAN RECOVERY PREFORMANCE AT

Submitted by: ------------------

Advisor Name: Date Signature

------------------------------------ ------------------- -----------------------

Examiner Name: Date Signature

------------------------------------ ------------------- -----------------------

APPROVED BY THE ADVISOR

Advisor Signature Date

_______________________ ______________________ _______________

Examiner Signature Date

_______________________ ______________________ _______________

1.1 Background of the study................................................................................................................1

1.2 Statement of the Problem...............................................................................................................3

1.3 Research Questions........................................................................................................................5

1.4 Objectives of the Study..................................................................................................................5

1.4.1 General objectives..................................................................................................................5

1.4.2 Specific objectives.................................................................................................................5

1.5 Significance of the Study...............................................................................................................6

1.6 Scope of the Study.........................................................................................................................6

1.7 Limitation of the Study..................................................................................................................6

1.8 Organization of the study...............................................................................................................7

2.2.1 Relationship Lending and Credit Repayment Performance...................................................9

2.3 Factors of loan Repayment Performance.....................................................................................11

2.4 Empirical studies on determinant of loan performance...............................................................16

2.4.1 Studies in other countries.....................................................................................................17

2.4.2 Empirical Studies in Ethiopia..............................................................................................17

2.5 Conclusions and identification of knowledge gap.......................................................................18

3.2 Research Design and Approach...................................................................................................20

3.3 Source of data and method of data collection..............................................................................21

3.3.1 Source of data......................................................................................................................21

3.3.2 Method of data collection....................................................................................................21

3.4 Population, sample size determination and sampling method.....................................................21

3.4.2 Sampling frame....................................................................................................................22

3.4.3 Sample size determination and sampling method................................................................22

3.5 Method of data analysis...............................................................................................................22

4.2 Response Rate..............................................................................................................................24

4.3 Demographic data of respondents................................................................................................25

4.3.1 Sex of Respondents..............................................................................................................25

4.3.2 Age Distribution...................................................................................................................25

4.3.3 Educational Level of Respondents.......................................................................................26

4.4 Loan recovery related problems...................................................................................................27

4.4.1 The biggest obstacle of bank loan recovery.........................................................................27

4.4.2 The procedure used to adopt to retrieve credit.....................................................................30

4.4.3 The debtor defaults and action taken...................................................................................32

4.4.4 The loan default affects the bank.........................................................................................34

4.4.5 Cause of loan defaults in banks...........................................................................................36

4.4.6 4.8 Measures to reduce loan default....................................................................................40

5. CONCLUSIONS AND RECOMMENDATIONS..............................................................................44

Table 4.1: Response Rate.............................................................................................................................24

Table 4.2: Customer going bankrupt...........................................................................................................28

Table: 4.3 Debtors delaying in making loan repayment..............................................................................28

Table: 4.4 Customer falling out of business unexpectedly..........................................................................29

Table: 4.5 Develop a payment plan.............................................................................................................30

_______ _

_______ _