LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

ADIGRAT UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF

ETHIOPIA SHIRE BRANCH)

SENIOR ESSAY SUBMITTED TO DEPARTMENT OF ACCOUNTING AND FINANCE OF

ADIGRAT UNIVERSTY IN PARTIAL FULFILLMENT OF THE REQUIRMENT FOR BA
DEGREE IN ACCONTING.

PREPARED BY: EYERUSALIEM YEMANE

ID NUMBER: SBE 0128/07
ADVISOR: Mr. Birhanu Abadi

AUGEST, 2019
ADIGRAT, ETHIOPIA
LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

Acknowledgement
First and for most I would like to thanks my god for endowing me the endurance and courage of
going all ups and downs to reach the stage where I am now. Then, I would like to take express my
advisor Mr.  Birhanu Abadi (MCS) for his technical and professional guidance in writing this
paper. Next my best thanks goes to all participated in my research and the manager of development
bank of Ethiopia, SHIRE branch and the employees of that organization for their corporation and
unreserved help.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

ABSTRACT
The study was focused on the assessment of loan recovery performance of developmental bank of
Ethiopia in shire branch. The study has the objective to assess the loan recovery performance from
2018-2019.The paper was analyzed through tables and graph. THE Documents analysis both
primary and secondary data source for collecting information from developmental bank of Ethiopia
shire branch. The researcher collects data and analyzed based on the above of data collection. Based
on this analysis the researcher recommended the bank should inefficient collecting to the loan
recovery performance and the staff employee are not have technical training by modern technology
in order to select the risk-taking application the bank should have adequate applicant screening
criteria like repayment history of the client. Finally, the study shows lack of sufficient skill and
awareness regarding loan recovery performance of the client of the bank.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

Table of Contents
Acknowledgement.............................................................................................................................................II
ABSTRACT.........................................................................................................................................................III
Table................................................................................................................................................................. VI
CHAPTER ONE....................................................................................................................................................1
1 INTRODUCTION...............................................................................................................................................1
1.1 Back Ground of The Study........................................................................................................................1
1.2 Statement of The Problem.......................................................................................................................1
1.3 Objectives of the Study............................................................................................................................2
1.3.1 General Objective..............................................................................................................................2
1.3.2 Specific Objectives.............................................................................................................................2
1.4 Methodology of the Study.......................................................................................................................2
1.4.1 Research Design................................................................................................................................2
1.4.2 Data Source and type........................................................................................................................2
1.4.3 Data analysis.....................................................................................................................................2
1.4.4 Sampling Method and Sampling Size................................................................................................2
1.5 Significance of the study..........................................................................................................................3
1.6 Scope of the study....................................................................................................................................3
1.7 limitation of the study..............................................................................................................................3
1.8 Organization of the paper........................................................................................................................3
CHAPTER TWO...................................................................................................................................................4
2. LITERATURE REVIEW...................................................................................................................................4
2.1 The Role of Development Banking...........................................................................................................4
2.3 The nature & role of credit market..........................................................................................................4
2.4 Economic benefits....................................................................................................................................5
2.4.1 The importance of qualification recovery performance....................................................................5
2.5 Borrowing requirement and procedure...................................................................................................6
2.5.1 Application form...................................................................................................................................6
2.5.2 Documentary requirement...............................................................................................................7
2.5.3 Credit investigation...........................................................................................................................8
CHAPTER THREE.................................................................................................................................................9
3. DATA ANALYSIS, INTERPRETATION AND DISCUSSION....................................................................................9
3.1 primary data analysis...............................................................................................................................9

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

3.1.1 General characteristics of the respondents......................................................................................9

3.1. 2. Secondary data analysis................................................................................................................15
3.2. Credit recovery performance of the agricultural sector........................................................................15
3.3. Credit collection performance of industry sector:................................................................................16
3.4. credit recovery performance of service sector.....................................................................................17
3.5. Evaluation of the credit performance of developmental bank of Ethiopia...........................................18
CHAPTER- FOUR...............................................................................................................................................19
4. CONCLUSSION AND RECOMMENDATION....................................................................................................19
4.1 CONCLUSSION........................................................................................................................................19
4.2 Recommendation...................................................................................................................................20
REFERENCE.......................................................................................................................................................21
Apendix............................................................................................................................................................22
Questionnaire..................................................................................................................................................22

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

Table
table 3 1 respondents’ sex....................................................................................................................9
table 3 2 respondent age structure.....................................................................................................9
table 3 3 Education level of respondents..........................................................................................10
table 3 4 work experience of respondent.........................................................................................10
table 3 5 No of respondent that give ‘yes and No about the loan collecting on time efficiency. .11
table 3 6 does examine the bank the loan among different sectors?.............................................11
table 3 7 No of respondent that give about the bank examine among different sectors..............11
table 3 8 responses by giving the respondent..................................................................................12
table 3 9 all sectors.............................................................................................................................13
table 3 10 Credit recovery performance of the agricultural sector...............................................15
table 3 11 Credit collection performance of industry sector..........................................................16
table 3 12 credit recovery performance of service sector...............................................................17

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

CHAPTER ONE

1 INTRODUCTION
1.1 Back Ground of The Study
Loan is the act of giving money, property or other material goods to other party in exchange for
future repayment of the principal amount along with the interest or other finance charges. A loan
may be for a specific, one-time amount or can be available as open-ended credit up to specific
ceiling amount. The terms of standardized loan are formally presented (usually in writing) to each
party in the transaction before any money or property changes hands. If any lender requires any
collateral, this will be stipulated in the loan documents as well. Most loans also have a legal
stipulation regarding the maximum amount of interest that can be charged, as well as other
covenants such as the length of time before repayment is required (www.investopodia.com/terms).

Loans can come from individual, corporations, financial institutions and governments. They are a
way to grow the overall money supply in an economy as well as open up competition, introduce new
products and expand business operations. Loans are a primarily sources of revenue for many
financial institutions such as banks, as well as some retailers through the use of credit facilities
(www.investopodia.com/terms).

A loan is a form of accommodation provided by the banker to his/her customer who is in need of
money (N. Kumar and R.2002,).

A loan is granted for a specific time period. Generally, commercial banks provided short term loans.
But term loans, that loan for more than a year, may also be granted. The borrower may be given the
entire amount in lump sum or in installment. Loans are generally granted against or in exchange of
the owner ship (physical or constructive) of various type of tangible items (D. Muraleedhrana,
2009).

1.2 Statement of The Problem

Loans are important to finance the purchase of inventory and equipment as well as to obtain
operating capital and funds for business expansion. These loans are a time honored and reliable
method of financing a small business and, it is as source of revenue for the individuals as well as for
any financial institutions. But a loan could be face such problems that, since lenders are taking a risk
that you may not repay the loan, they have to offset that risk by changing a fee, if the borrower
defaults, or does not pay back the loan, the lender takes possession of the asset, and if the borrower
does not pay back the loan the lender does not have the right to take anything in return, and loans
(bank loans) often only finance firms with substantial collateral and along track record, and the terms
they offer are often very strict.

Hence, the study will be trying to answer

1. Does developmental bank of Ethiopia efficient in collecting its loan?

LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

2. How loan is recovered among the different sectors?

3. What is the reason the loan default?

4. What methods are important to use to prevent the loan defaults?

1.3 Objectives of the Study

1.3.1 General Objective

The general objective of the study would be to search and assess the loan repayment efficiency of
Developmental Bank of Ethiopia (DBE) in shire branch.
1.3.2 Specific Objectives

The specific objectives of the study would be

 To identify whether development bank of Ethiopia is efficient in collect its loan.

 To quit out how loan is recovered among the different sectors.
 To determine the main reasons of loan defaults
 To identify methods there are important to prevent loan defaults.

1.4 Methodology of the Study

1.4.1 Research Design
The method of the study would be descriptive type of analysis and the data would be to use both
qualitative and quantitative methods of collecting and interpreting in nature.

1.4.2 Data Source and type

The type and data that the researcher want to be apply is mainly secondary data and to some extent
will be primary data.

The primary data collection was collected by using questionnaires distributed to loan repayment
department of the developmental bank of Ethiopia in shire branch. On the other hand, the secondary
data was gathered from the developmental bank of Ethiopia, which is contains annual reports,
written documents and other materials.

1.4.3 Data analysis

Since the type of the study that the researcher would be to study or would be to conduct is
descriptive and the data is in both quantitative and qualitative in nature, the analysis would be done
in percentage and ratio on tables of payment of the loan performance of the bank among different
sector and credit component recovery rate of comparisons between the years and clearly help to
analyze and evaluate the credit repayment performance of the bank.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

1.4.4 Sampling Method and Sampling Size

To collect available data the researcher would prepare questionnaires and distribute to the employee
of the bank by using judgmental sampling method. The researcher would be gathering information
from the total employees 7 as well as directly by asking to the credit manager of the developmental
bank of Ethiopia in shire branch.

1.5 Significance of the study

The study would be providing a certain significance, such as the manager of developmental bank of
Ethiopia in assessment of a loan gathering procedures of the bank the credit worthiness of the
borrowers of the loan and other interested parties about the performance of the loan recovery in the
bank. The significance of the study is to make a partial fulfillment or for the getting of BA degree in
accounting and finance. The study would be initiated other performance study or researcher to
perform as better and in-depth study and let them to use a reference for their study to use it as a basis
to better performance.

1.6 Scope of the study

The study would have focused on assessment of loan collection performance of development bank of
Ethiopia Shire branch. Hence, this study would only addresses issues relates to loan repayment and
collection in development bank of Ethiopia Shire Branch.

1.7 limitation of the study

The problem will face in conducting this research is insufficient time to investigation more facts and
information and also limited availability of all sorts of resources The problem that the researcher is
expecting is a problem of availability of all sectors sorts of resources that would provide by the
organization. The loan reports may not accessible for the researcher because of the confidentiality
and max not accessible in organized way.

1.8 Organization of the paper

The paper has contained four chapters. The first chapter is containing an introduction part that, the
back ground of the study, statement of the problem, objective of the study (general and specific),
significance of the study, scope and limitation of the study and methodology the study. The second
chapter contains literature review of the study. The third chapter contains data analysis and
presentation of the study. Finally, the fourth chapters contain conclusion and recommendation part
of the study.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

CHAPTER TWO

2. LITERATURE REVIEW
2.1 The Role of Development Banking
Development banks are specialized public and private financial institution that supply medium- and
long-term funds for the credit expansion of industrial enterprises. The have arisen in many
developing nations because the existing banks usually focus on either short term lending for
commercial purpose (commercial and saving) in the case central banks that control and regulation of
the aggregate supply of money. More over existing commercial banks set loan condition that are
often in appropriate for establishing new enterprises or for financing large scale projects. Their funds
are more often allocated to safe” borrower”. To facilitate industrial growth in economics
characterized by scarcity of financial capital development banks have sought to raise capital, initially
focusing on two major sources. Bilateral and multilateral loans from national aid agencies like USA
agencies for international development and from international donor agencies like World Bank and
two loan their own governments. However, in addition to raise capital development banks have had
to develop specialized skills in the filled of industrial project of appraisal. In many cases their
activities go far beyond the traditional banker’s role of lending money to credit worthy customers.
The activities of developmental bank often in compass direct entrepreneurial, managerial and
promotional involvement in the enterprises they finance including government owned and operated
industrial cooperation. Development banks are thus playing important role in the industrialization
process of many LDCS (Raymon P. Neveu, 198.)

2.3 The nature & role of credit market

Credit is the device for facilitating transfer of purchasing power from one individual or organization
to another. It indicates that 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 resolves and though who have substantial resource but lack of entrepreneurial
abilities (Oyatoya, 1983).

There are two important respects that a credit market differs from standard market for goods and
services. First standard markets, which are focus of classical competitive theory, involve a number
agents who are buying and selling a homogenous commodity. Secondly in standard market, the
delivery of a commodity by a seller & payment for the commodity a buyer occur simultaneously. In
contrast credit received to day by an individual or firm in exchange for promise of payment in the

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

future. A loan is a type of debt. Like all debts, a loan involves the real allocation of money over a
period of time between the borrower and the lender. This money is paid back either in full or regular
installment (with interest of course). Acting as a provider of loans is one of the principal task for
financial institutions such as a bank. For banks, loans are generally found by deposits. That is how
banks usually learn. Their deposits are loaned out and when the borrowers pay with interest earning
for the bank. Other types of dept include mortgages, credit card debt, bonds and lines of credit. A
mortgage is a very common type of debt used by many individuals to purchase housing. In this
arrangement, the money is used to purchase the property. The bank, however, is given the title to the
house until the house and sell it, to get their money back (Oyatoya, 1983).

2.4 Economic benefits

Recovery should be made at the time when the borrower is most likely to have money. According to
Charles Mensh(1999) credit can generate accelerate economic growth only when the amounts taken
are rap it in time. The problem of accumulated over due and arrears of interest amount need to be
solved immediately and once for all. The accumulated over due have passed many problems and if
not solved it would continue to oppose problems in to the issuance of future loans. He also revealed
that the regional rural banks, being an organization for development, provide cheep credit to the
deserving target group with objective that the loan less who shall repay the loan in easy installments
in accordance with phased repayment schedule.

“There are two problems that are major causes of poor loan recovery performance; credit project
design problems and credit project implementation problems. Credit project design problems in
clued debt versus equity realism versus aspiration (how realistic the projection of the product
designer is), expected value versus dispersion (details consideration of the variety of results which
occur in the field), book keeping convenience versus borrower cash flow pattern, collection
mechanism, institutional scope or range of service offered and interest rate credit project
implementation problems included low services levels, coordination access (i.e. information problem
& lack of decision making experience in the lending to specific target groups) and financial
recording.

“Strong recovery of loan plays a very important role in the entire economy and builds confidences of
general public in the soundness of the banking system. It also reduces the cost of credit operations
appreciable by avoiding litigation. It also improves the efficiency of the operations staff & helps
them to devote more for development work rather than keeping them selves busy in recovering
loans”.

2.4.1 The importance of qualification recovery performance

Discussion of recovery performance are vital because most attempts at its quantification conducted
by development banks different banks experienced with the qualification of loan recoveries
performance for the purpose of monitoring the collection of institutions. Development banks
of Ethiopia also experienced their own loan recovery performance quantification method. Records
must be timely and clearly kept disclosure in report should not be selective and sanitized.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

“Mathematical problems usually associated with measures of repayment performance. For example a
popular repayment ratio divides the amount collected during a given period by the sum of amounts
falling due during the period plus amount over due at the beginning of the period (called demand in
south Asia’s countries). This ratio continually declines as bad debts accumulated. It declines even
though there is no change in the collection of amounts falling due each year. Accommodation of
amounts that likely even to be collected eventually dominates.

The effect can be managed by writing of amounts that unlikely to be recovered, writing off removes
such amounts from the denominator, raising the arrears would display no over due carried from one
year to the next and demand equals to amounts reflective of actual performance, providing
transparency, which in most endeavors help to finish collectives for remedial action & strategic
reconsideration (to Jacob garon, 1997). But according to Jacob developing countries financial
institution supported by donor are generally very reluctant to write off bad and doubtful debts. This
reluctant has several sources.

 Instructions given by the central bank of financial ministry, possible to make it difficult for
bankers to reduce their profits and hence their tax liabilities.
 Statutory limitations on state owned lenders that interpret write offs as a use of public fund
which only parliaments has the authority to approve.
 Lenders internal rules that prohibits writing off amount in litigation and legal systems that take a
very long time to deliver judgments.
 The mistake belief that writing off or even making a provisions against doubtful loans,
accounting procedures that help to keep accounting values consistence with the actual value of a
loan portfolio means that no further efforts is to be made in collecting written off loans. This
relevant confuse good accounting practices with the demonstrative or strategic decisions to
continue to press defaulter for payment.
 The fear that the public knowledge of write offs will only encourage borrowers not repay.
  Incentives to pretend that the portfolio is healthy when in fact it is deteriorating.
 The use of demand in the denominator challenges the validity of simply, comparing collection
with amounts taking due, because it is distorted by the burden of arrears. An alternative would
be to include separate calculation of collection of over due amount with the arrears on the book
at the close of the reporting period.

2.5 Borrowing requirement and procedure

Borrowing requirement and procedures vary from bank to bank but the procedure described here
illustrate what can generally be expected when an entrepreneur approaches a bank to obtain credit
i.e. get a loan.

2.5.1 Application form

The loan application form is the instrument through which is a client formally applies for a loan. The
application form serves for several purposes. First it is an expression of the clients desire to borrow

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

from development banks and it is an expression of the development band acceptance of the
application. Finally as accounting documents, it is both a requisition for payment and an
acknowledgment of payment. When applying for a loan you must prepare a written loan proposal
make you best presentation in the initial loan proposal and application you may not get a second
opportunity.Always begin your proposal with a cover letter or executive’s summary clearly & briefly
explain who you are. In clued all there is to know about you. Your business background, the nature
of your business, the amount and purpose of your loan request, your requested terms of repayment,
how the funds will benefit your business, and how you will repay the loan keep this cover page
simple and device.

Many different loan proposal formats are possible you may want to contact your commercial lender
to determine which format is best for you were writing your proposal don’t assume the readers is
failure with your industry or your industry business. Always in clued industry specific details so
your reader can understand how your particular business is run what industry trends affect it.

Loan repayment: provide a brief written statement indicating how the loan will be repaid including
repayment sources and time requirement. Cash-flow schedules, budgets and other appropriating
information should support this statement.

Existing business: provide financial statement for at least the last three years plus a current dated
statement including balances sheets, profit & loss statements & a reconciliation of net worth. Again
of accents payable & account receivables should be included as well as a schedule of term debt.
Other balance sheet items of significant valve contained in the most recent statement should be
explained.

Projects show how your operations will make money, including earings, expresses and reasoning for
these estimates. The projection should be in profit or loss format. Explain assumptions used it they
are different from trend or industry standards & support your projected figures with clear,
domination explanations.

Collateral:- list real property and other assets to be held as collateral basically, collateral is the banks
way of injuring that they will get some thing back from if you are unable to pay back the loan. Few
financial institutions will provide non-collateral based loans. All a loan should have at least two
identifiable sources of repayment. The first source is ordinarily cash flow generated from profitable
operations of the business the second source is usually collateral pledged to secure this loan.

Your bank is in business to make many. Consequent, when a bank lends money it wants to ensure
that it will be paid back. The bank considers the five “C’S” of credit each time it makes a loan.

Capacity to repay is the most critical of the five factors. Capital is the money your personally have
invested in the business & is an indication of how much you will loss should the business fail.

Collateral or guarantees are additional form of security you can provide the lender. I the business can
not repay its loan, the bank wants to know there is a second source of repayment conditions focus on
the intended purpose of the loan. Character is the personal impression you make on the potential
lender or investor.  In general, the following information is usually asked when entrepreneurs apply

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

for a loan Name, Address, Telephone No, regal form of and nature of the business, registrations with
government business registries such as the security and exchange commission (SEC). the department
of trade and industry, or the city of municipal government, product lines, amounts of capitalization.
Name of owners (partners) stock holders, type, amount purpose of loan applied for and description
of collateral offered.( Mishkin, Frederic S., (1989)).

2.5.2 Documentary requirement

The request papers should preferably be prepared for be fore applying for a bank loan, incomplete
documents can cause delays. The following documents are commonly asked for.

 Residence certificates tax players’ identification number. BIR stamped tax declaration for the
past three years, financial statement for the past three years, bank & grade references.
 Mini-business plans or projects feasibility study; especially for borrowers who are just starting in
business. The business basically contains for cast in term of money of what the business is going
to be like for each month of a given year. It gives estimates of production expenses and expected
sales revenues.
  Business registration papers for single proprietorship, registration with the department of trade
and industry and with the municipal office. For partnerships, articles of partnership and joint
resolution to borrow-for corporations, security and exchange commission critical articles of
incorporation with by-laws, boar resolution to borrow and stock holder bio data for corporative,
registration with the because of cooperative department.
 Paper pertaining to collateral: for real estate mortgage copy of TCT location plans with vicinity
map, tax clearance, tax receipts, tax declaration, insurance floor plan or pictures. For chattel,
registration certificates, insurance loan (credit) evidencing payment in the case of important
equipment for exporters’ letters of credit, confirmed purchase orders and sales contracts.
(Mishkin, Frederic S., (1989)).    
2.5.3 Credit investigation

 The company’s background and history covering the date of registration (in corporation), the
type of business organization, records of registration name of incorporators, and a summary of
operating records.
  Financial condition: the current break down of financial statement reflecting the result of
operations for the past three years. It also includes schedules, explanation of extra ordinary
items, break down of merchandise and receivable and full explanation of all inter-company
loans, and merchandise transactions.  
 Dealing with government agencies; the lending bank checks on the credit availed of by the
applicant form lending government agencies, the nature of the loan. Collateral offered, and
installment payment, including arrear ages if any.        
 Banks experience with the borrower if the applicant is old client.
  Court asset; the bank cheeks on civil and criminal case involving credit applicants. It also
obtains information of the applicant from compotators. After the credit investigation and

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

supporting have been accomplished and evaluated, a recommendation for approval is prepared
and the release of the loan is facilitated.( Asseffa Moges (1998) Money).

CHAPTER THREE

3. DATA ANALYSIS, INTERPRETATION AND DISCUSSION

3.1 primary data analysis
Primary data analysis is collected from the developmental bank of Ethiopia employees based on
structure questionnaires the data has analyzed and presented in such a way that the respondent give
as relevant part of the paper.

3.1.1 General characteristics of the respondents

table 3 1 respondents’ sex

Item No of respondent Percentage

Sex
Male 5 71%
Female 2 29%
Total 7 100%
Source: questionnaire 2019

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

The above table discrips as from the total 7 respondent about 80% are male and the remaining 20%
of the respondents are females from the above table the researcher conclude that the majority
respondents are male.

table 3 2 respondent age structure

Item N of respondent Percentage

Age
15-20 0 -
20-25 4 57%
25-30 0 -
Above 30 3 43%
Total 7 100%
Source: questionnaire 2019

From table 2 the researcher conclude that about 70% of the respondents are between the age of
above 25-302 the remaining 30% are above 30 are above 30 so the majority respondents are between
the age of 25-30

table 3 3 Education level of respondents

Item No of respondent Percentage

Education level
Certificate 0 -
Diploma 2 28%
Degree 5 73%
Above degree 0 -
Total 7 100%
Source: questionnaire 2019

From the above table the researcher conclude that about 71.4 are degree holders the remaining 29%
are diploma holders. The rest certificate above degree are not available in the institution so that from
the above table the most respondents are degree holders.

table 3 4 work experience of respondent

Item No of respondent Percentage

work experience
0-5 1 14%
6-10 3 43%
11-15 3 43%
Above 6 0 -
Total 7 100%
Source: questionnaire 2019

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

The above table shows that both work experience 6-10 and work experience 11-15 holder 43% so
the most respondents are the work experience between

6-10 and 11-16.

Does the bank is collecting its loan on time efficiency?

Does the bank’s collecting its loan on time efficiency?

table 3 5 No of respondent that give ‘yes and No about the loan collecting on time efficiency
Table

Questions Response Quality respondent Percentage

Does the bank is Yes 16 86%
collecting its loan
No 1 14%
on time
efficiency?
Total 7 100%

Source: questionnaire 2019

From the above table 86% of the respondent give response as the bank is collecting on time
efficiency only 14% of the respondents give the bank is not collecting the loan on time efficiently.

Does the developmental bank of Ethiopia examines the loan recovery performance among different
sector?

table 3 6 does examine the bank the loan among different sectors?
table 3 7 No of respondent that give about the bank examine among different sectors

Questions response Quality respondent Percentage

Does the developmental bank Yes 5 71%
of Ethiopia examines the loan
No 2 29%
recovery performance among
different sector?
Total 7 100%

Source: questionnaire 2019

From table 70 the respondent 71 saying ‘yes the developmental bank of Ethiopia examine the loan
recovery performance among different sectors this implies that the bank examine which is not collect

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

by using different criteria it examine. The remaining 29% is saying ‘no’ the bank is not examine the
loan in different sectors.

Which sector is more effective in payment loan?

table 3 8 responses by giving the respondent

Questions response Quality Percentage

respondent
Which sector is more Agriculture 4 57%
industry 3 43%
effective in payment loan?
Service 0 -
Total 7 100%
Source: questionnaire 2019

From the above table 8 the respondent gives answer saying about 57% of agriculture is more
effective than the remaining sectors about 43% saying industry is more effective than the remaining
sectors from the above table agriculture is more effective than both industry and service and industry
is next to agriculture and then service is the least in payment of the loan.From what does the
institution get a revenue to provide a loan to the customer mobilizing funds from own country and
outside the country and also get from different income sources and from its profit, from different
organizations and from saving and also the revenue that have gotten from different loan collected
from import material sales, from the rendered to the client.

What kind of loan service do provided by the developmental bank of Ethiopia to their customers?
The respondent give answer for this question the developmental bank of Ethiopia give loans for all
sectors when summarized in table 9.

table 3 9 all sectors

Item Number of respondents Percentage

What kind of loan can DBE
give to client
Short term 0 -
Medium term 0 -
Long term 2 28%
Medium and long term 2 28%
All 3 44%
Total 7 100%
From the above table the researcher can understand most of the time the institution can all types of
loans 44% both medium and long term 28% and long term loan give 28% to the client. As indicate

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

on the above table the respondent’s response implies the bank can provide all type of loan service
that is long both medium long term and all type to the client.

Among the loan can provided by the bank the largest portion of the loan is covered by the all that is
about 44% and followed by medium and long term service loan and long term loan 28% , 28%
respectively. Medium and long term loans are called term loans. These loans are extended for
periods ranging from one year to about eight or ten years on the security of existing. To asset or
other parched with the loan. Term loans are used for purchase of capital assets for establishment of
new industrial units, for expansion. Modernization or diversification they involve an element of risk
as they are intended to be repaid out of the future profit over a period of years consequently, a part
from the financial appraisal of such loans the technical feasibility managerial competency of the
borrower should also be studied.

Does the developmental bank of Ethiopia indentifies (examines )the potential capacity the clients
against to recovers the credit? Table 8 number of respondent saying yes and No

Respondent saying yes and No No of respondent

Yes 7 100%
No 0 -
Total 7 100%
According to table eight the enter respondent, which means from 7 respondent 7 of them by saying
“yes” this implies that the institution examine the potentiality of the customer before giving the loan
similarly of this beside the respondent mentioned some of the criteria as clitoral such as trade
license, mater plan, kinds of project professional experience and legal registration certificate and
also background of the borrower, before that the take loan from other institution, capital assets loan
does have the borrower as collateral and capacity to repay the loan that have been taken from our
institution the developmental bank assume all these things before giving loan to the borrowers.

 If your answer is yes for question no eight what mechanism does the developmental bank of
Ethiopia use to control them?
 From the respondent that give response the project must be priory project or bank ground of
the customer.
 The borrower is not black list customer up on list providing mechanism. The clients must be
30% of the total loan amount as collateral is its life the project.
 The person who have collateral in order to get loan is identify for what is need.
 Source of finance, financial strengthens of the clients, background of the clients used to
evaluate the control of them.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

 The borrowers have as collateral to take the loan like capital asset, like house and other
capital that the institution believe that the borrower can repaid the loan even if any risk may
happen to the borrower.

Collateral: is defined as the security or asset pledge by the borrower to the lender, the lender 1 st try
to reduce risk by sound experience credit analysis. When the practical limits of goods credit analysis
have been reach the remaining uncertainty are mitigated by collateral. The value and quality of
collateral s determine by the property appraisal since all the preceding factors require some elements
judgment the function of collateral is protect lenders from the important action in condition.

Credit analysis serves the function of screening loan applications identifying risks structuring on
appropriate loan security quality assets when necessary and monitoring the loan ongoing bases
therefore the 5c’s of lending for small business loans are.

Capacity : the bank knows the borrower’s ability to satisfy debt obligation from predicable or
consistent income sources. The principal tool to use to measure capacity is the debt to income ration.

Capital: relates to how well the borrower has managed his/her financial affairs. There are three
detentions to worth is borrowers total assets minute his/her liability, naturally an individual with
significant net worth as greater incentive to protect investment and repay obligation to meet his/her
obligation with cash necessary or to convert asset to cash quickly. As sufficient level of liquidity,
over and above the equal. As sufficient level of liquidity, over and above the quits (position down
payment) and regular income steam, affirmed the borrower a cushion against un foreseen
development, financial development related to the borrower who seen to take in provident risks or to
level age theme selves beyond conventional limits.

Character: the basis here is the borrower are different report and his/her payment friends, character
gives on over all feel of how the borrower will treat the loan.

Condition: thus refers to the outside facts that will be considered, such as completion and trend of
similarity small business in industry. There are majority risks to pay back that cannot be foreseen
even with prevent credit analysis.

3.1. 2. Secondary data analysis

This chapter discussion and analysis of data collected on the loan repayment capacity of
developmental of Ethiopia between 2017 and 2018 for two years this analysis using table and other
to know the loan collect efficient of the institution. Credit collection efficiency of development

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

collection capacity the researcher is going to show the credit collection capacity the three sectors that
are agricultural, service and industry in shire branch. The researcher show the data in tables of each
sector from 2017-2018.

3.2. Credit recovery performance of the agricultural sector

To show the recovery performance of developmental bank of Ethiopia to see its loan recovery rate
by sector the following table show the recovery performance of the developmental bank of Ethiopia
shire branch in agricultural sector.

table 3 10 Credit recovery performance of the agricultural sector

Desorption 2017 2018 Total

Total disbursement 202266.5 18461.80 38728
Recovery against 8777.54 13911.08 22688.62
disbursement
Recovery rate 43.31% 75.35% 57.17%
Note payment 11488.96 4550.72 16039.38
Table annual collection performance of agricultural sector 2018 by the percentage of recovery rates
decreasing from 2017 to 2018 by the percentage of 32.04% the total disbursement or the total
demand for the period between 2017 was about birr 38728 of which birr 22688.62 was recovered.
The total demand disbursement for agriculture was increase so that this indicates the recovery is
shows an important performance. Because of the government inter free in the market and stability
the inflation, the agriculture sector got a chance to rise again.

3.3. Credit collection performance of industry sector:

The developmental bank of Ethiopia provide loan for financing the establishment and expansion of
industry sector for the national economy. The following table indicates the recovery performance of
the industrial sector with in the development bank of Ethiopia shire branch.

table 3 11 Credit collection performance of industry sector

Description 2017 2018 Total

Disbursement 85000 139,899 224899
Recovery against 55250 67151.52 122401.57
disbursement
Recovery rate 65% 48% 56.5
Not payment 29750 72747.48 102497.48
Table annual report credit performance of industry sector form the above table the total disbursement
of the industry sector 2241899 from this disbursement 122401.52 was recovered.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

The recovery rate shows during the two year was 56.5 the recovery tare shows fluctuating from
period to period given though the recovery performance of the industry show decreasing rate in the
period 2018 this implied that the recovery performance of the industry is not satisfactory because the
loan recovery performance of the industrial sector was decreasing from 2017 up to 2018 and also the
total recovery rate 56.5 even though the total average rate was above 50% the recovery rate was not
satisfactory as whole.

3.4. credit recovery performance of service sector.

The service sector advanced constitute a major part of priority sector advances. It is the activities of
the developmental bank were advance of several type of for increasing the production and providing
employment can made for economic development with in the country. In this sector advances
constitute a major part of priority sectors the bank provides loan to transport, communication,
mining and energy education health hotel and tourism sector of national economy. In evaluating the
loan recovery performance of developmental of Ethiopia shire branch the following table shows the
credit performance of service sector.

table 3 12 credit recovery performance of service sector.

Description 2017 2018 Total

Total disbursement 650,152 432,507.1 1082659.1
Recovery against 211.123 186,576.2 397699.2
disbursing
Recovery rate 3 2.4% 43% 37.5
Not payment 6297029 245931 484959.9
Annual report credit recovery performance of service sector. As shown in table 12 the total
disbursement in 2017 to 2018 was about birr 1082659.1 of which birr 397699.7 was recovered from
the sector the total disbursement for the period shows an increasing rate in the year 2017 up to 2018.

In general, as indicated the above table the recovery rate was increasing in the period based on this
information the research summarized that the recovery performance of the service sect not effective.
Because of the recovery performance in development bank of Ethiopia can say that there is un
effective credit performance even if in 2018 was the rate recover 89.3% in 2017 32.4% that is above
average.

Does the development bank of Ethiopia collect and recover all loans that have provided to clients at
the due? The institution is not more effective in collection of loan because when as compare to the
three sectors there is not more effective even if the recovery rate of is above average it is about 30%
of the loan in the three sector is doesn’t collection of the loan on the due date.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

Based on this the researcher concludes the bank doesn’t collect 8 recovery the loan on the due date.

What is the system of loan collection does the institution?

bLoan collection if the borrower is get the institution collect both principal and interest if the
borrower doesn’t can to offer to pay the institution first collect interest and then the principal.

3.5. Evaluation of the credit performance of developmental bank of Ethiopia

The performance of the three sector that means agricultural industrial and service by their repayment
capacity of the loan is graphically as follows using bar graph.

60 56.5 57

50

40 37.5

30
service

20

10

0
10 20 30 40 50 60 70 80

From the above bar graph the researcher conclude that even if all the sector is not more effective in
payment but service sector is more effect in payment that means that is below average the rest two
sectors are above average even if the two sector are not more effective in payment.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

CHAPTER- FOUR

4. CONCLUSSION AND RECOMMENDATION

4.1 CONCLUSSION
Based on the data analysis in chapter three the loan recover performance of developmental bank of
Ethiopia shire branch the following conclusion has been drawn.

Annually and semiannually the loan distributed was checked whether it collected or not to have
financial sustainability of any lending institution the strength to have economic efforts. The
developmental banks of Ethiopia are expected to have good loan recovery efficiency from their
clients and also the capital related to how well the borrower has managed his/her financial affairs.
Capacity the bank knows the borrower’s ability to satisfy debt obligation from predicable or
consistent income sources. The developmental banks of Ethiopia examine the loan recovery
performance among different sector. This implies that the bank examine which sector is effective in
collecting the loan and which is not collect by using different criteria but the developmental bank of
Ethiopia does not collect and recover the loan at the due date. Because the recovery rate 56.5% from
industrial 57% from agricultural and 37.5% from the service sector when we assess the total
disbursement and the recovery against them almost half of them are recovered in agriculture and
industry but in the service, sector is almost below average. the developmental bank of Ethiopia get
revenue to provide loan to their client from different source mobilizing funds, from own country and
outside the country, from income sources. The major source of capital for the bank to provided loan
service is from domestic and non-domestic sources. Among the loan can be provided by the bank the
largest portion of the loan is covered long and medium-term loans and also commonly known as
term loan. The clients take term loans are used for purchase of capital assets for establishment of
agro-industries. The bank gives loans first for the project must be priority project and also after
studying the back ground and source of finance, financial strength of the clients. The borrower also
has as collateral to take the loan like capital asset and other capital that the institution believe that the
borrower can repaid the loan even if any risk may happen to the borrowers. As overall repayment
performance of the bank shows that the table disbursement period under reviewed was about
1346286 from this disbursement both principal and interest was recovered 542789.39 from this the
uncollected part is 803496.61.

The average recovery rate from both principal and interest is 50.39% but at the end of this year about
602622.45 is expected to be collected. The system of the loan collection is based on the borrower
capacity if the borrower have the capacity to pay both the principal and interest it pay both if not
have first pay the interest then the principal next but most of the time the client of developmental
bank of Ethiopia pays both interest and the principal as the due dates.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

4.2 Recommendation
From the conclusion that have presented the following recommendation take improve the credit
management performance of the institution. To improve the credit collection the institution can take
technical training for the credit management and the experience of the borrower before giving credit
the bank knows credit discipline or repayment, history current capacity to loan and business
experience must be considered before giving the credit to borrowers. The institution should revised
and update processing criteria and forms that are used by lending department so as to be clearly
understandable to the client. The bank can motivate the client to pay full amount of credit as the due
date and adding punishment against the unpaid part of the loan.

The government has to recapitalization the bank to have solved the problem of capital inadequate
and there to satisfy the capital adequacy requirement of international leads by making additional
investment or some other means.

The bank makes rule and regulation for both the credit management and the borrowers. The credit
management follow the procedures of credit management how much is disburse and how much is
collected if it is not collected take action against them.

Finally, the institution takes further research on the loan recovery to know the collection
performance and to solve the problem as much as it can.

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

REFERENCE
1 B. subburaj , the law and the cooperative, 2005

1 Byerramraju and ram R pujari, entrepreneur, 2nd edition 2006. page 259
2 D.muralecdharan, 2009, modern banking theory and practice
3 Henry H. the economics of cooperative marketing 2009.
4 N. kumar&R.Mittar banking law and practice, 1st edition, 2002
5 Prof.J.Pmisra and shirikumarrawat and Drs.lakshmanan, cooperative its growth and new
dimensions 2004, page 20-32
6 Stephenc. Smith economic development, 10th edition, page 758-759
7 www.investipedia.com,time 9:23 2011
nd
8   Raymon P. Neveu , (1985), Fundamentals of Managerial Finance, 2  edition South main
th
9  Richard, A . Realey and Stewart, C. Myers, (1996), Principle of corporate finance, 5  edition.

10   Soldofsky and Olive, (1974) financial management, clininat Ohio.

nd
11  Mishkin, Frederic S., (1989), the economics of Money banking and financial markets, 2 edition,

Glenview Scott, Foresman

12   Wegagen Bank S.C. (2012) Domestic Manual, International Banking procedure, and polices and

procedures.
13  Asseffa Moges (1998) Money, Banking & insurance In Ethiopia, Birhan & Selam, Addis Ababa.
th
14  Suekuar; 1987 banking theory and practice in India, 8  edition 

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

Apendix

Questionnaire
The main aim of this questionnaire is that is arranged for the first degree graduated in Accounting
and Finance data collected from this questionnaire is an input (valuable) to the institution and
concerned officials to correct follow the paper activity of their work, on my topic loan recovery
performance a case study in shire branch. The researcher would like to think you and appreciate for
your polite cooperativeness and willingness to give answer of the questions.

Please try to put your answer for the questions in the box ( ) by putting mark, it is not
necessary to write your name and to have your signature.

Part I personal information

1. Gender Male female

2. Educational level below high school Diploma certificate

Degree above degree

3. Age 15-20-year 20-25 year 25-30year above 30 year

4. work experience 0-5-year 6-10-year 11-15 year above 16 year

5. Does the bank is collecting its loan on time efficiency? yes No

6. Does the development bank of Ethiopia examine the loan recovery performance among the
different sector?
Yes No
7. Which sector is more effective in payment loan?
Agriculture service industrial
8. From what does the institution /organization/ get revenue to provide a loan to the clients?
    ______________________________________________________________________   _
_____________________________________________________________________
9. What kinds of loan service do provide by the development bank of Ethiopia to the client?
Short term medium long term All
10. Does the development bank of Ethiopia identify (examines) the potential (capacity) of the
clients to words payment of the loan before providing the loan?

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LOAN RECOVERY PERFORMANCE (THE CASE OF DEVELOPMENT BANK OF ETHIOPIA SHIRE BRANCH)

Yes No
11. If your answer is “yes” for question Number 10, what criteria (mechanism) does the
development bank of Ethiopia use to evaluate /control them?
    ______________________________________________________________________    
______________________________________________________________________
12. Does the organization collect and recover all loans that have provided to the clients at the
due?
Yes No
13. What is the system of loan collection doing the institution use?
Principal interest both

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