Assessement On Credit Management Practice The Case of Wegagen Bank S.C. by Eskedar Bekele

St.
Mary’s University
School Of Graduate Studies
ASSESSMENT OF CREDIT MANAGEMENT PRACTICE

: THE CASE OF WEGAGEN BANK S.C.
BY: ESKEDAR BEKELE
DECEMBER, 2019
SMU
ADDIS ABABA - ETHIOPIA
By: ESKEDAR BEKELE
A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY,

SCHOOL OF GRAUDATE STUDIES IN PARTIAL FULFILMENT OF THE
REQUIRMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION
IN GENERAL MANAGEMENT
DECEMBER, 2019
SMU
ADDIS ABABA - ETHIOPIA

DECLARATION
I hereby declare that this thesis is the result of my own research work towards the partial
fulfillment of the requirements for the Degree of Masters in Business Administration in St. Mary’s
University. It contains neither material previously published by another person nor that has been
accepted for the award of any other degree of the university, except where I have made explicit
references to the work of others.
Eskedar Bekele ……………….. ………………….

Signature Date
ENDORSEMENT
This thesis has been submitted to St. Mary’s University, School of Graduate Studies for
examination with my approval as a university advisor.
Solomon Markos (PhD)
Signature______________________
Date___________________________
iii
APPROVAL
This is to certify that this research document has been submitted in partial fulfillment of the
requirements for the degree master’s in business administration with approved board of examiners.
By: Eskedar Bekele
APPROVED BY BOARD OF EXAMINERS
Dean, Graduate Studies _________________

Signature
Solomon Markos (PhD)

_________________
Advisor
Signature
Mulatu Takele (PhD)

_________________
External Examiner
Signature
_________________
Birhanu Edenshaw (PhD)
Signature
Internal Examiner
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AKNOWLEDGEMENT
Above all Glory is to Almighty God for his usual, continuous and unbroken support towards my
entire life. My sincere thanks go to my supervisor Dr. Solomon Markos for his constructive
criticisms, suggestions and guidance. I would also like to express my indebtedness and profound
gratitude to the management and staff members of Wegagen Bank S.C. for their cooperation in
providing me all the necessary data required for the study and Special thanks to, Wzo Meron
Kebede your help and dedication on distributing and collecting research survey questionnaire I
would have never been able to complete this thesis without their kind support. I would also like to
express my heartfelt appreciation to my courteous and sympathetic supervisor Ato Habtamu Yifa
for giving me time to work on my study even though I am expected to do more on my job.
Finally, yet importantly special thanks and most profound gratitude deserves to my mother Wzo
Senait Tsegaye for her unconditional love and consistent support without her support I would have
never been able to complete my study.
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LIST OF TABLES
No Description Page
Table 1.1 Trend of NPL…………………………………………………………….. 4
Table 3.1 Credit staffs of the bank………………………………………………….. 37
Table 3.2 Reliability Results………………………………………………………... 39
Table 4.1 Survey response rate……………………………………………………... 40
Table 4.2 Academic background of respondents…………………………………… 40
Table 4.3 Respondents experience in bank…………………………………………. 41
Table 4.4 Current Position of Respondents………………………………………… 41
Table 4.5 Practical loaning activity and alignment against NBE requirements……. 42
Table 4.6 Management of non-performing loan by the bank……………………….. 45
Table 4.7Current credit control of the bank………………………………………… 48
Table 4.8 Credit risk management activities of the bank…………………………… 50
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LIST OF ACRONYMS/ABBREVATIONS
WB Wegagen Bank
CA Credit Administration
CCA Credit Control Activity
CM Credit Management
CP Credit Policy
CPU Credit Processing Unit
LPM Loan Portfolio Management
NBE National Bank of Ethiopia
NPL Non-Performing Loan
SPSS Statistical Package for Social Science
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TABLE OF CONTENTS
DECLARATION ........................................................................................................................ i
ENDORSEMENT ..................................................................................................................... ii
APPROVAL ............................................................................................................................. iii
APPROVED BY BOARD OF EXAMINERS ........................................................................... iv
AKNOWLEDGEMENT .............................................................................................................v
LIST OF TABLES.................................................................................................................... vi
LIST OF ACRONYMS/ABBREVATIONS ............................... Error! Bookmark not defined.
ABSTRACT ............................................................................................................................. xi
CHAPTER ONE ........................................................................................................... 1
1. INTRODUCTION ..................................................................................................... 1
1.1 Background of The Problem ...................................................................................... 1
1.2. Statement of Problem ............................................................................................... 3
1.3. Research Question .................................................................................................... 5
1.4. Objective of the Study .............................................................................................. 5
1.4.1. General Objective .................................................................................................. 5
1.4.2. Specific Objective ................................................................................................. 5
1.5. Significance of the Study .......................................................................................... 5
1.6. Scope of the Study.................................................................................................... 6
1.7. Limitation of the Study ............................................................................................. 6
1.8. Operational Definition of Key Terms ....................................................................... 6
1.9. Organization of the Study ......................................................................................... 7
CHAPTER TWO .......................................................................................................... 8
2. RELATED LITERATURE REVIEW ..................................................................... 8
2.1 Theoretical Concepts ................................................................................................. 8
2.1.1. Credit Management ............................................................................................... 8
2.1.2 Process Of Credit Management .............................................................................. 9
2.1.3 Credit Policies And Procedures ............................................................................ 10
2.1.4. Credit Administration Policy ............................................................................... 11
2.1.5. Credit Process...................................................................................................... 11
2.1.5.1 Credit Application ............................................................................................. 12
2.1.5.2. Credit Information ............................................................................................ 12

2.1.5.3 Credit Analysis .................................................................................................. 14
2.1.6. The Loan System ................................................................................................. 15
2.1.7. Proposed Lending Tools ...................................................................................... 16
2.1.7.1 Credit Limits ..................................................................................................... 16
2.1.7.2. Loan Rescheduling ........................................................................................... 17
2.1.8 Credit Collection Techniques ............................................................................... 17
2.1.9. Credit/Loan Follow Up ........................................................................................ 18
2.1.10 Non-Performing Loan (Npls) .............................................................................. 19
2.1.11 Provisions .......................................................................................................... 20
2.1.12. Credit Risk Management ................................................................................... 21
2.1.13. Credit Control.................................................................................................... 22
2.1.13.1. Credit Control Functions ................................................................................ 23
2.1.14. Principles Formulated By the Basel Committee ................................................. 23
2.2 Empirical Review .................................................................................................... 25
CHAPTER THREE .................................................................................................... 28
3. RESEARCH METHODOLOGY ........................................................................... 28
3.1. Research Design ..................................................................................................... 28
3.2 Target Population and Sampling Technique ............................................................ 28
3.2.1 Target Population ................................................................................................. 28
3.2.2. Sampling Technique and Sample size .................................................................. 28
3.3. Data Sources and Collection Procedure .................................................................. 29
3.4. Data Analysis Method ............................................................................................ 29
3.5. Validity of Research Instruments ............................................................................ 30
3.6. Reliability of Research Instruments ........................................................................ 30
CHAPTER FOUR ....................................................................................................... 31
4. DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS ...... 31
4.1. Survey Results ........................................................................................................ 31
4.2. Respondents Profile................................................................................................ 31
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4.3. Assessing The Bank’s Credit Management Practice ............................................... 33

4.3.1 The Practical Loaning Activity Of The Bank And Alignment With The Nbe
Directives ...................................................................................................................... 33
4.3.2. Non Performing Loan Management ..................................................................... 36
4.3.3. Credit Control And Follow Up ............................................................................ 39
4.3.4. Credit Risk Management ..................................................................................... 40
CHAPTER FIVE......................................................................................................... 44
5.SUMMARY OF FINDINGS , CONCLUSION AND RECOMMENDATION ..... 44
5.1 Summary Of Findings On Credit Management Practice In Line With Its Policy And
NBE Requirements ....................................................................................................... 44
5.2 Summary Of Findings On Management Of Non-Performing Loan By The Bank .... 44
5.3 Summary Of Findings on Current Credit Control of the Bank ................................. 45
5.4. Summary of Findings on Credit Risk Management Activities of the Bank ............. 45
5.5. Conclusion ............................................................................................................. 46
5.6. Recommendation ................................................................................................... 47
5.7. Area for Future Research ........................................................................................ 48
REFERENCE................................................................................................................ 49
ANNEX A .................................................................................................................... 53
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ABSTRACT
This study intends to assess credit management practice of Wegagen Bank s.c.based on four basic
dimensions namely the practice of the bank in managing its loaning activity and alignment with
the National Bank of Ethiopia requirements, non-performing loan management, current credit
control and its credit risk management practice. The research is designed as a case study on a
single bank and a survey method was employed. Sources of both primary and secondary data were
used. Questionnaire was used as a main instrument to collect primary data while the secondary
data is collected from the bank’s unpublished provision reports (2012-2018), directives, credit
policy and procedure of the bank. Based on the nature of the study the research design is
descriptive and the methodology used for the study is population census for bank staffs. To analyze
the data collected a quantitative research method were used. Hence, the nature of the Study is
descriptive. Data was analyzed using SPSS 20.0 version and results are described based on
statistical mean and standard deviation values. As per findings of the study There is poor analysis
cash flow statement of borrowers before approval of the loan repayment period and a proper
assessment of credit risk is required in the analysis process and based on this findings
recommendations are given that the management of Wegagen bank must come up with a credit
risk management policy that is devised towards the granting of current loans whiles cutting down
drastically the approval of loans which has the potency of becoming doubtful or loss in the long
run.
.
Key Words; Credit Management, Credit Risk Management, NPL, NBE, Wegagen Bank s.c.
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CHAPTER ONE
1. INTRODUCTION
This introductory chapter of the thesis addresses background of the study, an overview of the
financial institution activities mainly bank’s lending and their associated risk and its management
and the problem statement. Besides, the research question and study objectives, significance of the
study, limitation of the study are presented. The scope of study too, is included in this chapter.
1.1 Background of The Problem

No one can deny the importance of financial institutions in any developed or developing economy
these financial institutions not only ease the credit flow in the economy but also enhance the
productivity by energizing the investment (Richard, 2011). Economic growth in any country is not
possible without a sound financial sector (Rajaraman and Visishtha, 2002). Good performance of
these financial institutions is the symbol of prosperity and economic growth in any country or
region and poor performance of these institutions not only hinder the economic growth and
structure of the particular region but also affects the whole world (Khan and Senhadji, 2001).
Financial institution is the support of the financial sector of the economy, they provide financing to
different groups, different sectors in the economy namely, the contractors, real estate builder’s,
traders, house-holds, and manufacturers. These credits will be used to reinvest in businesses and
for which the owners expect to earn a return. At the same time, lenders or financial intermediaries
supply credit to earn a return when these companies borrow. This process for extending credit has
a multiplier effect on the global money supply, so this is why credit is a powerful driver of our
backward economy. This transformation from supply to demand side is not without risk(Yaw Adu,
2015).
Banks are exposed to credit, market, operational, interest rate and liquidity risk. The appropriate
management of these risks is a key issue to reduce the earnings risk of the bank, and to reduce the
risk that the bank becomes insolvent and that depositors cannot be refunded (Bart and Gestel,
2009). Since, banks earn their highest gross profits from loans; the administration of loan
collection seriously affects the profitability of banks. Indeed, large number of uncollected amount
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of loan or non-performing loans is the main cause of bank failure (Rehm, 2002). Therefore, there
is a need of effective credit supervision where loans should be very well managed to minimize
potential risks that may affect the bank’s performance.
Credit creation is the main income generating activity for the banks. But this activity involves huge
risks to both the lender and the borrower. The risk of a trading partner not fulfilling his or her
obligation as per the contract on due date or anytime thereafter can greatly risk the smooth
functioning of a bank’s business. On the other hand, a bank with high credit risk has high
bankruptcy risk that puts the depositors in jeopardy. Among the risk that face banks, credit risk is
one of great concern to most bank authorities and banking regulators. This is because credit risk is
that risk that can easily and most likely prompts bank failure (Conford A., 2000).
Credit management means the total process of lending starting from inquiring potential borrowers
up to recovering the amount granted. In the sense of banking sector, credit management is
concerned with activities such as accepting application, loan appraisal, loan approval, monitoring,
and recovery of non-performing loans (Shekhar, 2005.) Banks take into account many
considerations as a factor of credit management, which helps them minimize the risk of default
that results in financial distress and bankruptcy. This is due to the reason that while banks
providing credit they are exposed to risk of interest and principal repayment, which need to be
managed effectively to acquire the required level of loan growth and performance.
According to Hettihewa (2001), Credit Management is extremely important as granting credit is

considered to be the equivalent of investing in a customer. Credit analysis is the first step in the
process to tailor-make solution to fit the customer’s needs. The assessment starts with an
understanding of the customer’s needs and capacities to ensure there is a good fit in terms of the
financing solution. Credit assessment is the most important safeguard to ensure the underlying
quality of the credit being granted and is considered an essential element of credit risk
management (Cade, 2003).
The credit quality generally refers to the borrower’s ability and willingness to meet the
commitments of the facility granted. It also includes default probability and anticipated recovery
rate (Saunders & Cornett, 2003). Credit assessment thus involves assessing the risks involved in
financing and thereby anticipating the probability of default and recovery rate. A credit analysis is
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used by the credit official to evaluate a borrower’s character, capital, capacity, collateral and the
cyclical aspect of the economy (Strischek, 2000).
How long does it take business partners to pay their debts? Understanding the payment behavior of
potential customers is vital in assessing credit management in every organization, since poor credit
assessment can lead to major problems in financial planning, Atradius (2011), as cited in
Emmanuel Y. (2012).
Myers and Brealey (2003) describe credit management as methods and strategies adopted by a
firm to ensure that they maintain an optimal level of credit and its effective management. Nelson
(2002) also views credit management as simply the means by which an entity manages its credit
extension. It is a prerequisite for any entity dealing with credit transactions since it is impossible to
have a zero credit or default risk. The key strategic value a bank adds has always depended on its
ability to manage credit. This cannot be done properly without an effective risk assessment, control
and follow up strategy.
A strong and effective credit management process is one that reinforces and compliments its
corporate objectives and goals. The main problem that banks encounter in credit administration is
that some of the granted credit facilities are not re-paid leading to a loss of depositor’s funds and
emergence of bad debts (yonas, 2016). Therefore, it becomes a matter of convincing determination
to assess Wegagen bank’s credit management practice. Since the Non-Performing Loan (NPL)
position of the bank has a fluctuating tendency in the past few financial periods.
1.2. Statement of Problem

Credit Management refers to the efficient credit policy variables to ensure prompt collection of
loans granted to customers and at the same time boost their confidence in and loyalty to the bank
(Ankrah, 2011). This is the function within the bank to control credit policies that will improve
revenues and reduce financial risks. It is an aspect of financial management involving credit
analysis, credit rating, credit classification and credit reporting. Sound credit analysis, credit
rating, credit classification and credit reporting standards are an excellent point of collectability
performance and effective credit policy management leads to enlargement of economy and
construct the self-reliance of customer by reducing the frequency and depth of loan problem
(Koch, 2005).
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Among the researches made in the area Selamawit (2017) conducted a study on credit management
practice in the case of awash international Bank share company and found that private commercial
banks including the wegagen bank is facing severe troubles as a result of the practice of poor credit
analysis, poor follow-up and portfolio management practice which leads banks to maintain high
percentage of nonperforming loans that will directly raise the provision expense and inversely
affect the overall profitability of the bank. Hagos (2010) conducted a study on wegagen bank S.C.
focusing specifically on credit management performance of nine branches in tigray region and
concluded that there was poor credit management performance.
Even though different research has been done the area of credit management most of the studies
have been mainly focused on the issue of compliance with policy and procedure banks
Furthermore, based on the unpublished loan classification and provision report made quarterly
Wegagen bank S.C.total loan portfolio and nonperforming loan has been increasing during the last
consecutive years.as shown below under Table 1.1 the bank loan portfolio has been increased from
3.9 Billion to 15.04 Billion and the non-performing loan were increased from 395 million to 1.17
billion and the ratio of non-performing loan from the total portfolio has fluctuating tendency in the
years under consideration. This clearly reveals that there is a problem of credit management in the
bank.
Table 1.1 Trend of NPL

Year Amount of Credit availed Amount of NPL %age
2011/12 3,950,970,950 395,097,094 10%
of NPL
2012/13 4,682,219,781 519,726,395 11.1%
2013/14 4,604,415,561 529,507,789 11.5%
2014/15 6,169,528,313 556,491,453 9.02%
2015/16 7,630,319,726 565,406,691 7.41%
2016/17 10,367,457,925 915,446,535 8.83%
2017/18 15,038,492,106 1,171,498,535 7.79%
**Annual Internal Performance Report 2012-2018
Furthermore, the researcher believe that the result obtained from a case study of Hagos (2010) can
not to reflect the current circumstance of the overall credit management practice of the bank due to
the reason that the study has been done by focusing only on one region and specifically on nine
branch’s and since 2010 the bank credit portfolio, NPL amount and the number of branch has been
increased by 27%, 34% and 18% respectively. Therefore, in light of the above facts and research
4
gaps the researcher belief that it is proper to undertake a research by taking all Addis Ababa
district office and head offices credit processing and administering staffs to evaluate the overall
current credit management activities of the bank at the district offices and at head office and
thereby recommend courses of action that are assumed to promote effective credit management
and consistency in lowering non-performing loans of the bank.
1.3. Research Question

The research is intended to answer the following basic questions which are entirely related to
credit management practice of Wegagen Bank S.C
1. How is the practical loaning activity of the bank and alignment with the National Bank of
Ethiopia requirements?
2. How are non- performing loans managed by Wegagen Bank
3. How are the current credit control activities of the bank
4. How are the credit risk management activities of the bank
1.4. Objective of the Study
1.4.1. General Objective

In view of the stated problems the general objective of the study is assessing credit management
Practice of Wegagen Bank S.C. and the specific objectives of the study are stated as follow.
1.4.2. Specific Objective
1. To assess and describe the practical loaning activity of the bank and alignment with the
National Bank of Ethiopia requirements
2. To describe how the bank manages its Non- performing loans
3. To assess the current credit control practice of the bank
4. To assess the credit risk management activities of the bank
1.5. Significance of the Study
This study has significant specifically to Wegagen bank s.co. in identify the areas of the credit
management practices that needs further enhancements so as to benefit from its forward looking
recommendations and helps them also to implement the recommendation if they have relative
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problems and the research paper can also be an initial reference for those who are proposed to
make further research in this area of the banks in different dimensions.
1.6. Scope of the Study

The study is concentrated on Wegagen Bank Share Company District offices found in Addis
Ababa and at head office. This is because; out of 277 branches of the bank 169 branches’ loan
applications are processed and administered under these district offices and at the head office and
The study covered unpublished report of Wegagen Bank S.C. for the period of seven years
(2012-2018 G.C.) and also credit policies and procedures of the bank were used.
1.7. Limitation of the Study

The study emphasis only on a single bank out of many commercial banks that believed to carried
on credit management practice as one of their basic functions. Had such study been made on all
commercial banks in Ethiopian banking industry, it would have better results. However due to the
vast nature of the topic (since credit management is wide principle), because of credit
management function is different for different banks (depends on their complexity, lending
culture, risk appetite etc.), because of confidentiality nature of credit documents, due to time and
financial constraints of the researcher, it is limited to this specific bank.
1.8. Operational Definition of Key Terms

Loans and Advances : means any financial assets of a bank arising from a direct or indirect
advance or commitment to advance funds by a bank to a person that are conditioned on the
obligation of the person to repay the funds, either on a specified date or on demand, usually with
interest (NBE Directive, 2008).
Nonperforming loans- loans or advances whose credit quality has deteriorated such that full
collection of principal and/or interest in accordance with the contractual repayment terms of the
loan or advances are in question; or when principal and/ or interest is due and uncollected
consecutive days or more beyond the scheduled payment date or maturity (NBE Directive, 2008).
Credit risk - it is the possibility of loan default or any type of inability to honor a financial
agreement when due (kay,2002).
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Loan Portfolio Management as the mechanism by which risks that are inherent in the credit
granting process are controlled and effectively administered (office of comptroller Ghana, 2011).
1.9. Organization of the Study

The research is organized into five chapters. The first chapter introduces the background of the
study, the research objectives and questions, significance of the study, limitation of the study and
organization of the study. The second chapter presents the theoretical and empirical review of the
related literatures while the third chapter deals with methodology of the study. The fourth chapter
is concerned with summary of analysis as results and discussions. Finally the fifth chapter
presents the conclusion and recommendations drawn from the findings.
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CHAPTER TWO
2. RELATED LITERATURE REVIEW

This chapter presents the theoretical overview of credit management in the banking industry in
Ethiopia. Describing different recorded manuals and literatures about bank’s credit Management.
Moreover, principles of the Basel committee, bank loans including concepts relating to
nonperforming loans are discussed.
2.1 Theoretical Concepts
2.1.1. Credit Management

According to Asiedu-Mante (2011) credit management involves establishing formal legitimate
procedures and policies that will ensure that the proper authorities grant credit, the credit goes to
right people, the credit is given for the productive activities or for businesses which are
economically and technically viable. The appropriate size of credit is given, the credit is
recoverable and there is adequate flow of management information within the organization to
monitor the credit activity.
Loans management refers to the effective use of the four major credit policy variables to ensure
that there is quick collection of loan given to borrowers when due and at the same time improve
on their confidence and loyalty to the bank (Van Home, 1995). Myers and Brealey (2003)
consider credit management to be made up of techniques and strategies used by an enterprise to
ensure that an optimal level of credit and its effective management are kept. This is one aspect of
monetary administration including credit examination, credit assessment, credit scoring and credit
reports.
Nzotta (2004) opined that credit management greatly influences the success or demise of banks
and other financial institutions. This is because the failure of deposit banks is determined largely
by the quality of credit decisions and thus the quality of the risky assets. He further notes that,
credit management provides a leading indicator of the quality of deposit banks‟ credit portfolio.
One important precondition for effective credit management is the ability to intelligently and
8
efficiently manage customer credit lines. He continued by stating that to reduce over exposure to
bad debts, overbooking and insolvency, financial institutions should have a better understanding
of the financial strength of customers, credit account history and evolution of payment methods of
clients.
Office of the Controller of the Currency (2011, Ghana) defined Loan portfolio management as the
mechanism by which risks that are inherent in the credit granting process are controlled and
effectively administered. It involves evaluating the steps taken by management of financial
service providers of credit to identify and exercise adequate control over the element of risk
throughout the credit delivery process. credit management starts with granting of a facility and
does not stop until the full and final payment has been made. Technically a transaction cannot be
termed as complete until full payment has been made. Good lending therefore ensures that the
borrower follows the repayment plan set up for him in a timely and prompt manner otherwise;
this eventually leads to the total loss of interest that the institution could have earned due to the
opportunity cost of the loan, the risk involved and time value of money.
Credit management is primarily concerned with the effective management of debtors as well as
judicious financing of receivables. The objectives of credit management can therefore be
expressively stated as safeguarding the portfolio of the banks‟ investments in debtors and
maximizing shareholders wealth. Policies and practices ought to be rigorously enforced for
granting credit facilities to customers, collection of repayments that are due and limiting the high
risk factor of non-performing loans.
2.1.2 Process Of Credit Management

The process of credit management begins with accurately assessing the credit-worthiness of the
customer base and his/her business viability. This is particularly important if the company
chooses to extend some type of credit line or revolving credit to certain customers. Hence, proper
credit management is setting specific criteria that a customer must meet before receiving the
proposed credit arrangement. As part of the evaluation process, credit management also calls for
determining the total credit line that will be extended to a given customer (Yalemzewed, 2013).
According to Agyman (1987), several factors used as part of the credit management process to
evaluate and quality a customer for the receipt of some form of credits. These factors include;
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 Gathering data on the potential customer’s current financial condition, including the current
credit score.
 The current ratio between income and outstanding financial obligations
 Competent credit management which not only protects the vendor/bank from possible
losses, but also protects the customer from creating more debt obligation that cannot be
settled in a timely manner.
According to Edwards (2004), Banks Credit Management process can be summarized in three
main stages. Theses stages are:
 Credit initiation
 Documentation and disbursement
 Credit Administration
When the process of Credit Management function becomes, efficient, everyone involved benefits
from the effort. The vendor /bank has a reasonable amount of assurance that invoices issued to a
client will be paid within terms, or that regular minimum payments will be received on credit
account balances. Customers have the opportunity to build a strong rapport with the vendor and
thus create a solid credit (Habtamu, 2015).
2.1.3 Credit Policies And Procedures

A Credit Policy is not something that is only operated by the Credit and risk Department. All
employees involved with customers, in any way, need to be aware of the credit policy and ensure
that it is operated consistently (Hagos, 2010).
In order to be effective, credit policies must be communicated throughout the organization,

implemented through appropriate procedures, monitored and periodically revised to take into
account changing internal and external circumstances. They should be applied, where appropriate,
on a consolidated bank basis and at the level of individual affiliates. In addition, the policies
should address equally the important functions of reviewing. Economic conditions and the firm’s
credit policies are the chief influences on the level of a firm’s account receivable. Economic
conditions, of course, are largely beyond the control of the financial manager. As with other
current assets, however, the manager can vary the level of receivables in keeping with the tradeoff
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between profitability and risk. Lowering quality standards may stimulate demand, which, in turn,
should lead to higher profitable receivables, as well as a greater risk of bad debt (Ibid).
The credit and collection policy of one firm are not independent of those of other firms. If product
and capital markets are reasonably competitive, the credit and collection practices of one
company will be influenced by what other companies are doing. Such practice related to the
pricing of the product or service and must be viewed as part of the overall competitive process.
The examination of certain policy variables implies that the competitive process is accounted for
in the specification of the demand function as well as in the opportunity cost associated with
taking on additional receivables ((Hagos, 2010).
2.1.4. Credit Administration Policy

Credit administration is a critical element in maintaining the safety and soundness of a bank.
Once a credit is granted, it is the responsibility of the bank to ensure that the credit is properly
maintained. This includes keeping the credit file up to date, obtaining current financial
information, sending out renewal notices and preparing various documents such as loan
agreements (NBE, 2010).
In developing credit administration arrangements, banks should ensure:
 The efficiency and effectiveness of credit administration operations, including monitoring
of credits, maintenance of adequate documentation, observance of contractual obligations
and legal covenants and maintenance of collateral, etc.;
 The accuracy and timeliness of information generated by management information
systems;
 The effectiveness of the segregation of duties and
 Compliance with prescribed management policies and procedures as well as applicable
laws and regulations.
2.1.5. Credit Process

The fundamental objective of commercial and consumer lending is to make profitable loans with
minimal risk. Management should target specific industries or markets in which lending officers
have expertise. The credit process relies on each bank’s systems and controls to allow
management and credit officers to evaluate risk and return tradeoffs.
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2.1.5.1 Credit Application

The credit application is the primary step in the credit management process. Regardless of the size
and purpose of the loan a loan application is required. Though it may appear as simple questions
to the applicants they should understand the importance of the document. The application
documents contain detail information about the applicant. The information among other things
include: name of the applicant, address, residential address, age, telephone number, marital status,
number of dependents, educational background, hometown, the type of business, business
location ,number of years in business, reasons for the loan, amount required, the repayment
period, security pledge if any and guarantors Michael Danso (2015).
The loan application form makes provision for loans committee’s member’s approval signature
and rejection comment. This document is the most important document as far as the loan
agreement is concerned. It is the content of this document which the credit union can take any
legal action against a borrower who defaults. Since this is the initial stage of the credit
management process any error committed at this stage goes a long way to negatively affect the
whole process. A loan defaulter can escape legal punishment if the content of the loan application
form is not properly structured. Hence the need to evaluate the existing loan application forms to
ensure that they are properly structured to protect the credit unions (Ibid).
2.1.5.2. Credit Information
Adequate and timely information that enables a satisfactory assessment of the creditworthiness of
borrowers applying for a bank loan is crucial for making prudent lending decisions. Prudent
lending decisions made on the basis of adequate information on the creditworthiness of borrowers
are one of the principal factors in ensuring the financial soundness of banks. But, there has been
serious difficulty in Ethiopia of getting accurate and timely information on prospective borrowers
that facilitates the making of such prudent lending decisions. One of the means for alleviating this
difficulty of getting accurate and timely information on prospective borrowers is the
establishment of a Credit Information Center (CIC) where relevant information on borrowers is
assumed to be pooled and made available to lending banks.
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According to article 36 of the Licensing and Supervision of Banking Business Proclamation No.
84/1994, the National Bank Ethiopia (NBE) has issued these directives to establish such a Credit
Information Center (CIC). Though there is still serious limitations in the accuracy of the credit
information extracted the summary of the directive is as follows:
 Banks shall provide, alter and update credit information on each and every one of their
borrowers using online system.
 Upon written request by banks, the Supervision Department of the NBE shall provide to
the requesting bank, in writing, all credit information available in the Central Database on
a prospective borrower within three working days from the date of receipt of the request;
 Access to the Central Database shall be restricted to the user group;
 The role of the NBE shall be restricted to administering the Credit Information Sharing
system, providing in writing credit information on borrowers available at Credit
Information Center to banks, ensuring that access to online system to update or alter credit
information is given only to authorized persons and ensuring that the system is operating
smoothly and reliably;
 The NBE shall not be responsible for any damages, claims or liabilities that may arise as a
result of inaccurate, misleading or incomplete credit information on borrowers supplied to
the Credit Information Center by individual banks and shared, through the NBE, with
other banks.
 Each bank shall provide, electronically, the initial credit and other related information to
the Credit Information Center on each and every one of its borrower;
 Each bank shall be fully responsible for providing accurate, complete and timely credit
information to the Credit Information Center. In cases where errors have been made, such
errors shall be corrected promptly by the concerned bank;
 Each bank shall be fully responsible for any damages, claims or liabilities that may arise
as a result of providing inaccurate, misleading or incomplete credit information to the
Credit Information Center or failure to provide, inadvertently or otherwise, information to
the Center that should have been provided in line with these directives;
 Each bank shall use the credit information on borrowers obtained from the Central
Database of the Credit Information Center only and only for making a lending decision.
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Such information shall be treated with utmost confidentiality and shall not be disclosed to
any third party or used for any other purpose;
 Each bank shall be fully responsible for any damages, claims or liabilities that may arise
as a result of disclosure of credit information on borrowers obtained from the Credit
Information Center to third parties or use of that information for purposes other than for
making a lending decision.
2.1.5.3 Credit Analysis
Credit analysis refers to the process of deciding whether or not to extend credit to a particular
customer. Once a customer requests a loan, bank officers analyze all available information to
determine whether the loan meets the bank’s risk-return objectives. Credit analysis is essentially
default risk analysis in which a loan official attempts to evaluate a borrower’s ability and
willingness to repay (Koch, 1995). Koch explained in his book that Eric Compton identified three
district areas of commercial risk analysis related to the following questions:
A. What risks are inherent in the operations of the business?
B. What have managers done or failed to do in mitigating those risks?
C. How can a lender structure and control its own risks in supplying funds?
The first question forces the credit analyst to generate a list of factors that indicate what could
harm a borrower’s ability to repay. The second recognizes that repayment is largely a function of
decisions made by a borrower. The last question forces the analyst to specify how risks can be
controlled so the bank can structure an acceptable loan agreement.
Pandey (1990) and Kich (1995) stated in their book that there principal factors taken in to
consideration when granting credit. Pandey states 3c‟s of credit: character, capacity and capital,
but Koch mentions 5 c’s: character, capital, capacity, condition and collateral.
CHARACTER - refers to the borrower’s honesty, integrity, serve of responsibility and
trustworthiness. An analyst must assess the borrower’s integrity and subsequent intent to repay. If
there are any serious doubts, the loan should be rejected.
CAPITAL – refers to the borrower’s wealth position, measured by financial soundness and market
standing. It helps cushion losses and reduces the likelihood of bankruptcy.
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CAPACITY – involves both the borrower’s legal standing and management expertise in
maintaining operations so the firm or individual can repay its debt obligation. A business or
individual must have identifiable cash flow or income respectively repay debt.
CONDITION – refers to the economic environment or industry specific supply, production, and
distribution factors influencing a firms operation. Repayment sources of cash often vary with the
business cycle or consumers demand.
COLLATERAL – collateral is the lenders secondary source of repayment or security in the case of
default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces
loss, but it does not justify lending proceeds when the credit decision is originally made.
2.1.6. The Loan System

Before endorsing any credit facility, it behooves the bank to ensure that the debtor has a practical
and viable proposal. However, the marketability of a loan proposition does not depend all
together on the quantum of collateral provided by the borrower. The financial intermediary needs
to establish the amount of credit risk latent in the credit proposal and within the boundaries of that
risk, a decision has to be made whether to accept or reject the proposal. An effective credit
management system provides the right framework for such decisions to be made Puri and Poli
(2013) For any provision of credit line within the retail sector for instance, a borrower must have
a pre-existing capacity to repay the loan either from his/her salary or income from self-employed
business or profession. But financing in the commercial sector is somewhat different.
A borrower is not always required to have a pre-existing capacity to repay a working capital or a
term loan that he or she seeks from the bank. The capacity to repay is built over the duration of
the facility with the help of the bank loan. As the borrower’s business expands, incremental cash
flows are generated from which the debt can be serviced and repaid as per agreement. Growth of
business in the right direction supported by the bank credit drives the cash flow of the business
upwards. It is the assessment of incremental cash flows which helps the lender to determine the
repayment capacity of the borrower to meet loan obligations in a timely manner (Yaw Adu,
2015).
Bank lending is premised on the assertion that the debtor has the willingness and capability to
requite the loan at all stages in their business transactions with the bank. However, the capacity to
15
pay back depends on future income streams and the disposition to repay has to be based on the
pre-existent commitment that has been undoubtedly demonstrated by the borrower. It is a
statement of faith because the lender relies largely on the debtor’s ability and competence despite
business downturns to at least guarantee future cash flows and ensure the flow of regular
payments.
These are some of the factors that are necessary in carrying out an effective appraisal of the
customer and provide the basis for making well-informed decisions as regards the credit granting
process.
2.1.7. Proposed Lending Tools

The current economic difficulties crave for new credit management processes to be put in order to
help reduce the lending risk (Fatemi and Fooladi, 2006). Consequently, several tools and
technologies will be discussed that have emerged from other research work which could be
integrated in the management of credit in the unions.
2.1.7.1 Credit Limits
Credit limit is one of the tools financial institutions use to control their loan portfolio. Setting
credit limit is one of the main ways financial institution use to control its’ credit process to reduce
risks associated with lending. Bessis (2002) shows the significance of employing the credit limit
process so as to avoid any credit risk which could imperil the financial position of the institution.
Dekker (2004) argues that the credit officers‟ responsibility is to set repayment period and
principle amount that would support the affordability of the customer.
Nevertheless, Bessis (2002) also states that the setting of credit limit could conflict with the
development of the financial institutions business volume as it will control the customer’s rate of
taking Loans. Furthermore, he states that a shorter loan repayment period affects the interest
income generated by the banks. This further increases the possibility of customers not being able
to meet their repayment installment as it will increase big.
Consequently borrowers are needlessly grouped into a delinquency state (Dekker, 2004). Contrary
to this, Dekker (2004) indicates that the longer the repayment period of a loan facility the greater
the likelihood that borrower will default in repayment. This is due to the changing environment
and possibly the changing circumstance and situation of the borrower. Accordingly, the question
16
then arises that, are financial institutions employing a rigorous credit limit procedure in their
credit assessment? The amendment of credit unions system of credit assessment is to support their
basic values of their formation which is assisting their members in the time of difficulties.
2.1.7.2. Loan Rescheduling
Loan rescheduling is a process by which the loan repayment agreement is changed as a result of
loan default in loan repayment. Most credit unions have rescheduling policy in place which helps
them to minimize the effect of none performing loans. Practice that involves restructuring the
terms of an existing loan in order to extend the repayment period. Debt rescheduling may mean a
delay in the due date(s) of required payments or reducing payment amounts by extending the
payment period and increasing the number of payments.
In the other wards it refers to loans that have been restructured and re-negotiated between
authorized institutions and borrowers because of deterioration in the financial position of the
borrower or of the inability of the borrower to meet the original repayment schedule and for
which the revised repayment terms, either of interest or the repayment period, are non-
commercial.
In line with this, Jensen (2016) states that, once the going concern value of a financial institution
is more than the liquidation value, its value of debt will have to be controlled in order to guarantee
the survival of the financial institution. A well-developed literature has focus on the borrower –
lender bargaining process in the design of debt contract (Hart and Moore 1998). At this point the
new terms is done in favor of the loan defaulter thus it is done to the ability of the loan defaulter.
The essence is to ensure that the loan does not go bad.
2.1.8 Credit Collection Techniques

Effective credit collection techniques are one of the necessities for financial institutions in any
economic climate. Knowing how to encourage customers to pay their outstanding debts to
financial institutions like banks on time can increase the cash flow of banks.
Therefore a number of collection techniques are employed. Under normal circumstances loan
clients are expected to pay in cash or deposit or keep their installment repayment as per the
agreement made. As the loan account becomes past due or overdue the collection effort becomes
more personal and strict. The basic techniques are:
17
 TELEPHONE CALLS: If the loan client passes the due date, a telephone call may be made to the
customer to request immediate repayment and up to date his or her account.
 PERSONAL VISITS: - If the telephone call made is not resulted positive response vesting his
business and discussing the issue with the customer can be a very effective collection
procedure.
 LETTERS: - If the efforts made so far is unsuccessful and not resulted positive response a
polite letter is to be served reminding the customer of its obligation followed by warning
letters for the action to be taken in future and its consequence. Collection letters are the first
step in the collection process for past due and overdue loan accounts.
 USING COLLECTION AGENCIES: Firms can turn uncollectible accounts over to a collection
agency or an attorney for collection. The fees for this service are typically quite high; the firm
may receive less than fifty percent on accounts collected in this way.
 LEGAL ACTION: legal action is the most stringent step in the collection process. It is an
alternative to the use of a collection agency not only is direct legal action expensive, but is
may force the debtor in to bankruptcy, thereby reducing the possibility of future business
without guarantying the ultimate receipt of overdue amount.
2.1.9. Credit/Loan Follow Up

Lending decision is made on sound credit risk analysis /appraisal and assessment of
creditworthiness of borrowers. But past records of satisfactory performance and integrity are no
guarantee future, though they serve as useful guide to project trend in performance. A loan
granted on the basis of 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. According to the National Bank of Ethiopia, monitoring or
follow-up deals with the following vital aspects:
 Ensuring compliance with terms and conditions
 Monitoring end use of approved funds
 Monitoring performance to check continued viability of operations
 Detecting deviations from terms of decision
 Making periodic assessment of the health of the loans and advances by nothing some of the
key indicators of performance that might include: profitability, activity level and management
18
of the unit and ensure that the assets created are effectively utilized for productive purposes
and are well maintained.
 Ensuring recovery of the installments of the principal and interest in case of term loan as per
the scheduled repayment program
 Identify early warning signals, if any, and initiate remedial measures thereby averting from
possible default.
Basically there are three types of loan follow up systems. These are: Physical follow up, financial
follow up and legal follow up (NBE Directives, 2010). Each is discussed in section that follows:
A. 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 (NBE Directives, 2010).
B. 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 was given (ibid).
C. 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 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 (ibid)
2.1.10 Non-Performing Loan (Npls)

Non-performing loans generally refer to loans, which for a relatively long period do not generate
income; that is the principal, and/or interest on these loans has been left unpaid for at least 90
19
days (NBE, 2008). Furthermore, the stability of banking is a pre-requisite for economic
development and resilience against financial crisis. Like any other business, success of banking is
assessed based on Profit and quality of asset it possesses. Even though banks serve social
objective through their priority sector lending, mass branch networks and employment generation,
maintaining asset quality and profitability is critical for their survival and growth. A major threat
to the banking sector is prevalence of Non-Performing Loans (NPLs).
Non-performing Loans represent bad loans, the borrowers of which failed to satisfy their
repayment obligations. Banks as intermediaries of funds are responsible for attracting resources
and inject it in various economic sectors. In the process of resources allocation, banks encounter
several risks and nowadays while making profits, one of the most important risks is default risk,
which leads to increase in non-performing loans (NPLs). Based on rules in banking system, the
amount of non-performing loans should not be more than 5% of remaining facilities of each bank,
but increasing growth of NPLs amount concerned officials and with considering the role of banks
in the country’s economy, this phenomenon could be named a “national” concern (Ghasemi,
2010).
Despite ongoing efforts to control bank-lending activities, non-performing loans are still a major
concern for both international and local regulators. To date there is no bank crises happened in
Ethiopia due to non-performing loans, but there is an indicator of high NPL in the country, which
may lead to that direction if not controlled on time (NBE, 2010).
2.1.11 Provisions
Loans and advances are financial instruments originated by the bank by providing money to the
debtors. There is a 50% chance the loan might be repaid on time, delayed or not at all. For this
reason banks set aside finance to cover this loans since they lend out customers deposit which
needs to be repaid on demand. This finance to be set aside is called provision. It is stated as
costless impairment losses. Impairment losses comprise specific provisions against debts
identified as bad and doubtful and general provisions against losses which are likely to be present
in any loans and advances portfolio. The Bank follows the National Bank of Ethiopia Supervision
of Banking
Business Directives SBB/43/2008 in determining the extent of provisions for impairment losses.
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The Directive classifies loans and advances into the following.

A. PASS LOANS- Loans and advances in this category are fully protected by the current
financial and paying capacity of the borrower and are not subject to criticism. It is fully
secured, both as to principal or interest payments, by cash or cash substitutes are classified
under this category regardless of past due or other adverse credit factors.
B. SPECIAL MENTION -Any loan or advance past due 30 days or more, but less than 90 days.
C. SUBSTANDARD - Non- performing loans or advances past due 90 days or more but less
than 180.
D. DOUBTFUL- Non- performing loans past due 180 days or more but less than 360 days.
E. LOSS- Non-performing loans or advances past due 360 days is classified as loss.
2.1.12. Credit Risk Management

OCC (2011) identifies fundamental credit risk management principles as sound underwriting,
comprehensive financial analysis, adequate appraisal techniques and loan documentation practices
and sound internal controls. Rose and Kolari (1995) see credit risk as the likelihood that
borrowers will not be able to repay their loans within the period agreed upon. Kay (2002) sees
Credit risk as distribution of financial losses due to unexpected changes in the credit quality of
counterparty in a financial agreement. Kay (2002) also sees it as the possibility of loan default or
any type of inability to honor a financial agreement when due. Kay stated that the likelihood of
default is estimated by specifying a model of investor uncertainty; a model of the available
information and its evolution over time and a model definition of the default event. Smook (2007)
defines risk assessment as the general procedure of risk identification, quantification, evaluation,
acceptance, aversion and management. He explains that risk management involves risk evaluation
and risk control. In the piece he states that Risk assessment is a complex procedure of developing
tolerable levels of risk to individuals, groups, or the society in general. It includes the associated
procedures of risk acceptance and risk aversion.
Fatemi and Fooladi (2006) characterize credit risk as risk that occurs from the ambiguity in a
borrowers‟ capacity to meet his/her debt. At a different angle, King (2008) defines credit
management as the “policies and practices businesses employ in recovering payments from their
defaulting customers”. With respect to the levels of priority in financial institutions, it is expected
21
that their main focus is to make known that this type of risk management is efficient beyond all
others. Risk acceptance means that the risk taker is ready to admit some risks to make a gain or
benefit from it. This is when the risk is not avoidable or cannot be controlled. The acceptance
level is a reference level against which a risk is identified and then compared. If the risk
determined is less than the level that it can be accepted, the risk is then said to be within the
acceptable range.
On the other hand, if it is higher than the accepted level it is seen as unacceptable and avoidable,
steps may be taken to control the risk or the project in question should be stopped. Credit risk
means the possibility of loan loss as a result of a borrower’s inability to make payments as per the
loan agreement. Credit risk management, meanwhile, is the practicing of measures that reduces
the impact of those losses by appreciating the competence of both a bank’s capital and loan loss
reserves at any given period time, a process that has long been a challenge for financial
institutions to fully implement.
2.1.13. Credit Control

According to O. Fatima (2010) credit control is concerned with the post approval and monitoring
of the credit facility, to ensure that each credit remains qualitatively satisfactory during the tenure
of the credit. It is very important to monitor (control) the facility after it has been approved to
ensure that:
A. the borrower complies with the stipulated conditions
B. The facilities are utilized with the purpose for which they were approved
C. Any deterioration or negative trends in the customers‟ business or prospects are determined
and corrective actions taken.
Credit controls also entail making some basic credit returns as required by the Banking Act for
the purpose of monitoring the banks total commitments to clients in a particular period. Based on
David T.R‟s statement made on the Hong Kong Monetary Authority’s Quarterly Bulletin of 1997
edition, poor asset quality attributable to over-concentration and poor risk selection remains main
causes of problems in banks.
In maintaining sound credit controls, a clear credit philosophy, and ongoing management of credit
portfolio with a view to identifying early warning signals of deteriorating asset quality helpful.
22
The bank identifies three main causes of these asset quality problems, some of which were
present in more than one case. One could be over concentration, where the failure of one loan
places the bank in jeopardy. Another was specialization, where there was a concentration of loan
book in one sector, region, or group of individuals. The third one may be poor risk selection,
where the bank extends loan without correctly price a risk.
2.1.13.1. Credit Control Functions

Office of the Comptroller of Credit Portfolio Management (1998) states that besides the loan
policy, the primary controls over a bank’s lending activity is its credit administration, loan review,
and audit functions. Independent credit administration, loan review, and audit functions are
necessary to ensure that the bank’s risk management process, management information systems,
and internal and accounting controls are reliable and effective. The bank’s control functions can
also provide senior management and the board with a periodical assessment of how the bank’s
employees understand its credit culture and whether their behaviors conform to the bank’s
standards and values.
2.1.14. Principles Formulated By the Basel Committee

As a direction for the achievement of the required level of loan status and healthy financial
institutions the Basel Committee on Banking Supervision in September 2000 also formulated the
following Principles
A) ESTABLISHING AN APPROPRIATE CREDIT RISK ENVIRONMENT
Principle 1: The board of directors should have responsibility for approving and periodically (at
least annually) reviewing the credit risk strategy and significant credit risk policies of the bank.
The strategy should reflect the bank’s tolerance for risk and the level of profitability the bank
expects to achieve for incurring various credit risks.
Principle 2: Senior management should have responsibility for implementing the credit risk
strategy approved by the board of directors and for developing policies and procedures for
identifying, measuring, monitoring and controlling credit risk. Such policies and procedures
should address credit risk in all of the bank’s activities and at both the individual credit and
portfolio levels.
23
Principle 3: Banks should identify and manage credit risk inherent in all products and activities.
Banks should ensure that the risks of products and activities new to them are subject to adequate
risk management procedures and controls before being introduced or undertaken, and approved in
advance by the board of directors or its appropriate committee.
B) OPERATING UNDER A SOUND CREDIT GRANTING PROCESS
Principle 4: Banks must operate within sound, well-defined credit-granting criteria. These criteria
should include a clear indication of the bank’s target market and a thorough understanding of the
borrower or counterparty, as well as the purpose and structure of the credit, and its source of
repayment.
Principle 5: Banks should establish overall credit limits at the level of individual borrowers and
counterparties, and groups of connected counterparties that aggregate in comparable and
meaningful manner different types of exposures, both in the banking and trading book and on and
off the balance sheet.
Principle 6: Banks should have a clearly-established process in place for approving new credits as
well as the amendment, renewal and re-financing of existing credits.
Principle 7: All extensions of credit must be made on an arm’s-length basis. In Particular, credits
to related companies and individuals must be authorized on an exception basis, monitored with
particular care and other appropriate steps taken to control or mitigate the risks of non-arm’s
length lending.
C) MAINTAINING AN APPROPRIATE CREDIT ADMINISTRATION, MEASUREMENT AND
MONITORING PROCESS
Principle 8: Banks should have in place a system for the ongoing administration of their various
credit risk-bearing portfolios.
Principle 9: Banks must have in place a system for monitoring the condition of individual credits,
including determining the adequacy of provisions and reserves.
Principle 10: Banks are encouraged to develop and utilize an internal risk rating system in
managing credit risk. The rating system should be consistent with the nature, size and complexity
of a bank’s activities.
Principle 11: Banks must have information systems and analytical techniques that enable
management to measure the credit risk inherent in all on- and off-balance sheet activities. The
24
management information system should provide adequate information on the composition of the
credit portfolio, including identification of any concentrations of risk.
Principle 12: Banks must have in place a system for monitoring the overall composition and
quality of the credit portfolio.
Principle 13: Banks should take into consideration potential future changes in economic
conditions when assessing individual credits and their credit portfolios, and should assess their
credit risk exposures under stressful conditions.
D) ENSURING ADEQUATE CONTROLS OVER CREDIT RISK
Principle 14: Banks must establish a system of independent, ongoing assessment of the bank’s
credit risk management processes and the results of such reviews should be communicated
directly to the board of directors and senior management.
Principle 15: Banks must ensure that the credit-granting function is being properly managed and
that credit exposures are within levels consistent with prudential standards and internal limits.
Banks should establish and enforce internal controls and other practices to ensure that exceptions
to policies, procedures and limits are reported in a timely manner to the appropriate level of
management for action.
Principle 16: Banks must have a system in place for early remedial action on deteriorating credits,
managing problem credits and similar workout situations.
2.2 Empirical Review

Collins, A.and Miebaka, D. (2018). Studied Impact of Credit Management on Bank Performance
in Nigeria. The study examined the impact of credit management and bank performance in
Nigeria. The study adopted cross sectional survey design. The population of the study consisted
of all management staffs of commercial banks operating in Nigeria. The sample sizes of eleven
(11) select commercial banks were considered by systematic technique. The Purposive sampling
technique was adopted; hence six respondents were administered questionnaire (Bank Manager
and five senior staff) from each bank to make up a 66 respondents for the study. Multiple
regression analysis was adopted for the study to determine the influence/impacts of credit
management variables (Credit Appraisal, Credit Risk Control, and Collection policy) on bank
performance. The study revealed that credit management has a significant impact on bank
performance in Nigeria. The study also revealed that among the credit management variables
25
considered, credit risk control has the highest driving force for bring about an effect financial
performance of bank in Nigeria. It was recommended that financial institution should not only
take credit management serious, but should recognize the role of credit risk section if they aim at
increasing profitability.
As with any financial institution, the principal risk in bank is lending money and not getting it
back. On this note, Kagoyire and Shukla (2016) studied effect of credit management on
performance of commercial banks in Rwanda (A case study of Equity Bank Rwanda LTD). The
study sought to determine the effect of credit management on the financial performance of
commercial banks in Rwanda. The study adopts a descriptive survey design. The target
population of study consisted of 57 employees of Equity bank in credit department. The entire
population was used; giving a sample size of size of 57 employees. Purposive sampling technique
was used where the entire population was included in the study. Primary data was collected using
questionnaires which were administered to the respondents. Descriptive and inferential statistics
were used to analyze data. The study found that client appraisal; credit risk control and collection
policy had significant effect on financial performance of Equity bank.
The study established that there was very strong relationship between financial performance of
Equity bank and client appraisal, credit risk control and collection policy. The study also
established that client appraisal, credit risk control and collection policy significantly influence
financial performance of the bank. Collection policy was found to have a top effect on financial
performance and that a stringent policy was more effective in debt recovery than a lenient policy.
The study therefore recommends that Equity bank should enhance their collection policy by
adapting a more stringent policy to a lenient policy for successful debt recovery. The findings also
revealed that most borrowers did not spend the loan amount on intended and agreed projects. It
came out that there are gaps in the credit management of the bank, which requires immediate
response to safeguard the future of the bank.
Hagos (2010) studied credit management– A Case Study of Wegagen Bank Share Company in
Tigray Region which attempts to indicate the importance of credit management in financial
institutions such as commercial banks, micro finances and others. The main objective of the study
was to evaluate the performance of credit management of Wegagen bank in Tigray Region as
compared to National Bank’s requirements in comparison with its credit policy and procedures.
26
For the purpose of the study both primary and secondary data are used. Descriptive statistical
tools are used in analyzing the data collected. The study concluded that the issues impeding loan
growth and rising loan clients complaint on the bank regarding the valuing of properties offered
for collateral, lengthy of loan processing, amount of loan processed and approved, loan period,
and discretionary limits affecting the performance of credit management and recommend the bank
to follow creative way of loan processing and approving direction that assists to meet the loan
demand of potential loan applicants and the required level of loan growth as it is the main source
of income for the banking industry.
Tekeste (2016) studied assessment of credit management performance in emerging private

commercial banks in Ethiopia: the case of Berhan international bank S.C. The main purpose of
the study was to assess the performance of credit management of Berhan International Bank as
compared to National Bank requirements vis à vis its loan policy and procedures. The
methodology used for the study is population census for bank staff and convenience non-
probability sampling for clients to verify the bank respondents as the bank is the main study. The
major findings of the study show that impeding loan growth and rising loan clients complaint on
the bank are regarding the lengthy of loan processing, amount of loan processed and approved,
loan period, and discretionary limits affecting the performance of credit management.
The overall credit management activity of the bank needs improvement in devising a strong
follow-up unit, devising an office that can control the condition and sanctions at each approval
document, establishing coordination among work units. Consequently, the bank should conducted
monitoring visit before and after disbursement of the loan, shortening of loan processing and
advice customers and give technical support that help to minimize loan loss and diversion of
loans.
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CHAPTER THREE
3. RESEARCH METHODOLOGY
This chapter deals with the methodology of the study whereby the research design, sampling, data
collection instruments, data collection procedures and the method of data analysis will be
discussed.
3.1. Research Design

This research has used descriptive research based on survey method. Descriptive research is
basically used to ascertain and describe the characteristics of variables of interest in some
situation and subject of study. This research design enables the researcher to describe the
phenomenon of interest from individual or organizational perspectives. It is a case study of
specific bank and survey method enables the researcher to have a designed data. Accordingly this
study has found this research design appropriate to collects data from sources and has used
quantitative research approach to analyzes the data collected in order to asses and describes the
present practice of credit management in Wegagen Bank S.C.
3.2 Target Population and Sampling Technique
3.2.1 Target Population

The target population of this study is Wegagen Bank S.C credit department employees who are
involved in credit processing and administering and clients. From head office credit department
and the four city district office employees of all Eighty Four staffs who are directly engaged in
loan activities this means Loan section head, Loan analyst, Loan officers and Loan clerks in forty
one branches in Addis Ababa were included.
3.2.2. Sampling Technique and Sample size
The study employed Census method which is the method of statistical enumeration where all
members of the population are studied as it is assumed to provide more efficient sample by
considering all members Credit Performing Unit (CPU) of the bank at head office and Addis
Ababa district offices that are taken under the study. The credit structural set up of the bank is
arranged in a way that loan requests that are below five million birr are handled at district offices
and loan requests that are above five million birr are handled at head office level.so that all
28
populations that are engaged in credit processing and administering at Addis Ababa district office
and head office are taken. Hence, this enables the researcher not only to cover great area of credit
management of the bank but also make the findings more concrete.
Table .3.1 Credit staffs of the bank at Addis Ababa district offices and head office credit unit
S/N Position Total Number

1 Credit director 1
2 Credit relationship management 27
3 Credit analyst 18
4 Credit portfolio management 8
5 Loan workout 4
6 Credit approval committee 12
7 Credit audit 5
8 Credit officer 9
Total Credit Performing Employees 84
3.3. Data Sources and Collection Procedure

The type of data used in the study includes quantitative data. Primary and secondary sources of
data were used for the study. The primary source of data was collected through the use of self-
administered questionnaires from credit processing and administering staffs at district offices and
head office staffs. Questionnaire is used as an instrument to collect primary data from the
respondents about their opinion at every question that designed to evaluate the credit management
practice of the bank.
In case of secondary source of data, NBE directives, Wegagen bank unpublished reports, credit
policy and procedures, annual report were used to collected data on procedures and policy. Books,
journals as well as different thesis were also used in the study.
3.4. Data Analysis Method

In order to evaluate the credit management practice of the bank quantitative analyses were
employed. Data were collected from unpublished provision report of Wegagen Bank S.C. for the
period of (2012-2018) and also using questionnaires; the questionnaires formed the basis for
generating the primary data.
29
Moreover, most of the data were analyzed, summarized and presented in tables, by the help of the
Statistical program for Social Sciences, Version 20, (SPSS, and V20). Frequency, Mean and
standard deviation for these data were computed in order to facilitate the analysis and to make it
presentable for the readers. Mean is basically used in order to measure the average opinion that
the respondents give on subject provided by the questioner and SD is also used to show how the
value obtained by participants opinion dispersed (spread) from the mean. They are widely used
measurements of population opinions on survey provided by Likert scale.
3.5. Validity of Research Instruments

Validity refers to the degree success of an instrument in measuring what it is set to measure so
that differences in individual scores can be taken as representing true references in the
characteristics under study. The content validity will be used to determine the validity of the
instruments. In subjecting the tools to validation, the process started by discussing with the
supervisor of the study who scrutinized all the questions in the tools to assess their
appropriateness in addressing critical issues in the study ARAKA et al (2018).
3.6. Reliability of Research Instruments

Reliability is the ability of research instruments to consistently yield the same results when
repeated measurements are taken under same condition Sharma (2012). Reliability of the data
collection instrument was first established through test re-test method (Bryman and Cramer,
2007). Keeping all these facts the researcher has made reliability analysis using Cronbach`s
coefficient alpha Based on Standardized Items for the entire set of statements found to be 0.912,
which is much higher than the threshold value of 0.65.
Table 3.2 Reliability results
Research topic Number of Cronbach’s
Items Alpha
Credit management practice & alignment with NBE requirements 10 0.759
Management of non-performing loan by the bank 10 0.807
Current credit control of the bank 4 0.720
Credit risk management activities of the bank 10 0.773
30
CHAPTER FOUR
4. DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

This chapter presents the findings and discussions of the study. It starts with the academic
background of the respondents with their respective work experience and current position of their
job followed by the analysis of the subjects of the study.
4.1. Survey Results

As it is stated in the previous chapter, questionnaires were developed for respondents. A total of
84 questionnaires for credit processing and administering staffs at head office and Addis Ababa
district offices were distributed. Of all the questionnaires distributed to the staffs 73 were filled
and returned respectively. Therefore, the data discussed in the subsequent sections of this report is
a summarized response of 73 respondents.
Table 4.1 Survey response rate
Sample size 84
Completed and returned questionnaires 73
Response rate 83.91%
Source: Survey outcome result
4.2. Respondents Profile

This section presents profile of respondents in relation to their educational level, current positions
and their total service year in the bank.
Educational background of employee is an important factor to be considered with regard to
making business decision. Education improves the skill, capacity, communication and access to
development endeavors.
Table 4.2 Academic background of respondents
Educational level Frequency Percent
Ba degree 43 58.9
Master’s degree 30 41.1
Total 73 100.0
Source: Researcher’s Survey result from Primary Data Sources
31
As shown above in table 4.2 all the respondents have a qualification of first degree and a master’s
degree only and more than 58 percent of them intact bachelor degree holders. This indicates that
respondents are academically qualified to quality of the survey.
Table 4.3 Respondents experience in bank
Year of service in bank Frequency Percent
0-4 years 12 16.4

5-9 years 8 11.0
10-14 years 25 34.2
15-19 years 13 17.8
20 years and above 15 20.5
Total 73 100.0
Source: Researcher’s Survey result from primary Data Sources
As presented on the above table-4.3 34.2 percent of the respondents have a service of 10-14 years
while 20.5 percent of them have been working for the bank 20 years and above. In general more
than half of the respondents have been working for more than 5 years in the bank, which indicate
respondents had enough experience to provide response that naturally contributed to the data
quality of the survey.
Table 4.4 Current Position of Respondents
Position of Respondents Frequency Percent
Credit director 1 1.4

Credit relationship management 22 30.1
Credit analyst 16 21.9
Credit portfolio management 6 8.2
Loan workout 4 5.5
Credit approval committee 12 16.4
Credit audit 4 5.5
Credit officer 8 11.0
Total 73 100.0
Source: Researcher’s Survey result from primary Data Sources
According to Table 4.4 Out of the total respondents 71.2 percent of the positions are maintained
by credit relationship managers, credit analysts, credit portfolio management officers and credit
officers. Such a segregation of the respondent is important to suppose the research choose the
32
right professionals which have direct relationship with the subject matter and in order to gather
the necessary information regarding credit management practice of the bank.
4.3. Assessing The Bank’s Credit Management Practice

The study tried to assess the credit management practice of wegagen bank s.c. using four basic
parameters namely, practical loaning activities and alignment against NBE requirements, Non-
performing Loan Management, current credit control and credit risk management of the bank. A
bank credit management system is expected to ensure compliance credit granting and collection
with the bank credit policy and improve the control of credit with the bank.
4.3.1 THE PRACTICAL LOANING ACTIVITY OF THE BANK AND ALIGNMENT WITH
THE NBE DIRECTIVES
Table 4.5 Practical loaning activities and alignment against NBE requirements
Item Evaluating Statements Strongly Agree Neutral Disagree Strongly Mean SD
agree Disagree
Q1 The bank credit management has a policy 11 33 - 17 12 3.19 1.39
for credit provisioning and write–off that are
aligned with NBE requirements
Q2 To better the state of management of credit, 6 12 3 27 25 2.27 1.32
reviews concerning collection policies have
been done on a regular basis
Q3 The practical loan processing and appraisal 13 25 1 31 3 3.19 1.28
activities of the district offices comply with
the banks credit policy and procedure
Q4 The credit management at a district level 12 28 1 20 12 3.11 1.41
improves the credit control of the bank
Q5 Managing the credit system of the bank at a 18 24 - 21 10 3.26 1.45
district level improves the bank capability
of reduction of the bank’s NPL
Q6 The bank maintains effective credit 5 18 - 38 12 2.53 1.23
management system to control the single
borrower limit while extending additional
loan.
Q7 Imposing loan size limits is a viable strategy 19 20 3 25 6 3.29 1.39
in credit management
Q8 Client appraisal considers the character of 11 13 2 32 15 2.63 1.39
the customers seeking credit facilities
Q9 The existing credit policy and procedure of 3 20 1 32 17 2.45 1.24
the bank is encouraging and flexible to
guide credit activities of the bank
Q10 Client appraisal makes proper analysis on 8 18 - 35 12 2.66 1.32
the cash flow statement of a borrower while
deciding on loan repayment schedules.
Average Mean 2.86
According to the respondents answer on the question whether the bank credit management policy
of credit provisioning and write-off are aligned with the NBE requirements under table 4.5 item
(Q1). Majority of them agreed with the mean and SD of 3.19 and 1.39 this implies that the bank
33
credit management policy for provisioning and write-offs comply with asset classification and
provisioning directive of the central bank.
Non-Performing Loans (NPLs) shall mean bad debts as defined in the Directives of the National
Bank of Ethiopia. In order to manage these loans, the collection policy of the bank shall be
regularly reviewed and effectively assist towards the overall credit management of the bank.
Regarding this, under table 4.5 item (Q2) respondents were asked whether Regular reviews have
been done on collection policies to improve state of credit management .as a result majority of the
respondents strongly disagree with the mean of 2.27 and SD of 1.32. This implies that the
collection policy of the bank is not regularly reviewed to improve state of credit management.
Majority of respondents were questioned whether the practical loaning activities at district offices
comply with the banks credit policy and procedure. More than fifty percent of them agree with the
mean value of 3.19 and SD 1.28 This denotes that the practical loaning activity of district offices
comply with credit policy and procedure of the bank.
Previously wegagen bank credit appraisal and administering process were done centrally at head
office. Loan requests were processed, approved and administered at the head office but currently
the bank has disseminated its credit operation to district offices, the bank has opened nine district
offices throughout the country, four district offices are operating in Addis Ababa and the
remaining five are outlying cities. District offices are allowed to process up to five million birr of
loan request while for loan requests that are above five million are processed at head office.
Regarding this, under table 4.5 item (Q4) respondents were asked whether the credit control of the
bank were improved after the credit processing and administering is disseminated to district
offices. The majority of respondents agree with the mean value of 3.11 and SD of 1.41 on the
issue similarly respondents were agreed for the statement that managing the credit system of the
bank at a district level improves the bank capability of reduction of the bank’s NPL with a mean
of 3.26 and SD 1.45 This implies that disseminating the credit processing and administration to
district offices has practically improved the credit control of the bank and it also enables the bank
reduce non-performing loans.
34
As the NBE directive no SBB/53/12 requires banks to maintain their single borrower limit up to
25% of their paid up capital. Regarding this the researcher desires to investigate the activity of the
bank in controlling the borrowers limit as per the bank procedure and NBE requirements As
shown on table 4.5 item (Q6) majority of respondents were strongly disagree with the mean 2.53
and SD 1.23. This entails that there is lack of effective credit management system in controlling
the credit limit of borrowers.
Barusa’s (2011) view that in setting up the credit limit, considerations must be taken to maximize
the returns in terms of the sales and also the financial strengths of the customer to ascertain
whether he will be able to pay the credit obligation. Regarding this respondents were asked
whether imposing credit limit is viable strategy in credit management under item (Q7) of same
table majority of respondents were agreed on the issue by mean value of 3.29 and SD 1.39.
Respondents were questioned whether the client appraisal considers the character of the
customers seeking credit facilities as indicated under table 4.5 item (Q8) they were disagree with
a mean of 2.63 and SD 1.39. This finding implies that the client appraisal does not consider the
character of the customers seeking credit facilities.
Respondents were questioned whether the existing credit policy and procedure of the bank is
encouraging and flexible enough to guide the loaning activity as indicated under table 4.5 item
(Q9) they were disagree with a mean of 2.45 and SD 1.24 This finding implies that the current
credit policy and procedure of the bank is not encouraging and flexible enough to attract and
satisfy the credit demand of customers.
Under item (Q10) of same table respondents were asked whether Client appraisal makes proper
analysis on the cash flow statement of a borrower while deciding on loan repayment schedules.
Majority of respondents were disagree with mean value of 2.66 and SD 1.32 this indicates that
there is poor analysis cash flow statement of borrowers before approval of the loan repayment
period.
35
4.3.2. NON PERFORMING LOAN MANAGEMENT

Table 4.6 Management of non-performing loan by the bank.
agree Disagree
Q1 The bank make proper - 22 - 33 18 2.36 1.16
follow up on the loans
availed whether they are
spend on the actual purpose
of the loan requested.
Q2 Collateralizing loans help 10 18 1 26 18 2.67 1.43
protect loan default.
Q3 Poorly assessed and - 27 - 23 23 2.42 1.28
advanced loans may
perform well if properly
monitored.
Q4 The bank effectively 10 18 1 26 18 2.67 1.43
implements its loan
recovery mechanism to
reduce its bad loans.
Q5 The bank continuously 11 32 1 24 5 3.27 1.26
make sure the NPL cases
transferred to foreclosure
process get timely decision
to reduce additional
provision expense of the
bank
Q6 Each districts having their 15 27 - 21 10 3.22 1.42
own credit monitoring and
follow up team would
sustainably reduce the bank
NPL
Q7 Having large number of - 22 - 33 18 2.36 1.16
borrowers causes loan
default.
Q8 assessments of secondary 15 27 - 21 10 3.22 1.42

source of repayments help
the bank as another
fallbacks for outstanding
loan balances of non-
performing borrowers
account
Q9 Collection policies - 27 - 23 23 2.42 1.28
available have helped in
effective management of
credit practices.
Q10 The bank prepares regular - 22 - 33 18 2.36 1.16
report on selected credit
accounts to help reduce
future failures
Average Mean 2.69
36
As shown on table 4.6 Item (Q1) respondents were disagree with 2.36 mean and SD 1.16 on the
statement that The bank make proper follow up on the loans availed for they are spend on the
actual purpose of the loan requested. This indicates that there is lack of proper follow up for
actual outlay of the loan after it is granted.
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure

repayment of a loan. The collateral serves as a lender's protection against a borrower's default and
so can be used to offset the loan if the borrower fails to pay the principal and interest satisfactorily
under the terms of the lending agreement. Regarding this under table 4.6 item (Q2) respondent
was asked whether collateralizing loans help protect loan default. Accordingly majority of the
respondents were disagree with mean 2.67 and SD 1.43 This reveals that borrowers pledged asset
cannot protect a loan from being defaulted.
As indicated under table 4.6 item (Q3) majority of respondents didn’t support the argument that
loan would perform well only by proper monitoring even if they are poorly assessed while
advancing the credit this is evidenced with mean value of 2.42 and SD 1.28 This indicates that
follow up would never substitute credit assessment.
As per the response result that is indicated under table 4.6 item (Q4) respondents were disagree
with mean 2.67 and SD 1.43 on the statement that the bank effectively implement its loan
recovery mechanism to reduce its bad loans. As the majority of the respondents disagree on the
effective implementation of loan recovery mechanism the bank towards reduction of bad loans it
indicates that the loan recovery mechanism of the bank is not sufficiently implemented to reduce
bad loans.
Foreclosure is a legal process in which the bank attempts to recover the amount of loan granted to
the borrower who has stopped making payments by forcing the sale of the asset used as the
collateral for the loan and timely decision must be made on the sale of the collateralized property
to avoid additional costs and other related risk that might be faced by the bank. Regarding this
under table 4.6 item (Q5) respondents were asked whether the NPL cases that are transferred to
foreclosure process get timely decision to avoid additional provision expense and reduce the ratio
37
of NPL. The majority of the respondents with mean 3.27 and SD 1.26 were agreed on the issue.
This shows that the foreclosure cases get timely decision.
Regarding question presented under table 4.6 item (Q6) respondents were questioned that district
offices having their own credit monitoring and follow up team would sustainably reduce the bank
NPL. Accordingly majority of respondents with mean 3.22 and SD 1.42 were agreed on the issue.
This indicates that the bank maintaining credit monitoring and follow-up staff at all district
offices would strengthen the credit management of the bank and enable the bank to sustainably
reduce its non-performing loans.
Respondents were questioned under table 4.6 item (Q7) whether having large number of
borrowers causes loan default. . Accordingly majority of the respondents were disagreed with the
mean of 2.37 and SD 1.16 this shows that having large number of borrowers will not causes loan
default.
Responses have agreed for the statement that assessment of secondary source of repayments help
the bank as other fallbacks for outstanding loan balances of non-performing borrowers. Evidenced
under table 4.6 items (Q8) by mean value of 3.22 & SD 1.42.this imply that assessing for
additional source of repayment will help the bank recover outstanding loans in case the initial
collateralized property or business defaults.
On same table item (Q9) respondents were disagree with mean of 2.42 and SD 1.28 that the
available collection policies have helped in effective management of credit practices. This
indicates that the collection policy must be organized in such a way that it would help to the
management of credit activities effectively. Similarly according to the respondents under table 4.6
item (Q10) results showed that regular reports are not prepared on selected credit accounts to help
the bank reduce future failures, this statement is evidenced with the mean value of 2.35 and SD
1.16.this shows that there is lack of follow up on the selected credit accounts so as to detect early
sign of future repayment failures.
38
4.3.3. CREDIT CONTROL AND FOLLOW UP

Table 4.7 Current credit control of the bank
Ite Evaluating Strongly Agree Neutral Disagre Strongly Mean SD
m Statements agree e Disagree
Q1 The bank having pre-set 16 26 - 20 11 3.22 1.45
concentration limits in
every sector in every
sector enables it to reduce
risks and improves credit
control activity of the
bank.
Q2 The bank having strong 10 28 - 22 13 3.00 1.40
credit control over
collection of loans as per
the repayment schedule
helps it reduced bad
loans.
Q3 The existing credit 9 18 - 36 10 2.73 1.32
control enables to classify
loans based on their
weakness level
Q4 Penalty for late payment 12 29 - 19 13 3.11 1.43
enhances customer’s
commitment to loan
repayment.
Average Mean 3.02
As depicted under table 4.7 item (Q1) majority of respondents with mean of 3.22 and SD 1.45
agree that the bank having pre-set credit limits in every sector enables the bank reduce risks and
improve credit control activity of the bank. This indicates that pre-set concentration limits in
every sector will strengthen the control of credit activities of the bank and help reduce risks
associated with the lending.
Continuous supervision, monitoring and follow-up are highly required for ensuring the timely
repayment and minimizing the default. Concerning this under table 4.7 item (Q2) respondents
were asked whether the bank having strong credit control over collection of loans as per the
repayment schedule helps it reduced bad loans. Majority of the respondents with mean 3.00 and
SD 1.40 agree on the issue. This indicates that having strong control over loan collection helps the
bank recover all loans as per their repayment contract period.
39
Regarding the question the existing credit control enables to classify loans based on their
weakness level under table 4.7 item (Q3) respondents were disagree with the mean of 2.73 and
SD 1.32 This denotes that the bank’s existing credit control is insufficient to classify loans based
on their weakness level.
Under table 4.7 item (Q4) respondents were asked whether Penalty for late payment enhances
customer’s commitment to loan repayment. Accordingly respondents were agreed with Mean 3.11
and SD 1.43 This indicates that penalizing non performing borrowers will help the bank enhance
loan repayment commitment of borrowers.
4.3.4. CREDIT RISK MANAGEMENT
Table 4.8 Credit risk management activities of the bank
agree Disagree
Q1 The existing credit risk 13 33 - 17 8 3.36 1.31
measurement tools used by the
bank safeguard the bank from
major credit risks
Q2 The Practical credit risk 16 28 5 22 2 3.47 1.21
assessment activity of the district
offices help the bank reduce
risks associated with loan
granting
Q3 The credit risk assessment of the 12 27 8 24 2 3.32 1.18
bank considers a quick response
to market changes
Q4 Poor credit risk assessment on 12 28 1 20 12 3.11 1.41
the process of analysis would
lead to loan default
Q5 Financial interest between the 18 27 - 18 10 3.34 1.44
borrower and the bank official
leads to loan default risks.
Q6 The bank practice in creating 15 27 - 21 10 3.22 1.42
clear and trustworthy
communication effectively
reduce credit risk
Q7 There is a proper system 5 19 1 38 10 2.60 1.21
implementation for
understanding credit risks in the
bank
Q8 providing credit risk 13 23 2 24 11 3.04 1.41
management training courses
will practically enable the bank
reduce credit risks
Q9 The bank assesses the likelihood 3 24 1 27 18 2.55 1.29
of occurring credit risks
Q10 The bank credit risk 8 23 - 30 12 2.79 1.34
management procedure enable
staffs to identify major credit
risks
Average Mean 3.08

40
As per the question presented under table 4.8 item (Q1) respondents were asked whether the
credit risk measurement tools used by the bank safeguard are the bank from major credit risks.
Accordingly respondents were agreed with mean 3.36 and SD 1.31 This denotes that the existing
credit risk measurement tools capable of securing the bank from major credit risks.
It is advisable for banks to measure the credit risk of each loan requests made by clients before
approval at least to minimize the risk of adverse selection. In this regard, respondents were
questioned whether the Practical credit risk assessment activity of the district offices help the
bank reduce risks associated with loan granting. The findings under table 4.8 item (Q2) showed
that majority of respondents with mean value of 3.47 and SD 1.21 were agreed on the issue. This
implies that the practical credit risk assessment activities of the district offices enables the bank
reduce risks associated with the loan granting.
The credit risk assessment of wegagen bank considers a quick response to market changes is
evidenced under table 4.8 item (Q3) by mean value of 3.32 and SD 1.18. This shows that the bank
credit risk assessment consider taking fast response to changes in the market. Similarly on the
same table item (Q4) respondents were agreed with mean 3.11 and SD 1.41 that poor credit risk
assessment would lead to loan default. This also shows that proper assessment of credit risk is
required in the analysis process.
Respondents under table 4.8 item (Q5) were agreed with mean 3.34 and SD 1.44 that financial
interest between the borrower and the bank official leads to loan default risks this indicates the
benefit that the bank official is going to receive will lead the analysis to poor appraisal of the loan
requested.
With respect to the question asked whether the bank practice in creating clear and trustworthy
communication effectively reduce credit risk. Under table 4.8 item (Q6) respondents were agreed
with mean 3.22 and SD 1.42 on the issue .this imply that creating clear and trustworthy
communication with the customer will help the bank reduce future risks through communicating
and devising new ways to solve problems and avoid repayment failures.
As per the assessment question presented under table 4.8 item (Q7) respondents were asked if
there is a proper system implementation for understanding credit risks in the bank. Accordingly
41
respondents were disagree with the mean 2.60 and SD 1.21. This denoted that the bank did not
implement a system to develop understanding about credit risks.
Regarding the statement providing credit risk management training courses will practically enable
the bank reduce credit risks respondents under table 4.8 item (Q8) with a mean of 3.04 and SD
1.41 were agreed. This indicates that providing proper training to staffs on credit risk
management will help the bank enable in identifying and avoiding major risks.
Under table 4.8 item (Q9) respondents were asked whether the bank assesses the likelihood of
occurring credit risks. Consequently respondents were disagreeing with Mean 2.55 and SD 1.29
which indicates that the bank did not make assessment on the likelihood of occurring risks.
Respondents under table 4.8 item (Q10) with the mean 2.79 and SD 1.34 were disagree that the
bank credit risk management procedure enable staffs to identify major credit risks. This shows
that the credit risk management procedure of the bank is not efficient enough to enable staffs
identify major credit risks.
In general compared to the other assessment parameters considered under the study the bank is
performing well in its current credit control and credit risk management areas as evidenced by the
average mean value of 3.03 and 3.08 respectively. However, there are some individual assessment
facts in the tables that tell us there are still problems in the current credit control and credit risk
management areas of the bank like insufficient credit control to classify loans based on their
weakness level, lack of proper system implementation to create understanding about credit risks,
lack of assessment for the likelihood of occurring credit risks and inefficient credit risk
management procedure are identified.
Even though the actual loaning activities of the bank going in a complied manner against the
National bank of Ethiopia requirement which is evidenced by the average mean value 2.86 there
are still problems in the loaning activity of the bank such as inflexible credit policy and procedure
, lack of effective credit administration system to control credit limit of borrowers, poor analysis
of client cash flow statements while setting loan repayment period, not considering clients
character in the process of loan appraisal and lack of regularly reviewed collection policy.
42
Moreover the non-performing loan management of the bank is on average level as evidenced by
the overall average mean of 2.69 some of the assessment facts in the table shows that there is lack
preparing regular report on selected credit accounts to detect early sign of future repayment
failures, lack of proper follow up on whether the loans disbursed are spend on the intended
purpose, insufficient implementation of loan recovery mechanism and inefficient collection
policies. These problems can be indicators for inconsistency in lowering of non-performing loans
of the bank. If the trend continued in such a way, it will affect not only the profitability of the
bank but also the lending capacity of the bank as well as the financial need of the general
economy.
43
CHAPTER FIVE
5. SUMMARY OF FINDINGS , CONCLUSION AND RECOMMENDATION

In this section of the paper the findings based on each response will be presented in informative
and summarized manner. The study analyzed each point that is believed to be weight and measure
the overall credit management activities of the bank
5.1 Summary Of Findings On Credit Management Practice In Line With Its Policy
And NBE Requirements
The bank credit management policy for provisioning and write-offs comply with asset
classification and provisioning directive of the central bank.
The collection policy of the bank is not regularly reviewed to improve state of credit
management.
The practical loaning activities of district offices comply with credit policy and procedure
of the bank.
Disseminating the credit processing and administration to district offices has practically
improved the credit control of the bank and it also enables the bank to reduce non-
performing loans.
There is lack of effective credit administration system in controlling the credit limit of
borrowers.
Imposing of loan size to borrowers is a viable strategy in credit management.
The client appraisal does not consider the character of the customers seeking credit
facilities.
The current credit policy and procedure of the bank is not encouraging and flexible
enough to attract and satisfy the credit demand of customers.
There is poor analysis cash flow statement of borrowers before approval of the loan
repayment period.
5.2 Summary Of Findings On Management Of Non-Performing Loan By The Bank

There is lack of proper follow up for actual purpose of the loan after it is granted.
Borrowers pledged asset cannot protect a loan from being defaulted.

44
The loan recovery mechanism of the bank is not sufficiently implemented to reduce bad
loans.
The NPL cases that are transferred to foreclosure process get timely decision to avoid
additional provision expense and reduce the ratio of NPL.
The bank maintaining credit monitoring and follow-up staff at all district offices would
strengthen the credit management of the bank and enable the bank to sustainably reduce
its non-performing loans.
Although, rapid credit growth is also believed to cause for occurrence of loan default.
According to the result of the study significant number of respondents disagree that having
large number of borrowers is not the cause for the loan default occurrences.
Assessing for additional source of repayment will help the bank recover outstanding loans
in case the initial collateralized property or business defaults.
The bank does not prepare regular report on selected credit accounts to help reduce future
failures.
5.3 Summary Of Findings on Current Credit Control of the Bank

Pre-set concentration limits in every sector will strengthen the control of credit activities
of the bank and help reduce risks associated with the lending.
Strong and continuous supervision, monitoring and follow-up over loan collection as per
their repayment minimize bad loans.
The existing credit control of the bank is not sufficient to classify loans based on their
weakness level.
Penalizing non performing borrowers will help the bank enhance loan repayment
commitment of borrowers.
5.4. Summary of Findings on Credit Risk Management Activities of the Bank

The existing credit risk measurement tools enable the bank to secure the bank from major
credit risks.
The practical credit risk assessment activities of the district offices enables the bank
reduce risks associated with the loan granting.
The bank credit risk assessments consider taking fast response to changes in the market.
45
Proper assessment of credit risk is required in the analysis process.

Financial interest between the borrower and the bank official leads to loan default risks
Creating clear and trustworthy communication with the customer will help the bank
reduce future risks through communicating and devising new ways to solve problems and
avoid repayment failures
The bank did not implement a system to develop understanding about credit risks.
Providing proper training to staffs on credit risk management will help the bank enable in
identifying and avoiding major risks.
The bank did not make assessment on the likelihood of occurring risks.
The credit risk management procedure of the bank is not efficient enough to enable staffs
identify major credit risks.
5.5. Conclusion
The general objective of the research was to assess the credit management practices of Wegagen
bank S.C. Based on these objectives basic research questions were developed and survey was
made on the bank’s credit performing employees at head office and four city district offices. The
research assesses the credit management of the bank using four basic dimensions namely the
practical loaning activity of the bank and alignment with the National Bank of Ethiopia
requirements, non-performing loan management, current credit control and its credit risk
management practice. As per the evidences and the forgoing findings the following conclusions
are drawn.
The result of assessment shows that the existing credit policy and procedure is concluded as
inflexible to guide credit activities of the bank and there is also lack of regularly reviewed
collection policy Moreover, the client appraisal does not consider the character of the customers
seeking credit facilities and there is poor analysis of borrower’s cash flow statement before
approval of the loan repayment period.
Similarly based on assessment on the practice of the bank on management of non-performing

loans it can be concluded as average. The assessment facts in the table shows that there is lack of
46
proper follow up on whether the loans disbursed are spend on the intended purpose, insufficient
implementation of loan recovery mechanism and inefficient collection policies.
Regarding the current credit control of the bank it is concluded as great that continuous
supervision, monitoring and follow-up over loan collection and Penalizing non performing
borrowers helps the bank in improving its credit control and enhance its overall credit
management activity .however The bank’s existing credit control is insufficient to classify loans
based on their weakness level.
Even though the researcher concluded the credit risk assessment activity of the bank as good there
are problem of lack of proper system implementation to create understanding about credit risks,
lack of assessment for the likelihood of occurring risks and inefficient credit risk management
procedure.
5.6. Recommendation
From the above findings and conclusions the study makes the following recommendations. First,
the study recommends that wegagen bank should have flexible credit appraisal policy and
procedure so that it would attract more customers and the policy should help improve prudential
oversight of asset quality of the bank. In addition, as borrower selection is the key to successful
lending, the bank should focus on the selection of true borrower. But at the same time it must be
taken into account that right borrower selection does not mean that the bank have to adopt
inflexible lending policy but rather ensure that the seek to adopt knowing the customers so as to
ascertain the true purpose of the loan as this would ensure that care is taken so that good
borrowers are not discarded due to strict adherence to the lending policy and the debt collection
policies pursued by the bank must be regularly reviewed so that it will ensure the credit advanced
to customers are repaid on time and thus ensuring that loan repayment is not adversely affected as
a result of debt accumulating due to non-repayments.
As deep credit assessment considers the borrowers` character, collateral, capacity, capital and
condition (what is normally referred to in the banking circles as the 5C`s) should be undertaken to
minimize credit risk (Kapoor et al., 2007). the researcher recommends the client appraisal to give
47
greater emphasis on the character of borrowers. Similarly, proper analysis must be undertaken on
the cash flow statement of borrowers before loan repayment periods are approved this is due to
the reason that the cash flow statement will exactly specify the cash cycle of the borrower
business so that repayments will be made promptly.
Besides, the researcher recommends the bank to perform physical follow up or visits on the
business activity of the borrower and makes proper check on the actual balance of accounts on the
financial statement presented by the borrower at the time of analysis and after disbursement of the
loan to help the bank ensure that funds disbursed to borrowers are utilized for the purpose for
which they were sanctioned.
To monitor actual exposures against established limits the bank must set up a management
information system in place in order so that exposures that are approaching risk limits will be
identified before time and the study also recommends the bank to establish a systematic credit
review process to identify weakened credits at their early stage when there may be options
available for improving the credit quality.
Finally the management of Wegagen bank must come up with a credit risk management policy
that is devised towards the granting of current loans whiles cutting down drastically the approval
of loans which has the potency of becoming doubtful or loss in the long run. Through such a
policy, the amount of risk associated with the granting of credit facility to borrowers will be
greatly reduced. And also the bank should make assessment on the likelihood of occurring risks
pay close attention to subtle changes in business practices that could affect the risks related to a
loan granting, and must implement a system to develop understanding about credit risks so that
the overall credit management practice of the bank will be improved.
5.7. Area for Future Research

The focus of this study was the credit management practice of the Wegagen Bank S.C.; therefore,
it is worth to study in comprehensive level in order to solve the persistent problems and promote
the bank as per its vision to the competitive level
48
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Arondekar, A.M. and others (2005).Principles of Banking (1st edition). New Delhi: Rajkamal
Electric Press. ;New Delhi
Asiedu M.,(2011), Rural Banking in Ghana, Combert Impression, Accra at Floucks (2001);
Financial Management and Control; London.
Bart Baesens and Tony Van Gestel, 2009. Credit Risk Management, Basic Concepts financial risk
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Habtamu Gemechu (2015, Assessment of factors affects Non-performing Loans. The case of
Ethiopian Private Banks. Addis Ababa University.
Hagos,M 2010.Credit Management, Case of Wegagen Bank Share Company in Tigray Region,
2010, Accounting and finance, Mekele University.
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Huppi,M and Feder,G.(1990) The Role of Groups and Credit Cooperatives in Rural Lending, The
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Enlarged edition, New A.S offset press, New Delhi.
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Economic and Political Weekly, pp. 429 – 435.
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Yalemzewed Tadesse (2013), MA thesis, exploring the Credit Management Practice of Bunna
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52
ANNEX A
QUESTIONERS
St. Mary’s University
School of Graduate Studies
ANNEX I
St. MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDEIS, MBA PROGRAMME
QUESTIONNAIRE)
Dear respondent,
This is a questionnaire designed to solicit first hand data that maybe helpful to conduct a research
on the title of “ Assessment of Credit Management practice at Wegagen Bank S.C.” in partial
fulfillment of master of Business Administration (MBA).
Hence, I kindly request you to attempt all the questions in the questionnaire to meet the aim of the
study. Whatever information provided will be treated with confidentiality and strictly to be used
for academic purpose only. No need to write your name.
Therefore, Please put a tick mark (√) on the space provided for questions that need further
explanation please use the space provided under each question.
Part I. Back ground of respondent:

1. Educational Qualification:
High school graduate Technical school graduate
College Diploma BA/ BSc Degree
Master’s Degree Other (please state) ____________
53
2. Total banking experience you have worked for (in years):
0-4 5-9 10-14 15-19 20 years and more
3. Your current position in the Bank
Credit Director Credit analyst Credit Portfolio Manager

Customer Relationship Manager Loan Workout Officer Credit Portfolio Officer
Credit Approving committee Credit Audit Other
Part II: REASEARCH RELATED QUESTIONS

Under this part the questions have both close ended & open ended besides to this questions are
divided in to
1. The practical loaning activity of the bank and alignment with the NBE requirements.
2. Management of non-performing loan by the bank
3. Current credit control of the bank
4. Credit risk management activities of the bank
I. Practical Loaning Activity and Alignment with NBE Directive
Questions to assess and describe the practice of the bank loaning activity and alignment with the NBE
requirements
On a scale of 1 to 5, with 1 = strongly disagree, 2 = disagree, 3 = Neutral, 4 = Agree and 5 = strongly
agree
Evaluating Statement 1 2 3 4 5
Q1 The bank credit management has a policy
for credit provisioning and write–off that
are aligned with NBE requirements
Q2 To better the state of management of
credit, reviews concerning collection
policies have been done on a regular
basis
Q3 The practical loan processing and
appraisal activities of the district offices
comply with the banks credit policy and
procedure
Q4 The credit management at a district level
improves the credit control of the bank
54
Q5 Managing the credit system of the bank

at a district level improves the bank
capability of reduction of the bank’s
NPL
Q6 The bank maintains effective credit
management system to control the single
borrower limit while extending additional
loan.
Q7 Imposing loan size limits is a viable
strategy in credit management
Q8 Client appraisal considers the character
of the customers seeking credit facilities
Q9 The existing credit policy and procedure
of the bank is encouraging and flexible to
guide credit activities of the bank
Q10 Client appraisal makes proper analysis on
the cash flow statement of a borrower
while deciding on loan repayment
schedules.
II. Non-Performing Loan Management
Questions to describe Non- performing loans management activity of the bank
On a scale of 1 to 5, with 1 = strongly disagree, 2 = disagree, 3 = Neutral, 4 = Agree and 5 = strongly
agree
Evaluating Statement 1 2 3 4 5
Q1 The bank make proper follow up on the
loans availed whether they are spend on
the actual purpose of the loan requested
Q2 Collateralizing loans help protect loan
default.
Q3 Poorly assessed and advanced loans may
perform well if properly monitored.
Q4 The bank effectively implements its loan
recovery mechanism to reduce its bad
loans.
Q5 The bank continuously make sure the NPL
cases transferred to foreclosure process
get timely decision to reduce additional
provision expense of the bank
Q6 Each districts having their own credit
monitoring and follow up team would
sustainably reduce the bank NPL
Q7 Having large number of borrowers causes
loan default.
55
Q8 assessments of secondary source of

repayments help the bank as another
fallbacks for outstanding loan balances of
non-performing borrowers account
Q9 Collection policies available have helped
in effective management of credit
practices.
Q10 The bank prepares regular report on
selected credit accounts to help reduce
future failures
II. Current Credit Control of the bank
Questions to assess the current credit control activities of the bank.
On a scale of 1 to 5, with 1 = strongly disagree, 2 = Agree, 3 = Neutral, 4 = Agree and 5 = strongly agree
Statement 1 2 3 4 5
Q1 The bank having pre-set concentration
limits in every sector enables it to reduce
risks and improves credit control activity of
the bank.
Q2 The bank having strong credit control over
collection of loans as per the repayment
schedule helps it reduced bad loans.
Q3 The existing credit control enables to
classify loans based on their weakness level
Q4 Penalty for late payment enhances
customer’s commitment to loan repayment.
III. Credit Risk Management
Questions to assess the credit risk management activities of the bank.
On a scale of 1 to 5, with 1 = strongly disagree, 2 = Agree, 3 = Neutral, 4 = Agree and 5 = strongly agree
Q1 The existing credit risk measurement tools
used by the bank safeguard the bank from
major credit risks
Q2 The Practical credit risk assessment
activity of the district offices help the bank
reduce risks associated with loan granting
Q3 The credit risk assessment of the bank
considers a quick response to market
changes
Q4 Poor credit risk assessment on the process
of analysis would lead to loan default
56
Q5 Financial interest between the borrower

and the bank official leads to loan default
risks.
Q6 The bank practice in creating clear and
trustworthy communication effectively
reduce credit risk
Q7 There is a proper system implementation
for understanding credit risks in the bank
Q8 providing credit risk management training

courses will practically enable the bank
reduce credit risks
Q9 The bank assesses the likelihood of
occurring credit risks
Q10 The bank credit risk management

procedure enable staffs to identify major
credit risks
57

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ASSESSMENT OF CREDIT MANAGEMENT PRACTICE

BY: ESKEDAR BEKELE

By: ESKEDAR BEKELE

A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY,

ADDIS ABABA - ETHIOPIA

Eskedar Bekele ……………….. ………………….

Solomon Markos (PhD)

By: Eskedar Bekele

APPROVED BY BOARD OF EXAMINERS

Dean, Graduate Studies _________________

Solomon Markos (PhD)

Mulatu Takele (PhD)

2.1.5.2. Credit Information ............................................................................................ 12

4.3. Assessing The Bank’s Credit Management Practice ............................................... 33

1.1 Background of The Problem

According to Hettihewa (2001), Credit Management is extremely important as granting credit is

1.2. Statement of Problem

Table 1.1 Trend of NPL

1.3. Research Question

1.4. Objective of the Study

1.4.1. General Objective

1.5. Significance of the Study

1.6. Scope of the Study

1.7. Limitation of the Study

1.8. Operational Definition of Key Terms

1.9. Organization of the Study

2. RELATED LITERATURE REVIEW

2.1 Theoretical Concepts

2.1.1. Credit Management

2.1.2 Process Of Credit Management

2.1.3 Credit Policies And Procedures

In order to be effective, credit policies must be communicated throughout the organization,

2.1.4. Credit Administration Policy

2.1.5. Credit Process

2.1.5.1 Credit Application

2.1.6. The Loan System

2.1.7. Proposed Lending Tools

2.1.8 Credit Collection Techniques

2.1.9. Credit/Loan Follow Up

2.1.10 Non-Performing Loan (Npls)

The Directive classifies loans and advances into the following.

2.1.12. Credit Risk Management

2.1.13. Credit Control

2.1.13.1. Credit Control Functions

2.1.14. Principles Formulated By the Basel Committee

2.2 Empirical Review

Tekeste (2016) studied assessment of credit management performance in emerging private

3.1. Research Design

3.2 Target Population and Sampling Technique

3.2.1 Target Population

S/N Position Total Number

3.3. Data Sources and Collection Procedure

3.4. Data Analysis Method

3.5. Validity of Research Instruments

3.6. Reliability of Research Instruments

4. DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.1. Survey Results