ASSESEMENT OF CREDIT RISK MANAGEMENT

PRACTICES: IN THE CASE OF COMMERCIAL BANK OF

ETHIOPIA HAWASSA BRANCH.

A RESEARCH PAPER SUBMITTED TO ACCOUNTING

AND FINANCE PROGRAM IN PARTIAL
FULLFILLEMENT OF THE REQUIREMENT FOR BA
DEGREE IN ACCOUNTING AND FINANCE

PREPARED BY-MAKDA TESFAYE

ADVISOR: BEKALU TESERA

HAWASSA UNIVERSITY

COLLEGE OF BUSSINESS AND ECONOMICS

SCHOOL OF MANAGEMENT AND ACCOUNTING

ACCOUNTING AND FINANCE PROGRAM

JUNE, 2016.ETHIOPIA
 Table of content

Contents Pages
Acknowledgment..............................................................................................................................I

List of tables....................................................................................................................................II

Abstract..........................................................................................................................................IV

Acronyms.......................................................................................................................................III

CHAPTER ONE:

1. BACKGROUND OF THE STUDY...........................................................................................1

2. Statement of the problem............................................................................................................2

3. Objectives of the study................................................................................................................2

3.1 General objective...................................................................................................................2

3.2 Specific objective.................................................................................................................3

4. Significance of the study.............................................................................................................3

5. Scope of the study........................................................................................................................3

6. Limitation of the study.................................................................................................................4

7.Ethical consideration.................................................................................................................4

8 organization of the Study..............................................................................................................4

CHAPTER TWO

2. LITERATURE REVIEW............................................................................................................5

2.1 Introduction............................................................................................................................5

2.2 Theoretical literature..............................................................................................................5

2.2.1 Definition of Credit............................................................................................................5

2.2.2 Banks’ overall risk.............................................................................................................5

2.2.3 Credit Management process...............................................................................................7

2.2.4 Credit worthiness analysis..................................................................................................9

 2.2.5 Credit risk management problems....................................................................................14

2.2.6 Credit risk management techniques.................................................................................15

2.3 EMPHERICAL LITRATURE.............................................................................................16

CHAPTER THREE

3. Research design and methodology…………………………………………………..18

3.1Source of data………………………………………………………………………18

3.2 Method of data collection …………………………………………………………18

3.3 Sampling technique and sampling size…………...………………………………..18

3.4 Research approach………………………………..………………………………..18

3.5 Research method…….…………………………..…………………………………18

3.6 Method of data analysis and presentation……….…………………………………19

CHAPTER FOUR

4. Data Analysis and Presentation.................................................................................................20

4.1 Background of the organization...........................................................................................20

4.2Data presentation...................................................................................................................22

4.3 Credit management process in commercial bank of Ethiopia..............................................23

4.3.1 Managing loan repayment of the bank.....................................................................24

4.4 Evaluation of the creditworthiness of the applicant.............................................................25

4.4.1 Credit Analysis.................................................................................................................26

4.5 Types of loan and processing period granted by the bank...................................................26

4.6 .CBE loan customer.............................................................................................................28

4.6.1 Loan Portfolio..................................................................................................................29

4.7 Major problems respect to management of credit risk.........................................................30

4.8 The structure of the bank regarding the loan approval process.........................................30

4.9 Data collection for the required documents.........................................................................31

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 4.10 Credit Risk Monitoring and Supervision mechanisms of the bank....................................31

4.11 Credit risk pricing system in CBE.....................................................................................32

CHAPTER FIVE

5.Conclusion and recommendation...............................................................................................33

5.1Conclusion.............................................................................................................................33

2.Recommendation.....................................................................................................................34

Reference.......................................................................................................................................35

Apendex………………………………………………………………….........................37

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 Acknowledgment

Firstly, I will like to thank my almighty God for his support throughout my life. I will
also like to convey my gratitude to my senior essay advisor dear Bekalu for his guidance,
critical comment and valuable professional advice in shaping this paper. And also, I
would like to mention my thankfulness to commercial bank of Ethiopia employees.

Finally, I would like to extend my lovely thanks to my family for their financial, material
and moral support, which were determinant for my achievement

I
List of tables
TABLE 1.-Analysis the of background of the respondent

TABLE 2-Types of loan and processing period granted by the bank

TABLE -3 Analyses of advisory services to its loan customer

TABLE-4 Categories of loan customer

TABLE-5 loan portfolios

II
 Abstract
The objective of this study is to investigate the effectiveness of credit management,
creditworthiness analysis, management of loan repayment, problems of credit risk
management and mechanism of credit risk management. To achieve the objectives the
study both primary and secondary data was used. The result of the study indicates that
there are problems of, insufficiency of collateral for loan, inappropriate system of loan
approval and repayment, and there is no a minimum time for the approval of loan and
there is no strong advising service.

III
Acronyms

CBE-COMMERCIAL BANK OF ETHIOPIA

CEO-CHIEF EXCUTIVE OFFICERS

CRM-CUSTEMER RELATIONSHIP MANAGEMENT

GAAP-GENERAL ACCEPTED ACCOUNTING PRINCEPLE

NBE-NATIONAL BANK OF ETHIOPIA

NPLGL-NON-PERFORMANCE LOANS TO GROSS LOANS

IV
 CHAPTER ONE:

1. BACKGROUND OF THE STUDY

Banks are in the business of safeguarding money and other valuables for their clients.
They also provide loans, credit and payment services such as checking accounts, money
orders and cashier’s checks. Banks also may offer investment and insurance products and
a wide whole range of other financial services. Banks engage in a large number of
financial activates and render a wide range of services to customers, direct lending is one
of the primary function performed by them, the one in which they have a natural
advantage over almost all financial institutions. In relation to this, banks have a chance to
face risk. The main risk facing banks are credit risk, market risk, mortgage risk, interest
rate risk, default risk, liquidity risk and operational risk. (Base committee on banking
supervision)

Credit risk is a risk of loss of principal or loss of financial reward stemming from a
borrowers failure to repay a loan or otherwise meet a contractual obligation. It arises
whenever borrowers are expecting to use future cash flow to pay current debt. Most
lenders use their own models to rank potential and existing costumers according to risk,
and then apply appropriate strategies with products such as unsecured personal loans or
mortgage lenders Charge price for higher price for higher risk customers and vice versa.
Loans typically exposure the greatest credit risk changes in general economic conditions
and affirms operating environment alter the cash flows available for debt service. Those
conditions are difficult to predict. Similarly, an individual’s ability to repay debts varies
with changes in employment and personal worth. (HTTP://EN.WIKIPIDIA.ORG)
Credit management is the process for controlling and collecting payment from the
customers. The credit management system provides connection to credit scores and other
measures of financial risk. This can be important for assessing new applicant for credit,
as well as adjusting accounts in response to changing financial risk. The system may
automatically increase interest rates and other expense associated with an account if the
person starts to default on other debt, for example if someone is caring usually high level
of debt. These changes reduce risk of the creditor.

1
Credit risk management is exactly what it sounds like; monitoring risk with in a
company’s or lenders operations. It’s an essential components of successful business
ventures (especially in high finance), as it controls and guide a profitable business
through transaction. (Credit risk management/index.htm/)

By reducing the problem of credit risk and following sound mechanism of credit
management, the institution can enlarge their advantage.

1.2 Statement of the problem

It’s true that the importance of sound mechanism of credit risk management system
significantly contribute to the enlargement of advantageous of the institutions, thus
proper planning, analysis, implementation and follow up of credit risk management
process are must be emphasized . Sound credit risk management is a means to achieve the
satisfactory advantages. Some of the factors which may be affect the credit risk
management of Commercial Bank of Ethiopia; problem in managing credit grant and
collection, lack of effective mechanisms of credit risk management, problem of good
evaluation process of business proposal and lack of good security for the collateral of
loan.
Thus, this study aims at the following basic research question:
 What processes are involved in credit management at CBE?
 How does CBE evaluate the credit worthiness of the applicants?
 What mechanisms are used in credit risk management at CBE?
 What are the major challenges of Commercial Bank of Ethiopia in credit risk
management?
 How does CBE price credit risk?

1.3 Objectives of the study

1.3.1 General objective

The general objective of this paper is to assess the credit risk management practice of
Commercial Bank of Ethiopia.

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 1.3.2 Specific objective
The specific objective of this paper is:

 To identify the process that is involved in credit management at CBE.

 To asses CBE used to evaluate the credit worthiness of the applicants.
 To identify the mechanisms those are used in credit risk management at CBE.
 To identify the major challenges of credit risk management in Commercial Bank
of Ethiopia.
 To determine the pricing system used by CBE in credit risk.

1.4 Significance of the study

The main purpose of this study is to give high light on the credit risk management in
commercial bank of Ethiopia. Furthermore, it can serve as bases for making further
investigation on such related issue; the study has the following significance.

The study gives to CBE the chance to revisit its credit risk management and improve
further.

 The study helps officers and experts to understand the problem that exists.
 It is expected to inform decision makers about the potential problems in relation
to credit risk management.
 The findings of the study will initiate other interested researcher to undertake a
better and detailed study in the area.
 In addition, suggest the possible strategies that to minimize the existing problem
have been helped.
 It also uses for the partial fulfillment of the requirement for the bachelor of art on
accenting and finance.

1. 5 Scope of the study

Although there are many banks in Ethiopia, this study focuses on Commercial Bank of
Ethiopia. When doing so, the researcher restricted herself to the head office, which is
found in hawassa for obtaining the necessary information that help to make the research
meaning full.
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1.6 Limitation of the study
This paper is limited by financial and time problem, in order to minimize this constraint
the researcher is tried to properly manage the constraints. In addition to this, when
conducting the research the researcher faced lack of full information about credit risk
management and its controlling system and overlapping of additional term paper will
contribute more for a limitation of the study.

1.7 Research design and methodology

1.7.1 Source of data

The data is collects with the use of both primary and secondary data sources. Primary
data is collects by distributing questionnaires to credit managers and employees of the
institution and interview with the chief executive officer bank of Ethiopia. Secondary
data is collects from data records and events like books, articles, research paper, internet,
publications and unpublished paper and bank manual.

1.7.2 Sampling technique and sampling size

The populations of the study are the employees of commercial bank of Ethiopia who are
responsible for credit risk management. Total populations employees of commercial bank
are 79. The researchers uses random sampling method to select respondent from
employee’s. The sample size of the study 24 respondents which the researcher selects
randomly.

1.7.3 Method of data Collection

The researcher distribute questionnaire and interview to obtain primary data, where as
uses data records and events like books, reports, and internet and research paper to obtain
secondary data.

1.7.4 Research approach

4
In order to assess and evaluate credit risk management system the researcher are use
mixes approach. Qualitative uses for analyses the data that gatheres through interview
and questionnaire. Quantitative approach uses for statistically techniques and use surveys.

1.7.5 Research method

The method of data analysis is descriptive in the sense the credit risk management of the
Bank will be percentage and table.

1.7.6 Method of data analysis and presentation

In attempting to assess the credit risk management, the data analysis implemented is
descriptive type and tables are used for meaningful interpretation of the data.

5
 CHAPTER TWO

2. LITERATURE REVIEW

2.1 Introduction
The purpose of this chapter is to describe and document what has been written and
recorded in different manuals, literatures and authors about Bank Credit Management and
Practices. For this particular study, the researcher has been the views, concepts and
definitions forwarded from selected manuals and authors on “assessment of Credit risk
Management Practice”. In short it summarizes the conceptual framework and empirical
review for this study.

2.2 Theoretical literature

2.2.1 Definition of Credit

The word credit is derived from the Latin word ‘creditum’, which means to believe or
trust. In economics, the term credit refers to a promise by one party to pay another for
money borrowed or goods or services received. It is a medium of exchange to receive
money or goods on demand at some future date. (ML JhiNGan, 2002)

Another definition of credit is that it has originated from the Latin word “Credo” which
means ‘I believe’. Credit is a matter of faith in the person and no less than in the security
offered. Credit is purchasing power not derived from income, but by financial institutions
either as an offset to idle incomes held by depositors in the banks, or as a net addition to
the total amount of purchasing power. In fact, no economy can function without credit;
all economic transactions are settled by means of credit instruments today. It is the very
life blood of modern business and commercial system. (G.D.H. Cole, 2000)

2.2.2 Banks’ overall risk

Banks, like other business entities, are susceptible to various risks but they face higher
and more versatile risk because banks are highly geared and over 80% of their assets are

6
loans that are, by themselves, subject to other risks such as Interest rates risk and default
risk. According to Sinkey (1998) bank risk Management focuses on three key areas,
namely, credit risk, interest rates risk and Liquidity risk. These risks arise from
unexpected changes in the borrower’s ability to repay loans, unexpected changes in
interest rates and unexpected changes in Balance sheet flows respectively. All these risks
need to be managed; the focus of this study will be on “the management of credit risk”.
Banks have managed deferent types of risk to earn profit for making shareholders wealth,
according to Koch (1994).these are: credit risk, liquidity risk, interest rate risk
,operational risk ,capital or solvency risk ,other risk

1. Credit risk

Whenever a bank acquires an earnings asset, it assumes the borrower will default, that is,
not repay the principal and interest on timely basis. Credit risk is the potential variation in
net income and market value of equity resulting from this nonpayment or delayed
payment. Deferent types of assets have deferent default probabilities. Loans typically
exhibit the greatest risk.

2. Liquidity risk

Liquidity risk is the variation in net income and market value of equity caused by a
bank’s difficulty in obtaining cash at reasonable cost from either the sale of assets or new
borrowing .liquidity risk is greatest when a bank can not anticipate new loan demand or
deposit withdrawal and does not have access to new sources of cash.

3. Interest rate risk

Interest rate risk refers to the potential variability in bank’s interest income and market
value of equity due to changes in the level of market interest rates. it encompasses the
total portfolio compositions focusing on mismatched asset and liabilities maturities and
duration as well as potential changes interest rate.

4. Operational risk

Operational risk refers to the possibility that operating expresses might vary significantly
from what is expected, producing a decline in net income and firm value .a bank’s

7
operating risk is those closely related to its burden, number of division or subsidiaries,
and number of employees. Because operating performance depends on the technology a
bank uses, the success in controlling this risk depends on whether a bank’s system or
delivering products and services is efficient and functional.

5. Capital or solvency risk

Capital risk represent the possibility that a bank may become insolvent .a firm is
technically insolvent when it has negative net worth or shareholders equity .the economic
net worth of a firm is the deference between the market value of its assets and liabilities
.thus capital risk refers to the potential decrease in net asset value before economic
growth is zero .capital risk is closely associated with financial leverage ,which refers to
the use of debt and preferred stock that pay fixed rates as part of a firm’s capital structure.

6. Other risks

Banks that deal with international activities often assume additional risks (Koch, 1995).
The most important of these are exchange risk and country risk. Exchange risk arises
whenever a bank receives or makes a payment in foreign currency .it will eventually need
to convert the currency to another currency. Exchange risk refers to the unpredictable
value of a foreign currency relative to another currency .in general, losses can arise when
the value of what a bank is receiving falls or when the value of what it is paying arises
beyond that expected. Country risk refer to the potential losses of interest and principal
on international loans due to a country refusing to make timely payments as per a loan
agreement .in essence, foreign government borrowers can default on their loans. Thus the
country risk is a form of risk.

2.2.3 Credit Management process

The most important objective of credit management is to make profitable loans with
minimal risk. In order to achieve this objective, both goals of loan volume and loan
quality must be balanced with banks liquidity requirements, capital constraints, and rate
of return objectives. According to Koch, the credit management process has three

8
fundamental functions, which reflect the bank’s credit policy determined by board of
directors. These are

 Business development and credit analysis credit market research, marketing bank
services to existing and potential customers, identification of inherent risks,
collecting information for credit files, evaluating collateral.
 Credit execution and administration: loan approval within limits, documentation,
loan covenants (agreement)
 Credit review: monitoring loan performance, handling problem loans (Koch,
P.1995).

Of these three major functions, credit analysis plays a vital role on credit management
process providing key factors to identify good customer from applicants. These factors
are known as Cs of credit. Hanks called them as 4Cs character, capacity, capital, and
collateral (1956). According to Koch, there are 5Cs to credit character, capital, capacity,
condition, and collateral. Character indicates the debtors honesty, thrust worthiness,
etches, and integrity to repay the loan. Capital is the borrower’s wealth position and
financial soundness. Capacity refers to both the legal standing and management expertise
of borrower’s so as to meet its obligation. Condition involves the economic environment
or industry-specific supply, production, and distribution factors influencing the firm’s
operation. Lastly but not the least collateral is the lenders security in case of default. It is
the guarantee provided by the debtor for liquidation in case of fail, (1995). Here Koch’s
approach to credit analysis factors sounds more factor (known as condition), which helps
as to investigate economic and industrial environments that influence the borrower’s
business operations.

In lending process, economic priorities must be taken into account. However, credit
management process highly relies on the bank’s systems and controlling mechanisms that
allow the management and credit officers to exercise their expertise.

So sustainable credit operation management is possible only through effective and

efficient credit analysis, credit policy implementation, credit monitoring and credit

9
review. Therefore having well qualified with adequate experience and ethically
conducting credit officers is the life-blood of successful credit operation.

2.2.4 Credit worthiness analysis

Credit analysis –refers to the process of deciding whether or not to extend credit to
particular customer. It usually involves two steps; gathering relevant information and
determining credit worthiness (Ross, 1998).

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 officer attempt to evaluate a borrower’s
ability and willingness to repay (Koch, 1995).

Many authors states in their book that the principal factors which may be taken in to
consideration which extend or using credit .among these authors are (pandy, 1990 and
Koch, 1995). These authors have deferent number of credit evaluation, i.e.Pandey(1990)
states three c’s of credit , i.e. character , capacity ,capital, condition and sometimes also
condition is added .But ,Koch (1995) mentions five c’s of credit : character ,capital,
capacity, condition and collateral. These five c’s:

I. Character. This refers to the borrower’s personal characteristics such as honesty,

willingness and commitment to pay debt. Borrowers who demonstrate high level of
integrity and commitment to repay their debts are considered favorable for credit.

ii. Capacity. This also refers to borrowers’ ability to contain and service debt judging
from the success or otherwise of the venture into which the credit facility is employed.
Borrowers who exhibit successful business performance over a reasonable past period are
also considered favorable for credit facility.

iii. Capital. This refers to the financial condition of the borrower. Where the borrower has
a reasonable amount of financial assets in excess of his financial liabilities, such a
borrower is considered favorable for credit facility.

10
iv. Collateral. These are assets, normally movable or unmovable property, pledged
against the performance of an obligation. Examples of collateral are buildings, inventory
and account receivables. Borrowers with a lot more assets to pledge as collateral are
considered favorable for credit facility.

v. Condition. This refers to the economic situation or condition prevailing at the time of
the loan application. In periods of recession borrowers find it quite difficult to obtain
credit facility.

The formal credit analysis procedures include a subjective evaluation of the borrower’s
request and a detailed review of all financial statements. The initial quantitative analysis
maybe performed by credit department employees for the loan officer.

The process consists of the following

1. collecting information for the credit file

2. spreading financial statements
3. projecting the borrower’s cash flow
4. evaluating collateral
5. writing a summery analysis and making a recommendation

The credit file contains background information on the borrower, including call report
summaries, past and present financial statement, pertinent, credit reports and supporting
schedules such as an aging of receivables, a break dawn of a current inventory and
equipment, a summary of insurance coverage .if the customer is a precious borrower ,the
file should also contain copies of the past loan agreement ,cash flow projections
,collateral agreements and security documents ,any narrative comments provided by prior
loan offices /and copies of all correspondence with the customer. The credit analyst uses
the credit file data to spread the financial statements, project cash flow and evaluate
collateral. The last step is to submit a written report summarizing the loan request, loan
purpose and the borrower’s comparative financial performance relative to industry
standards, and then make a recommendation.

11
The loan officers evaluate the report and discuss any error, omission and extension with
the analyst .if the credit does not satisfy the banks risk criteria ,the officer notifies the
borrower that the original request has been denied .The officer may suggest procedure
that would improve the borrower’s condition and repayment prospects ,and solicit
another proposal if circumstances improve . If the credit satisfies acceptable risk limit,
the officer negotiates specific preliminary credit terms including the loan amount,
maturity pricing, collateral requirements and repayment schedule.

Many small banks do not have formal credit departments of full time analysis to prepare
financial histories .loan officers personally complete the steps activities above before
accepting or rejecting a loan .often loan request are received without detailed information
on the borrowers condition financial statements maybe hand written or unaudited and
may not meet GENERALLY ACCEPTED ACCOUNTING PRENICIPLE (GAAP).yet
the borrower may possess good character and substantial net worth .in such instances, the
loan officers work with the borrower to prepare a formal loan request and obtain the best
financial information possible . This may mean personally auditing the borrower receipts,
expenditure, receivables and inventory.

Sometimes, five p’s of credit are also linked with these credit principles (pandy, 1990)
.These p’s pertain to: Purpose, Person, Productivity-planning scheme or projections,
Payment of installment or repayment and Protection security

All these characters, in fact, determine the soundness of credit, i.e., generating adequate
income create to purpose and productivity planning scheme or projections, repaying the
same whenever falls due (payment installment) and maintain risk-bearing ability (person
–and protection-security).

2.2.4.1 Borrower study and status report

The study of a borrower is a study of his character, capacity, capital, condition and
collateral as stated before .In order to get a complete picture of the borrower’s credit
worthiness, enquires will have to be made about his business, trade experience, assets and
liabilities, etc. from various sources (bedi and hardikar, 1993) .his account with the bank
or other banks will throw light on his personal habits and business dealings. His financial
statement and income –tax returns will have to be seen. Probability an interview with will

12
be necessary to elucidate or supplement the information that may have been collected
.There are hardly any credit agencies in India which assists banks by giving reports even
a report on a borrower obtained throw banks in India is usually brief and sketch and does
not give sufficient information that could be of a practical use .It would appear that banks
could be in a better position to serve in a business community and themselves. They
evolve a system by which detailed credit reports on customer are communicated to each
other.

Status reports on borrowers are sometimes called credit reports, financial reports,
banker’s opinion or confidential reports. All these terms carry more or less the same
meaning. A study report is an assessment of the borrower’s character, capacity, capital,
condition and collateral from the point of view of banker.

Sources

Banks get information on borrowers throw various sources enumerated below.

a. Loan application
b. Bazaar reports through friend or rivals mostly from the borrower’s trade of
business.
c. Mode of living
d. Borrower’s account with the bank or statement of account with other banks.
e. Statement of asset and liabilities .in the case of companies, their balance –
sheet and profit and loss accounts for, say three years, records of the register of
companies, etc.
f. Personal contact including personal interview.

Some of the above sources are discussed below.

a. Loan application

Some banks require borrowers to fill answers to a detailed questionnaire. The consumer
have to state the name of their concern ,its constitution ,the year when established ,place
of business ,names of bankers with detailed of asset owned and particular of charges

13
there on. They must also state in the application, the purpose, and period of advance
applied for and the sources as well as the term of payment .they have to specially mention
the nature and particulars of the security offered, if any .they have, moreover, to give
their existing liabilities .such an application gives the banker as a starting point to
proceed with the work of making relative inquires .it may sometimes not be practicable to
institution such detailed information will have to be obtained through a personal
interview of other resources.

b. Bazaar reports

Reports can be obtained from the various markets; particularly from businessmen
carrying on the same trade as the borrower, some of when may be his friends, other his
rival’s or enemies while others may try to run him down. All such report, sometimes
contradictory to each other, has to be weighted independently and balanced opinion has
to be formed about the character, capacity, condition and collateral of the borrower.

c. financial statements

The borrower should be requested to supply the latest statements, preferably audited of
his liabilities and assets. It will be very helpful to a banker if two or three previous
statements are available, a copy of his income –tax return will be helpful in enabling the
banks to know the details to his net income .it will be them possible to trace from the
returns the capital resources of the borrower. His wealth –tax statements will similarly
enable a bank to form an estimate, of his assets, his tax- sales return will indicate the
figures of his sales .in the case of limited companies, the audited balance sheet and profit
and loss accounts for the last three years should be looked into.

d. Other sources

Other sources of information about the borrower include press report regarding purchase
and sales of property, auctions and decrees .registration, revenues and municipal records
can be also referred to with advantage to verify the properties owned by the limited

14
company, a search of the records of the register of companies should be made for finding
out if there are any prior changes or wastage on the company’s assets.

e. Personal interview

In addition to the information collected from outside sources, it is advisable and perhaps
preferable to arrange for a personal interview with the borrower .an experienced banker
armed with the reports he already has with him, can gather a lot of information on various
points through an interview and should thereby be in a position to assess the fives “c’s”
of the prospective borrower. A personal interviews one of the most important duties of
banker and this responsibility should no case be delicate to an experienced officer.

An interview with the borrower may be held in the banks office or outside, say, in a club
where the borrower may be invited, or even at the borrower’s place .It may be formal
with previous appointment or may be arranged through a common friend.

2.2.5 Credit risk management problems

Many credit problems reveal basic weakness in the credit granting and monitoring
process. While shortcomings in underwriting and management of market- related credit
exposures represent important sources of losses at banks, many credit problems would
have been reducing or mitigated by a strong internal credit process.(dereje,2010)

Many banks find caring out a through credit assessment (or basic due diligence)
substantial challenge. For traditional bank lending, competitive pressures and the growth
of loan syndication techniques create time constraints that interface with basic due
diligence. Globalization of credit markets increase the need for financial information
based on sound accounting standards and timely macroeconomic and flow of funds data.
When this information not available or reliable, bank may dispense with financial and
economic analyses and support credit decisions with simple indicators of credit qualities,
especially if they perceive a need to gain a competitive foothold in a rapidly growing
foreign market, finally banks may need new types of information, such as risk
measurements, and more frequent financial information to assess relatively newer counter
parties, such as institutional investors and highly leveraged institutions.

15
The absence of testing and validation of new lending techniques is another problem.
Adoptions of untested lending techniques in new or innovative areas of the market,
especially techniques that dispense with sound principles of due diligence or traditional
benchmarks for leverage, have leads to serious problems at many banks. Sound practice
calls for the application of basics principles to new types of credit activity. (Dereje, 2010)

A related problem in that way banks does not take sufficient account of business cycle
effects in lending. As income prospects and asset values rise in the ascending portion of
the business cycle, credit analyses may incorporate quarry optimistic assumptions.
Industries such as retelling, commercial real estate and real estate investment trusts,
utilities and consumer lending often experience strong cyclical effects. Sometimes the
cycle is loss related to general business conditions that the product cycle in relatively
new, rapidly growing sector, such as health care and telecommunications. Effective stress
testing which takes account of business or product cycle effects is one approach to
incorporating in to credit decisions a full understanding of a borrower’s credit risk.
(Dereje, 2010)

Many of the major banking problems encountered worldwide emanate from lax credit
risk management practices. Such problems, therefore, can be effectively controlled and
minimized by implementing efficient risk management process. To this end, the Basel
committee developed an efficient risk management practice to be implemented by banks
and used by banking supervisors worldwide in evaluating performance (Dereje, 2010.)

2.2.6Credit risk management techniques

Oldfield and Santomero (1997) investigated risk management in financial institutions. In
this study, they suggested four steps for active risk management techniques:

 The establishment of standards and reports;

 The imposition of position limits and rules (i.e. contemporary exposures, credit
limits and position concentration);

 The creation of self-investment guidelines and strategies;

16
Loans that constitute a large proportion of the assets in most banks’ portfolios are
relatively illiquid and exhibit the highest credit risk (Koch and MacDonald, 2000). The
theory of asymmetric information argues that it may be impossible to distinguish good
borrowers from bad borrowers (Auronen, 2003), which may result in adverse selection
and moral hazards problems. Adverse selection and moral hazards have led to substantial
accumulation of non-performing accounts in banks (Bester, 1994; Bofondi and Gobbi,
2003). The very existence of banks is often interpreted in terms of its superior ability to
overcome three basic problems of information asymmetry, namely ex ante, interim and
ex post (Uyemura and Deventer, 1993). The management of credit risk in banking
industry follows the process of risk identification, measurement, assessment, monitoring
and control. It involves identification of potential risk factors, estimate their
consequences, monitor activities exposed to the identified risk factors and put in place
control measures to prevent or reduce the undesirable effects. This process is applied
within the strategic and operational framework of the bank.

Banks must have a process to analyze beneficiaries’ ability to service a facility advanced
to them. In some instances, stringent policies must be put in place to prevent individuals
that involve in fraudulent activities or crimes from accessing a facility. This can be
achieved through a number of ways for example using reliable source of references,
accessing credit bureaus, or becoming familiar with individuals responsible for managing
a company and checking their references and financial conditions.

2.3 EMPHERICAL LITRATURE

NSIAH (2010) did a study on assessment of credit risk management practices of

commercial bank of Ghana .The purpose of the study to examine credit risk management
policies and procedures of two rural bank of Ghana. The researcher used qualitative
method to analyze the data which were collected from secondary and primary sources
from two rural banks. Commercial banks are relatively less profitable and less liquid and,
are exposed to risk as compared to banking industry. With regard to asset quality or credit
performance, this paper found no conclusive result.

17
Oretha (2012) did a study on the relationship between credit risk management practices
and financial performance of commercial banks in Liberia. The research objective was to
gain a better understanding of credit risk management practices and its relationship with
financial performance. The measure of financial performance was the return on asset. The
results of there searcher showed a positive relationship between credit risk management
practices and the financial performance of commercial banks in Liberia.

Abdus (2004) has examined empirically the performance of Bahrain's commercial banks
With respect to credit (loan), liquidity and profitability during the period 1994-2001.
Nine financial ratios (Return on Asset, Return on Equity, Cost to Revenue, Net Loans to
Total Asset, Net Loans to Deposit, Liquid Asset to Deposit, Equity to Asset, Equity to
Loan and Non-performing loans to Gross Loan) were selected for measuring credit,
liquidity and profitability performances. By applying these financial measures, this paper
found that commercial banks' liquidity performance was not at par with the Bahrain
banking industry. Commercial banks are relatively less profitable and less liquid and, are

exposed to risk as compared to banking industry. With regard to asset quality or credit
performance, this paper found no conclusive result.

Non-performing loans to gross loans (NPLGL) indicates that there was no difference in
performance between the commercial banks and the banking industry in Bahrain.

Hagos (2010) did study on credit management case on wegagen bank Share Company in
tigray region. The objective of the study was to evaluate the performance of credit
management in wegagen bank tigray region. The researcher was used qualitative
methodology to analysis the data were collected primary and secondary. Its recommend
on the basis of the analysis that the banks should adopt a more active marketing strategy
to expand and create their own market, consider tighter control for their operations with
understanding banking regulations (e.g., Financial Institutions Reform, Recovery, and

18
Enforcement Act) and adopt the loan policy in a way that they can make a loan decision
with more reliable cash flow analysis.
The above empirical review of literature emphasizes that all the studies so far conducted
are mainly discussing the loan recovery problems, determinant factors for default of
borrowers in financial institutions in general at Macro-level. The researcher also observed
in the review of literature that there are no studies conducted mainly to identify the
problems related to lack of effective credit risk pricing system with reference to
COMMERCIALBANK OF ETHIOPIA. Thus , the researcher felt it appropriate to take
up the present study entitled “ASSESEMENT OF CREDIT RISK MANAGEMENT- A
CASE STUDY ON COMMERCIAL BANK OF ETHIOPIA” to assess the credit risk
pricing system problems and thereby to recommend courses of action that are assumed to
promote quality loan growth and curtail non-performing.

CHAPTER THREE

Time Table of Budget break down

19
 No Activities Month Cost/birr
Jonu Feb march
1 Preparing proposal 
2 Preparing questionnaires 
3 Distributing questionnaires to 
target population
4 Collecting the questionnaires 
5 Preparing first draft 
6 Writing final draft 
7 Presentation 

Table of Budget break down

Item Budget break down

Birr Cent
1 for paper 41 60
2 for writing this paper 75 90
3 for printing 45 -
4 for trang population 64 50
5 for other purpose 68 80
Total 295 80

Reference

http://www.combank,com//

(http//en.wikipidia//)

20
Sinkey, J. F. (1998) Commercial bank financial management. 6th edition. Prentice hall
USA.
Oldfield, G.S. and Santomero, A.M. (1997), “Risk management in financial institutions”,
Sloan Management Review, Vol. 39 No. 1, pp. 33-46.
Bofondi, M. and Gobbi, G. (2003), Bad Loans and Entry in Local Credit Markets, Bank
of Italy Research Department, Rome
Basel (1999), “Principles for the management of credit risk”, Consultative paper issued
by the Basel Committee on Banking Supervision, Basel.
Koch, T.W. and MacDonald, S.S. (2000), Bank Management, the Dryden Press/Harcourt
College Publishers, Hinsdale, IL/Orlando, FL.

Uyemura, D.G. and Deventer, D.R. (1993), Risk Management in Banking: Theory and
Applications of Assets and Liability Management, Banking Publication, Kamakura,
Honolulu, HI.

Basel Committee on Banking and Supervision (2000). Best practices for credit

risk. Basel Committee Publication No. 74, Basel.

Basel Committee on Banking and Supervision (2001). Sound practices for the

management of operational risk Basel Committee Publication No. 86, Basel.

Brigham, E. F., & Ehrhardt, M. C. (2002). Financial management theory and

practice (10th edition), Harcourt College Publishers.

Calomirus, R., & Enggel, C. (2004). Adjustment is much slower than you think.

Unpublished working paper, MIT and Yale University.

Ganesan, V. (2000). Good credit culture to enhance confidence. Journal ofFinancial

and Quantitative Analysis, Vol 25(4) 469-490.

21
Machiraju, H. R. (2004). Modern commercial banking. Vikas publication House

PVT.

Matyszak, P. (2007). Ancient Rome on five denarri a day. New York Thames &

Hudson publication.

McNaughton, C. (2001). Modeling credit migration. Research paper. J. P.

Morgan.

Mowbray, B. H. (2001). Risk management and insurance (7th edition) McGraw

Hill.

Mueller, H. P. (1998). Credit risk policy: the anchor of credit culture. Journal of

Commercial Lending. Vol. 78, 41-47.

Rachev, S., Schwartz, E., & Khindanova, L. (2000). Modeling of credit risk.

Research paper, Karlsruhe University of Califonia

Sanaders, C. (2005). Financial markets and institutions: An introduction to the

risk management approach. McGraw Hill Publication

Wilson, J. S. G. (1998). Bank asset and liability management. Magazine of Bank

Adminmistration, p.20-2
Wheehem, T. L., & Hunger, D. J. (2008). Strategic management and business policy, New
Jersey; Pearson educati

22
Ethical consideration

This rsearch is conducted only for academicals purpose .The information to be obtained
from the bank used for this purpose only, but not for personal interest and transferring to
other organization. To prepare this proposal the researcher read some books and research
paper that use as a source .Therefore, when taking researcher the other works, by
referencing the name of the person.

8.organization of the Study

This study is organizes in to three chapters. The first chapter deals with the problem and its
approach. It also includes research design and methodology the second chapter focuses on the
literature review followed by the third chapter is includes time table and budget break down

23
 CHAPTER THREE

3. Research design and methodology

3.1 Source of data

The data is collects with the use of both primary and secondary data sources. Primary
data is collects by distributing questionnaires to credit managers and employees of the
institution and interview with the chief executive officer bank of Ethiopia. Secondary
data is collects from data records and events like books, articles, research paper, internet,
publications and unpublished paper and bank manual.

3.2 Method of data collection

The researcher distribute questionnaire and interview to obtain primary data, where as
uses data records and events like books, reports, and internet and research paper to obtain
secondary data.

3.3 Sampling technique and sampling size

The populations of the study are the employees of commercial bank of Ethiopia who are
responsible for credit risk management. Total populations employees of commercial bank
are 79. The researchers uses random sampling method to select respondent from
employee’s. The sample size of the study 24 respondents which the researcher selects
randomly.

24
 3.4 Research approach

In order to assess and evaluate credit risk management system the researcher are use
mixes approach. Qualitative uses for analyses the data that gatheres through interview
and questionnaire. Quantitative approach uses for statistically techniques and use surveys.

3.5 Research method

The method of data analysis is descriptive in the sense the credit risk management of the
Bank will be percentage and table.

3.6 Method of data analysis and presentation

In attempting to assess the credit risk management, the data analysis implemented is
descriptive type and tables are used for meaningful interpretation of the data.

25
 1.2 Background of the organization
The history of back in Ethiopia dates bank to establishment of bank of Abyssinia in 1905
E.C. It was the first bank in the history of Ethiopia established under the partnership of
the government of Ethiopian and the national bank of Egypt.

After the victory over the fascist Italy, the state bank of Ethiopia was established by a
proclamation issued in august 1942.Although the intention was to establish it as a full-
fledged commercial banks, a year later 1943, it was given additional central banking
duties thus state bank of Ethiopia provides central banking and commercial banking until
it was split in the two banks; the national and commercial bank of Ethiopia.

In the 1963, commercial bank of Ethiopia was legally reestablished, as a share company,
to take over the commercial over the commercial banking activities of the state bank of
Ethiopia and to carry all types of banking activities and operation competing with other
banks.

Commercial bank of Ethiopia was in a monopoly era dominating the banking business all
over the country .but new banking proclamation enacted in 1994 E.C .has created several
new opportunities for the private sector to be involved in the banking sector .

26
Today like other commercial banks the commercial bank of Ethiopia plays a great role in
receiving deposit which it has to repay according to its promise and makes them available
to those who face a problem of money to operate their activity. In addition, the CBE is
noted as pioneer of modern banking in the country. It was the first bank to serve ATM
service for its locals. CBE has over 10.1 million account holders and 276.5 billon in asset
at April 30, 2015, and held approximately 63.5% of deposit and about 38.5 of all banks
loan in the country. Beside of this, the bank has 22 000 employees and 945 branches as of
December –January, 2014.

VISION

To become a world- class commercial bank by the year 2025.

MISSION

We are committed to best realize stakeholders' needs through enhanced financial

intermediation globally and supporting national development priorities, by deploying
highly motivated, skilled and disciplined employees as well as state-of-the-art
technology. We strongly believe that winning the public confidence is the basis of our
success.

VALUES

1. Corporate Citizenship

 We value the importance of our role in national development endeavor and step-
up for commitment.
 We abide by the law of Ethiopia and other countries in which we do business.
 We care about society's welfare and the environment.

2. Customer Satisfaction

 We strive to excel in our business and satisfy our customers.

3. Quality Service

27
  We are committed to offer quality service to our customers' and aspire to be
branded with quality in the minds of our customers and the general public.

4. Innovation

 We encourage new ideas that can improve customers' experience and the Bank's
performance.

5. Teamwork

 We recognize the importance of teamwork for our success.

 We respect diversity of viewpoints

6. Integrity

 We are committed to the highest ideal of honor and integrity.

7. Employees

 We recognize our employees as valuable organizational resources.

8. Public Confidence

 We understand that the sustainability of our business depends on our ability to

maintain and build up the public's confidence.
4.2Data presentation

The researcher distributed 24 research questionnaires to employees of the bank. From this
the researcher collects 100% questionnaires from respondents. Based on the collected
questionnaire responses the researcher analysis and interprets the finding in the following
manner based on the research questions sequence.

General background of respondents:

28
Table 1 Analysis of the general background of respondent
Background No. respondent %age
Age
20-25 11 45%
25-30 13 55%
30-35
>35
24 100%
Sex
Male 16 67%
Female 8 33%
24 100%
Educational status
>degree 1 4%
Degree 20 83%
Diploma 3 13%
Certificate - -
24 100%
According to the table above 45% of respondents found in age determination of 20-25
and 55% are found in age between25-30.This shows almost all respondents are found
between the ages units from 20-30 the bank is leaded by matured and experienced
employees. In addition, from the above table the researcher recognized that there is
majority of employees are male.

According to the data presented above table, 4% respondents have greater than BA
degree. There are 83% of employees are BA degree and the remaining 13% are less than
BA(diploma holder.The researcher recognized that the bank leads by the qualified
personnel.

4.3 Credit management process in commercial bank of Ethiopi

According to the respondent responses, the bank manages its credit according to polices
and procedure. There are two departments in the institution which are customer
relationship and credit analysis department, both departments makes their work
independently. The costumer relationship department has responsibility to receive the
customer request, and then collects the necessary data in order to ensure the customer’s
creditworthiness. The credit analysis department has responsibility to evaluate the
customer’s credit request and judge the costumer request ,then both department finishes
data collection and evaluation process present the data to credit committee . Every loan
application that is received and granted by the bank goes through certain processes at the
29
time of receipt till such a facility is fully recovered. These processes include screening,
credit analysis and investigation and credit monitoring.

1. Screening

In order to ensure that credits granted are fully recovered with little difficulties, CBE
screens by trying to identify good customers with a positive orientation to repay credit
extended them. The Bank has two main objectives in its screening process. These are: (i)
to prevent problem loans, and (ii) to quickly identify any problems that may occur.

2 .Credit analysis and investigation

According to the manual of the bank, credit analysis and investigation is one of the basic
cardinal processes used in the credit granting-process. The granting or otherwise of credit
largely depends on the analysis and investigation part of the credit granting-process.
According to the respondent response, it was realized that CBE uses the principles of the
5Cs in its credit analysis and investigation process. In doing so, capacity of clients to
repay loans granted them played the leading factor. Character follows capacity closely as
the second most important factor or consideration in the credit granting-process.
Condition of clients’ business is the third most important factor, followed by collateral
used as guarantee to secure the credit facility. Capital, that is, the wealth of the client is
considered the least factor in the credit-granting process in CBE. This emphasizes the
importance CBE gives to the concept of the 5Cs in its credit-granting process. This shows
that the concept of the 5Cs is very alive in credit risk management in CBE.

Credit analysis involves the Credit Department and the credit analysis department. CBE
uses the credit analysis department to undertake its credit analysis.

It was realized that CBE runs strong credit approval system. All credit approvals are done
at the under strict system. Credit officers only furnish information pertaining to the 5Cs
of the prospective loan customer and recommend the amount to be granted based on the
credit risk assessment. The purpose for strong the credit approval process is to prevent
the perpetuation of fraud by officers of the bank at the blind side of management.

3 .Credit monitoring

30
CBE monitors the operations of their clients after granting credit. According to
respondent responses, Customer relationship mangers monitor loans granted to clients.
The frequency of monitoring depends on clients condition and risk profile. However,
quarterly monitoring seems popular. The fact is that monitoring can be expensive in
terms of the opportunity cost of time required for it. Where the bank is sure of dealing
with a safe client, they are more likely to relax the frequency of monitoring. According
to the report, all banks are to ensure proper monitoring of loans granted. This is to ensure
that loan portfolios are performing to avert or reduce non-performing loans.

4.3.1 Managing loan repayment of the bank

Every banks engaged in lending activities properly managed its loan repayment process,
unless will faces difficulty to exist in the business. Based on the interview conducted, the
respondent replied that after granting the loan, credit relationship manager conducting the
follow up activities in order to ensure how the customers repay the loan accordingly
agreed term.

4.4 Evaluation of the creditworthiness of the applicant

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 officer attempts to evaluate borrower’s
ability and willingness to repay. The Bank assesses the creditworthiness of a loan
applicant mostly by gathering detail information with regard to:

a. The applicant

 Whether the applicant is customer of any other bank. This is done to check
whether the applicant has any loan arrear with other banks. This will be checked
by the help of NBE Central Database of the credit information center.
 The exposure of the applicant to credit and his track record in meeting his
obligation.
 The educational level and experience of the applicant.
31
b. Collateral

 Credit policy of the Bank, for building collateral (85%), For Vehicles and
Machinery (70%), for cash (100%), Merchandise (70%), Leased land (30% less
lease amount if Construction not started), Treasury bills and Government bonds,
(100%), etc.
 Marketability and habitability
 easily transferability

c. Business viability

Based on the basic financial measurements used to certify the credit worthiness of the
business the Bank depends on liquidity rate, solvency, efficiency ratio, sales turnover and
profit margin of the business.

4.4.1 Credit Analysis

Loan requests should be carefully analyzed and appraised in accordance with the
prevailing credit policy and procedures. Financial statements should be analyzed to
determine the financial soundness of the applicants. According to the respondent
responses mentioned, all type of risks such as ownership risk, management risk, business
risk, financial risk, collateral risk and legal risk should be assessed with utmost care.

4.5 Types of loan and processing period granted by the bankTable

2 Types of loan and processing period granted by the bank

A 1. What types of loan do you grant? Respondent

No. %

Short term loan 24 100

32
 Medium term loan 24 100

Long term loan 24 100

Total 24 100

How long does of take to process a loan?

Processing time No of days.

B
Short term loan Max. 4-8 17 71.4%

Min. 3-7 7 28.6%

Total 24 100

Medium term loan Max 8-21 18 75%

Min 8-15 6 25%

Total 24 100

Long term loan Max 15-31 15 62.5%

Min 15-25 9 37.5%

Total 24 100

Source: questionnaire

33
Table 2 indicates that question under “A”, 100% of respondents replied that the bank granted all
types loan mentioned in the questioners’.

Considering question “B” 71.4% of the respondents replied that short term loan will take the
maximum processing time on average 4-8 days, While 28.6% of the respondents indicated
minimum processing time on average 3-7 days.

According to table presented above, 75% of the respondents replied that Medium term loan will
takes the maximum processing time on average 8-21 days, while 25% of the respondents
indicated minimum processing time on average 8-15 days.

The table above indicated, 62.5% of the respondent replied that long term loan will takes the
maximum processing time on average 15-31 days, while 37.5% respondents answered minimum
processing time on average 15-25 days. In addition the respondents also mentioned that
depending on the nature and merit of the loan, the processing period will vary.

Table 3 Advisory services to its loan customers

Does the bank provide any advisory services to its loan consumers? Respondents

No. %
 Yes

24 100
 No

0 0

34
 Total 24 100

Source: questionnaire

According to question the above table 2, 100% of respondents replied that there is an advisory
service to its loan customers by the bank.

The researcher observed that from the above analysis of the question under table 2, CBE provide
advisory services to its customer in order to give know how about loan and what criteria the
customer fulfill before requesting the loan.

4.6 .CBE loan customer

Table 4 .which categories of loan customers do you deal with? Or not

deal with?
Item Deal with Not deal with
mark(√) Mark(√)
Farming √

Manufacturing √

Mining √

Trading √

Small scale entrepreneur √

Contractor √

Salaried workers √

Source:Questionnaire

The data presented the above table, according to the respondents answered CBE deal with the
following customers such as:

 Farming

35
  Manufacturing

 Mining

 Trading

 Small scale entrepreneur

 Contractor

But only not deal with the salaried worker. In the case of current time, the bank will not grant
loan for construction sector.

4.6.1 Loan Portfolio

At the end of the fiscal year, the total outstanding loans and advances of the Bank rose by
21.1 percent, reaching 149.0 billion Birr. Outstanding loans to customers grew by about
20.6 percent.

Table 5 Outstanding Loans and Advances by Sector (Mill. Birr)

TABLE 5

Particulars 2012/13 2011/12 percent Change

Loans to customers (Net of impairment losses 67,856.38 56,465.40 20.17

Agriculture 11,941.39 13,551.80 -11.88

Manufacturing 30,514.89 18,673.70 63.41

36
 Domestic trade & services 4,038.64 5,310.30 -23.95

Foreign trade 15,479.22 14,949.20 3.55

Building and Construction 4,389.41 4,635.50 -5.31

Personal Loan 3,362.63 719.10 367.61

Loans to banks (Financial Institutions) 508.5 487.70 4.27

Receivables-EGTE 1,309.9 3,987.10 -67.15

Bonds (Coupon &Corporate) 79,331.72 62,052.40 27.85

Total outstanding loans 149,006.5 122,992.60 21.15

0

Source: annual report 2011-2013

The amount of fresh loans disbursed to the various economic sectors during the reporting
year was Birr 56.5 billion. This amount represents a 7.2 percent decrease compared with
the level in the preceding year. This shortfall is attributable to underutilization or non-
utilization of disbursement commitment from some corporate entities and pre-shipment.

37
 4.7 Major problems respect to management of credit risk
According to the questionnaire responses,CBE faces many problems with regard to
managing credit risk. Some of them are as follows;

 Unforeseen conditions like global financial crisis for revolving export credit
facilities, succession and educational level of customers.
 Loss and repayment capacity .This also refers to borrowers unable to repay its
loan repayment and challenges of bankruptcy their business.

 Integrity of loan customer -this refers to the borrower’s personal characteristics

such as honesty, willingness and commitment to pay debt. Borrowers who
demonstrate high level of integrity and commitment to repay their debts are
considered favorable for credit.
 Inadequate document –it’s refers to insufficient document essentials for credit
approval process.
 Non reliable data from loan customer

 Collateral risk in related to with legal perspective

 Business condition risk refers to the chance a business cash flow are not enough
to cover its operating expenses like cost of goods sold, rents and wages.

Analysis of interview questions

According to the interview response the bank credit risk management, analysis of loan
approval process, mechanism of credit risk management and credit risk pricing system
and so on are presented below.

4.8 The structure of the bank regarding the loan approval process
Commercial bank of Ethiopia classified under the biggest bank. In this case, the loan
approval bodies for the different amount are different. The bank has divided in to three
committees regarding the loan approval including the amount requesting such as
committee A, B and C.

38
1st.The customer relationship managers accept the loan request .If the request amount
50,000,000 below the loan officer analyzes all the requirements properly and it can be
approved by under the category “C” loan approval committee.

2nd.If the loan request is birr 50,000,000 to 250,000,000 the loan analyst committee
analyzes all requirements are properly fulfill and approved by under the category “B”
loan approval committee.

3rd.If the loan request is birr 250,000,000 above the loan analyst committee analyzes all
requirements are properly fulfill. If all requirements properly fulfilled, the loan request
can be approved by under the category “A” loan approval committee including CEO.

4.9 Data collection for the required documents

Under the interview conducted the general manager said that, due to legality issues and
related obligations there is no difficulty to acquire the documents which are required for
the loan approval .If the one who come for the request of the loan he/she prepare the
required documents as per the policies and procedure of the bank without any difficulty .
These shows, the bank is better to work hard in checking the truthfulness of the
documents received from their customers.

4.10 Credit Risk Monitoring and Supervision mechanisms of the

bank

Once a credit request is approved, the task of supervising disbursement and monitoring
repayment until a facility is paid off is a job function undertaken by the Credit
administration Unit of the Risk Management Division. It ensures that the appropriate
information about a credit approval is placed at the disposal of a customer. It also ensures
that credit limits are not breached, covenants are respected, collaterals are perfected, risk
ratings are monitored, credit reports are generated for management’s attention, review,
rescheduling or refinancing of credit after beneficiaries have submitted relevant
documents. The unit also updates customers’ files, especially Know Customer
information. Credit Relationship Managers follow up on customer’s business progress.
They visit customers’ business premise or shops to review progress in sales, debt
39
collection, etc. A unit of the Risk Management Division is responsible for credit
mitigation, remedial measures and recovery including legal action leading to foreclosure
and sale of collaterals.

4.11 Credit risk pricing system in CBE

Based on the interview conducted, the respondent replied that the risk pricing approach
looks at all degree of risk as a normal part of the banking business. In effect it view the
asset of the bank loans, securities and investment in various shade of white and gray and
accept all of them as legitimate, worthwhile assets. Asset of greater credit risk involve
greater risk of loss, but these assets are expected to be priced to earn enough more
interest in come to offset their credit risk a profit for the bank. The bank conducted
different analysis and gives grade, according to its measurement criteria. These are:

1. Grade A: consist of the most risk free customer.

2. Grade B: consist of medium risk free customer.
3. Grade C: consist of high risky customer.

40
 CHAPTER FIVE

5. Conclusion and recommendation

5.1Conclusion

Based on the data analysis the researcher come up with the following conclusion .proper
credit management is the most critical element of the bank to exist in the activities of the
business. CBE followed three credit management processes to identify the customer
creditworthiness such as screening, credit analysis and investigation and credit
monitoring .creditworthiness evaluation of the applicant, once the customer request a
loan the bank officers analyzes all available information to determine whether the loan
meets the banks risk-return objectives .The bank assess the creditworthiness of a loan
customer mostly by gathering detail information with regard to the applicant
,collateral .capacity ,condition ,character ,capital and business viability . in addition to
that, the bank consider different types of risk in order to screen out the customer request
such as ownership risk, management risk ,business risk ,financial risk ,collateral risk and
legal risk.

Types of loan granted and processing time to decide the loan application. The bank
divided in to three type’s loan by maturity such as short term loan, medium term loan and
long term loan, while the bank takes on average 15-31 days to decide the loan request. In
addition to that, the bank grants loan the following sector manufacturing, mining,
construction and building, trading and trade export sector. Major problem respect to the
management of credit risk includes unforeseen condition, loss and repayment capacity,
integrity of loan customer, inadequate document .collateral risk in related to with legal
perspective and business condition risk .The structure of the bank regarding the loan
approval ,the loan approval committee for the different amount are different . The credit
risk monitoring and supervising mechanism of the bank that ensures appropriate
information about the a credit approval is placed at the disposal of a customer .It also
ensures that credit limits are not breached ,covenants are respected ,collateral are
41
perfected ,risk rating are monitored ,credit reports are generated for management’s
attention ,review ,rescheduling or refinancing of credit after beneficiaries have submitted
relevant documents. The bank uses credit pricing system to identify highly risky or less
risky customer, high credit risk holding loan charged high interest.

5.2 Recommendation

 The bank should be managing credit properly in order to exists the activities of the
business and maintain the health of the bank operation.
 The bank should follow strict credit managing process in order to maintain the safety
of the institution.
 Awareness should be created among borrowers that they should be close to the bank
and consult the bank when they observe any symptom that they will be facing
difficulties on meeting obligation.

 The bank should prudently analyze the loan approval process and procedures in order
to have better approach that will meet the objectives of the bank.

 Precaution should be exercised by all credit processing and approving personnel in

dealing with financial analysis.

 The bank should frequently follow up by visiting borrowers businesses to create long
lasting relationship and assure future repayment.

 The bank should continuously improve and review the follow up systems from time
to time in order to collect the loan on the expected time.

 The bank should improve the processing time of the loan approval so as to make
decision timely and more efficient.

42
43
 Reference

http://www.combank,com//

(http//en.wikipidia//)

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Sloan Management Review, Vol. 39 No. 1, pp. 33-46.
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of Italy Research Department, Rome
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Applications of Assets and Liability Management, Banking Publication, Kamakura,
Honolulu, HI.

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Basel Committee on Banking and Supervision (2000). Best practices for credit

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Mueller, H. P. (1998). Credit risk policy: the anchor of credit culture. Journal of

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46
 HAWASSA UNIVERSITY
SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

RESEARCH QUESTIONNAIRE

Dear respondent pleas fill in confidential the listed questions with the help of data
collector as genuinely as possible your corporation in this regarded is very beneficial and
complete response will be highly appreciated.

Questioner for employees

Instruction

Please, put a tic mark in the appropriate box for each questions

Personal information

1. Age _______
20-30 31-40 41-45 above 45
2. Sex
A. male B. female
3. Education background
A. Certificate B. diploma
C. Degree D.> d. Above Degree

4. year of service

1 year 2 year 3-5 year above 5 year

47
Part II

1. How does manage credit in your bank?

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

2. What kind of process are uses to manage credit in your bank?

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

3. What types of loans do you grant? Tick as many as applicable

Short term loan

Medium term loan

Long term loan

Others

48
4. How long does of take to process a loan?

Types of loan Minimum time Maximum time

Short term loan
Medium term loan
Long term loan

5. Which categories of loan customers do you deal with? Tick as many as applicable

A. farming

B. mining

C. trading

d. Small scale entrepreneur

E. contractors

F. salaried workers

G. Manufacturing

H. others

6. Which of these categories of loan customers to you normally give loan?

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

7. Which of the categories of loan customers do you not normally give loan?
---------------------------------------------------------------------------------------------------

8. Please state or outline sequentially, the procedure for granting loans

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

9. What types of collateral does your bank require from

borrowers?-------------------------------------------------------------------------------------------------------------------------------------------------------------------
-----------------------

49
10. What measures does the bank take to ensure that its interest is secured with the type
of collateral demand? ---------------------------------------------------------------------------------

11. Does the bank provide any advisory services to its loan customers?

Yes NO

12. If yes, what form does it take? -----------------------------------------------------------------

13. How often do you monitor the business of your clients after granting?

Weekly monthly

Quarterly semi-final

14. If you monitor, who performs the monitoring?

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

15. How important do you consider the following factors in your credit granting process?

Please rank in order of importance.

Where; 1.Most important 2. Important

3. Less important

Capacity

Character

Collateral

Condition

Capacity (capital)

16. Who is responsible for credit analysis in your bank?

Loan officers

Loan committee

50
Others (specify)

17. Do you have a written loan policy?

Yes no

18. If yes, which of the following is/are content of written loan policy?

General polices

Specific loan category

Miscellaneous loan policy

Committees

Quality control policy

19. Is the CEO /MD/GM involved in the credit granting process in your bank?

20. If yes, what is the responsibility of the CEO in the granting of credit?

21. What do you suppose that major problems respect to management of credit risk?
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Structured interview

How loan repayment is managed?

How loan approval is analyzed?

What are the structures of the institution regarding loan approval?

What is the time duration to approve the loan application?

What are the major problems faced by the institution?

51
What kind of mechanism uses to control the problems?

How to use credit risk pricing system?

How data are collected to gather required document?

What are the credit risk monitoring and supervision mechanism of the bank?

52