ARBA MINCH UNIVERSITY

SCHOOL OF POST GRADUATE STUDIES

MASTER OF BUSINESS ADMINISTRATION (MBA)

MBA-621-MANAGERIAL ECONOMICS

Title of assignment: Assessing existing managerial problems and suggesting optimal solution
after prioritizing the core problems that are identified in the case of Development Bank of
Ethiopia.

Name I.D

1. Teshale Buchacha PEBE/051/12

Submitted to: Dr. Mebratu A. (Ph.D)

Sep, 2020

ARBA MINCH

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Contents

1. INTRODUCTION...................................................................................................................................3
1.1 Historical backgrounds of Development Bank of Ethiopia.................................................................3
1.1.1 Main Function of Development Bank of Ethiopia (DBE).............................................................4
1.2 Objective of the Study.......................................................................................................................4
1.3 Methodology of the Study.................................................................................................................4
2. Identified Managerial Problem of the Bank.........................................................................................5
2.1 Findings of Problem in Development bank of Ethiopia (DBE)............................................................5
2.2 Prioritizing the Problem.....................................................................................................................6
2.3 The Decision Making Tools................................................................................................................8
2.3.1 Look at potential causes for the problem...................................................................................9
2.3.2 Identify alternatives for approaches to resolve the problem.....................................................9
2.3.3 Select an approach to resolve the problem..............................................................................10
2.3.4 Plan the Implementation of the best alternative......................................................................10
2.3.5 Monitor implementation of the plan........................................................................................11
2.3.6 Verify if the problem has been resolved or not........................................................................11
3. Conclusion and Recommendation.....................................................................................................12
3.1 Conclusion.......................................................................................................................................12
3.2 Recommendation............................................................................................................................12
4. Reference......................................................................................................................................14

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 1. INTRODUCTION
In today's tough and uncertain economy, a company needs strong managers to lead its staff
toward accomplishing business goals. But managers are more than just leaders they're problem
solvers, cheerleaders, and planners as well. And managers don't come in one size fits all shapes
or forms. Managers fulfill many roles and have many different responsibilities at each level of
management within an organization. Managers appear in every organization — at least in
organizations that want to succeed. These individuals have the sometimes unenviable task of
making decisions, solving difficult problems, setting goals, planning strategies, and rallying
individuals. And those are just a few of their responsibilities.

Development finance institution means an institution which is engaged mainly in medium and
long term project finance business, with the purpose of promoting development in the industrial,
agriculture, construction, service, commercial or other economic sector (NBE Directive, 2012).
Development banks are state backed financial institutions engaged in the provision of long term
loans to not only profitable projects but also to socially beneficial ones. The rapid
industrialization in many countries in the 19 th century was achieved by state provision of long
term loans to risky projects via Development banks,(Diamond,1957;Boskey,1961). Accordingly
the credit policy of Development bank of Ethiopia (2009) details the governing operational
principles and guidelines of the bank for achieving its dual objectives of (1) providing customer
focused and efficient credit services and (2) maintaining its own financial health and
sustainability (DBE Credit Policy,2009).

In the course of undertaking credit activity it deserves special emphasis from managers or staffs
in order to develop credit policies and procedures; strong portfolio management; effective credit
controls and the central of all to manage credit from unwanted fraudulences since it greatly
influences the success or failure of financial institution at all.

1.1 Historical backgrounds of Development Bank of Ethiopia

Development Bank of Ethiopia (DBE) is one of the state-owned financial institutions engaged in

Providing short, medium and long-term credits over the last 110 years. The Bank was
reestablished on September 19, 1994 by the Proclamation No. 200 of 1994 and Proclamation No.

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25 of 1992 with an authorized capital of Birr 250,000,000, of which Birr 62,500,000 was paid in

Cash and in-kind. Since 1994, the Bank has been re-established three times, first, on January 24,

2003 by Regulations No. 83 of 2003; and second, on May 24, 2005 by the Amendment

Regulations No. 116 of 2005; with an authorized capital of Birr 600,000,000 and Birr

3,000,000,000respectively. The Council of Ministers Regulation No. 343/2015 re-established

the Bank for the third time and has raised its authorized capital to Birr 7.5 billion and recently 21
billion additional capital approved by the council of ministers and raised its capital to 28.5billion.

1.1.1 Main Function of Development Bank of Ethiopia (DBE)

The bank mainly provides loans for the economic sectors such as commercial agriculture, agro-
processing, manufacturing, and extractive industries, preferably export focused. Moreover, it
finances new capital goods from the priority areas of the government for small and medium
enterprises (SMEs).

1.2 Objective of the Study

The objective of study is to assess the existing managerial problems of Development Bank of
Ethiopia and give optimal solution for the problems after prioritizing.

1.3 Methodology of the Study

Primary source of data was used to undertake the study. The information gathered through
interviewing (through discussion and phone calls) sample chosen employees from DBE Jinka
branch used for primary data source and also printed periodicals.

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 2. Identified Managerial Problem of the Bank
Development banks in general and DBE in particular were not, however, established for the sole
purpose of providing credit to strategic projects. The other unique objective of such banks is
technical support and advice.

DBE is mainly involved in development projects finance along with technical advice. In
addition to this the Bank is currently involved in:

 Sales of government Hidase bond,

 Rural Financial intermediation program;
 Administering trust funds;
 Export credit Guarantee to commercial Banks

2.1 Findings of Problem in Development bank of Ethiopia (DBE)

In the organization I found the following short listed managerial problems during work. Such as

– Low level of strategic leadership

– Insufficient supervisory role of line managers.
– Lack of timely enforcement of accountability
– Attitude & behavioral changes are not developed to the required level
– Increased rent seeking attitude
– Irregular staff pyramid (the middle staff is very low)
– Less Technical competency to handle complex projects
– Inadequate Skill to undertake due diligence assessment(KYC),
– Inadequate Skill of project appraisal
– Poor Follow-up and providing technical advice Inadequate IT expertise
– Lack of experience in SME financing
– Weak Problem solving skill and lack of business orientation
– Defiance to rules & regulations
– Long credit service delivery cycle time
– Poor financial soundness
– BSC alignment problem with core and support directorates
– Practical Team work is not up to the desired level

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 – Inadequate value enhancement & communication
– No Implementation of succession planning
– Engagement in routine and operational tasks rather than focusing on strategic
issues
– Depleted organizational culture

2.2 Prioritizing the Problem

If you discover that you are looking at several related problems, then prioritize which ones you
should address first.
Note the difference between "important" and "urgent" problems. Often, what we consider to be
important problems to consider are really just urgent problems. Important problems deserve
more attention. Such problem of the bank has: -

 Poor Loan Portfolio Quality management: - It is true that as development financial

institution, the Bank has a higher risk appetite than commercial banks, and thus is
expected to have relatively higher non-performing loans (NPLs) ratio. However, the
current level of NPLs of the Bank in terms of magnitude and ratio is significantly higher
than what is deemed to be normal for development banks (maximum 15%) this is because
of increase in the number of troubled projects financed by the Bank and low management
quality or problems among the banks staff or managements.
 Poor Know Your Customer Assessment in the bank: - It is believed that due diligence
or knows your customer (KYC) assessment conducted by the Bank lacks in depth
analysis of a customer’s background and his financial and managerial capacity. The
Bank’s due diligence assessment was based on information collected from the customers
themselves, not strongly backed by full and reliable information especially for foreign
investors, PLCs and borrowers of rain-fed agricultural loans. 26 This inadequate KYC
assessment has led to wrong customer selection and contributed a lot for failure of
projects from the beginning and resulted in financing born-sick projects as it is the initial
and most important step in any business relationship. Assessments made, at the initial
stage on the source of equity and credit worthiness of the borrowers, in most occasions
failed to provide the desired result. Poor KYC could be cited as the main reason for
failure of loans.

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 Weak and Shallow Project Appraisal by bank: - Project appraisal being performed by
the Bank lacks in-depth understanding and analysis of a project. It is undertaken based on
incomplete feasibility study from a customer and unrealistic assumptions. Besides that
technical experts engaged in project appraisal are not well trained and skilled and not
supported by information technology and well established price database. Due to these
reasons, the project appraisal reports of the Bank show over exaggerated estimated
financial results that are in contrary to realities on the ground.
 Imprudent Lending Practices and Bad Credit Culture: - The staff has became more
mechanical in processing loans than reasoning, calculated risk taking and knowledge
based risk management. Loans were used to be approved without due diligence and
adequate evaluation of the financial and technical feasibility projects in the name of
supporting development and employment creation. As a result, most of projects, which
were approved with loose credit analysis, ended up being loss makers and/or over
financed (leveraged) and thus unable to carry the financial debt burdens.
 Inadequate Coordination among Stakeholders:-
 Errors in Loans Classification: - The Asset Classification and Loan Provisioning
Directives of the NBE dictate that loans rescheduled for operational projects shall be kept
under NPLs category until some consecutive repayments are made depending on
repayment schedule of the loan (Directive No. SBB/052/2012) But it was recently found
out that the Bank disregarded this NBE provision directive in previous years and
classified all rescheduled loans erroneously as pass status, which its NPLs have been
consistently understated for years as a result.
 Financial Un-sustainability and Inadequate Capital
 Weak Information Technology System

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2.3 The Decision Making Tools

Quite literally, organizations operate by people making decisions. A manager plans, organizes,
staffs, leads, and controls his/her team by executing decisions. The effectiveness and quality of
those decisions determine how successful a manager will be.

Managers are constantly called upon to make decisions in order to solve problems. Decision
making and problem solving are on-going processes of evaluating situations or problems,
considering alternatives, making choices, and following them up with the necessary actions.
Sometimes the decision‐making process is extremely short, and mental reflection is essentially
instantaneous. In other situations, the process can drag on for weeks or even months. The entire
decision‐making process is dependent upon the right information being available to the right
people at the right times.

The decision‐making process involves the following steps:

Define the problem Identify limiting factors Develop potential alternativesAnalyse the
alternativesSelect the best alternativeImplement the decisionEstablish a control and
evaluation system.

The decision making process begins when a manager identifies the real problem. The accurate
definition of the problem affects all the steps that follow; if the problem is inaccurately defined,
every step in the decision making process will be based on an incorrect starting point. One way
that a manager can help determines the true problem in a situation is by identifying the problem
separately from its symptoms.

All managers want to make the best decisions. To do so, managers need to have the ideal
resources information, time, personnel, equipment, and supplies and identify any limiting factors.
Realistically, managers operate in an environment that normally doesn't provide ideal resources.
For example, they may lack the proper budget or may not have the most accurate information or
any extra time. So, they must choose to satisfice to make the best decision possible with the
information, resources, and time available.

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Time pressures frequently cause a manager to move forward after considering only the first or
most obvious answers. However, successful problem solving requires thorough examination of
the challenge, and a quick answer may not result in a permanent solution. Thus, a manager
should think through and investigate several alternative solutions to a single problem before
making a quick decision.

2.3.1 Look at potential causes for the problem

 It's amazing how much you don't know about what you don't know. Therefore, in this
phase, it's critical to get input from other people who notice the problem and who are
affected by it.

 It's often useful to collect input from other individuals one at a time (at least at first).
Otherwise, people tend to be inhibited about offering their impressions of the real causes
of problems.

 Write down what your opinions and what you've heard from others.

 Regarding what you think might be performance problems associated with an employee;
it's often useful to seek advice from a peer or your supervisor in order to verify your
impression of the problem.

Write down a description of the cause of the problem and in terms of what is happening, where,
when, how, with whom and why

2.3.2 Identify alternatives for approaches to resolve the problem

At this point, it's useful to keep others involved (unless you're facing a personal and/or employee
performance problem). Brainstorm for solutions to the problem. Very simply put, brainstorming
is collecting as many ideas as possible, and then screening them to find the best idea. It's critical
when collecting the ideas to not pass any judgment on the ideas -- just write them down as you
hear them. (A wonderful set of skills used to identify the underlying cause of issues is Systems
Thinking).

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2.3.3 Select an approach to resolve the problem

 When selecting the best approach, consider:

 Which approach is the most likely to solve the problem for the long term?

 Which approach is the most realistic to accomplish for now? Do you have the resources?
Are they affordable? Do you have enough time to implement the approach?

 What is the extent of risk associated with each alternative?

2.3.4 Plan the Implementation of the best alternative

1. Carefully consider "What will the situation look like when the problem is solved?"

2. What steps should be taken to implement the best alternative to solving the problem? What
systems or processes should be changed in your organization, for example, a new policy or
procedure? Don't resort to solutions where someone is "just going to try harder".

3. How will you know if the steps are being followed or not? (These are your indicators of the
success of your plan)

4. What resources will you need in terms of people, money and facilities?

5. How much time will you need to implement the solution? Write a schedule that includes the
start and stop times, and when you expect to see certain indicators of success.

6. Who will primarily be responsible for ensuring implementation of the plan?

7. Write down the answers to the above questions and consider this as your action plan.

8. Communicate the plan to those who will involve in implementing it and, at least, to your
immediate supervisor.

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2.3.5 Monitor implementation of the plan

Monitor the indicators of success:

1. Are you seeing what you would expect from the indicators?

2. Will the plan be done according to schedule?

3. If the plan is not being followed as expected, then consider: Was the plan realistic? Are there
sufficient resources to accomplish the plan on schedule? Should more priority be placed on
various aspects of the plan? Should the plan be changed?

2.3.6 Verify if the problem has been resolved or not

One of the best ways to verify if a problem has been solved or not is to resume normal operations
in the organization. Still, you should consider:

1. What changes should be made to avoid this type of problem in the future? Consider changes to
policies and procedures, training, etc.

2. Lastly, consider "What did you learn from this problem solving?" Consider new knowledge,
understanding and/or skills.

Consider writing a brief memo that highlights the success of the problem solving effort, and what
you learned as a result. Share it with your supervisor, peers and subordinates.

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 3. Conclusion and Recommendation

3.1 Conclusion

Much of what managers do is solve problems and make decisions. Often, they are "under the
gun", stressed and very short for time. Consequently, when they encounter a new problem or
decision they must make, they react with a decision that seemed to work before. It's easy with
this approach to get stuck in a circle of solving the same problem over and over again. Therefore,
it's often useful to get used to an organized approach to problem solving and decision making.
Using established tools and techniques will help the manager improve his/her approach to
solving the problems that his/her team and organization face. The manager will be more
successful at solving problems and, because of this, more successful at what he/she do, in a wise
and positive way.

3.2 Recommendation

Based on the above finding and conclusion I recommended as follows.

With regards to policy and business model of the bank I recommend the bank
 To review the Bank’s business model
 To review and update the credit policy of the Bank to align it with the current changes in
the political and macroeconomic landscape.
In terms of the problems the bank faces regards to financial soundness and critical performance
problems that causes the bank’s sustainability under question I suggest the bank
 to diversify funding sources of the Bank and minimize its dependency on NBE priority
sector loan
 to ensure prudent lending practice in the Bank and maintain quality of loans to reduce
NPLs
 to optimize the Bank’s profit to ensure sustainability
For the situations analysis regards to governance and structure issue I suggest
 Ensure proper checks and balances at every level of credit operations
 Ensure good governance at each level of governance structure including the Board
 Ensure proper and timely decision making
 Ensure that the Bank’s credit services are fairly accessible

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For the identified potential gaps on leadership and human resource in relation with capacity
limitations, commitment and behavioral and ethical characters I recommend
 operating units are managed and lead by competent professionals
 the capacity of staff and management should have to be enhanced through continuous
training and development works
 The staff and management should have to adhere with the policy and code of conduct and
maintain work discipline in the bank
For the critical problems arises with low loan collection performance it’s suggested the bank
 to improve loan collection capacity
 to enhance asset disposal performance
 to improve the working methods and performance of project rehabilitation functions
 should have to ensure proper compliance to internal policies and procedure and prevails
law enforcement

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4. Reference

 Development bank of Ethiopia five year strategic reform plan, 2019.

 Development bank of Ethiopia lease financing policy for SMEs. Jan, 2016.
 Development bank of Ethiopia procedure manual for lease financing. Jan, 2016.
 Development bank of Ethiopia pre and post credit measurement / rating criteria, 2008.
 Development bank of Ethiopia due diligence assessment guideline, March 2008.
 Development bank of Ethiopia Project appraisal guideline, march 2008
 Development bank of Ethiopia Procedure for the Separate and accelerated
Supervision of Rescheduled Loans, March 2008.

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