Determinants of Manufacturing Projects Failure

Financed by Development Bank of Ethiopia,

Adama District
Proposal Submitted

In Partial Fulfillment for the Requirement of Degree of

Master of Art in Businesses Administration (MBA)

By: Sefanit Asteraye Biru

Advisor: Mulachew Haile (PhD candidate)

Department of Business Administration

College of Business and Economics

Harambee University

March 2021

I
Declaration

I, sefanit Asteraye, declare that this proposal entitled “Determinants of Manufacturing Project
Failure Financed by Development Bank of Ethiopia (The case of Adama District)” all sources of
materials used for the study have been duly acknowledged. In addition, this study has not been
submitted for any degree in this University or any other University.

By: Sefanit Asteraye Biru

Signature:

Date: _______________

II
Statement of confirmation

This is to certify that the thesis entitled “Determinants of Manufacturing Project Failure
Financed by Development Bank of Ethiopia (The case of Adama District)” cared by Sefanit
Asteraye under my supervision andis fit for submission for defense requirement of Masters
degree in business Administration

Advisor: Mulachew Haile (PhD candidate)

Signature __________________________

Date _________________________

III
Statement of Approval

As member of the board of examiner of open research proposal defense we have read and
evaluate the research proposal prepared by “Determinants of Manufacturing Project Failure
Financed by Development Bank of Ethiopia (The case of Adama District)” and recommend that
the proposal is approved with incorporation of the comment for warded.

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

External Examiner
Name Signature Date

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

Internal Examiner
Name Signature Date

IV
ACCRONMYS

ADFIAP Association of Development financing Institution in Asia and the Pacific

ADLI Agricultural Development Led to Industrialization
ANOVA Analysis of Variance
BSC Balance Score Card
CBE Commercial Bank of Ethiopia
CC Contingency Coefficient
CCP Corporate Credit Process
DBE Development Bank of Ethiopia
G.C Gregorian calendar
GDP Gross Domestic Product
KYC Know Your Customer
LPM Leaner Probability Model
MPMF Master in Project Management and Finance
NBE National Bank of Ethiopia
NPL Non-performing Loan
OLS Ordinary Least Square
PF Project Finance
PMBOK Project Management Body of Knowledge
PMI Project Management Institute
PRLRSP Project Rehabilitation Loan Recovery Sub-Process
PRLRT Project Rehabilitation and Loan Recovery Team
SNNPRS Southern Nation Nationality Peoples Regional State
SWOT Strength, Weakness, Opportunity and Treat
UNDP United Nation Development Program
UNIDO United Nation Industrial Development Organization
VIF Variance Inflation Factor
WB World Bank

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Table of content

Contents
ABSTRACT...............................................................................................................................................................- 3 -
1. Introduction........................................................................................................................................................- 4 -
1.1 Back ground of the Study.................................................................................................................................- 4 -
1.2 Statements of the Problem...............................................................................................................................- 6 -
1.3 The purpose of the study................................................................................................................................- 9 -
1.4 Objectives of the study.....................................................................................................................................- 9 -
1.4.1 General objective...........................................................................................................................................- 9 -
1.4.2 Specific objectives..........................................................................................................................................- 9 -
1.5 Significance of the Study................................................................................................................................- 10 -
1.6 Scope of the Study..........................................................................................................................................- 10 -
1.7 Organization of the Study..............................................................................................................................- 10 -
2. Literature Review.............................................................................................................................................- 11 -
2.1Theoretical Literature Review.........................................................................................................................- 11 -
2.1.1 Definition of Project.....................................................................................................................................- 11 -
2.2 Concepts of Project Finance...........................................................................................................................- 12 -
2.3 Concept of Project Success.............................................................................................................................- 13 -
2.4 Concepts of Project Failure.............................................................................................................................- 14 -
2.5 Why project failure.........................................................................................................................................- 15 -
2.6 Empirical Review............................................................................................................................................- 16 -
2.6 Conclusion and Knowledge Gap.....................................................................................................................- 20 -
2.7 Conceptual framework...................................................................................................................................- 20 -
2.8 Research Hypothesis.......................................................................................................................................- 22 -
3. Research Methodology.....................................................................................................................................- 23 -
3.1 Research Approach.........................................................................................................................................- 23 -
3.2 Description of the Study Area.........................................................................................................................- 24 -
3.3 Population and Sampling Size........................................................................................................................- 24 -
3.4 Sampling Technique.......................................................................................................................................- 25 -
3.5 Research Design.............................................................................................................................................- 25 -
3.6 Type and Source of Data................................................................................................................................- 25 -
3.7 Data Analysis Technique................................................................................................................................- 25 -

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3.8 Econometric Model selection and specification............................................................................................- 25 -
3.8.1 Model Selection...........................................................................................................................................- 25 -
3.8.2 Binary Logit Model......................................................................................................................................- 26 -
3.9 Model Specification........................................................................................................................................- 27 -
3.9.1 Definition of Dependent and Independent Variable...................................................................................- 27 -
4 Work Plan..........................................................................................................................................................- 28 -
4.1 Budget............................................................................................................................................................- 28 -
REFERENCE...........................................................................................................................................................- 29 -

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 ABSTRACT
Projects play significant role in the development of a give country. The Development Bank of
Ethiopia is a specialized financial institution established to promote the national development
agenda through development finance and close technical support to viable projects from the
priority areas of the government by mobilizing fund from domestic and foreign sources while
ensuring its sustainability. However, projects financed by DBE incurred failure at the bank level
and specifically manufacturing projects at Adama district. The main aim of this study is to
identify the determinants of manufacturing project failure financed by development bank of
Ethiopia Adama District by taking into account the factors emanated from Project specific,
Bank’s credit management specific and external factors. The study will use both qualitative and
quantitative data. Secondary data will be used as evidence for the study. In identifying the
project document from the study population simple random sampling method will be adopted.
Based on this, 84 sample of manufacturing project document will be drawn from total financed
and started operation of manufacturing project financed at Adama district from 2013-2020. The
collected data will be analyzed through descriptive statistics and also Determinants of
manufacturing project will be identified by Binary Logit Model Method. The collected data will
be analyzed through explanatory research design and also Determinants of manufacturing
project will be identified by fixed effect Model.

Keywords: Project, project failure manufacturing,

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Chapter One
1. Introduction
1.1 Back ground of the Study
The history of traditional project financing in practice goes back to that of the Romanian empire,
at that time it was used as a mechanism of financing for exporting and importing of different
goods which found countries under Romanian empire by colonies. The development of rail roads
in America from 1840 to 1870 and oil field exploration in 1980s in Europe flourished the modern
project financing mechanism. In 1980s and 1990s through the entrepreneur finance to develop
the basic infrastructure in the developing countries opened the door for the modern project
financing mechanism development at developing countries. The funding was provided during
this time on the basis of the produced products revenue generation projection for the future to
repay the principal and interest with long term counteracts serving as counter guaranty (Stefano,
2008)

In parallel with the development of project financing practice the establishment of Development
Bank started during the time of industrial revolution and expansion to the developed countries
for industrial support to their level of development based on the mechanism of long term project
financing of banks. Those financial institutions which participated in the long-term project
financing were known as Industrial Banks (ADFIAP Secretariat Report, 2010).

At the end of the Second World War in 1950s increased the need for the formation of
Development Banks, because of the encouragement came from World Bank and its associates to
reconstruct the distracted infrastructure due to the war. After that many Development Banks
were emerged and established in many countries and continents around the world, some of them
are the Inter- American Development Bank (1959), Asian Bank (1966) and African
Development Bank (1964) (UNIDO, 1972).

Inversely with that of the above the establishment of Development Bank of Ethiopia goes back to
1909 G.C with the name of “Society for the promotion of Agricultural and Trade Bank” during
the Era of Emperor Minilik II. Starting from that time the bank’s name changed at different time
though its mission and business purpose has not changed significantly except some of changes
due to economic policy and governmental regime changes create occasional adjustment. The
current name of Development Bank of Ethiopia re-established at 2003 G.C in the EPRDF regime

4
with the mission of promoting the national development agenda through development finance
and close technical support to viable projects from the priority areas of the government by
mobilizing fund from domestic and foreign sources with ensuring the sustainability of the Bank
(DBE annual News Document, 2018)

The government of Ethiopia has been following Agricultural Development Led industrialization
(ADLI) policy and also giving enormous incentives to domestic private and foreign investors to
get involved in agriculture sector in order to ensure the availability of quality and sufficient raw
material supply to the selected prior industry sectors that have a huge comparative advantage and
will have a potential to boost the country export capacity of processed and semi-processed
industrial products and at the same time to address the major macroeconomic problem that the
country faced such as high unemployment rate, shortage of hard currency, minimum tax
collection from the private sector and lack of sufficient raw material (UNDP, 2016).

Among many incentives giving mechanism arranged by the government credit facility at
manufacturing sector is the vital role since it is focused on the allocation of the country most
scarce resource toward the increment of manufacturing investment. The government has
assigned this mandate to the state owned bank known Development Bank of Ethiopia (DBE) to
finance and provide technical advice to those investors which have interest to invest on projects
in the government priority area predominantly in Commercial Agriculture, Agro-Processing,
Manufacturing, Mining and Extractive Sectors, (DBE, Loan Manual, 2016).

The Bank shall extend investment credit to creditworthy borrowers and projects that have
received a thorough appraisal and are found to be financially and economically viable, socially
desirable and also environmentally friendly projects (DBE, Loan Manual, 2016).

Adama District is one of the twelve district established by the Development Bank of Ethiopia
located in Adama Town east to the capital city of Addis Ababa. It has two main branch and six
Branches. As one of the banks district it extends short term, medium term and Long term
investment credit loan to the projects that comply with government policy and selected as
priority area by proving its financial, economical, technical and social viability based on the
banks parameter. However, from the total loan outstanding which the district deliver to the credit
worthy borrowers at least 90% of them or predominantly seen on that of the manufacturing

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sector, this was due to district catchment areas having a large potential for the production of
primary manufacturing products like tanning lather, corrugated iron, edible oil, bakery and
pastry, soap and detergent, textile and fabric, metal and steel, wood work painting (DBE Annual
report, 2017/18).

But more than 50% of the manufacturing projects financed by bank at Adama district failed due
to different internal and external factors, so these failed manufacturing projects are increasing the
sunk cost of the country and the bank (DBE Annual report, 2019). Since fixed investments of
the projects are specific to intended purpose and difficult to liquidate or require high switching
cost. Moreover, it depletes the fund available for loan that the Bank could finance other sectors
projects such as the Agriculture and mining which most of the governments concern that may
have significant importance for unemployment reduction and for economic growth of the
country. This proposal, therefore, concentrate on the determinants of manufacturing project
failure within the project stages that are under the Bank intervention and measures their
significance in order to help the Bank in developing a strategy and mitigating measures to reduce
manufacturing project failure.

1.2 Statements of the Problem

The mission of development bank of Ethiopia is to promote the national development agenda
through development finance and close technical support to viable projects from the priority
areas of the government by mobilizing fund from domestic and foreign sources while ensuring
its sustainability. So the projects financed by the bank should have been operated successfully in
order to achieve the stated mission.

However, failure of projects financed by the bank (Development bank of Ethiopia) has been a
big challenge to achieve the outlined mission. According to new DBE’s strategic reform plan
documents annual report, (2018) from the total banks loan outstanding 39.44% are found at Non-
performing loan status. Moreover, specifically by sectors distribution from the total loan
outstanding found under non-performing loan share 70% are from manufacturing,28.03% from
Agriculture, 0.80 % from Mining and extractive industries and 1.10% from service sectors at the
bank (DBE) level. Adama district is one the district established by the bank to deliver the service
of investment credit facility to the communities which found to the east part of the countries.
From the total loan portfolio found under the district, manufacturing sector cover around 80% of

6
the loan outstanding, but from this total manufacturing projects 41% of manufacturing projects
financed by the districts are found under non-performing loan status or failed projects based on
the banks loan classification criteria according to districts annual report on (2018)

Moreover, currently it is common to see foreclosure advertisement of different projects on

newspapers, which indicates the failure of many banks financed project of DBE generally at the
bank level and specifically manufacturing projects which financed by the district. This situation
created a bad image on the public about DBE finance by misperceiving that credit management
system of the Bank as the main cause for project failure. The failure of projects increases sunk
cost of the country irrespective of their ownership since fixed investments of plant projects are
purpose oriented and require high switching cost.

By considering the seriousness of the problem and perceptions of the public, the bank has tried to
set its own new ten year strategic vision “To be a state of art development bank that help to
achieve Ethiopia’s Economic transformation vision by 2030”. So to achieve the vision from the
risky natures of project finance, a study is required to identify the determinant factors of project
failure financed at general DBE and particular financed manufacturing sector projects at Adama
district level and to design appropriate strategy to achieve the stipulated vision.

So far Alex (2018), Adamu (2013), and Yilkal (2015) are the pioneers in conducting studies
about causes/determinants of project failure financed by DBE at Dessie district, at all over DBE
level and at corporate credit service level respectively. They found that:- market problem,
implementation delay, poor follow-up/technical support by the bank to the borrower’s,
management and manpower quality problem, missing objectives, overestimation of the return,
banks project planning capacity problem, corruption problem, inflation/continues increment of
raw material, wages and product price, intervention of the political leaders, government officials
perception towards the project, economic policy change, change of the exchange rate,
population size and literacy level of the population found around the project area were identified
as determinant factors of the project failure financed at the bank, district and corporate credit
service level of DBE.

On another hands, different researchers have conducted studies on determinants of Non-

Performing Loan In Case of Development bank of Ethiopia including Simeon (2018), Fikerte

7
(2015) and Ashenafi(2015). They found that: poor project follow-up, poor due diligence practice,
weak credit negotiation, in adequate skill of the credit performers, under finance, intervention of
external bodies on the credit decision making, shortage of foreign currency, unwillingness, of the
borrower to disclose truthful information, data constraint to appraise the loan, willful default,
foreign currency fluctuation, poor credit culture practice in the industry, management problem of
the borrower are identified as determinant factor for the increment of NON-performing Loan of
DBE.

On the Determinants of project failure or the increment of NPL financed by Development bank
of Ethiopia had been done very well by the researches which were outlined on the above.
However most of the studies conducted were an overall project level financed by Bank. It was
not conducted as needed specifically on determinants of failures for manufacturing project
financed by bank as far as the researcher’s analysis of different literatures. The manufacturing
project financed by DBE at head office and also at district level increase their failure through the
passage of year to year, according to DBE Adama District Annual Report of (2019) from the
total loan outstanding of manufacturing project above 50% of them was found as Non-
Performing loan of failed manufacturing project.
So these problems initiated the researcher to conduct this research. This study will fill the
research gap by incorporating failure factors emanated from banks credit management related
factor, from borrowers related factor and external factors to investigate the major determinants
of manufacturing project failure then to forward appropriate recommendation to the concerned
management and credit employee of the bank.
In the light of discussions made above this study will try to address the research questions stated
below.
 What is the level of performance of manufacturing project financed by development bank
of Ethiopia?
 What are the major internal credit management related determinants of manufacturing
project failure financed by DBE at Adama District?
 What are Borrowers specific determinants of manufacturing project failure of DBE
financed at Adama district?

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  What are factors related which contribute for manufacturing projects failure financed by
Development bank of Ethiopia?

1.3 The purpose of the study

The focal point of this research project is to identify the major determinants of manufacturing
project failure factor financed By Development banks of Ethiopia at Adama district. Moreover,
the study will consider major internal and external factors which determine financed
manufacturing project failure.

1.4 Objectives of the study

1.4.1 General objective
The general objective of the study is to investigate the major determinants of manufacturing
project failure financed by DBE at Adama district.

1.4.2 Specific objectives

The study will have the following specific objectives
 To analyze the level of performance of manufacturing projects financed by development
bank of Ethiopia over the specified period?
 To examine credit management failure factors of DBE financed manufacturing projects at
Adama district?
 To investigate internal failure factors of DBE financed manufacturing projects at Adama
district?
 To investigate External failure factors of DBE financed manufacturing projects at Adama
district
 To investigate project specific failure factors of manufacturing projects financed by DBE
at Adama district

1.5 Significance of the Study

Research studies regarding DBE financed projects in particular on determinants of
manufacturing project failure at Adama District is not yet studied so far. Therefore, the results of
this study will provide pertinent information and knowledge to bank’s management and also
district’s employee which their loan delivery concentrate specifically on manufacturing projects,
and also to the borrowers of the bank which already borrowed and which have interest to borrow

9
from DBE. On the other hand, the results of this study also expect to have important role to fill
the knowledge gap in the study area. Furthermore, the study also helps as evidence and literature
for those researchers who have the interest to conduct a study related to this topic in the future.

1.6 Scope of the Study

The focus of this research project is to identify the major determinants of manufacturing project
failure factor financed By Development banks of Ethiopia at Adama district. Moreover the study
will consider major internal and external factors which determines financed manufacturing
project to fail, but all manufacturing projects financed by the bank will not be included yet in the
research and also all the possible factors that determine manufacturing project failure are not
included in this paper. In addition to this, the analysis will not be conducted on all existing
manufacturing projects which are financed by DBE at Adama district. manufacturing projects
financed by district and branches found under Adama district will be included in the study which
started operation that are financed during the period covering from January 1, 2013 up to
December 31, 2020 will be taken into account.

1.7 Organization of the Study

This study is organized under five chapters. The first chapter presents the introduction which
Includes the background, statement of the problem, objectives, significance, scope of the study
The second chapter provides the review of relevant literatures. Chapter three explains about the
research method is used, which includes the sources of data and method of data collection and
analysis. Empirical results and their interpretation are delivered in fourth chapter. Finally,
concluding remarks of the findings and their implications are presented in the fifth
chapter.

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Chapter Two
2. Literature Review
2.1Theoretical Literature Review
2.1.1 Definition of Project
Different author’s and scholars defined the concept of project variously some of them are listed
below accordingly. Project defined as a beneficial change which uses the special project
management techniques to plan and control the scope of work in order to deliver a product to
satisfy the clients and stakeholder's needs and expectations (Burke, 2001)

According to Project Management institute (PMI, 2013) guide to project management body of
knowledge (PMBOK Guide), a project is a temporary endeavor undertaken to create a unique
product, service or result”

Kerzner, (2009) Defined a project any series of activities and tasks that have specific objectives
to be completed within certain specification; with defined start and end points; within limited
funds, human resources and also use multifunctional tasks to deliver the planned objective.

And also according to (Assefa ,2015) defined as project is a complex set of activities where
resources are used in expectation of return and which lends itself to planning, financing and
implementing as a unit; It is the smallest operational element unit; Which have specific starting
point and a specific ending point, in order to accomplish specific objectives with defined
sequence of investment and production activities for defined groups of benefits that can be
identified, quantified, and valued either socially or monetarily additionally it have also
boundaries, which make them distinguishable from one project from that of another one.
Generally from all the above definition given by various scholars of the field and company the
features of project can be summarized as

 A project is an activity which have a defined start and end date (time), Budget (cost), and
scope.
 A series of activities undertaken in order to achieve well defined specific and unique
objectives.
 Risk is inevitable whether the project small or large.

11
  Different factors of production must be integrated in order to achieve the objective which
planned before starting of the project.
 Needs sufficient material, cost and human resource to achieve the unique product or
objective.

2.2 Concepts of Project Finance

There is no single definition of project finance, various scholars and companies defined the
concept of project in different ways some of them are listed below. According to the definition
given by DBE credit Policy (2017) project financing means a loan arrangement for development
project who’s paid up capital is Birr 7.5 million and above; in such financing modality, the loan
repayment is derived primarily from the project’s cash flow on completion and where the
projects assets, rights & interests are held as collateral.

Project finance is a form of financing based on a standalone entity created by the sponsors, with
highly levered capital structures and concentrated equity and debt ownership Pinto (2017)
Project finance refer to a non-recourse or limited alternative financing structure in which debt,
equity and credit enhancement are combined for the construction and operation, or the
refinancing, of a particular facility or economic unit in a capital- high intensive industry (Fight,
2006)

Project finance is the structured financing of the project company created by sponsors using
equity or entresol debt and for which the lender considers cash flows as being the primary source
of loan reimbursement or repayment, whereas assets only represent used as collateral by the
lending financial institution (Gatti, 2008). Project finance refers to the funding of long term
investment projects (Derese, 2018)

And also additionally Project Finance is a financing mechanism where a firm (project sponsor)
forms a separate legal project company whose assets and cash flows are separated from the firm
and provides equity and raise non-recourse debt to carry out a specific business operation for a
finite period of time. On the other hand, the firm (non-sponsor) can finance project without
legally separating it from its existing assets, and this method of financing is called corporate
finance. (Zinat, 2010)

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 2.3 Concept of Project Success
There is no commonly accepted definition of project success from different scholars. Different
authors (Scholars) define project success from different perspective and context. According
Kerzner (2009) define project success as completion of the planned project activity within the
allocated time period, within the budgeted cost; at the proper performance or specification level;
with acceptance by the customer/user; with minimum or mutually agreed upon scope changes;
without disturbing the main workflows of the organization and also without changing the
corporate culture. Pinto (1998) define project success as a matter of paying attention to the
outcome the completion of the project activities within the planned budget; schedule;
performance and client satisfaction.

Development Bank of Ethiopia has also defined the term project success from its perspective.
According to DBE‟s Corporate Balanced Scorecard (2010), a project is classified under the
category of successful project if the project properly meets its debt service, performs above its
breakeven point and meets its objective by generating tax revenue to the government, creating
employment opportunity and generating and/or saving foreign currency.

DBE definition of project success includes meeting of project objective in addition to

expectation of fulfilling debt obligation that stipulated in foreclosure law and non-performing
directives since the strategic mission of DBE goes far more than loan collection fulfilling its role
as a development partner. The success of projects financed by DBE, therefore, highly required
from the point of overall contribution to the national economic growth.

For a project to be completed successfully great effort should be exerted on project success
factors. Mishra and Soota (2005) had identified different project success factors. According to
them, clearly defined goals, support of top management, competent project manager & team
members, sufficient project resources, client involvement in defining needs and requirements,
adequate communication channels, involvement of all parties in project review and corrections,
consulting with users, implementing appropriate technology and control measures to keep project
on track and daily trouble shooting and resolution of problems are the factors that have
influences over the direction of project success.

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In this research project, success (i.e., project success) is defined as it has been defined by
Development Bank of Ethiopia.

2.4 Concepts of Project Failure

There is no commonly accepted definition for project failure from different scholars. Different
authors (scholars) define project failure from different perspectives and context. According to
Kerzner (2009), defined project failure from planning perspective as the difference between what
was planned and what was in fact and actual project failure as the difference between what was
planned achievable and what was actually accomplished or in other way as the difference.
between the planned achievable things with that of the accomplished things. Ghattas and McKee
(2001) defined project failure as non-completion of or wrongly completed project.

The definition given by DBE is a little bit different from the definitions given above. As per
DBE‟s Corporate BSC (2017), a project that doesn’t fulfill some criteria such as properly
meeting its debt service, performing above its breakeven point, meeting its objective by
generating tax revenue to the government, creating employment opportunity and generating
and/or saving foreign currency are considered to be a failed project and also similarly by the
DBE loan Manual (2016) A project is basically defined as sick when its loan turns out to be non-
performing per NBE definition. However, projects that meet the following conditions should also
be immediately transferred to PRLRSP/PRLRT together with a complete and up to date project
follow-up report:

 If the loan is classified as doubtful or loss by the NBE loan aging criteria; and
 If it exhibits continuous loss for more than two financial years unless expected in the
initial study;

In this research project, failure (i.e., project failure) is defined as it has been defined by
Development Bank of Ethiopia

2.5 Why project failure

The literature in the field of Project Management is replete with reasons for projects failure. For
instance, it is recognized that one of the reasons for project failure is poor management of the
project cycle stages. According to PMI (2008), there are five stages in a project cycle. These
processes are: Project initiating or commencement phase; Project planning or design phase;

14
Project executing or production phase; Project monitoring and controlling systems; and Project
closing or completing phase. According to, the initiation stage determines the nature and scope
of the project. It involves defining a new project or a new phase of a project by obtaining
authorization from stakeholders. At this level, the initial scope is defined, outlined and
documented, initial resources committed for commencement of the project or phase. Further,
internal and external stakeholders are identified. In the argument of PMI (2008), if the initiation
phase is not performed well, it is unlikely that the project will be successful in meeting the
objectives.

According to John M. Nicholas (2004) the causes of project failure comes from three levels.
These are the project failure from project management context which used the project
management approach that is incorrect for project objective and environment and also lack of
management supplies for the project. The second level of causes of project failure comes from
project management system, these are source of failure comes due to poor project leadership,
philosophy and practice. The last level of project failure comes due to project planning and
control processes, this failure exist due to poor communication and inadequate uses participation
occur any time in the project and require continuous attention.

And also according to Yescombe (2002) divided the project risk into main three categories, these
are commercial risk, macro-economic risks and political risks.
 Commercial risks: are the risks which originate from the project itself in which the
project markets operate. The risks associated with the commercial risks are bankrupt,
implementation delay, management incompetency; technological failure; raw material
shortage; and decrement of the revenue are the risk which the project incurred during
implementation and operational phase. The major sub-components of this risks are
 Completion risk
 Environmental risk
 Operational risk
 Revenue generation risk
 Raw material supply risk and force majeure risks.

15
  Macro-economic risks: are the risks which are financial risk by nature which emanated
from external not from that of the projects internal factor. The major sub components
under these are; -Interest rate change, inflation and Exchange rate change.
 Political Risks: - are the risks which are known as country risks. Which emerged due to
the effects of government action, the major sub-components under this categories are
investment risks, change of law, withdrawal of permits, license concessions, increment of
tax, tariffs and export and import duties; the introduction of new competitors into the
market due to de-regulation .

2.6 Empirical Review

Mubila, &Lufumba(2000) their study on “A Statistical Analysis of Determinants of Project
Success: Examples from the African Development Bank” applied explanatory research design by
taking into account factors such as project size, implementation delay, investment cost overrun,
economic rate of return of the project and human development index as measure project specific
success or failure determinant in their study by using OLS regression and probit model analysis.
The findings of the study revealed that the rates of return at appraisal are at best weak indicators
of project performance. There are invariably huge disparities between rates of return at appraisal
and those at completion, suggesting that if not qualified the former might not be good policy
guides. Further, the results suggest that a good policy environment, as shown by rates of
economic growth, inflation and the country’s level of development, is as important for project
success as are the project specific characteristics, such as size of project or its sectorial
description
Kalonge (1995) found that physical elements were the important determinants for the success or
failure of an agricultural project. However, project planners do not put efforts into understanding
the implications of soils, climate, topography and temperature. El-Ashry (1992) indicates that
various projects failed because of unreliable rainfall patterns. Kalonge (1995) found that
agricultural projects failed because of inadequate data, particularly information on topography,
water, existing land use, soils and patterns of cropping. Poor risk management is one of the most
critical factors that leads to project failure (Kerzner, 2003) Factors such as credit policies, loan
recovery procedures and loan appraisal process are also Viewed as critical drivers of loan
delinquency occurrence by another study (Gatimu , Eric and Frederic, 2014).

16
Simeon, (2018)in his study on “Determinants of Non- Performing loans in case of Development
Bank of Ethiopia” applied explanatory research design with quantitative and qualitative data
approach. The researchers used five variables to analyze the determinants of Non-performing
loan namely project follow up attributes, policy induced attributes, source of equity contribution,
credit evaluation criteria of the bank during project appraisal and nature of the commodity
factors assessed. In the study, probity regression model was used to examine variables which
determine NPL. The study found that project follow up attributes, policy induced attributes and
credit evaluation criteria during project appraisal had a significant and positive impact on the
loan default in project financing which was consistent with the Researcher expectation. While
source of equity contribution and nature of commodity attributes was found to have no
significant contribution of loan default. Similarly Fikerte (2015) in her study “determinants of
default in project finance the case of commercial bank of Ethiopia” by using descriptive type of
research design with qualitative and quantitative approach she revealed that poor due diligence
assessment made by the bank to know the customer, weak credit negotiation, weak credit
assessment on the feasibility of the project, in adequate skill of the credit performers, under-
finance, poor monitoring and follow-up, shortage of foreign currency supply, unwillingness of
the borrower to disclose truthful information, unplanned and ambitious business expansion, lack
of commitment by the project promoter, lack of understanding the project by the project
promoter, management capacity problem, poor working capital management, willful default, data
or information constraint to appraise project loan, inflation, foreign currency fluctuation, and
poor credit culture in the industry, as a significant cause of default.

Ashenafi (2015) in his study “Analysis of Determinants of Non-Performing Loan in Case of

Development Bank of Ethiopia” the researcher employed Descriptive statistics and regression
analysis to analyze and examine the data. Mainly the bank specific, non-bank specific
(borrowers’ related and other external) factors/causes of NPLs in DBE and major determinants
of NPLs in DBE were considered. The study found out that poor project follow-up, shallow
know your customer (KYC) assessment, low capacity of credit performers, poor loan
underwriting, fund dive-ration by borrowers, poor project management capacity of borrowers
and intervention of external bodies on credit decision making are among the major bank specific
and non-bank specific (borrowers related and other external) factors for occurrence of NPLs in

17
DBE; moreover, the study find out that loan outstanding and loan in arrear are considered as
variables that positively and significantly determine/affect NPLs in DBE. But loan collection is
the variable among the tested variables that negatively significantly affects NPLs in DBE.

Yilkal (2015) and Alex (2018) do their research on the title of causes of project failure at DBE at
the case corporate credit process and at Dessie district level respectively: Yilkal (2015) in his
study both descriptive and explanatory analyses were employed. By using the descriptive
analysis method technical support given by the Bank, implementation delay, project’s manpower
quality and overestimation of project’s return were found to be the major causes of failure of
projects that were financed by the Process. And to analyses the explanatory variables by using a
regression analysis using the logistic regression model and comparison of the mean between and
within these economic sectors using ANOVA that implementation delay, overestimation of
project return and manpower quality of projects are found statistically significant while technical
support given by the Bank was found statistically insignificant for failure/success of projects that
were financed by CCP of DBE. Moreover, the highest ratio of project failure was found to be in
the agricultural sector while the lowest ratio was registered in the service sector.

Alex (2018) in his study “Causes of Project Failure Financed by DBE at Dessie District”
employed Survey questionnaire, Document analysis and open ended interview were to identify
the major causes. As a result, project specific factors, credit related management factors, socio
political environment and economic factors of 24 financed projects are considered for the study.
After collecting the required data, a descriptive analysis has been conducted. The results of the
analysis had shown that cause of project failure financed by the bank are management problem,
implementation problem ,market problem, technical failure ,quality of manpower problem,
missing objectives, follow up level /technical support given by the bank ,overestimation of
project return and manpower quality of projects, problems of corruption and related cause,
continuous rise of product price ,raw materials price and wages, intervention of political leaders
on project ,government officials perception towards the project and change in economic
policies.
Adamu(2013) in his study “Determinants of failure for projects financed by DBE ”Both
descriptive and explanatory research design was employed. For the analysis of explanatory

18
variables econometric regression method (logit model) employed. The finding of this study
portrayed that the statistical significance of some project specific explanatory variables, such as
marketing problem and manpower recruitment variation in aggravating project failure, but
project implementation time overrun to decrease project failure Moreover, DBE’s project
planning capacity and exchange rate change are found statistically significant in increasing
project failure from DBE’s credit management and macroeconomic explanatory variables
respectively. Among sociopolitical variables, population size and literacy level in which the
projects are working are found to be statistically significant in decreasing project failure as both
variables increasing.
Wondimagegnehu (2012) in his study “determinants of NPLs on commercial banks of Ethiopia”
revealed that underdeveloped credit culture, poor credit assessment, aggressive lending, botched
loan monitoring, lenient credit terms and conditions, compromised integrity, weak institutional
capacity, unfair competition among banks, willful defaults by borrowers and their knowledge
limitation, fund diversion for unexpected purposes and overdue financing has significant effect
on NPLs. Conversely, the study indicated that interest rate has no significant impact on the level
of commercial banks loan delinquencies in Ethiopia
And lastly Adane (2018) in his study “Determinants of Agricultural Project Implementation
Delays: A case of Agricultural Projects Financed by DBE found at Gambela regional state)
Quantitative research approach with a causal research design was adopted by the researcher for
the investigation. The multiple linear regression analysis was carried out to identify the factors
that determine delay. The findings of study extremely poor implementation follow up by the
relevant staff, frequent land over lapping, improper utilization of disbursed fund by promoters,
low and limited capacity of the bank staff to assist the promoter regularly, poor time
management and scheduling operational activities (work breaking down), lack of well-developed
system of resources (natural, human, financial, social, physical and informational) as a
determinants of implementation delay of agricultural project found in Gambela regional state.

2.6 Conclusion and Knowledge Gap

A research gap is defined as a topic area for which missing or insufficient information limits the
ability to reach a conclusion for a question. A research need is defined as a gap that limits the
ability of decision-makers from making decisions (Ayalney, 2018).

19
The researcher has found on studies conducted inside and outside of the country’s banks on the
causes or determinants of project failure or success using different related factors as a measure of
significance. As researcher review different articles, there are no studies conducted that
specifically by concentrating on failure of manufacturing projects financed by banks. Moreover
the existence of manufacturing project failure financed by DBE at Adama district increases
through the passage of time. In addition to this, Adamu (2013) have suggested further studies on
industry project failure which seen at the DBE level.

In general, from the research gap discussion it is understood that more study should be done to
have more comprehensive understanding the selected title by the researcher. Therefore by
considering the above gap, the researcher tried to investigate major factors that determine
manufacturing project failure financed by Development Bank of Ethiopia at Adama district level
by taking into consideration Credit management (Bank specific) related factor (Implementation
Delay Problem; Management Problem; Poor record Keeping), Project (Borrower) related factor
( Poor Project follow-up and Monitoring; Aggressive Lending Practice and Overestimation of
Return) and Other External Factors (Existence of Inflation Problem; and Land Overlapping
Problem) for this thesis preparation.

2.7 Conceptual framework

As expressed in chapter one the main objective of the study is to identify the major determinant
factors of manufacturing project failure financed by DBE at Adama district. In the theoretical
and empirical reviews for the purpose of these studies done the researcher identifies the major
Credit Management (Bank specific), Project (Borrower) specific and external factors that
determine for failure of projects financed by the banks. As Creswell (2009) suggests that after
summarizing the literature review, structuring it thematically or organizing it by important
concepts to end the literature review is commendable. Therefore in view of the various literatures
reviewed the following conceptual framework is developed to provide a rationale for the study.

20
 Project(Borrower)specific
related factor

-Poor implementation -
-Poor record keeping
-management problem
Manufacturing
project failure
Credit management (bank
specific) related factor

-poor project follow up and

monitoring
-Aggressive lending
- Overestimation of returns
from the project

External related factor

-Impact of inflation

-Land overlapping

21
 2.8 Research Hypothesis
The hypotheses of this study were formulated by referring to the existing theories and past
empirical studies that have been conducted on the determinants of banks project failure
determinant. However, from the review of empirical literature, the researcher supposed as there
is no consistency in the results for the determinants of project failure factors, based on this belief
the following hypotheses are formulated
HA1 poor record keeping practice of the borrower has negative and significant influence on
manufacturing project failure financed by DBE Adama District

HA2 poor project follow-up and monitoring has Positive and significant influence on
manufacturing project failure financed by DBE Adama District

HA3 aggressive lending has positive and significant influence on manufacturing project failure
financed by DBE Adama District

HA4 overestimation of returns from the project has positive and significant influence on
manufacturing project failure financed by DBE Adama District

HA5 inflation has positive and significant influence on manufacturing project failure financed
by DBE Adama District

HA6 existence Land overlapping has positive relation and significant influence on
manufacturing project failure financed by DBE Adama District

HA7 Implementation Delay of manufacturing project has positive and significant influence on
manufacturing project failure financed by DBE Adama District.

HA8 Management Problem of the borrower has positive and significant influence on
manufacturing project failure financed by DBE Adama District

22
Chapter Three
3. Research Methodology
Research methodology is a science of studying how research is to be carried out. Moreover, it is
also the procedures by which researchers go about their work of describing, explaining and
predicting phenomena are called research methodology. It also defined as the study of methods
by which knowledge is gained. Its aim is to give the work plan of research (Rajasekar et al,
2013). Hence in this section, the specifications of the methodology and model that will be
employed to analyze the determinants of manufacturing project failure financed by DBE at
Adama District are described accordingly.

3.1 Research Approach

The deductive research approaches, used to introduce from high level of objectiveness through
external observation and finally come to specific one (General to specific concepts). Besides,
deductive reasoning is applicable for quantitative research whereas inductive reasoning is for
qualitative research. Thus, due to quantitative nature of data, the researcher will use deductive
reasoning to examine the cause-and-effect relationships between failure of project and its
determinants in this study. Therefore, in this research, the deductive research approach will be
used because the study examines the previous findings in the related literature, and apply the
model in Development Bank of Ethiopia at Adama District.

3.2 Description of the Study Area

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 107 years. The Bank has been
playing central role in promoting the over-all economic development of the Country since its
establishment. In it’s over a century old service, DBE has established recognition at the national
and international levels. Nationally, it is the sole Bank with reputable experience in long-term
investment financing. Internationally, it is recognized as an important on-lending channel for
development programs financed by bilateral and /or multilateral sources. The recent focus of the
government in relation to the revised credit policy of DBE is to provide medium and long term
loans for investment projects in the Government priority areas such as Commercial Agriculture,
Agro-processing, Manufacturing Industries, Mining and Extractive Industries preferably, export
focused as well as lease financing for Small and Medium Enterprises.

23
 3.3 Population and Sampling Size
The selection criterion for this study requires that manufacturing project to be selected has been
operational at least for one year and financed by DBE at Adama district level within (2013-
2020). Projects that have been operational for at least one year are considered, because it is
important to assess some of the project failure determinants such as, implementation problem,
management problem and to see their financial performance. Project financed within the last
eight years are preferred in order to focus on the determinants still important for manufacturing
project failure financed by the district which highly seen the last eight years (2013 to 2020).

According to the information collected from DBE loan registration T-24 system 154
manufacturing projects are financed at Adama district level from (2013 to 2020) . From these
154 manufacturing projects 122 of them are started operation whereas the rest 28 of them are
found under implementation stage. To maintain the representativeness of the samples to all
credit-processing units of the district, as much as possible, 122 projects are considered in this
study To obtain the representative sample size, the following Taro Yamane (1967) simplified
formula at 95% confidence level (which is the accepted confidence level in social sciences) will
be used. This Yamane random sampling formula was applied for their research preparation by
Adamu (2013), Alex (2018) and also Yilkale (2015).
n= N / [1 + N (e2)]

3.4 Sampling Technique

Stratified sampling method will be used in selection of projects for this study to ensure the
inclusion of manufacturing projects from all strata. First, project status (successful and failed),
and secondly projects found from credit team and PRLRT Then, the required numbers of
projects were selected from each stratum randomly.

3.5 Research Design

In this study, both descriptive and explanatory analyses will be conducted. Descriptive statistics
is one of the techniques will be used to summarize information (data) collected from a document
analysis. By applying descriptive statistics such as mean, frequency of appearance, percentage,
maximum and minimum value etc. Explanatory analysis using logit regression model is
employed to analyze cause-effect relation between determinants of failure and DBE financed
projects.

24
 3.6 Type and Source of Data
Secondary data will be used for this study; this secondary data were collected by assessing from
due diligence report; appraisal report, follow up report, technical evaluation report, and audit
with provision report and also from approval reports of the manufacturing project financed by
the District which are qualitative as well as quantitative data.

3.7 Data Analysis Technique

The researcher will use fixed effect regression model analysis to examine the effect of each
explanatory variable on manufacturing project failure in development bank of Ethiopia. Thus,
Regression results were presented in a tabular form with the appropriate test statistics and then
an explanation of each parameter were given in line with the evidence in the literature. Then the
collected data was processed and analyzed through STATA version 12 software packages.

3.8 Econometric Model selection and specification

3.8.1 Model Selection
The general objective of this study was to identify the major determinants of manufacturing
project failure financed by DBE at Adama district. The dependent variables in this case are a
dummy variable, which takes a value of one or zero depending on the financed manufacturing
projects are failed or not financed by DBE at Adama District. Regression models, in which the
regress and evokes a yes or no, present or absent or success or failed response are known as
dichotomous or dummy dependent variable regression models. They are applicable in a wide
variety of fields and are used extensively in survey or census-type data (Gujarati, 2004 and
Woodridge, 2002). In this regard, the Non-Linear probability models, Binary Logit and Probit
models are the possible alternatives.

From this three alternative dichotomous or dummy dependent variable regression models the
researcher choose the Binary Logit Model. In the studies involving qualitative factors, usually a
choice has to be made between logit and probit models. According to Rajulton (2011), the logit
and probit models are almost the same and choice of the model is arbitrary. Consequently, the
statistical similarities between the two models make the choice between them difficult. However
as pointed out by Hosmer and Lemeshow (2013), the logistic distribution (logit) has certain
advantages over the others, in that the analysis of dichotomous outcome variable is externally
flexible and relatively simple from mathematical point of view and lends itself to a meaningful

25
interpretation. In practice many researchers choose the logit model because of its comparative
mathematical simplicity such as Adamu(2013) , Yilkal (2015) and also Abebayehu (2019).

3.8.2 Binary Logit Model

Binary Logit Model will be used employed to analyze the factors emanates from bank specific,
from borrowers specific and from external that determine manufacturing project failure financed
by DBE Adama District. Logistic regression is one of binary choice models (or dichotomous
models), which is designed to model the ‘choice’ between two discrete alternatives. This model
essentially describes the likelihood of observing failure event (Y = 1) is directly depends on
observed explanatory variables which are exogenous (independent) to the model. The project
status is dichotomies issue in its nature; whether failed and otherwise. Therefore, based on the
above theoretical concept, the researcher has developed the model as of Yilkal(2015) and Adamu
(2013). Since, dependent variable, (i.e., Project Status) is a binary outcome (dichotomous)
variable and treated as qualitative data, the researcher assumes one (1) for Failed Project and
zero (0) otherwise. And also the dependent variables are analyzed as dummy variables for the
simplicity of the analysis.
Consequently, for this data logistic regression is appropriate model to measure how explanatory
variables significantly determine the manufacturing project failures or not. The Logit function
can be derived from odds rations:
failure of Manufacturing project
( Successof
log ( odd ratio )=log l
Manufacturing project )
=log ⁡¿……………….. Equation 1

3.9 Model Specification

The Binary Logit model underlying response variable ‘Yi’ the dependent variable in this study
defined by the regression relationship of explanatory variables that contain major determinant
factor from project specific, credit management system of the Bank, and from external factors as
below.

Yi = β0 + β1X1 + · · · + β13’X13+ui
Where; β0 = the constant in the model
βi = the probability of a response
 Yi = Project status represented by dummy variable 1 for failure and 0 for success
 X1 = Implementation problem
 X2 = Management Problem,

26
  X3 = Poor record keeping
 X4 = poor project follow-up and monitoring
 X5 = aggressive lending
 X6 = overestimation of returns
 X7= Inflation problem
 X8 = Land overlapping

3.9.1 Definition of Dependent and Independent Variable

Dependent variable: Manufacturing Project Status is dependent variables, measures as dummy
variable where it takes value 1 for project failure and 0 for otherwise in the Binary Logit model.
The dependent variable of this study, project success or failure, is specified based on the criteria
set by Development Bank of Ethiopia. The project to be categorized as successful project
according to DBE required properly meeting its debt service fully, performing above breakeven
point, and generating or saving at least half of foreign exchange, create half of employment
opportunity and generate half of tax revenue for the government from estimated of the same in
appraisal report based on manufacturing product type produced. The project that failed to fulfill
any of the above criteria, it is categorized as failed. (DBE Loan manual 2018)
The independent variable that are hypothesized to affect the project status which are either
success or failure of manufacturing projects combined effects of factors that Yi represents in
equation of model specification assigned from project specific (implementation delay,
management problem and poor record keeping), from banks credit management (poor project
follow-up , aggressive lending and overestimation of returns) and factors emanated from external
(inflation problem and land overlapping problem).

4 Work Plan

27
This research is assumed to be completed in four months. Accordingly, different activities
necessary for the study will be carried out in the following time plan.

Activity 1 2 3 4
1 Reading and proposal writing x x
2 x
Proposal presentation
3 Reviewing related literature x x x
4 Designing data collection tools x x
5 Data collection x
6 Data analysis x
7 Writing summary, conclusions x
and recommendation.
8 Finalizing the dissertation x
9 Submitting the research paper x

4.1 Budget
In order to conduct the study, the budget breakdown seems the following.

No. Item Cost in birr

1 Stationery 600.00
2 Photo copies 300.00
3 Secretarial services 1,000.00
4 Communication services (phone, internet, fax, 600.00
postage)
5 Data collection 2,000.00
6 Transportation 1,500.00
Grand Total Cost 6000.00

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