Yalemzewd Tadesse

ST.
MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES
EXPLORING THE CREDIT MANAGEMENT PRACTICE

OF BUNNA INTERNATIONAL BANK S.C
BY
YALEMZEWD TADESSE AYELLE
IDNo: SGS1/0121/2004
NOVEMBER, 2013
ADDIS ABABA, ETHIOPIA
EXPLORING THE CREDIT MANAGEMTN PRACTICE OF
BUNNA INTERNATIONAL BANK S.C
BY
ID No: SGS1/0121/2004
A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY,

SCHOOL OF GRADUATE STUDIES IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF MASTER OF BUSINESS ADMINISTRATION
NOVEMBER 2013
ADDIS ABABA, ETHIOPIA
ST.MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES
FACULTY OF BUSINESS
EXPLORING THE CREDIT MANAGEMTN PRACTICE OF

BUNNA INTERNATIONAL BANK S.C
BY
IDNo: SGS1/0121/2004
APPROVED BY BOARD OF EXAMINERS

________________________ __________________
Dean, Graduate Studies Signature& Date
______________________________ _____________________
Advisor Signature & Date
______________________________ _____________________
External Examiner Signature & Date
______________________________ _____________________
Internal Examiner Signature & Date
DEDICATION
This piece is dedicated to my lovely sister, Addisalem Tadesse , and the Almighty God.
TABLE OF CONTENTS
ACKNOWLEDGEMENT ........................................................................................................iii
LIST OF ABBREVIATIONS AND ACRONYMS ................................................................. iv
LIST OF TABLES ..................................................................................................................... v
ABSTRACT .............................................................................................................................. vi
CHAPTER ONE: INTRODUCTION .................................................................................... 1
1.1. BACKGROUND OF THE STUDY ....................................................................... 1
1.2. STATEMENT OF THE PROBLEM ...................................................................... 3
1.3.BASIC RESEARCH QUESTIONS ......................................................................... 5
1.4. OBJECTIVES OF THE STUDY ............................................................................ 5
1.5.SIGNIFICANCE OF THE STUDY......................................................................... 5
1.6.SCOPE OF THE STUDY ........................................................................................ 6
CHAPTER TWO: REVIEW OF LITERATURE ................................................................ 7
2.1. DEFINITIONS, AND FUNCTIONS OF CREDIT ................................................ 7
2.2. DEFINITION AND CONCEPTS OF CREDIT MANAGEMENT ....................... 8
2.3. CREDIT MANAGEMENT PROCESS .................................................................. 9
2.4. CREDIT MANAGEMENT PRACTICES ........................................................... 11
2.5. IMPLICATIONS OF LOANS ON BANKING INSTITUTIONS ..................... 16
2.6. DEBT RECOVERY STRATEGIES..................................................................... 19
2.7. ADDRESSING RISK ASSOCIATED WITH CREDIT MANAGEMENT ........ 21
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY .......................... 24
3.1. RESEARCH DESIGN .......................................................................................... 24
3.2. POPOLATION AND SAMPLING TECHNIQUE .............................................. 25
3.3. TYPES OF DATA AND INSTRUMENTS OF DATA COLLECTION ............. 25
3.4. PROCEDURE OF DATA COLLECTION .......................................................... 26
3.5 . METHODS OF DATA ANALYSIS ................................................................... 26
CHAPTER FOUR:RESULTS AND DISCUSSION ........................................................... 27
4.1. RESULTS ............................................................................................................. 27
4.2. DISCUSSION ...................................................................................................... 49
CHAPTER FIVE:CONCLUSION, AND RECOMMENDATION ................................... 52
5.1. CONCLUSION ..................................................................................................... 52
5.2. LIMITATIONS OF THE STUDY........................................................................ 53
5.3. RECOMMENDATIONS ...................................................................................... 53
REFERENCES
APPENDICIES
DECLARATION
ENDORSEMENT
ACKNOWLEDGEMENTS
I praise the name of Almighty God who gave me power and patience in every endeavor
of my life. Next to that, I would like to express my appreciation to all who have helped
me in conducting this study. First of all; I would like to express my genuine thank to my
advisor, Dr. Zenegnaw Abiy, for his comments, advice and inspiration. I am very much
grateful to my friends who helped me during the study. I am also indebted to all who
share their views with me during data collection and questioner session. My heartfelt
thanks go to my mother Banchiwossen Lema, her moral support was an immense help
throughout my work.
May God Bless you all

LIST OF ABBREVIATIONS AND ACCRONYMS
BIB- Bunna international Bank
Freq. - Frequency
CIC-Credit Information Center
MFIs – Micro Finance Institutions
MIS-Management Information System
NBE -National Bank of Ethiopia
NPL- Non-performing loan

LIST OF TABLES
Table Name Page No
Table: 1.1 Portfolio of loan and advances 4

Table: 1.2 Non-performing Loans at BIB 4
Table: 4.1 Level of Education 27
Table: 4.2 Years of Service 28
Table :4.3 Credit processing/appraisal 29
Table: 4.4 Monitoring & Control of Credits 30
Table: 4.5 Credit Administration 32
Table :4.6 Time required to finalize a single request 34
Table :4.7 Internal factors affecting the timely decision making process 34
Table :4.8 Factors inhibit access to credits 35
Table: 4.9 Methods related to the credit control process 36
Table: 4.10 Collection strategies 38
Table: 4.11 Time Interval of follow-up 40
Table: 4.12 Time Interval 40
Table: 4.13 Non performing loan VS credit management 41
Table: 4:14 Credit management policy VS non-performing loan 41
Table: 4.15 Bank’s support in dealing with Defaulters 42
Table: 4:16 Factors vs credit management tools 42
Table: 4.17 Credit Risk Management Technique 43
Table 4.18 Management Information System (MIS) 45
Table 4.19 Does the MIS support the credit management 45
Table 4.20 Does the bank have policies-have information requirements 46
Table 4.21 Does the bank have internal risk ratings 47
Table 4.22 Does the bank review the risk ratings 47
Table 4:23 Level of Credit Approving Organ 48
ABSTRACT
The study assessed credit management practices of Bunna International Bank S.C (BIB).
The research was carried out by analyzing the process of accessing credits; credits control
processes and credits collection strategies. The research was done against the background
that there was huge debts as a result of nonperforming loans affecting the financial status of
the bank. The descriptive survey method was used for the study. Sample size of 40
members of staff was drawn from the thirty three branches and Credit Department staff.
Primary and secondary sources of data were used for the study. Questionnaires were used
as the main instrument to collect the primary data on access to credit, credit control
processes and credit collection strategies. Among the major findings of the study are; the
main factors influencing access to credit are the stringent policy guidelines as well as the
credit worthiness of the customers. A major credit control process was the process of
ensuring compliance of internal guidelines. A major recommendation of the study was the
need to adopt flexible policy which can improve access to credit. Besides, implementing
the policies and guidelines that are set in place are mandatory. The overall credit
management activity of the bank is poor and needs improvement in devising a strong
follow-up unit, devising an office that can control the condition and sanctions at each
approval document, establishing coordination among work units.
CHAPTER ONE
INTRODUCTION
1.1.BACKGROUND OF THE STUDY

The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s
trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to repay.
In other words, credit is the ability to command goods or services of another in return for
promise to pay such goods or services at some specified time in the future. For a bank, it
is the main source of profit and on the other hand, the wrong use of credit would bring
disaster not only for the bank but also for the economy as a whole (Edwards ,2004).
Banks as financial intermediaries are very significant in the economy of every nation.
Currently, in Ethiopia the banking system dominates the financial system. At the close of
April 2013 the financial system comprises of one central bank (National Bank of
Ethiopia), eighteen commercial banks (of which two are owned by government), one
development bank (Development Bank of Ethiopia), 19 micro-finance institutions
(MFIs), fifteen insurance companies (of which one is government owned).
The relevance of banks to the economy lies primarily in their ability to mobilize
fund/deposit and grant credit to various economic actors for the production of goods and
rendering of service while earning a comfortable surplus for itself. However, where credit
is not properly channeled, controlled and administered, the aforementioned goals will not
be achieved; rather it may lead to severe consequences to the economy.
According to Hempel (1994), credit management is the most important function of the
banking industry. It is the risky, difficult but profitable function performed by banks. The
key strategic value a bank adds has always depended upon its ability to manage credit.
This cannot be properly done without an effective risk assessment, control and follow-up
strategies. A strong and effective credit management process is one that reinforces and
compliments its corporate objectives and goals. The main problem that banks encounter
in credit administration is that some of the granted credit facilities are not re-paid leading
to loss of depositor’s funds and emergence of bad debts.
It is advisable to analyze the payment capability of the customers. Understanding the
payment behavior of potential customers is vital in assessing credit management in every
financial organization. Since poor credit assessment can lead to major problems in the
overall financial performance of a bank.
Before a loan becomes bad, it needs to be granted; moreover the poor quality of a loan is
sometimes due to factors not attributable to the lending process such as adverse selection
and moral hazards (Satiglitz and Weiss 1981) or any other external shock that may alter
the borrower’s ability to repay the loan (Bonin 2001). Factors like wrong economic
decisions by individuals and unexpected price change for certain products could be a
source for problem loans. Problems with loans are normally identified at the end of the
credit channel. Nevertheless, there are cases where the ways banks grant and monitor
credits can be responsible for the bad loan portfolio. In other terms weak credit risk
management systems can also be sources of problem loans (Coyle B.2001).
The objective of the credit management is to maximize the performing asset and the
minimization of the non-performing asset as well as ensuring the optimal point of loan
and advance and their efficient management. Credit management is a dynamic field
where a certain standard of long-range planning is needed to allocate the fund in diverse
field and to minimize the risk and maximizing the return on the invested fund.
Continuous supervision, monitoring and follow-up are highly required for ensuring the
timely repayment and minimizing the default. Actually the credit portfolio is not only
constitute the bank’s asset structure but also a vital factor of the bank’s success. The
overall success in credit management depends on the banks credit Policy, portfolio of
credit, monitoring, supervision and follow-up of the loan and advance.
Therefore, while analyzing the credit management of Bunna International Bank
S.C,(BIB) it is required to analyze its credit policy, credit procedure and quality of credit
portfolio. Since there is an increment in the non-performing loan position of the bank
despite its early age of establishment.
Therefore, it becomes a matter of compelling urgency to evaluate BIB’s credit
management to provide for a close analysis and monitoring of the approved credits with a
view to evaluating its impact on the banks credit decisions. Since the Non-Performing
Loan (NPL) position of the bank gets more than 100% increment in three reported
financial periods. Also to emphasize the importance that sound credit management
procedures should be put in place, to achieve simultaneously, low risk and high returns.
1.2.STATEMENT OF THE PROBLEM

A major problem facing all banks is credit management that banks ensure the individual
appraisal and rating of credit application through their credit analysis department, is not
in doubt. However what are being questioned is their procedures and strategies for caring
out this important function. As a result of non-effective assessment and control policies
and procedures that threaten performance, profitably and subsequently its survival. Poor
credit administration has been a complement of an unviable risk assessment and control
strategy. Besides there is no previous research conducted on the area of the topic so it is
an opportunity to feel the knowledge gap.
In the light of this, the following problem has been identified.
 Non-effective risk assessment and control policies in banks, leading to poor

credit administration, incidence of doubtful and bad credits that is assured
with the increase in the non-performing loan position of the bank.
 Failure of operators of banks to comply with safety rules and regulations in
credit administration- no controlling organ is assigned at branch level
violation of rules and conditions is experienced.
 Poor loan portfolio management-since the outstanding loan of the bank
inclined to specific sectors like shown in table below. The portfolio mix of the
bank is not consistent throughout the reported periods and no clear
demarcation on the policy of the bank that sets a limit for each sector in terms
of the percentage of total portfolio :
Table 1.1. Portfolio of loan and advances
June 2010 June 2011 June 2012
Amount
Amount
Amount
Description
%
Domestic Trade 80,572,800 42 113,797,556 31 239,575,280 37
and Service
Export 16,140,772 8.4 41,852,238 11 52,760,813 8

Import 32,654,321 17 75,635,539 21 118,937,856 18
Manufacturing 11,433,937 6 12,166,434 3 44,791,247 7
Transport 5,720,014 3 55,828,615 15 76,944,035 12
Construction 44,768,081 23 64,430,208 18 112,823,365 17
Personal 927,441 0.48 1,095,676 0.3 2,768,900 0.4
Staff 40,088 0.02 1,455,566 0.4 3,339,343 0.5
Total 192,257,454 99.9 366,261,832 99.7 651,940,839 99.9
Source: Annual Report, 2010-2012

 the increasing trend in nonperforming loans in the bank -as depicted below:
Table 1.2. Non-performing Loans at BIB

Amount of Non-Performing Percentage
Year Amount of Loan
loan of change
2010 192,257,454 -- 0%
2011 366,261,832 2,973,563.62 100%
2012 651,940,839 8,323,500.21 180%
Source: Quarterly provision Report, 2010-2012

1.3.BASIC RESEARCH QUESTIONS
The Study seeks answer the following questions:

 What are the major factors influencing the overall credit activity?
 What credit control processes are adapted in the management of credit in
BIB?
 What credit collection strategies are adapted in the management of credit in
BIB?
 What are the procedures designed to manage the credit management process
effectively?
 What are the components of an effective credit management system?
 Does the bank revise and maintain quality portfolio as per the procedure and
the policy?
1.4.OBJECTIVES OF THE STUDY
In view of the stated problems, the general objective of the study is to explore how
credits are managed in Bunna International Bank S.C (BIB).
The specific objectives are to:
 Determine the factors that influence access to credit in BIB
 Determine the credit control processes in BIB.
 Analyze the credit collection strategies in BIB ;
 Determine best credit management practice that the bank should follow;
1.5.SIGNIFICANCE OF THE STUDY

This study is significant because it deals with issues banks are facing and will continue to
confront them in the future. Giving that interest on loans and advances constitute a major
source of income to banks, it is very important that loans are properly appraised before
approval and that when granted, they are monitored to ensure that they don’t go bad.
In light of the present challenges facing banks in the management of credit, to ensure
minimal loan loss through maintenance of a good risk assessment and control, this study
will significantly assist the bank in setting a clear credit management and implementation
strategy. In reducing bad debts to the barest minimum by assessing the capacity of bank
risk assessment and credit control procedures to provide for close analysis and
monitoring of banks credit administration. Bring to the notice of credit managers the
importance of effective risk assessment and control in credit administration and make
useful contributions to effective and efficient credit management in Bunna International
Bank(BIB).
1.6.SCOPE OF THE STUDY

This study is limited to examining the assessment of credit management practices of
Bunna International Bank S.C(BIB), finding out the problems encountered in the process.
All thirty three branches and a Credit Department are target respondents.
CHAPTER TWO
REVIEW OF LITERATURE
2.1. DEFINITIONS, AND FUNCTIONS OF CREDIT
Credit, in commerce and finance, is a term used to denote transactions involving the
transfer of money or other property on promise of repayment, usually at a fixed future date.
The transferor thereby becomes a creditor, and the transferee, a debtor; hence credit and
debt are simply terms describing the same operation viewed from opposite standpoints
(Donald L. 2008).
The principal function of credit is to transfer property from those who own it to those who
wish to use it, as in the granting of loans by banks to individuals and corporate bodies who
plan to initiate or expand their business ventures. The transfer is temporary and is made for
a price, known as interest, which varies with the risk involved and also with the demand
for, and supply of, credit, (Stiglitz and Weiss, 1981).
Credit transactions have been indispensable to the economic development of the modern
world. Credit puts to use property that would otherwise lie idle, thus enabling the world to
fully utilize its resources. One of the most significant differences between some nations of
Africa, Asia, and South America and the advanced Western nations is the extent to which
the use of credit permits the latter to keep their savings continuously at work. The presence
of credit institutions rests on the readiness of people to trust one another and of course to
enforce business contracts (Stiglitz and Weiss, 1981).
The use of credit also makes feasible the performance of the complex operations involved
in modern business without the constant handling of money. Credit operations are carried
out by means of documents known as credit instruments, which include bills of exchange,
money orders, checks, drafts, promissory notes, and bonds. These instruments are usually
negotiable; they may legally be transferred in the same way as money. When the party
issuing the instrument desires to prevent its use by anyone other than the party to whom it
is issued, he or she may do so by inscribing the words “not negotiable” on the instrument
(Donald L. 2008).
2.2. DEFINITION AND CONCEPTS OF CREDIT MANAGEMENT
Credit management is defined as the efficient control and co-ordination of loanable funds
so as to keep credit and the investment in credit at optimal level (Hempel,1994).
Credit management is a term used to identify accounting functions usually conducted under
the umbrella of Accounts Receivables (Wise-geek, 2012).
The process of credit management begins with accurately assessing the credit -
worthiness of the customer base. This is particularly important if the company chooses to
extend some type of credit line or revolving credit to certain customers. Proper credit
management calls for setting specific criteria that a customer must meet before receiving
this type of credit arrangement. As part of the evaluation process, credit management also
calls for determining the total credit line that will be extended to a given customer.
According toAgyeman, (1987) several factors are used as part of the credit management
process to evaluate and qualify a customer for the receipt of some form of credits. These
factors include;
 Gathering data on the potential customer’s current financial condition,
including the current credit score.
 The current ratio between income and outstanding financial obligations will
also be taken into consideration.
 Competent credit management seeks to not only protect the vendor/bank from
possible losses, but also protect the customer from creating more debt
obligations that cannot be settled in a timely manner.
A good credit management system helps to reduce the amount of capital tied up with
debtors (people who owe money) and minimize the exposure to bad debts. Good credit
management is vital to cash flow.
After establishing the credit limit for a customer, credit management focuses on providing
the client with accurate and timely statements or invoices. The invoices must be delivered
to the customer in a reasonable amount of time before the due date, thus providing the
customer with a reasonable period to comply with the purchase terms.
When the process of credit management functions becomes, efficient, everyone involved
benefits from the effort. The vendor/bank has a reasonable amount of assurance that
invoices issued to a client will be paid within terms, or that regular minimum payments will
be received on credit account balances. Customers have the opportunity to build a strong
rapport with the vendor and thus create a solid credit (Bank Negara Malaysia, 2001).
2.3. CREDIT MANAGEMENT PROCESS
According to Edwards, Banks credit management processes can be summarized in three

main stages. These stages are:
i. Credit initiation
ii. Documentation and disbursement
iii. Credit administration
2.3.1. CREDIT INITIATION
The credit initiation is a process that starts from a market analysis and ends at the credit
application approval. The steps involved in credit initiation processes are listed below:
 Surveys and industry studies: Loan officers/ Customer relationship
Officers/branch managers scan the market and economic sectors to identify key
players and potential business for the Bank. In the same vein, industries with
high potential of growth that can be good business for the Bank are also listed
with their expected risks.
 Prospect lists: some prospects (companies and individual customers) identified
as the main role players are short listed in accordance with the industry studies
and the minimum risk criteria. This prospect list is ranked in order of
preference.
 Customer solicitation: at that stage, although the primary source of target is
the prospect list, the initiation of a credit comes either at the bank request in
the frequent contact with existing customers or at the clients request if they
have a need for financing.
 Negotiation: the Loan officer /relationship officer / branch manager scan
identifies the financing needs of the borrower and gathers background
information such as the latest financial statements, project details, projections
over the loan life. This information will allow the officer to check whether the
risk is bearable by the Bank and its compliance with the bank's targets.
 Presentation: the conformity of information given with the market and
industry analysis is the reliability of the information once again verified by
consulting other sources.
 Credit committee approval: a copy of that annex and loan approval form
(LAF) is submitted to each member of the credit committee. The members
review and approve or decide on the request.
 Advice to customers: once the credit is approved, the customer is advised in
writing with details concerning the terms and conditions and with the statement
that the credit can be subject to review, modification or cancellation at the
Bank option or in line with the decision.
2.3.2. DOCUMENTATION AND DISBURSEMENT
The documentation and disbursement refers to the compliance of documents provided with
the law applicable and the requirements of the Bank's legal department. Documentation
provided must satisfy the Bank's legal department and afford maximum protection
to the Bank. The documentation is periodically reviewed to keep them in fine with ever-
changing legal systems and practices.
The Legal department is consulted before making any compromises with the customer. Any
amendments are done in consultancy with the legal department. Once the credit application
satisfies all these conditions, a thorough analysis is done and if the application complies
with the Bank's conditions, instruction is given to the Credit administration for
disbursement.
2.3.3. CREDIT ADMINISTRATION
The credit administration refers to the credit support, control systems and other practices
necessary for the effective monitoring of credit risks taken by the Bank. Some of the
important points of the credit administration are:
 Control of Credit files.
 Safekeeping of credit and documentation files.
 Follow-ups for expirations of essential documents like insurance.
 Control of credits and excesses over approved lines.
 Monitoring of collateral inspections, site visits and customer calls.
 Monitoring of repayments under term credits.
 Reporting: the portfolio is periodically reviewed to make sure that the
names tiered are still complying with the risk acceptance criteria.
2.4. CREDIT MANAGEMENT PRACTICES
Credit risk continues to remain the largest source of risk for banking institutions in the
world (Credit Bank Negara Malaysia, 2001). Effective credit management is therefore vital
to ensure that a banking institutions credit activities are conducted in a prudent manner and
the risk of potential bank failures reduced. The success of banks (in the view of the
researcher) hinges on their ability to manage their credit effectively. Even though there are
no strictly laid down credit management practices, most financial institutions practice the
following in order to maximize profit as well as to reduce credit risk.
2.4.1. LENDING
Lending is one of the core pillars of financial intermediation and for that matter a
significant activity in the operations of banks. It is at the same time highlyrisky. This is
asserted by McNaughton (1992), who emphasized that risk taking is central to banking
and banks are successful when the risk they take are reasonably controlled and within
their financial reserves and credit competence. McNaughton was also of the view that to
survive the numerous lending risks and to prosper, bankers must re-examine their
bureaucratic tendencies in order to become responsible to the financial needs of the
economy. The bureaucratic tendencies could thus cause lots of frustrations for loan
applicants to obtain credit at the right time, which may hamper the success of projects.
In the area of credit delivery, Rouse (1989) has asserted that a lender lends money and
does not give it away. The lender needs to look into the future and asks; will the customer
repay by the agreed date? Rouse contends that, there will always be some risk that the
customer will be unable to repay, and it is in assessing this risk that the lender needs to
demonstrate both skill and judgment. Lending is perceived as an art because it involves
imagination and creativity (Rouse, 1989). It could be contended that credit management
prescribes the guidelines to be followed and their religious adherence is very crucial for
good credit management practices. The appropriate judgment depends on the skills,
knowledge and foresight of the manager. This should embrace skills and knowledge in
financial analysis, the performance of the sector receiving credit, the overall
macroeconomic condition, the psychology in determining the perceived and indirect
intentions of the borrower, the type of soil and climatic pattern in terms of agricultural
loans and the perceived impact of the credit on the performance of the lending institution.
In this vein, lending operations encompass various disciplines of economics, finance,
law, accounting, geography, science, psychology, and culture among others. The situation
makes lending activity very challenging since substantial significant slip causes
undesirable financial losses and for that matter threatens the very existence of the lending
institution. In this respect, persons with the right attitude, knowledge and skills devoid of
all egoistic sentiments, are needed to superintend lending activities.
Olashore (1988) has identified four interested parties in bank lending and these are the
depositor, the borrower, the lending bank and government. Whilst the depositor wants
the highest possible interest on his deposits, the borrower cherishes lowest interest rate on
lending; the bank wants the highest spread between lending and borrowing rates of
interest, and the government places emphasis on the responsiveness of lending to the
sectorial needs of the economy. In spite of these interest groups, the lending bank ensures
that its interest supersedes that of the others.
In a liberalized and deregulated economy, banks dictate both borrowing and lending
interest rates and determine the direction of credit to sectors which are considered less
risky and more profitable.
2.4.2. COST OF BORROWING (INTEREST RATE)
Stiglitz (1981) asserted that interest rates on lending would be higher if the probability of
default is higher. In this regard ventures with high risk of success attract higher interest
rates
The level of lending interest rates is also influenced by the availability of loanable funds
and the competing ends. In situations where Government needs to borrow substantially to
support its business, high interest rates are offered to crowd out the private sector. This
view was advocated by Cox (1988), when he indicated that, interest rates were influenced
by supply and demand for funds, risk premium, inflationary factors and amount of loan.
Before the liberalization of the economy in 1990, the Bank of NBE regulated interest
rates. During the pre-liberalization period, interest rates were fixed by the Bank of NBE
for the various sectors for which the banks were to comply. However, this system was
abolished and banks were to determine their own interest rates according to the market
forces and the dictates of the macroeconomic conditions. The Bank Rate of the National
Bank of Ethiopia seemingly becomes the benchmark but it takes time for the banks to
adjust appropriately to it especially when there is downward revision of the rate.
2.4.3. ASSESSMENT OF BORROWERS CREDIT WORTHINESS
The assessment of the credit worthiness involves the gathering, processing and analyzing of
information on the loan applicant. An important aspect of information is by way of credit
references and credit rating. Ethiopia is yet to have credit rating agencies, which will
provide opinion on the credit standing of businesses in the system. The existence of such
an agency would facilitate the credit decision process of banks. Rather banks are
performing rating for their own credit customers.
According to Rose (1989) the question that must be dealt with before any other is
whether or not the customer can service the loan – that is, pay out the credit when due,
with a comfortable margin of interest. The factors underlying the assessment of pre-
lending safeguards, in the opinion of Rose (1989) are; character, capacity, cash,
collateral, conditions and control (i.e. the 6Cs). In another context, Rose (1989) referred
to mnemonics used as common checklist to review loan application as: CCCPPARTS
(Character, Capital, Capability, Purpose, Person, Amount, Repayment, Terms and
Security); PARSER (Person, Amount, Repayment, Security, Expediency, Remuneration);
CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment,
Insurance/Security).
The variation in the mnemonics relates to the basic principle of assessing the potential of
having loans repaid. The dimension of each of the factors outlined by Rose (1989) is as
follows:
Character: customers’ past payment records; experience of other lenders with the
customer; purpose of loan; customer’s track record in forecasting business or personal
income and credit rating.
Capacity: identity of customer and guarantors, description of history, legal structure

owners, nature of operations, products and principal customers, suppliers for a business
borrower and management quality.
Collateral: ownership of assets; vulnerability of assets to obsolescence and liquidation

value of assets.
Conditions: Customers current position in industry and expected market share; competitive
climate for customer products; sensitivity of customer and industry to business cycles and
changes in technology.
Control: applicable banking laws and regulations regarding the character and quality of
acceptable loans; adequate documentation for examiners who may review the loan.
Security: Securities for loans and overdrafts are to ensure recovery of the funds lent to the
borrower in the event that the borrower becomes unwilling or incapable of meeting his
commitments.
Dunkman (1996) outlined reasons for security as: safeguarding against some doubts about
borrowers repayment ability, basis for increasing amount of loans over and above existing
facilities, and as a last resort to recover loan in the face of default. Agyeman (1987)
expressed the view that even though security is necessary, its requirement by bankers must
be adopted cautiously otherwise it is capable of being counterproductive. According to
him, this can come about when bankable projects are funded solely because of availability
of security. Agyemans (1987) view that security has the unintended tendency for causing
skewness of loans in favor of property owners. The researcher shares the view that if
security becomes dominant factor in credit decision, bankable projects, which lack
securities as support, may be starved of credit while those with adequate security support
but not financially viable may rather have access to credit. This then serves as draw back in
using financial intermediation as focus for meaningful economic development and growth.
Banks are often confronted by instituting legal action against loan defaulters to take
possession of assets pledged as collateral for foreclosure.
Akakpo (1994) suggested that the view that security should always be the last
consideration in any loan proposition and one should not lend purely because security is
offered. Any loan proposition should stand on its own with the security only providing a
cushion should things go wrong. Rouse (1989) however, held the view that no advances
should be made until security procedures have been completed or at least at a stage where
completion can take place without the need to involve the borrower any further. This
suggests that the provision of adequate perfected security should be paramount in taking
a credit decision. The rigidity in total secured collateral before disbursement of credit
facilities needs to be relaxed in order not to delay the financing, which invariably
impedes the success of projects.
It should be also noted that the provision of security just provides secondary source of
repayment and therefore to ensure sustained relations with customers in their business
endeavors, it is pertinent to consider the viability of the project being financed to generate
sufficient cash flows to liquidate the credit facility. Furthermore the foreclosure of
immovable property pledged as security goes through a long legal tussle, which could not
easily bring prompt liquidity relief to a bank. It is therefore very essential for banks to lay
much premium on the viability of a project as a paramount consideration for lending
financial support.
2.5. IMPLICATIONS OF LOANS ON BANKING INSTITUTIONS
Loans generate huge interest for banks which contribute immensely to the financial
performance of banks. However, when loans go bad they have some adverse effects on the
financial health of banks. This is because in line with banking regulations, banks make
adequate provisions and charges for bad debts which impact negatively on their
performance. National Bank of Ethiopia regulations on loan provisioning indicate that
loans in the non-performing categories that is loans that are at least ninety days overdue in
default of repayment will attract minimum provisions of 20%, 50%and 100% for
substandard, doubtful and loss, respectively (National Bank of Ethiopia 2008).
According to Bloem and Gorter, (2001), though issues relating to non-performing loans
may affect all sectors, the most serious impact is on financial institutions such as
commercial banks and mortgage financing institutions which tend to have large loan
portfolios. Besides, the large bad loans portfolios will affect the ability of banks to provide
credit. Huge non-performing loans could result in loss of confidence on the part of
depositors and foreign investors who may start a run on banks, leading to liquidity
problems.
2.5.1. PERFORMING LOANS
Legally, a loan or credit facility refers to a contractual promise between two parties where
one party, the creditor agrees to provide a sum of money to a debtor, who promises to
return the said amount to the creditor either in one lump sum or in installments over a
specified period of time. The agreement may include provision of additional payments of
rental charges on the funds advanced to the borrower for the time the funds are in the hands
of the debtor.
The additional payments that are in the form of interest charges, processing fees,
commissions, monitoring fees among others, are usually paid in addition to the principal
amount lent. Indeed these additional payments when made in accordance with the loan
contract constitute income to the lender or the creditor. A loan may therefore be considered
as performing if payments of both principal and interest charges are up to date as agreed
between the creditor and debtor.
National Bank of Ethiopia classifications of loans indicates that loans that are pass are
those for which the borrower is up to date in respect of payments of both principal and
interest. It further shows that an overdraft would be considered as current or performing if
there were regular activity on the account with no sign of a hardcore of debt building up
(Natioanl Bank of Ethiopia, 2008).
The foregoing reveals that loans that are up to date in terms of principal and interest
payments are described as performing facilities. These types of loans constitute quality
asset portfolio for banks in view of the interest income generated by such assets.
2.5.2 . NON-PERFORMING LOANS
The term bad loans as described by Al-Zubaidi (2002), is used interchangeably with non -
performing and impaired loans as identified in Fofack (2005). Berger and De Young,
(1997) also considers these types of loans as “problem loans”. Thus these descriptions are
used interchangeably throughout the study.
Generally, loans that are outstanding in both principal and interest for a long time contrary
to the terms and conditions contained in the loan contract are considered as non-performing
loans. This is because going by the description of performing loans above, it follows that
any loan facility that is not up to date in terms of payment of both principal and interest
contrary to the terms of the loan agreement, is nonperforming.
Available literature gives different descriptions of bad loans. Some researchers noted that
certain countries use quantitative criteria for example number of days overdue scheduled
payments while other countries rely on qualitative norms like information about the
customer’s financial status and management judgment about future payments (Bloem and
Gorter, 2001).
Alton and Hazen (2001) described non-performing loans as loans that are ninety days or
more past due or no longer accruing interest. As cited in Fofack (2005), consider non-
performing loans as loans which for a relatively long period of time do not generate
income, that is the principal and or interest on these loans have been left unpaid for at least
ninety days. A non-performing loan may also refer to one that is not earning income and
full payment of principal and interest is no longer anticipated, principal or interest is ninety
days or more delinquent or the maturity date has passed and payment in full has not been
made (Parry C, 1999).
A critical appraisal of the foregoing definitions of bad loans points to the fact that loans for
which both principal and interest have not been paid for at least ninety days are considered
non-performing.
This included loans captured within substandard, doubtful and loss categories. Loans in
these groups have exceeded ninety days in terms of repayment (National Bank of Ethiopia,
2008).
2.6. DEBT RECOVERY STRATEGIES
It is inevitable that any business owner, big or small, is going to encounter clients that are
just not willing to pay. This is especially prominent in the banking industry, as services are
ongoing processes and not a one-time product purchase. It is no surprise that many small
businesses do not survive the first two years, and the inabilities to collect from nonpaying
clients are likely a large contributor of this failure. Debt collection is an endless challenge
that must be tackled with care (Al-Zubaidi, 2002). The following strategies are
recommended.
2.6.1. MONITORING
Monitoring of credit facilities granted to customers is a significant function in ensuring the

success of the project for which repayment is made. Huppi and Feder (1990) revealed that
effective monitoring leads to higher recovery of loans by exposing possible dangers (like
loan diversions) and reminding borrowers of their obligations to the lending bank (i.e.
calling for redoubling of efforts towards loan repayments).
Monitoring of credit facilities has been concentrated typically on ensuring repayment
when there are signs of defaults for either payment of interest or principal repayment by
installments. Such practice, in the view of the researcher, fails to achieve desirable loan
repayments since the facility might have already gone bad. The researcher believes that
monitoring of loans should be total by following events right from the disbursement of
the facility, ascertaining the deployment of funds on the intended project, following up
and reviewing progress of the project, identifying shortcomings for possible advice
through field visits and discussions, ensuring prompt repayment of proceeds from the
project and advising on further expansion or re-direction of the project among others.
“Armed –chair” monitoring invariably becomes a factor for non-repayment of credit
facilities. Effective monitoring should be instituted by a lending institution and apprise
management of the state of affairs of each project.
2.6.2. COLLATERAL
The granting of credit facilities is underpinned by the risk of being repaid when due.
Williams and Heins (1985) indicated that risk identification is the process by which a
business systematically and continuously identifies property, liability, and personnel
exposures as soon as or before they emerge. The first step in business risk management in
their view is to identify the various types of potential losses confronting the firm, and
secondly, to measure these potential losses with respect to such matters as their likelihood
of occurrence and their probable severity.
It is therefore pertinent to assess the inherent risk of a credit facility, the existing
operational management to mitigating the risk and determining the underlying actual risk.
This assessment gives the idea of intended quality of the credit facility.
The unlikelihood that there will be a loss arising from default at repayment of a credit
facility granted is referred to as credit or default risk. The primary danger in granting credit
is the chance that the borrower will not repay the loan. Rouse (1989) buttressed this by
stating that a lender lends money and does not give it away and there will always be some
risk that the customer will be unable to repay. This therefore calls for critical assessment of
any credit request with reasonable assurance that repayment would not be of much
problem. A bank further covers the uncertainty of the repayment by demanding collateral.
2.6.3. FREQUENT CONTACT
A lack of continued contact is a common mistake in bank debt recovery. While initial
contact brings the debt to the attention of the delinquent client, without continuous,
friendly reminders, you lose the benefit of the first courtesy call. Frequent contact is the
key to assuring successful bank debt recovery efforts. At the same time, all contact
should be hospitable. When keeping in touch with delinquent debtors, you want to remain
on good terms, which require a careful, gentle approach. You will find that, if you are
speaking to the client as often as every three days, having a good attitude will assist in
more success at bank debt recovery. Even once the debtor makes a commitment to pay,
continued contact and follow-up is necessary to assure the payment is actually recovered.
Many clients will make such promises in an effort to stop collection calls while others
become so overwhelmed with paying several debts that one can slip through the cracks
unless the bank debt recovery agent follows up as a reminder (Business blog, 2011).
2.7. ADDRESSING RISK ASSOCIATED WITH CREDIT MANAGEMENT
Credit risk has the repercussion of liquidity risk, which in the extreme instance can lead a
bank to severe financial crisis, resulting in erosion of capital, insolvency and could ruin the
bank. To identify and address risk associated with credit management, the Basel Committee
on Banking Supervision in its Publication No. 54 issued in September 2000 outlined the
following measures:
 Establishing an appropriate credit risk environment
 Operating under a sound credit granting process
 Maintaining an appropriate credit administration, measurement and
monitoring process;
 Ensuring adequate controls over credit risk
 The role of supervisors.
The highlights of the above issues raised by the Basel Committee on Banking
Supervision (2000) are as follows:
2.7.1. ESTABLISHING AN APPROPRIATE CREDIT RISK ENVIRONMENT
The Board of Directors should have responsibility for approving and periodically (at least
annually) review the credit risk strategy and significant credit risk policies of the bank. The
strategy should reflect the banks tolerance for risk and level of profitability the bank
expects for incurring various credit risks.
Senior Management should have responsibility for implementing the credit risk strategy
approved by the Board of Directors and for developing policies and procedures for
identifying, measuring, monitoring and controlling credit risk. Such policies and procedures
should address credit risk in all of the banks activities and at both the individual credit an d
portfolio levels.
Banks should identify and manage credit risk inherent in all products and activities. Banks
should ensure that risks of products and activities new to them are subject to adequate risk
management procedures and controls before being introduced or undertaken, and approval
in advance by the Board of Directors or its appropriate committee.
2.7.2 OPERATING UNDER A SOUND CREDIT GRANTING PROCESS
Banks must operate within sound, well-defined credit granting criteria. These criteria
should include a clear indication of the banks largest market and a thorough undertaking of
the borrower or counter-party, as well as purpose and structure of the credit, and its source
of payment; Banks should establish overall credit limits at the level of individual
borrowers and counter-parties, and groups of connected counter-parties that aggregate in
comparable and meaningful manner different types of exposures, both in banking and
trading book and on and off balance sheet; Banks should have a clearly established process
in place for approving new credit as well as the amendment, renewal and re-financing of
existing credits All extension of credit must be made on an arm-length basis. In particular,
credit to related companies and individuals must be authorized on an exceptional basis,
monitored with particular care and other appropriate steps taken to control or mitigate the
risk of non-arm’s length lending.
2.7.3. MAINTAINING APPROPRIATE CREDIT ADMINISTRATION THROUGH

MEASUREMENT AND MONITORING PROCESS
According to Theodore N. (1962), this process entails the following:
Banks should have in place a system for the ongoing administration of their various credit
risk bearing portfolios and a system for monitoring conditions of inadequate credits,
including determining the adequacy of provisions and reserves.
Banks are encouraged to develop and utilize an internal risk rating system in managing
credit.
The rating system should be consistent with the nature, size and complex it y of a banks
activities.
Banks must have information system and analytical techniques that enable management to
measure the credit risk inherent in all on-and-off balance sheet activities. The management
information should provide adequate information on the composition of the credit
portfolio, including identification of any concentration of risk;
Banks must have in place a system for monitoring the overall composition and quality of
the credit portfolios and take into consideration potential future changes in economic
conditions when assessing individual credits and their stressful conditions.
2.7.4. ENSURING ADEQUATE CONTROLS OVER CREDIT RISK
Theodore N. (1962), stated that banks must establish a system of independent, ongoing
assessment of the bank’s credit risk management process and the results of such reviews
should be communicated directly to the Board of Directors and senior management.
Banks must ensure that the credit granting function being properly managed and the credit
exposures are within levels consistent with prudential standards and internal limits; and
must further have a system in place for early remedial action on deteriorating credit,
managing problem and similar workout situations.
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY

Both primary and secondary data sources were used to undertake this research. Primary
data were collected through questionnaire, and informal discussion with professionals.
The secondary data sources are annual reports, manuals, credit policy and procedures of
Bunna International Bank S.C. To identify the implementation, supervision, monitoring
and repayment practice- questionnaire with the staff and extensive study of documents
was done.
The study is made on Bunna International S.C –specifically Credit operation and all
employees in the department and thirty three branches are included in the research. The
research is designed as a case study type. And descriptivestatistics like percentile is used
as a data analysis methods.
3.1. RESEARCH DESIGN
This study used the survey methods by employing qualitative instruments for data
collection and analysis. The survey methods were used because the variables involved in
the analysis were qualitative in nature. According to Trochin (1999), survey methods are
used for non- experimental and descriptive research methods. He further indicated that,
survey can be useful when a researcher wants to collect data on phenomena that cannot be
directly observed. Besides, survey can be useful when a researcher wants to collect data on
phenomena that cannot be directly observed. Qualitative research is not intended to test a
predetermined theory or hypothesis; instead, it is exploratory in nature and through
induction it builds theories or hypotheses. In showing the lack of an established theory and
exploratory nature of the qualitative research approach, McDonald and Daly (1992) noted
that this approach is particularly essential when the researchers have little knowledge about
the area of investigation. The strength of qualitative research is to generate a theory; also it
explores issues which are not studied in the past. But it is criticized by bias because of
researcher‘s interference.
3.2. POPULATIONAND SAMPLING TECHNIQUES
The study units were limited to members of staff and management of Bunna International
Bank S.C(BIB) who have exposure to credit area.
Survey sampling method was used to select credit staff of the branches and head office in
the study area, dealing in various types of credit portfolio (exposure) after. And all staff
who work on credit operation were incorporated in the study. This was carried out after the
number of workers in each branch has been determined.
3.3. TYPES OF DATA AND INSTRUMENTS OF DATA COLLECTION
The type of data used in the study include qualitative data. Primary and secondary sources
of data were used for the study. The main primary source of data was through the use of
questionnaires. The questionnaires were both open- and close ended. The open-ended
questions offered the respondents the opportunity to freely express themselves on the
issues under consideration while the close-ended questions restricted the respondents on
the options provided.
In the case of the secondary source of data, annual, and quarterly reports of the bank were
analyzed. These reports contain financial performance of the bank. Besides, as reference
material NBE directives, books, journals working paper as well as different thesis were
used in the study.
Structured questionnaires were used for the collection of data. As indicated earlier these
questions were both open and close-ended and were based on factors influencing access to
credits, strategies for improving access to credits, credit control processes and credit
collection strategies. Besides review of different documents were done.
3.4. PROCEDURE OF DATA COLLECTION
Since the number of respondents are few and could be managed easily of all staff who
work on credit area were considered for the study. And a questionnaire is distributed to
branches and head office credit department.
3.5. METHODS OF DATA ANALYSIS
The qualitative and quantitative data collected were summarized and presented by means of
tables. This offered a pictorial presentation to enhance the understanding of the data. The
data presented was also analyzed using descriptive statistics.
CHAPTER FOUR
RESULTS AND DISCUSSION

This chapter presents the finding and discussions of the study. It starts with the socio –
demographic analysis on the respondents after which subjects the study are analyzed.
As it is stated in the previous chapter, questionnaires were developed for respondents. A total
of 38 questionnaires for employees (branches and head office) were distributed. Among the
38 questionnaires distributed to respondents, only 30 filled and returned. Thus, out of the
100% questionnaires distributed 79% were collected. Therefore, the data given below is a
summarized response of 30 respondents.
4.1. RESULTS
4.1.1. SOCIO – DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS

The following socio – demographic characteristics of respondents were analyzed, level of
education, position and years of experience.
LEVEL OF EDUCATION
Table 4.1. Level of Education
Level of Education Frequency Percent
Bachelor 27 90
Masters 3 10
Total 30 100
Source: Questionnaire
As indicated in the above table, the analysis on the level of education indicated that, over
90% of the respondents have bachelors’ degree while the remaining 10% holds Masters
Degree.
YEARS OF SERVICE /CREDIT RELATED BANK EXPERIENCE
Table 4.2. Years of Service
Types of Service Frequency Percentage
1–5 25 83
6-10 3 10
Above 10 2 7
Total 30 100
The above table 4.2 shows experience of the staff. And the study found that, 83 % of the
respondents have experience related to credit area between 1-5years. From the total number
of respondents, 10% of Staff has experience of 6-10years on credit area. Small portion of the
respondents that is 7% have experience above 10 years of experience.
4.1.2. RESEARCH RELATED QUESTION

4.1.2.1. Credit Management Process
As indicated in table 4.3 item (A) respondents were asked whether the bank checks the
borrowers history before granting loans or not. With this regard, 20 (67%) of the respondents
strongly agree on the issue while 7 (23%) of employees agree that the bank checks the history
of a borrower. On the other hand, 1 (3%) of respondents disagrees, 2 (7%) strongly disagree.
In same table item (B) respondents were asked whether the bank properly assessed the
customer ability to meet obligations. The majority of respondents 14(47%) strongly agree
with the idea. On the other hand, 13(43%) of respondents agree, 1 (3%) of respondents
neither agree nor disagree, and 2 (7%) of respondents strongly disagree.
As can be seen from item (C) of table 4.3, 14(47%) of respondents strongly agree that the
credit granting process of the bank creates accountability for each decision making activity
and 12 (40%) of respondents agree on the issue. Whereas 1 (3%) of respondents are neutral
with the idea, 2 (7%) of respondents disagree, and the remaining 1(3%) strongly disagree.
In item (D) of table 4.3, respondents were asked whether there are times credit granting and
monitoring process is overridden by directors, senior management or other influential staff.
The majority of respondents, 16 (53%), strongly agree, 2(7%), accept its happening on the
credit approval process. Specifically, 3 (10%) respondents neither agree nor disagree, 7
(23%) of supervisors disagree furthermore, the rest 2(7%) of respondents strongly disagree.
Table 4.3. Credit processing/appraisal
Strongly Agree Neutral Disagree Strongly
Total
agree disagree
Item No
Freq.
Freq.
Freq.
Freq.
Freq.
Freq.
% % % % % %
Description
A The Bank checks the
borrower history before 20 67 7 23 1 3 2 7 30 100
granting loans
B The Bank properly assessed
the customer ability to meet 14 47 13 43 1 3 2 7 30 100
obligations
C Credit-granting approval
process established
14 47 12 40 1 3 2 7 1 3 30 100
accountability for decision
taken
D There are times credit
granting and monitoring
process is overridden by
16 53 2 7 3 10 7 23 2 7 30 100
directors, senior
management or other
influential staff
E The bank carried out credit
processing activities 1 3 13 43 2 7 14 47 30 100
independent of the appraisal
As item (E) of table 4.3 shows, 1 (3%) of respondents strongly agree with the idea that the
bank carried out credit processing independent of the appraisal, 13(43%) agree, 2(7%) neutral
and the rest 14(47%) strongly disagree.
Table 4.4. Monitoring and Control of Credits

agree disagree
Item No
Total
% % % % % %
Freq.
Freq.
Freq.
Freq.
Freq.
Freq.
Description
A The bank strictly
implement the conditions
2 7 10 33 18 60 30 100
and sanctions set by
different approving organs
B Collateral coverage is
regularly assessed and
17 57 10 33 3 10 30 100
related to the borrower’s
financial health
C The Bank regularly
undertakes Stress Testing
5 17 25 83 30 100
on the overall credit
portfolio
D The Bank periodically
prepares ‘Credit Quality
10 33 5 17 15 50 30 100
Reports’ for signaling loan
loss in any portfolio
E The Bank monitors the
business of clients after
2 7 4 13 24 80 30 100
granting credits on regular
interval basis
F Customers are often given
sufficient training on loans 5 17 10 33 15 50
usage
Source: questionnaire
As can be seen from item (A) in table 4.4, 2(7%) of respondents agree with the proposition
that the bank strictly implement the conditions and sanctions set by different approving
organs. It is also found that, 10 (33%) of them disagree with the idea, 18 (60%) of them
strongly disagree.
In item (B) of table 4.4, respondents were asked whether the collateral coverage is regularly
assessed and related to the borrower’s financial position. The majority of respondents 17
(57%) strongly agree, 10(33%) agree whereas the remaining 3 (10%) strongly disagree.
In item (C) of table 4.4, respondents requested whether the bank regularly undertakes stress
testing on the overall credit portfolio or not. With this regard, 5 (17%) of respondents
responded that they disagree, and the rest 25 (83%) of respondents strongly disagree.
The result presented in item (D) of table 4.4 indicates that 10(33%) of respondents are neutral
whether the bank periodically prepares ‘Credit Quality Reports ’for signaling loan loss in
any portfolio or not,5(17)% disagree ,whereas the remaining or almost half of the respondents
15 (50%) strongly disagree.
It can be seen from item (E) of table 4.4 that 2 (7%) of respondents have responded that the
bank monitors the business of clients after granting credits on regular interval basis ,4(13%)
are neutral, whereas 24(80%) of them disagree.
In same table item (F) respondents were asked whether the customers are given sufficient
training on loan usage or not, 5(17%) agree with the idea. On the other hand, 10(33%) of
respondents neither agree nor disagree, while the majority 15(50%) disagree.
Table 4.5. Credit Administration

agree disagree
Item No
Total
% % % % % %
Freq.
Freq.
Freq.
Freq.
Freq.
Freq.
Description
A The process of “credit
administration” is
performed independently
4 13 11 37 10 33 2 7 3 10 30 100
of individuals involved in
the “business origination”
of credit
B The bank has well
structured documentation
15 50 15 50 30 100
tracking system for credit
and collateral files
C The Bank segregates the
workout activity from the
1 3 5 17 6 20 18 60 30 100
area that originated the
credit
D The Bank has credit risk
policy that clearly set out
5 17 3 10 10 33 12 40 30 100
how problem credits are to
be managed
E The Bank has appropriate
criteria for credit
15 50 10 33 5 17 30 100
classification,
provisioning and write off
F Adequate measures are put
in place to recover non- 3 10 17 57 10 33 30 100
performing loans
As we can see from table 4.5, item (A), respondents were asked whether the process of credit
administration is performed independently of individuals involved in the business origination
of credit. With this regard 4 (13%) of respondents strongly agree, 11 (37%) agree, 10(33%)
neither agree nor disagree, 2(7%) disagree, and the rest 3(10%) of them strongly disagree.
In item (B) of table 4.5 respondents were asked whether the bank has employed well-
structured documentation tracking system for credit and collateral files, their response
suggest that 15(50%) strongly agree and the rest 15 (50%) agree.
In item (C)of table 4.5 respondents were asked whether the bank segregates the workout
activity from the area that originated credit. Among the respondents 1 (3%) strongly agree
that the bank segregate the workout activities, 5(17%) agree 6(20%) disagree and the rest
18(60%) strongly disagree.
As indicated in table 4.5 item (D) respondents were asked whether the bank has a credit
policy that clearly set out how problem credits are to be managed. With this regard, 5 (17%)
of the respondents strongly agree that it has while 3 (10%) of respondents agree,10(33%
)disagree and the remaining 12(40%) strongly disagree.
In same table item (E) respondents were asked whether the bank has appropriate criteria for
credit classification, provisioning and write-off. The majority of respondents 15(50%)
strongly agree with the idea. On the other hand, 10(33%) of respondents agree, and 5 (17%)
of respondents disagree.
In the last item of table 4.5 i.e item (F), respondents were requested whether the bank has
deployed adequate measures to recover non-performing loans. And as per the collected
response 3(10%) strongly agree, 17(57%) disagree and the remaining 10(33%) strongly
disagree.
4.1.2.2. How to process and make decision on a single request
Respondents were asked how long it takes on average to process and make a decision on
a single credit request. 15(50%) responds less than 15 days, 14(47%) responded a
maximum of one month a minimum of 15 days while 1(3%) of respondents responded
more than a month.
Table 4.6.Time required to finalize a single request
Days Frequency Percentage
<15 15 50
15-30 14 47
>30 1 3
Total 30 100
4.1.2.3 Internal Factors affect the timely decision making of credit

Table 4.7. Internal factors affecting the timely decision making process
Strongly Agree Neutral Disagre Strongl

agree e y
disagre
e Total
Item No
% % % % % %
Freq.
Freq.
Freq.
Freq.
Freq.
Freq.
Description
A Centralized decision 2 2 1
5 17 8 7 5 17 5 30 100
making process 6 3 7
B lack of adequate man 3 2
9 30 9 6 6 20 30 100
power 0 0
C delay in obtaining
2 2
reliable credit 14 47 6 7 1 3 2 7 30 100
0 3
information
D Submission of
1
incomplete data by the 27 90 3 30 100
0
prospective borrower
In table 4.7, respondents were asked internal factors that prevail fast and timely decision. And
in item (A) respondents asked centralized decision making process as a factor and
5(17%)strongly agree,8(26%) agree,7(23%)neither agree nor disagree,5(17%) disagree and
the rest 5(17%) strongly disagree.
As shown in item (B) of table 4.7, 6 (20%) of respondents responded that lack of adequate
manpower affect the decision making process, 9(30%) strongly agree, 9(30%) agree, 6(20%)
disagree and the rest 6(20%) neutral.
In Item (C) delay in obtaining reliable credit information is strongly agreed by 14(47%) of
respondents, agreed by 6(20%) of respondents, neither agreed nor disagreed by 7(23%)of
respondents, disagreed by1(3%) of respondents and strongly disagreed by 2(7%) of
respondent groups.
In item (D) of the same table submission of incomplete data by the applicant is strongly
agreed as a cause for fast decision making and it is shared by 27(90%) of respondents while
the rest 3(10%) accepted it as a factor.
4.1.2.4. Factors that inhibit access to credits
Table 4.8: Factors inhibit access to credits
Strongly Agree Neutral Disagree Strongl

agree y
disagre
e Total
Item No
Freq.
Freq.
Freq.
Freq.
Freq.
Freq.
% % % % % %
Description
A Age of client 1
25 83 5 30 100
7
B Purpose of Loan 1 3
9 30 3 9 30 9 30 100
0 0
C Customer’s credit 13 4 5 1 6 20 6 2 30 100
D HistoryFlow
Cash /financial 14 43 4 17 6 20 6 20 30 100
E position ofPolicy
Stringent the applicant
rule of 17 3 30
9 30 3 9 30 9 30 100
the bank 0 0
F Amount of request 27 90 2 7 1 3 30 100
In table 4.8 item (A) 25%(83%)of respondents strongly agree that age of applicants for a
factor to access credit while the rest 5(17%) has agreed .
In item (B) of table 4.8 purpose of the loan is cited as factor that inhibit access to credit. From
respondents 9(30%) strongly agree, 3(10%) agree, 9(30%) disagree and 9(30%) strongly
disagree.
Customer credit history is also cited as a factor that determine access to credit in item (C) of
the same table and 13(43%) agree, 5(17%) neutral, 6(20%) disagree and 6(20%) strongly
disagree.
The cash flow/financial position of the applicant is mentioned as a factor for credit access in
item (D) of the table and 14(47%) agree,-4(13-% neutral, 6(20%) disagree and 6(20%)
strongly disagree.
In item (E) of table 4.8 9(30%) of respondents strongly agrees that stringent bank policy as a
factor to access credit while 3(10%) agreed, 9(30%) disagree and the rest 9(30%) has
strongly disagreed.
In item (F) the amount of request was raised as a cause for accessing credit or not and
27(90%) of respondents has strongly agreed, 2(7%) agreed and the rest 1% disagree.
4.1.2.5.Methods to improve credit control process
Table 4.9: Methods related to the credit control process
Strongly Agree Neutral Disagree Strongl

agree y
disagre
e Total
Item No
Freq.
Freq.
Freq.
Freq.
Freq.
Freq.
% % % % % %
Description
A Training to staff 26 86 2 7 2 7 30 100
B Improve Internal Control 4
13 43 14 3 10 30 100
System 7
C Initiate Legal Processes 9 30 9 3 9 3 3 10 30 100
D Early
Effective Monitoring 24 80 6 20 0 30 100
E Provide reminder letters 0
14 4
early 46 2 7 12 2 7 30 100
0
The researcher raised questions that the methods that the bank shall deploy in improving
credit control process.
In item (A) of the above table, 26(86%) of the respondents has strongly agreed that the
training provided to staff have an impact on improving the credit control process. While
2(7%) agree, and the remaining 2(7%) disagree.
As can be seen in item (B) of table 4.9 13(43%) strongly agree, 14 (47%) agree, and 3(10%)
disagree on the idea that the internal control system of the bank could improve the credit
control process.
Initiating legal processes early is raised as a factor to improve credit control process and
9(30%) strongly agree, 9(30%) agree, 9(30%) neutral and the rest 3(10%) disagree.
In item (D) of same table designing an effective monitoring system will improve the credit
control process or not .And 24(80%) of respondents strongly agree, and the rest 6(20%)
agree.
In item (E) of the same table, the researcher requested whether serving reminder letters early
will facilitate the credit control process or not. Of the respondents 14% strongly agree, 2%
agree,12% neither agree nor disagree and the remaining 2% strongly disagree.
Besides, some credit controlling processes recommended by respondents includes putting a

strong and practical credit risk rating policy , developing the staff capacity at branch level –
since no enough officers assigned at each branch to manage the credit activity in general,
visiting the business after disbursement on regular basis, and applying due care before
granting the loan.
4.1.2.6.Collection strategies in retrieving credit
Table 4.10. Collection strategies
agree disagree
Total
Item No
% % % % % %
Freq.
Freq.
Freq.
Freq.
Freq.
Freq.
Description
A Establish payment
15 50 10 33 2 7 3 10 30 100
guideline
B Consider prompt
10 33 15 50 2 7 3 10 30 100
payment
C Writing reminder letter 5 17 14 47 10 33 1 3 30 100
D Provide incentive for 5 17 3 10 22 73 30 100
E prompt payment
Seek legal advice 3 10 9 30 11 37 7 23 30 100
In table 4.10 item (A) respondents were requested whether establishing payment guideline
could be considered as a collection strategy and 15(50%) of them strongly agreed with the
idea, 10(33%) agreed,2(7%) disagree, 3(10%).
In item (B) of same table 10(33%) strongly agreed on the idea that considering prompt
payment will be a strategy in retrieving credit , half of the respondents agreed on the idea,
2(7%) neutral and the rest 3(10%) disagree.
In the same table item (C) 5(17%) of respondents strongly agreed that writing a reminder
letter as a strategy in retrieving credit,14(47%) agree,10(33%) neutral and the rest 1(3%)
strongly disagree.
In item (D) providing incentive for prompt payment is requested as a strategy in retrieving
credit and 5(17%) strongly agreed, 3(10%) neutral and the remaining 22(73%) disagree.
Item (E) of the same table has raised seeking legal advice as a strategy in retrieving credit and
3(10%) of respondents strongly agree 9(30%) of respondents agree and 11(37) neutral and
the rest 7(23%) disagree.
4.1.2.7.The following strategies are proposed by the respondents, that helps the Bank to
improve the quality of loans as high as possible.
The respondents further replied that the bank should depend on customer cash flow rather
than collateral which is the least way out mechanism. Since the collateral value varies with a
change in evaluator and it is highly vulnerable to subjectivity. With all the problems of being
dependable on collateral the bank should rather focus on the viability of the business and
develop a mutual understanding with the customer in maintaining a professional recording.
The bank should also give training to employees on regular interval to manage the changes in
the business environment it is also advisable if the bank hires professionals who have
experience on credit area at branch level.
Revising the credit policy and procedure is also a means to maintain a quality portfolio
especially in addressing ambiguous terms in all aspects of credit. Providing a sound credit
management throughout the bank is another point that the bank should give attention at each
credit request. Taking five C’s in decision making is vital and the bank should protect the
approval process from anyone who wants to interfere the decision making. In addition the
information system of the bank related to credit information system shall be decentralized at
branch level so as branches will have first hand information in its own and clarify any
ambiguous issue before sent to approval.
4.1.2.8.Credit Management practices which is not applicable at BIB as per the response
of respondents incorporates:
Some of the credit management practices that the respondents responds incorporates,
structured visit at a specified time interval or when the need arise, the bank’s customer
business visit is not to the level-and the overall business visit interval shall be revised.
Organize a full-fledged research and development department which could help as an
information source for the overall credit process. Therefore the banks have to organize a
research and development department that helps to cope up with the changing business
environment. In addition creating a sense of collaboration among credit department and
branches in general and organizing the management information system of the bank is
expected.
4.1.2.9.Follow up time interval of the bank after loan disbursement
Table: 4.11 Time Interval of follow-up
Time Interval Frequency Percentage

Monthly
Bi-monthly
Quarterly
Semi annually 1 3
Annually
None 29 97
Total 30 100
In table 4.11, respondents were asked the time interval that the bank deploys in conducting a
visit after release of fund to the borrowers business site. And 1(3%) responded semiannually
and 29(97%) responded that no visit is conducted after disbursement of the loan.
The responses assure that the follow-up system of the bank is not as such structured and as it
is well known business visit is conducted to assure the end use of the loan that the bank has
granted. In this case if the bank fails to conduct such activity huge portion of the loan might
be converted to non-perfuming at the time lapses.
4.1.2.10. Is the time interval enough or reasonable?

Table: 4.12 Time Interval
Description Frequency Percentage

Yes 1 3
No 29 97
Total 30 100
In relation to the responses of respondents in the above table, 1(3%) replied that the time
allotted is enough and the majority i.e. 29(97%) responded it is not enough.
4.1.2.11. Those who responded the time allotted for interval period is not enough
proposes solutions like:
 Establishing a post credit grant and follow up together with site visit and
customer advise;
 Improve the time allotted for such tasks of surprise visit, consultancy and
advisory service on credit utilization;
4.1.2.12. Do you think non-performing loan of the bank related to poor credit
management
Table: 4.13 Non performing loan vs credit management

Yes 28 93
No 2 7
Total 30 100
Almost all respondents 28(97%) have responded that the banks non-performing loan is
related to poor credit management of the loan. While the rest 2(7%) disagree on the issue.
Problems encountered in credit processing, granting and administering activities have an
impact on the non-performing loan of the bank.
4.1.2.13. How do you evaluate the bank credit management policy in dealing with non-
performing loan
Table: 4.14. Credit management policy VS non-performing loan

Very good 2 7
good 1 3
Fair 26 87
Poor 1 3
Very poor
Total 30 100
How far is the credit management policy of the bank helps to deal with non-performing loans
or not and 2(7%) responded very well, 1(3%) good, 26(87%) fair, the remaining 1(3%) of
respondents rate it as poor.
4.1.2.14. How do you evaluate the bank’s support to customers default due to
unforeseen circumstances?
Respondents were asked how far is the bank’s support in dealing with default customers
2(7%) responded very supportive, 12(70%) supportive, 6(20%) fair and the rest 1(3%) not
supportive.
Table: 4.15 Bank’s support in dealing with Defaulters

Very supportive 2 7
supportive 21 70
Fair 6 20
Not supportive 1 3
Very obstructive
Total 30 100
4.1.2.15. What inhibit the bank not to implement the basic credit risk management
tools?
Table: 4:16 Factors VS credit risk management tools

Item No
agree disagree Total

Freq. % Freq. % Freq. % Freq. % Freq. % Freq. %
Description
A Lack of awareness 5 17 23 77 2 6 30 100
B Carelessness of
1 3 15 50 14 47
employees 30 100
C Insufficient man power on
12 40 1 3 3 10 12 40 2 7 30 100
the area of specialization
D Lack of policy and
4 13 15 50 9 30 2 7
procedure 30 100
Respondents were asked factors that inhibit the basic credit risk management tools in the
bank. And with regard to lack of awareness –in item (A), 5(17%) strongly agreed, 23(77%)
disagree and 2(6%) strongly disagree.
In item (B) of same table i.e table 4.16, 12(40%) of respondents responded existence of
insufficient man power on the area of specialization as a factor, 1(3%) agree, 3(10%) neutral,
12(40%) disagree and 2(7%) strongly disagree.
From the total number of respondents, 1(3%) of employees responded that Carelessness of
employees is a cause for improper utilization of credit risk management tools. While 15(50%)
neutral and 14(47%) disagree on the idea.
The inexistence of policy and procedure related to credit risk management tools is strongly
accepted by 4(13%) of respondents, agreed by 15(50%) , neither agreed nor disagreed by
9(30% ) and the rest 2(7%)strongly disagree as a cause for improper utilization of credit
management tools in the bank.
Besides respondents added lack of industry average and lack of willingness to accept the
experience of other banks as a problem.
4.1.2.16. Credit Risk Management Technique used in the Bank
Table: 4.17 Credit Risk Management Technique
Intractably Highly Applied Less Not used

applied applied applied at all Total
Item No
% % % % % %
Freq.
Freq.
Freq.
Freq.
Freq.
Freq.
Description
A Credit Approval Authority 15 50 12 40 3 7 30 100
B Prudential Limits 14 47 14 47 1 3 1 3 30 100
C Risk Ratings 1 3 12 40 15 50 2 7 30 100
D Portfolio Management 5 17 12 40 12 40 1 3 30 100
E Loan Review Policy 1 3 12 40 15 50 2 7 30 100
F Collateral 25 83 3 10 2 7 30 100
G Diversification 15 50 11 37 1 3 30 100
H Other tools like credit
audit and problem loan 15 50 11 37 3 10 1 3 30 100
management
15(50%) of respondents responded that there is credit approval authority used in the bank as
one credit management technique. While 12(40%) responded as it is highly applied, 3(10%)
responded as applied in the bank.
In item (B) of table 4.17 14(47%) responded intractably application of prudential limits,
14(47%) responded as highly applied, 1(3%) less applied and not used at all each.
1(3%) of respondents responded that risk rating is highly applied as a credit management
tool, 12 (40%) responded as it is applied, 15(50%) as less applied, 2(7%) not used at all.
As per the responses of the respondents, portfolio management is responded by 14(47%) of
respondents as intractably applied, 14(47%) as highly applied, 1(3%) less applied and 1(3%)
not used at all as a tool.
Loan review policy is intractably applied as responded by 1(3%)of respondents, applied as
per the responses of 12(40% )of respondents, less applied as per the response of
15(50%)respondents, not used at all as per the response of 2(7%) respondents as a tool for
credit risk management.
Diversification as a tool for credit risk management is responded as intractably applied by
3(10%), of respondents, highly applied as per the response of 15(50%) of respondents,
applied as per the response of 11(37%) of respondents, and responded as not used at all as per
the response of 1(3%) of the respondents.
In item (G) of table 4.17, the tools like credit audit and problem loan management is used asa
credit risk management techniques as rated by respondents,15(50%)intractably
applied,11(37% )highly applied,3(10%)less applied and 1(3%) not used at all.
4.1.2.17. Does the bank install a Management Information System that helps for credit
management?
27(90%) of respondents replied that there is no a management information system that helps
for credit management in the bank and the rest agrees the existence of the system.
Table 4.18 Management Information System (MIS)
Yes 3 10
No 27 90
Total 30 100
4.1.2.18. If yes, does the Management Information System Support the Credit
management of the Bank?
Equal number of respondents i.e. 1(33.3%) has strongly agreed, agreed and no idea about the
ability of the existing management information system in supporting the credit management
task of the bank.
Table 4.19 is the MIS support the credit management

Strongly agree 1 33.3
Agree 1 33.3
No idea 1 33.3
Disagree
Strongly disagree
Total 3 100
4.1.2.19. Challenges faced in credit management activities?
Some of the challenges faced in credit management activities include:
 Difficulties with respect to KYC(Know Your Customer) aside of credit
appraisal
 High dependency on collateral
 Customers and some staff at branch level are not aware of credit policy and
procedure of the bank
4.1.2.20. Does the bank have policies in place regarding the information and
documentation needed to approve
Table 4.20 Does the bank have policies-have information requirements
Item number
Frequency
Frequency
Item %
Item No
Item %
A New credits Amendments

B
(workouts)
a) yes 30 100 a) yes 21 70
b) No b) No 4 13
c)Neutral 5 17
Total 30 100 Total 30 100
C Renewals Refinancing of
D
Existing credits
a) yes 30 100 a) yes 3 10
b) No b) No 27 90
Total 30 100 Total 30 100
E Change the terms and
conditions previously
approved credits
a) yes 3 10
b) No 27 90
Total 30 100
100% of respondents responded that the bank have policies regarding the information and
documentation requirement on new loan.
In item (B) of table 4.20, 21(70%) of respondents responded that the bank have policies
regarding the information and documentation requirement on amendments (workout),4(13% )
believe no such policy and the rest5(17%) have no idea.
Like responses on new loan 100% of respondents also responded that the bank has policies
regarding the information and documentation requirement on renewals.
In item (D) 3(10%) respondents have agreed that the bank put in place a policy of
information and documentation requirement on refinancing of existing credit , the rest and
the majority 27(97%) disagree.
The existence of a policy on changing the terms and conditions on the previously approved
credits is only accepted by 3(10%) of respondents and the rest 27(99%) of the respondents
opposing the idea.
4.1.2.21. Does the bank have internal risk ratings that could be assigned to individual
borrowers at the time and credit is granted?
Table 4.21 Does the bank have internal risk ratings that support the credit
management

Yes 5 17
Yes but not always 15 50
No 10 33
Total 30 100
The respondents were asked whether the bank have internal risk ratings that could be
assigned to individual borrowers at the time and credit is granted .Among the respondents
5(17%) responded yes there is an internal risk rating at the time of credit request,15(50%)yes
but not always and 10(33%) no.
4.1.2.22. If the answer to questionnaire No. 22 is yes, does the bank review the risk
ratings on a periodic basis and assign a new rating when conditions either
improve or deteriorate
Table 4.22 Does the bank review the risk ratings

Yes 2 40
Yes but not always 1 20
No 2 40
Total 5 100
Source; Questionnaire
From respondents who responded there is an internal credit risk rating while the loan was
granted,2(40%)responded yes the bank reviews the ratings whether it is deteriorating or
not,1(20%) yes but not always and the remaining 2(40%) no .
4.1.2.23. Are different levels of management designated to grant different amounts of

credits
Table 4:23 Level of Credit Approving Organ

Yes 30 100
No
Total 30 100
Respondents were asked whether they know that the bank has designated a different levels of
management to grant different amounts of credit or not, all respondents have common
understanding and say yes that the bank set different discretionary limits. It has an
implication in managing credits properly.
4.1.2.24. General comments forwarded by the respondents regarding the credit

management practice of Bunna International Bank Includes:
 No strong credit management in the bank in administering each loan;
 Clear credit policy shall be put in place to administer non- performing loans;
 Existing customers shall be managed through consultancy ,visit etc;
 Risk management should be revised and updated given change in the business;
 Strong rule and regulation to manage NPLs shall be devised;
 Accurate and timely follow up shall be done;
 Proper implementation of the existing policy and procedure shall be taken in
to consideration;
 Proper communication between branches and head office is required therefore
developing good coordination among work units;
4.2. DISCUSSION
The bank checks the borrower history. The bank assesses customer ability to meet
obligations. The credit granting process creates accountability. Credit granting and
monitoring process is overridden by directors, senior management staff. Credit processing is
not independent of appraisal. The bank not implements the conditions and sanctions set by
different approving organs. The bank regularly assessed the collateral coverage with the
borrowers’ financial position though most credit approval is collateral based. The bank did
not take a stress testing on the overall credit portfolio- in which it is a valuable task to be
taken. No credit quality report for signaling loan loss in any portfolio or not except the
quarterly provision report disclosed to National Bank of Ethiopia. The bank is not in a
position to monitor or visit the clients business on regular basis after disbursement that
creates a huge amount of non-performing loan. No sufficient training is provided by the bank
with regard to loan usage- this leads to high diversion of funds.
The process of credit administration is performed independently of individuals involved in

the business origination of credit –helps to reduce conflict of interest. The bank has well-
structured document tracking system for credit and collateral files. The workout activity is
not segregated from the area that the credit is originated –helps to reduce conflict of interest.
The credit policy of the bank is not clear in managing problem loan that creates loop-holes to
the overall credit management. The bank has a criterion for credit classification that is issued
by National Bank of Ethiopia.
The bank has not yet deployed adequate measure to recover non- performing loans. The bank
should improve the time allotted for centralized decision making of credit. The credit
approval period shall be reasonable as soon as possible. The lack of manpower is not a case
in the bank for determining the decision making process however; the bank should hire staff
with the required skill and train them. Submission of incomplete data by the applicant is a
reason for delay the loan officer or branch manager should use a checklist as first contact as
the time of application and resolve the incompleteness.
The bank should clearly communicate the factors to access credit and the factors raised
includes age of applicant, purpose of a loan, customer credit history, cash flow, bank policy
and amount of request.
The credit controlling process of the bank needs training of the staff, improving control
system , initiating legal process early in case of NPLs, designing effective monitoring system
and serving reminder letter early as possible.
Putting risk rating policy , visiting business on regular basis after disbursement , applying due
care before granting a loan, establishing payment guideline, considering prompt payment,
writing reminder letter, providing incentive for prompt payment, as best strategy in retrieving
credit; but legal advice in retrieving credit is put at last by respondents.
The bank utilizes a credit risk management technique of credit approval authority, application
of prudential limits, risk rating, diversification, credit audit and problem loan management.
The current management information system of the bank is not helpful to the credit
management-so the bank should improve the MIS though the bank is on the way to deploy
core banking.
Proper utilization of manpower on the area of risk management is required since no task is
done.
Hiring experienced staff on critical areas. Challenge faced by the bank includes knowing the
customer, dependency on collateral, lack of awareness of individuals work on credit about the
credit policy and procedure of the bank.
The bank has stated clear policy and guidelines on the required information on new credit,
amendments, refinancing of existing credit.
Week credit risk management is seen in the bank. There is an internal credit risk rating
guideline related to new credit approval as well as renewals but there is a problem on
implementing it so effort shall be done to improve it.
There is a problem in collection of payments. Since the bank is not in a better position to
understand the payment behavior of the borrowers—rather set a repayment on its own need
considering the liquidity position and the regulatory requirement.
The policy of the bank needs a revision on some aspects. Like re approving the terms and
conditions and other key aspects.
Poor portfolio management related to the mix of the loan. The loan and advance position of
the bank is concentrated on some sectors. If concentration is high and that sector gets a
problem it is one cause of non-performing loans.
No detail industry analysis since there is no full information regarding the sector. Therefore,
organizing a Research and Development department is necessary.
The credit processing and appraisal activity of the bank was previously performed
independently, but it has been decided to be performed at one desk-but it creates conflict of
interest and burden to the staff;
Upgrade the managers’ ability in financial analysis, through training them on continuous
basis from hiring till carrier development. Since the responses of the respondents indicate that
the majority of respondents have no enough experience on credit area.
High dependability on collateral that leads to skewness of loan as per Agyemans(1987),

therefore the banks should reduce high dependability on collateral.
Frequent contact or business visit shall be conducted to minimize loan loss (Fofak, 2005);
since it helps the bank to advise the customers besides reduces diversion of the loan.
CHAPTER FIVE
CONCLUSIONS, AND RECOMMENDATIONS
The purpose of this chapter is to review the whole thesis and highlight future researcher
directions. Accordingly section one presets the major findings and conclusion and the next
section presents the limitations and recommendations.
5.1. CONCLUSIONS
The overall credit management activity of the bank needs the attention of the management
.The major problems in BIB is not lack of clear policy and procedure rather a problem in the
implementation of the existing guidelines in proper manner. The finding of the study also
assures existence of poor credit management, including improper follow-up etc. In addition
the communication and information system of the bank hinders the credit management
activity of the bank.
Generally, the result assures though there are procedures and rules but; there is variation in
implementing the policies and procedures. Besides;
 The credit approval process of the bank is overridden by approving staff on the
process-this leads to distortion in decision and result inconsistency in decision making
therefore the bank should reduce subjectivity considerations in approving a credit
request and develop a sense of accountability and transparency at each level.
 The bank is not in a position to strictly implement the conditions and sanctions set by
different approving organs.
 No stress testing on credit portfolio this leads the risk management practice of the
bank is poor ;
 The bank not undertake credit quality report so devising a strong risk management
environment is mandatory;
 The Bank did not monitors the business of clients after granting credits on regular
interval basis besides customers are not advised regarding loans usage but it should
be undertaken to control the end use of the loan;
 Workout is done the same time the loan originally originates that creates problem so
segregation of duty shall be done;
 No clear policy is set how to deal with problem loans so procedural issue shall be put
in place to resolve ambiguity;
 The process of decision making is a factor for fast decision making so the bank shall
equip itself with adequate and appropriate manpower, since it is a key in facilitating a
credit decision making process;
 Even though the current credit information system of the country shows improvement
from past years there is still a problem in obtaining reliable credit information,
therefore the bank play its part in improving the overall credit information system
(CIC) through updating its data in timely and accurate manner as well as work in
collaboration with other banks in the industry;
5.2. LIMITATION OF THE STUDY
A major limitation of the study was the unwillingness of management to disclose the credit
management processes as well as the best practices in credit management. Management was
reluctant because it considered such processes and practices as trade secrets which should not
be in the public domain for its competitors to take advantage of. In addition the other
challenge in conducting this research was lack of reference materials and previous researches
on the area of the topic.
5.3. RECOMMENDATIONS
In view of the findings and the subsequent conclusions, the following recommendations are
put forwarded in the hope that they would help in order to curb the major problems identified
in the study and facilitate the overall credit related activities.
 Bunna International Bank needs to hire the one who has high experience and
qualification on credit risk management and the one who aware about its significant
impact to banks performance;
 Banks’ board of directors are responsible for each and every activities of the bank, so
they have to devise a mechanism for upgrading the carrier of the employees thorough
continuous training;
 The bank should establish strong credit risk environment ;
 The bank should design administration, measuring and monitoring process of credit;
 The bank should establish adequate control strategies;
 The bank should work on problem loan management areas that helps to minimize the
non-performing loans;
 The bank should improve the Management Information System(MIS) of the bank;
 BIB shall employ coordinated credit management- between branches and head office;
 Assigning staff at branch level to manage the overall credit activities since it creates
burdens to the branch managers and other staff who work on generalist base have no
detail credit knowledge and have no sense of accountability for their activity;
 Revise the follow-up structure of the bank ;
 Establish a Research and Development (R& D) center for filling the information
requirement of the bank;
 Designing clear decision making, at all level that helps to reduce the number of days
for each request approval;
 Devise a credit risk policy and procedure as well as credit risk management tools;
 The bank should work to devise a financing scheme through reducing dependability
on collaterals ;
 The repayment structure that the bank should set shall be in line with the business
nature of each applicant rather than depending on the liquidity position of the bank.
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http://www.smallbusiness.wa.gov.au.
Stiglitz, J. E. (1996). Some Lessons from the East Asian Miracle, World Bank Research Observer,
Vol. 2 No. 2.
Theodore N. Backman.(1962)Credit and Collection: Management and Theory . McGraw Hill,
New York.
Trochin William M. (1999). Survey Research: The Research Method Knowledge based, 2 nd
Edition, www.page at URL
Wise Seek (2012). Credit Management, http://www.wisegeek.com/credit-management.htm .
Women’s World Banking (2010 ). Accessed 20/07/2013 ( http://www.swwb.org).
Williams, C. A. J. and Heins, R. M. (1985). Risk Management and Insurance, McGraw-Hill, New
York.
QUESTIONNAIRE
ST. MARRY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES, MBA PROGRAMME
QUESTIONNAIRE
Dear respondents:
This is a questionnaire designed to solicit data on exploring the credit management practices
of Bunna International Bank S.C which will be used as an input for a thesis in a partial
fulfillment of Master of Business Administration (MBA). Your genuine response is solely
used for academic purpose and the data will be treated utmost confidentiality. Therefore, your
kindly cooperation is appreciated in advance.
Please put a tick mark (√) on the space provided
For questions that need further explanations please use the space provided under each question.
Part I. Background of the respondents
1. Sex: Male Female
2. Age group 20-29 30-39 40-49 above 50
3. Educational background
Diploma Degree Masters and above
4. Current position
Managerial non- managerial
5. Credit related Bank experience
1-5 years 6-10 years above 10 years
Part II. Research related questions
1. Credit Management Process

Please provide your level of agreement using the following rates (where 1= strongly
disagree, 2= disagree, 3=Neutral 4=Agree and 5 – strongly agree)
1.1.Credit processing/appraisal 1 2 3 4 5
The Bank checks the borrower history before granting loans
The Bank properly assessed the customer ability to meet obligations
Credit-granting approval process established accountability for decision taken
There are times credit granting and monitoring process is overridden by directors,
senior management or other influential staff
The bank carried out credit processing activities independent of the appraisal
1.2.Monitoring and Control of Credits
function 1 2 3 4 5
The bank strictly implement the conditions and sanctions set by different
approving organs
Collateral coverage is regularly assessed and related to the borrower’s financial
position
The Bank regularly undertakes Stress Testing on the overall credit portfolio
The Bank periodically prepares ‘Credit Quality Reports’ for signaling loan loss in
any portfolio
The Bank monitors the business of clients after granting credits on regular
interval basis
Customers are often given sufficient training on loans usage
1.3.Credit Administration 1 2 3 4 5
The process of “credit administration” is performed independently of individuals
involved in the “business origination” of credit
The bank has well structured documentation tracking system for credit and
collateral files
The Bank segregates the workout activity from the area that originated the credit
The Bank has credit risk policy that clearly set out how problem credits are to be
managed
The Bank has appropriate criteria for credit classification, provisioning and write
Adequate
off measures are put in place to recover non-performing loans
2. How long it takes to process and make a decision on single credit request?
< 15 days 15-30 days More than a month
3. What internal factors prevail affecting fast and timely decision of credit? (where 1=not
prevail 2=moderately prevail , 3= prevail ,4= highly prevail, and 5= very highly prevail)
Factors 1 2 3 4 5
Centralized decision making process
lack of adequate man power
delay in obtaining credit information
submission of incomplete data by the prospective borrower
Other please
specify_____________________________________________________________
4. Rank the factors that inhibited access to credits? (where 1=not inhibit 2=moderately
inhibit , 3= inhibit ,4= highly inhibit, and 5= very highly inhibit)
Factors 1 2 3 4 5
Age of client
Purpose of Loan
Customer’s credit History
Cash Flow /financial position of the applicant
Stringent Policy rule of the bank
Amount of request
Other please
specify_____________________________________________________________
5. How can the credits control processes be improved? (where 1= strongly disagree,2=
disagree, 3=Neutral and 4=agree 5 – strongly agree)
Factors 1 2 3 4 5
Training to staff
Improve Internal Control System
Initiate Legal Processes Early
Effective Monitoring
Provide remainder letters early
Other please
specify_____________________________________________________________
6. What credits collection strategies does the bank adopt in retrieving credit?
(where 1= strongly disagree, 2= disagree, 3=Neutral and 4=agree 5 – strongly agree)
Factors 1 2 3 4 5
Establish payment guideline
Consider prompt payment
Writing reminder letter
Provide incentive for prompt payment
Seek legal advice
Other please
7. What strategies do you propose to the Bank so as to improve the quality of loans as high as
specify_____________________________________________________________
possible and enhance the overall Credit Management of the Bank?
8. Please give any experience, comment or opinion about Credit Management practices which
is not applicable at your organization.
9. How frequently you conduct a follow-up or a visit to your customer’s site?

Monthly Bi monthly Quarterly
Semi annually Annually None
Please incorporate any issue you want to raise
10. Is the time interval enough or reasonable?

Yes No
11. If your answer for the above question is no, what do you plan for future?
12. Do you think non performing loan of the bank related to poor credit management?
Yes No
13. How do you evaluate the bank credit management policy in dealing with non performing
loan?
Very good Good Fair
Poor very poor
14. How do you evaluate the bank’s support to customers default due to unforeseen
circumstances?
Very supportive Supportive Fair
Not supportive very obstructive
15. What inhibit the bank not to implement the basic credit risk management tools?
(where 1= strongly disagree, 2= disagree, 3=Neutral and 4=agree 5 – strongly agree)
Factors 1 2 3 4 5
Lack of awareness
insufficient man power on the area of specialization
Carelessness of employees
Lack of policy and procedure
Other please
Other please
specify________________________________________________________
specify_____________________________________________________________
_____
16.______________________________________________________________
Which technique/instrument, do you use for Credit Risk Management in your bank?
________________
(Please rank them where –1= not used at all,2= less applied 3= applied,4= highly applied
and 5= intractably applied)
Techniques 1 2 3 4 5
Credit Approval Authority
Prudential Limits
Risk Ratings
Portfolio Management
Loan Review Policy
Collateral
Diversification
Other tools like credit audit and problem loan
management
17. Does the bank deploy a Management Information System that helps for credit
management?
Yes No
18. If yes, does the Management Information System Support the Credit management of the
Bank?
Strongly agree Disagree No idea
Agree Strongly disagree
19. What are the significant challenges that you have faced credit management activities?
20. Does the bank have internal risk ratings which is supportive to credit management activity , that
could be assigned to individual borrowers at the time and credit is granted?
Yes No
21. If the answer to questionnaire No. 35is yes, does the bank review the risk ratings on a periodic
basis and assign a new rating when conditions either improve or deteriorate?
Yes No
22. Are different levels of management designated to grant different amounts of credits?
Yes No
23. Please put your own general comment related to the Credit Management of the Bank
Thank you
DECLARATION
I, the undersigned, declared that this thesis is my original work, prepared under the guidance
of Dr..Zenegnaw Abiy. All sources of materials used for the thesis have been duly
acknowledged. I further confirm that the thesis has not been submitted either in part or in full
to any other higher learning institution for the purpose of earning any degree.
_________________________ ______________________
Name Signature& Date

ENDORSEMENT
This thesis has been submitted to St. Mary’s University, School of Graduate Studies for
examination with my approval as a university advisor.
_________________________ ______________________
Advisor Date
Zenegnaw Abiy (PhD)

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ST.

EXPLORING THE CREDIT MANAGEMENT PRACTICE

A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY,

EXPLORING THE CREDIT MANAGEMTN PRACTICE OF

APPROVED BY BOARD OF EXAMINERS

May God Bless you all

BIB- Bunna international Bank

CIC-Credit Information Center

MFIs – Micro Finance Institutions

MIS-Management Information System

NBE -National Bank of Ethiopia

NPL- Non-performing loan

Table Name Page No

Table: 1.1 Portfolio of loan and advances 4

1.1.BACKGROUND OF THE STUDY

1.2.STATEMENT OF THE PROBLEM

In the light of this, the following problem has been identified.

 Non-effective risk assessment and control policies in banks, leading to poor

Export 16,140,772 8.4 41,852,238 11 52,760,813 8

Source: Annual Report, 2010-2012

Table 1.2. Non-performing Loans at BIB

Source: Quarterly provision Report, 2010-2012

The Study seeks answer the following questions:

1.4.OBJECTIVES OF THE STUDY

1.5.SIGNIFICANCE OF THE STUDY

1.6.SCOPE OF THE STUDY

2.1. DEFINITIONS, AND FUNCTIONS OF CREDIT

2.2. DEFINITION AND CONCEPTS OF CREDIT MANAGEMENT

2.3. CREDIT MANAGEMENT PROCESS

According to Edwards, Banks credit management processes can be summarized in three

2.3.1. CREDIT INITIATION

2.3.2. DOCUMENTATION AND DISBURSEMENT

2.4. CREDIT MANAGEMENT PRACTICES

2.4.2. COST OF BORROWING (INTEREST RATE)

2.4.3. ASSESSMENT OF BORROWERS CREDIT WORTHINESS

Capacity: identity of customer and guarantors, description of history, legal structure

Collateral: ownership of assets; vulnerability of assets to obsolescence and liquidation

2.5. IMPLICATIONS OF LOANS ON BANKING INSTITUTIONS

2.5.2 . NON-PERFORMING LOANS

Monitoring of credit facilities granted to customers is a significant function in ensuring the

2.6.3. FREQUENT CONTACT

2.7. ADDRESSING RISK ASSOCIATED WITH CREDIT MANAGEMENT

2.7.1. ESTABLISHING AN APPROPRIATE CREDIT RISK ENVIRONMENT

2.7.2 OPERATING UNDER A SOUND CREDIT GRANTING PROCESS

2.7.3. MAINTAINING APPROPRIATE CREDIT ADMINISTRATION THROUGH

According to Theodore N. (1962), this process entails the following:

2.7.4. ENSURING ADEQUATE CONTROLS OVER CREDIT RISK

RESEARCH DESIGN AND METHODOLOGY

3.1. RESEARCH DESIGN

3.3. TYPES OF DATA AND INSTRUMENTS OF DATA COLLECTION

3.5. METHODS OF DATA ANALYSIS

RESULTS AND DISCUSSION

4.1.1. SOCIO – DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS

4.1.2. RESEARCH RELATED QUESTION

Strongly Agree Neutral Disagree Strongly

Strongly Agree Neutral Disagree Strongly

4.1.2.2. How to process and make decision on a single request

4.1.2.3 Internal Factors affect the timely decision making of credit

Strongly Agree Neutral Disagre Strongl