Arbaminch University
Arbaminch University
Arbaminch University
BY: Yirgalemkusse
ID No. EBE/513/11
ADVISOR:BizunehGirma (M.Sc.)
FEB, 2022
Arbaminch, Ethiopia
TABLE OF CONTENT
TABLE OF CONTENT.......................................................................................................I
LIST OF TABLES.............................................................................................................III
LIST OF ACRONYM.......................................................................................................VI
ABSTRACT......................................................................................................................IV
ACKNOWLEDGEMENT..................................................................................................V
CHAPTER ONE: INTRODUCTION..................................................................................1
1.1 Background of the Study...........................................................................................1
1.2 Statement of the Problem...........................................................................................2
1.3 Objectives of the Study..............................................................................................4
1.3.1 General objectives..............................................................................................4
1.3.2 Specific objectives..............................................................................................4
1.4 Significance of the Study...........................................................................................4
1.5 Scope of the Study.....................................................................................................5
1.6 Limitation of the Study..............................................................................................5
1.7. Organization of the study..........................................................................................6
CHAPTER TWO: LITERATURE REVIEW......................................................................7
2.1 Theoretical foundation of the study...........................................................................7
2.1.1 Relationship Lending and Credit Repayment Performance...............................9
2.1.2 Factors of loan Repayment Performance..........................................................11
2.2. Empirical studies on determinant of loan performance..........................................16
2.2.1 Studies in other countries..................................................................................17
2.2.2 Empirical Studies in Ethiopia...........................................................................17
2.3. Conclusions and identification of knowledge gap..................................................18
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY...........................19
3.1. Research Approach.................................................................................................19
3.2. Population...............................................................................................................19
3.3. Sampling Techniques and Sample Size..................................................................20
3.4. Type of Data...........................................................................................................20
I
3.5. Source of Data........................................................................................................20
3.6. Method of data collection.......................................................................................20
3.7. Data presentation and analysis................................................................................21
3.8.Time plan and Budget Breakdown..........................................................................22
REFERENCES..................................................................................................................23
II
LIST OF TABLES
Table 1: Work plan
Table 2: Budget break dawn
III
ABSTRACT
The main objective of this study will be to assess the Loan Recovery Performance of
Commercial Bank of Ethiopia, Arbaminch District. The relevant data will be collected from both
primary and secondary sources. The judgmental sampling will be applied to select those
respondents who have enough knowledge about the study. By using this technique, the
researcher will select 22 respondents from 44 employees and 177 from 354 customers who have
get credit and 3 managers will be selected from 6 managers. The primary data will be collected
from the employees and clients of the bank through interview and questionnaires. The sources of
secondary data will be from the written materials, manuals, policies and procedures of the bank
that prepared by bank itself and from library books of this university. The collected data will be
analyzed and discussed in connection to the literature review, for loan disbursement and recovery
of Commercial Bank of Ethiopia, Arbaminch District. Descriptive and explanatory method of
data analysis will be used in this study. Based on the summary of findings, the recommendations
will be given on the last page of this research paper.
IV
LIST OF ACRONYM
V
CHAPTER ONE
INTRODUCTION
Banks have always played a vital role in the country’s economy. Moreover, it plays a
decisive role in the development of the industry and trade. Banks are acting not only as
the custodian of wealth of the country but also as resource of the country, which are
necessary for the economic development of a nation. In this modern time money and its
necessity is very important. Therefore, a modern bank plays a vital role in the socio-
economic matter of the country. Delivering/facilities/ loan for the organization and
peoples, promote saving habits of the peoples, capital formulation and promote industry,
smoothing of trade and commerce functions, generate employment opportunity and
support agricultural development (Garhwalis, 2003).
In finance, the term loan represents the process of lending money from an
organization, individual or entity, to another organization, entity or individual.
Therefore, a loan is more or less a debt that provided by an entity to another, at a set
interest rate, alongside with a promissory note that is meant to highlight the amount of
money being borrowed, the rate of interest that parts have previously agreed on, but also
repayment terms. A loan also legally entails what people often refer to as the reallocation
of a subject’s assets for a specified period, agreed between the borrower and the lender.
Now days there are a number of government and private owned banks in Ethiopia
that providing loan for various purpose.
Nevertheless, most banks financial statement shows that the collections of loans from
borrowers are not satisfactory. This result shows a huge amount of non-performing loans
(NBE, Annual Report, 2011). Loans taken from credit institutions vary from country to
country, region to region, sector to sector. However, credits of developing countries were
found to share one common characteristic suffer from a considerable amount of default
rate (the amount of loans not collected on current and past due loans for the reference
period) (Kashuliza, A, 1993) comprises margin, interest and commission.
1
Background of the organization
The fore runner of commercial bank of Ethiopia (CBE) was State Bank of Ethiopia,
which received its charter by decree on Nov. 30 of 1943 in Addis-Ababa. The bank was
established with a capital of one million dollars. The bank acted as the country’s central
bank, with the power of issuing bank notes and paper money on behalf of the ministry of
finance. In May 1945, the bank was granted the sole right of issuing currency and after
the legal tender proclamation of 1945. An issue department was established in July of
that year. Later, in July 1949, the bank was made the sole authority to deal in foreign
exchange the bank also engage in wide range of commercial activities and introduced
saving accounts in January 1946.
The Commercial Bank of Ethiopia during its two decades of existence opened 21
branches in the country. It started operations with staff of only about forty persons. But
this had grown twenty years later to title short of a monetary sector. During this period
the bank has 1288 branches in this country from those branches, the Commercial Bank of
Ethiopia Arbaminch District is the one which found in Arbaminch town at a distance of
500 km from the capital city of the country (Addis Ababa). This branch was established
in 1985, E.C. During its establishment, it has only 7 workers, but currently the branch has
58 workers (CBE, 2018).
The loan extended to various sectors of the economy must be recovered in full if the
objective of circulating more and more financial resources to meet the increasing demand
for credit and to keep the bank in sound financial health is to be achieved. The major
source of income for the banking industry is interest on loans. Both the principal and
interest must be recovered. The bank collects the principals and interest from the clients
on the due date. But default may occur on the side of the client due to various reasons. If
there is high incidence in the deficit of client, this leads the bank to be insolvent and weak
in its financial position. Finally this situation will paralyze the investment program as
well as the economy as a whole.
2
Various studies have been conducted to assess the non-performing loan in different
countries. A set of studies have been conducted in relation to NPLs and its implication for
the economy. The high level of non-performing loan in the banking industry has been a
hindrance to economic stability (Kwambai, 2013). According to (Hossain, 2017), if the
invested funds in an economy are not recovered, it limits the recycling of the funds is
reduced by the amount of classified loans which may lead to economic stagnation. NPL
affects banks' profitability adversely because of the provision of classified loans and
consequent write-off as bad debts, reduces return on investment (ROI), and disturbs the
capital adequacy ratio (CAR). It also increases the cost of capital, widens assets and
liability imbalance and upsets the economic value additions (EVA) by banks. EVA is
equal to the net operating profit minus cost of capital. Banks may face liquidity problem
due to high rate of NPL amount. In our country case there are a research conducted on
other commercial banks. According to (Feyisa, 2009) the amount of fund that is being
lent by the bank is being decreased which has a negative impact up on its profit. These
research was classifies the recovery performance by sectorial out of eight loan sectors of
AIBunder study five of sectors’ recovery rates are less than 22%.And out of the total loan
demand of AIB during the period, on average only 34% was recovered. This implies on
average 66% of the total loan demand was not recovered. Also, according to Abraham,
(2002) the repayment problem can arise from different factors. Such as change in lending
policy, change in structure of the bank, failure in properly appraising the project
document (technical capability, marketability, financial and economic viability of the
project) and lack of responsibility of the staff members on the supply side. The borrowers
age, sex, educational level, loan utilization, bank credit experience, household size,
management capacity, availability of other source of income and specific situation of the
lenders (market condition, technical capability, specific location etc.) on demand side.
Therefore, this study was find out the loan recovery performance and investigates the
major factors affecting loan recovery performance of the bank. Factors such as associated
with lack of obtaining potential creditors, estimating and checking appropriate values of
collateral and loan documentation of creditors, preparing customer’s disbursement
instruction and follow up their periodic loan repayments was assessed in depth. There is
no research done on Loan recovery performance in CBE Arbaminch District recently so
3
far to my knowledge is concerned, therefore, this study was filled this gap by taking the
case of CBE Arbaminch District. Thus, the study will assess the loan recovery of CBE
Arbaminch District in particular between the Periods 2019 to 20021
The general objective of this study will be to assess the loan recoveryof Commercial
Bank of Ethiopia, Arbaminch District.
This study, which is conduct in Arbaminch town, on Commercial Bank of Ethiopia, helps
to provide necessary information for loan recovery in Commercial Bank and to see some
functioning of the Banks and possible actions to be taken for remedy.
Thus, the study is significant in the following way:-
1. It helps to identity the factors that affect the customers cannot repay the loan on
due time and the problems of non-repayment of the loan.
2. It helps in assessing the problem of uncollectible loan and how to collect the
disbursed loan on time.
3. In addition to this it helps for government and policy maker to design or formulate
the credit policy and program to achieve good loan recovery performance.
4. Moreover, the study also serves as a reference for potential researcher who is
interested to do the research related to this topic.
4
1.5 Scope of the Study
This study will be delimited to assess recovery of loan between the bank and the
customers and analyzing the procedure and mechanisms that follow-up during collection
of loan in Arbaminch district only. It also focuses on the low collection and non-
repayment of loan on due date and studying for what reason the borrowers do not pay on
time and what measure the bank take and how it enforce the borrowers to pay the loan on
due date.
Undeniably, every study has its own limitation. No study can be perfect and carried out
as expected to recurring change in the environment. This study will be carried out with
the following limitation facts. While conducting the study there may be certain problems
associated with data collection. That is, the branch manager refused to give accurate
information, the researcher may not have sufficient time for more gathering information
and analyzing the collected data. Some respondents may not be voluntary to offer
information at all, due to the fear of their manager; enough information may not be
obtained from unstructured interview to reach at appropriate conclusion and to achieve
objectives of the study. Another limitation for this study may be that the branch do not
have enough written materials (documents) related research work made the study.
The paper will be organized in five chapters. The first chapter will highlight introduction
of the study. The second chapter consists of related literature review and the third chapter
deals about methodology and the fourth chapter will present about data analysis and
interpretation. The fifth chapter will provides major finding, conclusion and
recommendation.
5
CHAPTER TWO
LITERATURE REVIEW
2. Introduction
In this section, the review of related literature presented. It starts on the theoretical
foundation of the study. Subsequently the relationship between lending and credit
repayment performance types of loan, and factors of loan repayment performance were
present respectively. At the end, empirical evidence that shows the determinants of loan
repayment performance in Ethiopia and outside the country was also presented.
This part of the paper takes a closer look on theoretical foundations and contributions on
the subject matter. A bank exist to perform a number of functions chiefly, accepting
deposits and granting credits (loans and advances) categorically provided as primary or
banking functions; in fact banking means accepting for the purpose of lending of
investment of deposits of money from the public. Granting of credit facilities by
commercial banks which is the primary function as pointed out earlier, expose them to
credit risk. Credit is a device for facilitating transfer of purchasing power from one
individual or organization to another. As indicated by (Oyatoya,1983) credit provides the
basis for increased production efficiency through specialization of functions thus bringing
together in a more productive union the skilled labor force with small financial resources
and those who have substantial resources but lack entrepreneurial ability.
In more explicit analysis of the association between finance and economic development
(Schumpeter, 1933) treated the banking system and entrepreneurship as the two key
enabling agents of development. He argues that the banking system’s capacity to supply
initiative and entrepreneurship in addition to credit creation enabled it to transfer
resources from less productive uses to more economically rewarding uses because those
who control existing resource or have claims on current wealth are not necessarily those
best suited to use these resources. Banks in many developing countries hold a truly
alarming volume in non-performing assets. Differences between promised and actual
repayments on loans are the result of uncertainty concerning the borrower’s ability or
6
willingness to make the repayments when they are due which creates the risk of
borrowers default (Pischke, 2006), (Vigano, 2010) , ( Kitchen, 2009). The inapplicability
of the standard demand and supply model for credit market give rise to credit rationing
phenomena.
There are those who argue that the failure of lending agencies in playing their roles in
loan disbursement and recovery process is a major contribution to loan default (Okorie
Aja, Andrewc, Iheanacho, 2002), (Vigano, 2010). They contend their view that
determining credit worthiness requires investment of time and resources to evaluate firm
specific and industry wide variable, structural or cyclical, by analysts with specific
professional skills. A mistake on the evaluation of the borrowers’ characteristics or the
introduction of inappropriate loan conditions may increase the total risk of the transaction
(Vigano,2010).
Improving repayment rates might also help reduce the dependence on subsidies of the
financial institution, which would improve sustainability. It also argued that high
repayment rates reflect the adequacy of financial institutions services to client’s needs.
They limit the incidence of cross subvention across the borrowers. Related also,
repayment performance is a key variable for donors and international funding agencies on
which many financial institutions still depend for their access to funds. The first-best
level of repayment performance is a perfect (100%) on-time repayment rate (Ongena and
David, 2001).
7
Information asymmetries arise when gaining information on the characteristics or on the
behavior of the borrower are costly for the financial institution. Information asymmetries
generate problems of adverse selection, allocation of loans to borrowers with undesirable
characteristics such as a high level of risk or inability to take advantage of the loan as
well as moral hazard the borrower may behave in an undesirable way make little or
insufficient effort to take advantage of his loan or used it for unproductive purposes
(Lown and Morgan, 2003.)
Adverse selection and moral hazard increase the proportion of borrowers who cannot
repay their loans on time. Borrowers that have enough money to reimburse their loan
might also default strategically. The cost of strategic default might indeed be low if the
lending institution has low collateral requirements and if the legal system gives little
power to the financial institution to enforce contracts. Financial institutions try to restrict
the occurrence of those three types of situations in designing appropriate credit schemes.
The theoretical foundations of relationship banking are found in the modern literature of
financial intermediation that acknowledges the special role of banks in alleviating the
informational asymmetries in the credit markets. Early works of (Brow and Zehnder,
2006) stress the information production function of banks. Screening and monitoring
procedures give an information advantage to banks that allow them to overcome
information and incentive problems between the bank and the borrower. Therefore, the
main benefit attributed to bank financing with respect to other sources of finance is that
banks help overcome problems of asymmetric information by producing and analyzing
information and by designing loan contracts that improve borrowers' incentives. Bank
financing may also entail some costs.
Degryse and Cayseele, (2000) develop a model of loan pricing in which firms bear search
costs to find a new bank. They show that loan rates offered by the relationship bank are
higher than those offered at competing banks, because the latter are willing to offer an
interest lower than their funding cost in order to capture the firm. The critical assumption
in that model is the existence of exogenous search costs. In the early nineties, two
influential papers warned about the potential costs of bank lending even when there are
no exogenous costs of starting a relationship (Elsas and Krahnen, 2000.)
8
Present a model in which relationships arise endogenously. A bank that lends to a firm
learns more about that borrower's characteristics than do other banks. This generates an
asymmetry of information among banks. Therefore, a distinction is made between
relationship (informed) banks and transaction (uninformed) banks. Informed lenders can
capture some rents generated by their older costumers, while the uninformed competitors
face a winner's curse problem. In a competitive world, the implication for loan pricing is
increasing interest rates with the duration of the relationship. In the model of (Kano,
Uchida, Udell, & Watanabe 2006), a firm balances the costs and benefits associated to
two borrowing sources, namely informed debt and arm's length debt. Bank debt is
provided by an informed bank that monitors the firm and exerts some control on the
owner's decision to continue a project only if it has positive net present value. However,
informed bank debt generates distortions on the owner's incentives to exert effort.
In contrast, arm's length debt guarantees that the owner exerts the optimal level of effort
but lenders do not have control over the owner's continuation decision. It shows that
borrowing from multiple sources is a way to restrict the bank's ability to extract surplus.
In a later contribution, (Kon&Storey2003) derived the optimal loan contract that avoids
the lock-in costs with a single lender: a long-term debt contract consisting in a line of
credit that the lending bank may terminate at any point in time, but if it chooses to
continue financing it should do so at ex ante specified terms. This arrangement can
optimally limit the informed lender's bargaining power without the need for multiple
bank relationships.
Loans and advances constitute the primary source of income by banks. As any business
establishment, a bank also seeks to maximize its profit. Since loans and advances are
more profitable than any other assets, a bank is willing to lend as much of its funds as
possible. However, banks have to be careful about the safety of such advances
(Radha .M, et al, 1980). Bankers naturally try to balance the issue of maximizing profit
by lending and at the same time manage risk of loan default as it would impair profit and
thereby the very capital .Generally, in developing and under developed countries, the
9
reasons for default have multidimensional aspect. Various researchers have concluded
various reasons for loan default. Literature categorizes determinants of loan repayment
performance. The following paragraphs were discussed about determinants of
nonperforming loans.
Banks that charge high interest rate would comparatively face a higher default rate or
non-performing loans. Study by (Sinkey&Greenwalt, 2001) on large commercial Banks
in US depict that a high interest rate charged by banks is associated with loan defaults.
(Rajan& Dhal 2003)who used a panel regression analysis indicates that financial factors
like cost of credit has got significant impact on NPLs. Study by (Waweru&Kalini , 2009)
on the commercial banks in Kenya using statistical analysis indicates that high interest
rate charged by the banks is one of the internal factors that leads to incidence non-
performing loans. Besides, studies by (Berger and DeYoung, 1997), for the US; (Jimenez
G. & J. Saurina.2006), for Spain; (Quagliariello, 2007), for Italy; Pain, 2003, for the UK;
and (Bikker and Hu, 2002), (for 29 OECD countries) banks profit margin exhibited by
high interest rate affects occurrence of NPLs.
Credit sanctioning that has not duly considered the credit terms would potentially lead to
occurrence of poor loan performance. In their study conducted on the Spanish banking
sector from 1984 to 2003 evidence that NPLs are determined by lenient credit terms.
Cause for the lenience is attributed to disaster myopia, herd behavior, moral hazard and
agency problems that may entice bank managers to take risk and lend excessively during
boom periods as per this study. (Rajan and Dhal 2003) Who studied the Indian
commercial banks also found out terms of credit determines occurrence of
Nonperforming loans.
Rajan, R.G. (2004) Hypothesizes that bank managers have short-term decision horizons
because their reputations are strongly influenced by public perceptions of their
performance, as evidenced by short-term earnings. Managers’ reputations suffer if they
10
fail to expand credit when the economy is expanding and bank earnings are improving.
This herd behavior will result in some loans going to customers with higher default risk
than would occur otherwise. (Weinberg, J. A. 1995) also suggests that bank managers
adjust lending standards as market conditions change, seeking to smooth overall lending
risk. The Office of the Comptroller of the Currency (OCC, 2008) concludes that the
dominant reason for bank failure in the early 1980s was poor bank management, which
encompasses lax lending standards. An FDIC study of the causes of the banking crises of
the 1980s and early 1990s (FDIC, 1997) finds that a combination of factors economic,
legislative, managerial, and regulatory - led to the banking crises.
Training is one of the important requirements for the success of microfinance institution
(Assefa, et al, 2005). If the lender provide various training, the clients will able to
understand the rule and regulation easily. They also develop skill on how to do business
and money utilization. Training is needed not only for clients but also for loan officers. In
both case it has a positive contribution to the repayment rate. (Norell D. 2001) Also agree
on the importance of training for the decreasing of default rate. Form of Disbursement:-If
the loan is released in cash directly to the loan, the borrower could have an incentive to
divert the loan other than the intended purpose because money is fungible. Thus, a
negative sign is expected.
The borrower is repeated one he may have acquired more experience on the banks rules
and regulations, hence could efficiently utilize the loan for the intended purpose.
Therefore, a negative sign is expected.
Studies indicate that loan delinquencies are associated with rapid credit growth.(Keeton
1999)Who used data from commercial banks in the United States (from 1982 to1996) and
a vector auto regression model indicate this association between loan and rapid credit
growth. (Sinkey&Greenwalt1991)Who have also studied large commercial banks in the
US and found out that excessive lending explain loan -loss rate. (Salas Vincente& Jesus
11
Saurina 2002) Who studied Spanish banks found out that credit growth is associated with
nonperforming loans. Similarly (Weinberg 1995 ) uses data on the growth rate of total
loans and loan charge-offs in the United States from 1950 to 1992 to show a pattern of
increases in lending preceding increases in loan losses (Weinberg .1995).
2.1.2.4 Collateral
Collateral (also called security) is the assets that the borrower pledges to the bank to
mitigate the bank’s risk in event of default (Sinkey, 2002).It is something valuable, which
is pledged to the bank by the borrower to support the borrower’s intention to repay the
money advanced. Security is taken to mitigate the bank’s risk in the event of default and
is considered a secondary source of repayment (Koch & MacDonald, 2003). Supporting
of the aforementioned, (Rose & Hudgins 2005) define secured lending in banks as the
business where the secured loans have a pledge of some of the borrower’s property (such
as home or vehicles) behind them as collateral that may have to be sold if the borrower
defaults and has no other way to repay the lender. The purpose of security is to reduce the
risk of giving credit by increasing the chances of the lender recovering the amounts that
become due to the borrower. Security increases the availability of credit and improves the
terms on which credit is available. The offer of security influences the lender’s decision
whether or not to lend, and it changes the terms on which he is prepared to lend, typically
by increasing the amount of the loan, by extending the period for which the loan is
granted and by lowering the interest rate (Norton, J., &Andenans, M. 1997.).
According to (De Lucia, R. & Peters, and J. 1998.), in the banking environment, security
is required for the following three reasons:
To ensure the full commitment of the borrower to its operations,
To provide protection should the borrower deviate from the planned course of
action outlined at the time credit is extended, and
To provide insurance should the borrower default.
12
2.1.2.5 Loan Follow up (Monitoring)
Financial Follow- up
Financial follow up is required to verify whether the assumptions on which lending
decisions was taken continues to hold good both in regard to borrowers’ operation and
13
environment ,and whether the end use is according to the purpose for which the loan was
given.
Legal Follow- up
The purpose of legal follow up is to ensure that the legal recourse available to the Bank is
kept alive at all times. It consists of obtaining proper documentation and keeping them
alive, registration, proper follow up of insurances. Specific issues pertaining to legal
follow up include: ascertaining whether contracts are properly executed by appropriate
persons and documents are complete in all aspects, obtaining revival letters in time
(revival letters refer to renewal letter for registration of security contracts that have
passed the statutory period as laid down by the law), ensuring loan/mortgage contracts
are updated timely and examining the regulatory directives, laws, third party claims
among others.
(Von Pischke, 2001) noted that efficient loan sizes fit borrowers’ repayment capacity and
stimulate enterprise. If the amount of loan released is enough for the purposes intended, it
will have a positive impact on the borrower’s capacity to repay. On the other hand, in
case of over and under finance, the expected sign is negative. If the amount of loan
exceeds what the borrower needs and can handle, it will be more of a burden than help
and extra funds may go toward personal use (Norell, 2001), thereby undermining
repayment performance. If the loan is too small, it may also encourage borrowers to
divert the loan to other purposes (Vigano .L1993) Therefore, over finance is not a
problem as such. Moreover, the loan usage is also affecting the repayment rate. If the
entire loan used for the intended activities, the repayment will be enhanced. By putting
the whole loan for running business, it is possible to generate income and performing the
business in a better way. While, if the loan used for unintended purpose like
consumption, it will hinder the repayment performance of the clients.
14
negatively affecting the repayment rate. Regarding to the loan repayment performance of
borrowers several studies have been conducted in many countries by different authors.
Some of the studies are summarized below.
(Bhatt N. & Tang S.( 2002) Studied the determinants of loan repayment in microcredit
evidence from programs in the United States. Their study showed that women has low
repayment rate because some women entrepreneur in the study might have been engaged
in high risk and low return activities.(Godquin, M. 2004) also examined the micro
finance repayment performance in Bangladesh. His result is female borrowers did not
proven to have a significant better repayment performance. The size of loan and the age
of the borrower showed the negative impact on the repayment performance. On the
contrast, (Abreham G.2002) showed in his study male borrowers are the undermining
factors for repayment.
Abafita (2003) analyzed the microfinance repayment performance of Oromia credit and
saving institution in Kuyu, Ethiopia. According to his finding; sex, loan size and number
of dependents are negatively related to loan repayment. On the other hand age was found
15
to be positive, while age squared turned to be negative. Income from activities financed
by loan, repayment period suitability and loan supervision are positively and significantly
related to loan repayment performance. Moreover, loan diversion is significant and
negatively related to loan repayment rate. The negative sign implies that the use of
diverted funds for non-income generating purposes.
As stated above, research on loan recovery performance have been undertaken in Kenya,
Bangladesh, and Madagascar but in our country Ethiopia have limitation of study on
assessment of loan recovery performance. These research examined the socio-economic
factors that affect rural household loan recovery rates. However, the literature review said
nothing about assessing all borrowers' debt recovery performance. Thus, this study might
focus on different categories of borrowers. Most previous studies focused on determining
/factors/ affecting loan repayment performance of commercial bank of Ethiopia, however
our study focused on assessing loan recovery performance of main branch of commercial
bank of Ethiopia.
16
CHAPTER THREE
The targeted population of the study will includes managers, employees and credit
customer of commercial bank of EthiopiaArbaminch District which are 404 in number
17
and the customers of the branch who have knowledge about the loan review practice
which are ( district total numberof managers 6, Employees 43, 354 credit customers and).
To conduct a research with whole populations is time consuming and financially difficult.
Taking this factor in to consideration the judgmental sampling will be applied to select
those respondents who have enough knowledge about the study. By using this technique
the researcher will select 22 respondents from 44 employees and 177 from 354 customers
who have get credit and 6 managers will be selected. The total sample size for this study
will be 202 (22 employees and 3 manager, and 177 customers).
As the sources are identified earlier, primary data will be obtained from the employees of
the bank and from the clients and manager of the bank. Primary data that are related with
qualitative will be collected using; questionnaire and unstructured interview because it
helps in sorting out information relevant to the study.
Secondary data will be collected from bank’s manuals, policies, and procedures and some
other written documents of the bank. These documents are published magazines, annual
18
and semi-annual reports, manual showing the overall activities of the bank and relevant
books concerning disbursement and recovery of the loan. These written document will be
seen and evaluated in great depth whether they are reliable, suitable and adequate to
provide the necessary information or not and then the information was taken from these
documented sources were analyzed.
1. Editing
This involves the inspection of questionnaires on a raw data and necessary collection of
each questionnaire, and detecting the most glaring omission and in accuracies in detail.
2. Coding
This is technical procedure by which data are categorized. Through coding the raw data
are transferred in to symbols usually numerals. They may be tabulated and counted. This
can be done:-
o Specifying the categories in to which the responses will be placed. The number
will depend up on the number of questions on the questionnaire.
o Coding open-ended questions. This will be done through developing consistent
set of standards to each question.
3. Tabulation
This consists of simply counting the number faces that fall in to various categories.
Tabulation communicates the result of the study, were used for several propose. (i.e. to
calculate summary statistics). Tabulation can be entirely done by hand. Tabulation is
facilitated by determining the empirical distribution of characteristics in question and
distribution of variables. Frequencies will be numerated in each table for calculation of
various statistics and cumulative distribution function will be employed to observer, with
less than or equal to specified quantity is determined.
19
3.8. Time plan and Budget Breakdown
24
REFERENCES
Abafita2003.(n.d.). ‘Microfinance and loan repayment performance: A Case Study of the Oromia
Credit and Savings Share Company (OCSSCO) in Kuyu’, MSc thesis, Addis Ababa
University, Addis Ababa.
Abel A, Eberly JC 2004. (n.d.).Investment, valuation and growth options.
Abreham G.2002. (n.d.).A ‘Loan repayment and its Determinants in Small-Scale Enterprises
Financing in Ethiopia: Case ofprivate borrowers Around ZewayArea’, M. Sc. Thesis,
AAU.
Annual Credit Report of Commercial Bank of Ethiopia /CBE) Dicha Branch (2007-2008)
Armendariz, A. and Morduch, J. 2010. (n.d.).The Economics of Microfinance’, (2nd ed. ed.).The
MIT Press Cambridge, Massachusetts London, England.
Aryeetey E 1995). (n.d.)..Filling the niche-informal finance in Africa, East.
Assefa B.A. (2002). Factors influencing loan repayment of rural women in Eastern Ethiopia.
Ethiopia, : the case of Dire Dawa Area’, A Thesis presented to the school of graduate
studies, Alemaya University,.
Berger and DeYoung, 1997. (1997). Problem loans and cost efficiency in commercial banks.
Journal of Banking and Finance, 21, 849-870.
Berhanu A. (2005). Determinants of formal source of credit loan repayment performance of
smallholder farmers.Ethiopia, the case of north western Ethiopia, North Gondar’, M.Sc.
Thesis, AlemayaUniveristy, Ethiopia.
Bhatt N. & Tang S. 2002. (n.d.). ‘Determinants of Repayment in Microcredit: Evidence from
Programs in the United States’,.International Journal of Urban and Regional Research,,
26 , pp.360-76.
Bikker, J. A. & H. Hu. 2002. (n.d.). Cyclical patterns in profits, provisioning and lending of
banks and procyclicality of the new Basel capital requirements. .BNL Quarterly Review,,
55, 143-75.
Commercial Bank of Ethiopia Credit Policy Manual July 1999.
Commercial Bank of Ethiopia (CBE) Credit Policy Directive Dec, 2002.
Commercial Bank of Ethiopia (CBE) New Letter June 2018.
Credit Policy of Commercial Bank of Ethiopia 2002.
24
De Lucia, R. & Peters, J. 1998.(n.d.).Commercial Bank Management.(4th Edition ed.). Sydney,
Country: LBC Information Services.
Diamantopoulos, A. &Schlegelmilch, B.B. 2006.(n.d.). Taking the Fear Out of Data Analysis. (6
th edition ed.). Singapore: Thomson Learning.
Fry M1995. (n.d.)MoneyInterest and Banking in Economic Development, (Second
Edition,ed.).the John Hopkins University Press.
Garhwalis, (2003).General role of commercial bank of Ethiopia. Addis Ababa, Ethiopia
Lee Jim Roger Leroy, Miller and David Van House, Money Banking And Financial Markets, 2 nd
Edition 2004.
Lioyed Brewster, Money Banking and Financial Markets, 1996.
24
APPENDIX
ARBAMINCH UNIVERSITY
Dear respondent:
This questionnaire is prepared to collect data about the effectiveness of recovery of loans in CBE in
Arbaminch District. This study is to be conducted by a student of Arbaminch University in partial
fulfillment of the requirements for the award of Bachelor of Arts (BA) degree in accounting and finance.
The information that you are going to provide will help the researcher to identify the issues in the study
and will be used for academic purpose only. Each of your responses will have high value for this study
and it will be kept strictly confidential. Therefore you are kindly requested to give your genuine response.
N.B You are kindly requested to respond sincerely to the questions for warded below and provide your
opinion whenever necessary.
24
Section II:- Question related to loan recovery performance, difficulties and challenges
24
A. Yes B. No
14. Are feasibility studies obtained and do they support the viability of new development projects?
A. Yes B. No
15. Does the Bank have a proper way of gathering information all applicants’ from other financial
institutions about their previous credit history? A. Yes B. No
16. Do you think that the collaterals are estimated properly by the responsible body?
A. Yes B. No
17. Is there any gap (problem) in the disbursement procedure manual of the bank?
A. Yes B. No
18. If your answer is Yes, please state the problems----------------------------------------------
19. Does the Bank effect disbursement based upon progress of the project? A. Yes B. No
20. Does the bank collect and recover all loans as per the repayment schedule stated on the contract?
A. Yes B. No
21. If your answer is No, Why? ------------------------------------------------------------------------
22. Does the bank have a trend to assess its’ customers financial statement periodically?
A. Yes B. No
23. Does the bank have well designed system of controlling and monitoring of the status of the loan
as per bank’s schedule? A. Yes B. No
24. Are there outstanding non-performing loans whose cases are transferred to foreclosure /process
and no decisions are made to them so far? A. Yes B. No
25. What improvements do you recommend for successful loan recovery performance of the bank?
----------------------------------------------------------------------------------------
24