ASSESSMENTOFCREDITMANAGEMENTPRACTICEINCASEOF

COMERTIAL BANK OF ETHIOPIA IN DIRE DAWA BRANCH

RESEARCHPAPERSUBMITTEDTODEPARTMENTOFACCOUNTINGAND
FINANCE FOR THE PARTIAL FULFILLEMENT OF BA DEGREE
INACCOUNTINGANDFINANCE

PERIPARED;BY MULUKEN

WONDIMU ADVISOER;JUNDI

DIRE DAWA UNIVERSITY

COLEGEOFBUSINNESSANDECONOMICSDEPART

EMENTOFACCOUNTINGANDFINANCE

JUNE, 2024

DIREDAWA,ETHI

OPIA
i
 ABSRACT
Thestudyisdesignedtoassesstheassessmentofcreditmanagementcomercial bank ofethiopia at DIRE
DAWA BRANCH
Fortheassessmentofcreditmanagementofthebank,bothprimaryandsecondarydatawouldbeused.Pri
marydatawasgatheredthroughquestionnaire.Secondarydatawascollectedfrombooks,journalsarticl
esandthebank’sfilesandwebsite.Tableandpercentagewereusedtoanalyzethedata.Thefindingsofthest
udyrevealedoutthatmostofthebank’semployeeshavefewworkexperience,thebankprovidescreditservi
cesmostlyforservicesanddomestictrades.Thebanklendsmostlymediumtermloanwhichcomprisesofab
out60percent.Building,cashdepositandvehiclesarehighlyusedcollateralinthebanktogivecredittothec
ustomers.Thebankrelaysmostlyoninstallmentmethodtorepayloan.Thepopulationfromwhichjudgmen
talsampleswillbetakencomprisesofbranchmanagerandemployeesofthebankwhohavemoreexperienc
einthearea.

Basedonthefindingsummary,conclusionisdrawnandfinallyrecommendationthatsupposedtobeimpo
rtanttosolvetheexistingproblemofcreditmanagementpracticesoncommercial bank of ethiopia at
diredawa branch made.

ii
 ACKNOWLEDGMENT

First and for most I would like to thank almighty God who gave me healthy and
strength.Secondly, I would like to thank my advisor jundi for his patient and
valuableadvices throughout theworktimeofthisresearchpaper.

Finally, I would like to acknowledge those people who helped me by their idea and opinion
onmywork.

iii
 Tableofcontents

Contents
page

ABSRACT........................................................................................................................................................ ii
ACKNOWLEDGMENT ................................................................................................................................. iii
Listof table ........................................................................................................................................................ v
CHAPTERONE............................................................................................................................................... 1
1. Introduction ................................................................................................................................................. 1
1.1 Background of thestudy......................................................................................................................... 1
1.2 Background of theorganization ............................................................................................................. 2
1.3 Statementof the problem ....................................................................................................................... 3
1.4 Objectiveofthestudy............................................................................................................................... 4
1.4.1 General objectives .......................................................................................................................... 4
1.4.2 Specificobjectives........................................................................................................................... 5
1.5 Significanceofthestudy .......................................................................................................................... 5
1.6 Scopeof thestudy ................................................................................................................................... 5
2. Literature Review ....................................................................................................................................... 6
2.1 Theoretical Review................................................................................................................................ 6
2.1.1 Meaning andtypesofcreditmanagement .......................................................................................... 6
2.1.2 Typesofcredit .................................................................................................................................. 7
2.1.3 Dimensionof creditmanagement...................................................................................................... 7
2.1.4 Method ofcreditdeliveryandrepaymentmethod .............................................................................. 8
2.1.5 Variablesof creditpolicy .................................................................................................................. 8
2.1.6 Functions of credit .......................................................................................................................... 9
2.1.8 Creditplanning .............................................................................................................................. 10
2.1.9 Collection procedures ................................................................................................................... 11
2.2 Empirical review ................................................................................................................................. 11
3. ResearchMethodology ............................................................................................................................... 14

iv
List oftable
Table4.1demographicinformationorsummeryofthenumberandpercentageofrespondentbyage,sexan
d educational qualification.

Table4.2jobexperienceinthebankwithcurrentjob.Table4.3bo

rrower’spaybackornotpaybackloanontimeTable 4.4sector

usesof the bankcredit

Table4.5methodofloanrepayment

Table4.6typesofloanextendedbythebankandpurposecreditprovisionTable4.7item

srequested toguaranteea loan

Table4.8customerguidanceandadvisory

servicegivenbythebankTable4.9financialhighlightsasDecember31(2011-

2015)inmillions

v
CHAPTERONE

1. Introduction
1.1 Backgroundofthestudy
Credit is the power or ability to obtain goods orservices in exchange fora promise to pay
forthemlater.Similarly,itisthepowerorability toobtainmoney by theborrowing processinreturn for a
promise to pay the obligation in the future. Futurity is thus a basic characteristic
ofcreditandriskwhichisnecessarilyconnectedwiththetimeelementisanaccompanyingcharacteristic.
Credit is sometimes defined as “mans confidence in man” (Theodore N. Beckmanand Ronald
S.Foster,1924)

Creditmanagement is thus,the process in which one person manages creditexchange functionsin

which creditor gives some good or money to debtor with a belief that after sometimes
he/shewillreturn it(www.investowards.com).

Credit management has the profound implication both at micro and macro level.when credit
isallocatedpoorlyitraisescosttosuccessfulborrowers,erodesthefund,andreducesbankflexibility in
theredirecting towardalternativesactivities.moreover ,themorethecredit,thehigheristherisk
associatedwith it.theproblem ofloandefault,which isresultedfrom poorcredit
management,reducesthelendingcapacity ofthebank(shekholder,1985).

Poor quality of a loan is sometimes due to factors not attributable to the lending bank such
asadverse selection and moral hazard or any other external shock that may alter
theborrower’sability to repay the loan (Stieglitz andWeiss(19821). (Minsky1982&1985) there are
cases wherethe banksgrant and monitor creditandcan be responsible for badloan portfolio.Weak
creditrisk management systems can also be sources of the
probleloan(Nishimuraandal,2001)..Significantbankcreditmanagementprocessescanbesummarizedi
nthreemainstages.Thesearecreditinitiation, documentationanddisbursement.

1
Creditmanagementpracticecontinuestoremainthelargestsourceofriskforbankinginstitutionsin the in
the world (Negara, 2001) and it is vital to insurea banking
institution'screditactivitiesareconductedinaprudentmannerandtherisk
ofpotentialbankfailureisreduced

Creditmanagement practice is one of the major functions,which financialinstitution undertakefor

proper mobilization of funds. Credit management function includes loan and advance. It
alsoinvolves a large number of activities ranging from credit investigation to contract with
borrower,appraisal, review, and follow-up, documentation, nursing, recovery and writers-off.
Method ofcredit delivery can generally be divided into the two broad
categoriesofindividualandgroupapproachesbasedonhowthebankdeliversandguaranteeitsloans(Joann
aLedgerwood,1998).

Therearecostsassociatedwithofferingcredittocustomer.Firstgrantingcreditexposesthefirmto the
possibility that the customer default on the payment, resulting in losses for the firm.
Thesecondcostistheinterestforgonebetweenthetimeofcreditandthetimeofpaymentbycustomers(Ram
aMouthy,1976).

(Theodore N. Beckman and Ronald S. Foster, 1924 credit manager is responsible for the credit
ofthe bank. The principal tasks of credit manager are: Assessment of credit
standingofbothnewandexistingcustomer,MonitoringandcontrolofcustomerbalanceandCollectionofp
ayment

1.2 Backgroundoftheorganization
Commercialbankofethiopiaisthepioneer commercialbankinEthiopiaafterthedownfallof the military
regime and introduction of market economic policy in 1991. It was established by486 founder
shareholders with a paid-up capital of Birr 24.2 million licensed on November 10,1994. It started
banking operations on February 13, 1995. It wasnamedafterthepopularriver“commercialbankof
ethiopia”whichisthemostutilizedriverofthecountryespeciallyforirrigationandhydroelectricpower.co
mmercial bank of ethiopia playspivotalroeintheeconomicdevelopmtofthecountry.

2
 The number of share holders and paid-up capitalincreased continuously and currently reachedover
3000 and 910 million respectively. Commercial bankis the first bank
tobuilditsownheadquartersatthehubofwhatisgrowing intotheEthiopianfinancialdistrict.The

twinsbuildingnamed“commercial
bankTowers”builtatcoastofmorethanBirr217millionincollaborationwithitssistercompany,commerci
al bank.2016

Currently,thebankhasmorethan190branchesspreadthroughoutthecountry,(www.commercial
bank.com). thus boosting the wider branch network next only to the state owned,Commercial
Bank of Ethiopia. All city branches and almost half of the outlying branches areproviding online
services. The bank is working on a project aimed at
replacingtheexistingcorebankingsystemwithanewoneinordertoimproveitsservicesandpromoteeffici
ency.

Comercial
bankatdiredawa.branchwasestablishedin1991andbeganitsoperationsinthesameyears.Afteritsestablish
mentthebankhavebeenprovidingdifferentservicestothedifferentsectorofthesocietyandhasbeencontribu
tinggreaterroleineconomicdevelopmentofthecountryasonefinancialinstitutiondo.Thisbankprovidesdif
ferentservicessuchasdepositservice,currentaccount,advancingloan,moneytransferandotherdifferentser
vicestoitscustomer

1.3 Statementoftheproblem
Assessment of credit management practice is good for successful of credit service given by
thebank. Credit is the backbone of investment, trade and other business activity. Managing
andmaintaining credit is a common problem of banking industry due to the poorcredit
managingtechniqueswhichcreatenegativeinfluenceontheactivityofthebankingindustry(www.awash.
bankbank) The consequence of failure to pay back is the realization and sale of thecollateral
pledgedtosettle theamountpledged.(www.investowards.com)

Manyresearchershaveconductedresearchesconcerningcreditmanagementpracticesandforwardedthe
irfindings.ForexampleAspireUmlaut(2003)arguesthatifyounotfollowthecreditmanagementpolicies
andproceduresonecannotthinkofmanagingcreditandatthesametimecreditdecisionwillbecomearbitra
3
rysubjecttoindividualdiscriminationandjudgment.

4
Ontheotherhand(Meaza,2010)saidthegroupbasedlending
methodisnoteffectiveinachievingthebankobjectivebecauseduetodefaultpaymentismadebythegroup
members.Inadditionthebeneficiarieswhousethismethodalsofaceaproblemintherepaymentofloan,the
restwhopayregularlywereenforcedtopaythe default amount.

So,theintentionofmyresearchistoassessthecreditmanagementpracticesinthebankindustryspecificallyon
commercial bankinthecaseofdiredawa branch.

Theconsequenceoffailuretopaybackistherealizationandsaleofthecollateralpledgedtosettletheamount
pledged.

My objective is to asses credit management practice as general objective with some of

specificobjective like identification of the problem of the bank to collect its loan with the due
date. Tothis end, the studytriedtoanswer thefollowingresearch

⮚ Doesthe bank consistently comply its policy and procedures entertaining its
loanapplicants,loanprocessing,andcollecting?
⮚ Towhatextentisthebankacceleratingtheperformanceofcreditmanagementinlinetoits policy
⮚ Docustomersofthebanksupporttheprevailingloanpolicyandproceduresthatcould
resultlonglastingrelationship?

1.4 Objectiveofthestudy

1.4.1 Generalobjectives
Inthecontextoftheproblemsexplainedabove,theintentofthisstudyistoassessthecreditmanagementpractic
eof commercial Bank of Ethiopia in dire dawa branch.

5
 1.4.2 Specificobjectives
Inlinewiththegeneralobjectivehighlightedabove,thespecificobjectivesare

✓ Toevaluatethecomplianceofthebanktoitspoliciesandproceduresinprocessingloanapplication
and collection.

✓ Toevaluatetheabilityofthebankinthecreatingcreditandcollectingitsloanontheirduedate
✓ Toassesstheperceptionofthecustomertowardsthebank’policyinrelationtoitsloanprovision

1.5 Significanceofthestudy
Thesignificanceofthisresearchincludesthefollowing.

✓ Theresultofthestudywillbeexpectedtogivecertainknowledgehowtomanagecreditforthemana
gerofthebankaswellasforthe customer.

✓ Itwillalsoprovidesolutionthatenablethebanktoimproveserviceofcreditprovisionand
efficientpaybackonduedate
✓ Itteachesthebankhowtoeliminatecustomerdissatisfactionanditsimpact

1.6 Scopeofthestudy
Thestudywillbeconductedoncommercial bank of
ethiopia.Thestudyfocusesonassessmentofcreditmanagementanditsimpact.Thestudyalsoviewstheser
vicedeliveryoncreditmanagementsystemandimpact ofcreditmanagement.

1.8ORGANIZATIONOFTHEPAPER

The main research report willcontainsfivechapters. The first chaptercontainsan introduction to thestudy
which as different parts. Background of the organization and the study; statement of the
problem,objectivesofthestudy;significanceofthestudy;scopeofthestudy;limitationofthestudyandorganizationo
fthepaper.Thesecondchaptercontainsliteraturereviewoncreditmanagement.Thethird

6
chapter contains methodology of the study. The fourth chapter contains data analysis,
interpretation,andchaptersfivecontain recommendationandconclusion.drawninthestudyistothestud

CHAPTERTWO

2. LiteratureReview
Inthispartitismadetogivesomehighlightsontheoreticalbackgroundsandempiricalevidencein the area
of credit management. In this task of providing credit to individual, the decisionwhether to extend
or not to extend credit to individuals with credit policy, function of credit
andotherarebrieflyexplained.

2.1 TheoreticalReview
Banks in today world have many functions. Lending is the most important one. Credit or
loanscoversthelargeportionofbankstotalassetandabackboneofeverybankstructure.Informulating
policies and procedures for the credit granting process several basic steps must
betakenbycreditmanagement(Theodore N.BeckmanandRonaldS.Foster).

Step 1: theremustbe determination of thegrade or amountof risk thatthe firm is willing toaccept.

Step2:eachcreditapplicantmustbeinvestigated.

Step 3: credit management must analyze the information obtained in its investigation in order
toestablish in the applicants credit worthiness.

Step 4:thecreditmanageroranotherperson towhom such responsibility hasbeen

delegatedmustdecidewhethertoaccept orrejectthe applicant.

2.1.1 Meaningandtypesofcreditmanagement
Credit means delaying payment for goods or services you have already received until a later
date.Creditmanagementis concerned withmaking surethatpaymentofgood to be produced
orservicegivenispaybackwithina specifiedtime(http://www.icm.org.uk).

7
2.1.2 Typesofcredit
Credit can be classified according todifferentdimension. According toTheodore N. Beckmanand
Ronald S. Foster credit is classified according to their purpose of the loan borrowed and timethey
are borrowed.According tothe purpose ofthe loanthey are borrowedthe type of loancanbe
classifiedintorealestate loan, consumer loanandagriculturalloan.

Realestateloanincludeslong-termmortgageontheprovisionofpropertiesandbusinessenterprise. It is a
loan build a real estate for which are generally paid off which the property iscompleted and sold.

Consumerloanisoneoftheloanswhicharegrantedbybank.Manyconsumerloansaremainlyfor the
purpose of purchasing durablegoods like refrigerators, automobiles and etc.from thebanks point of
view consumer loans are generally more liquid than other types of loans becausemost of the time
consumerloansare renderedasshorttermloan.

Agriculturalloanisacreditfinancingvehicle,whichisdesignedespeciallyforagricultureproducts.
Typically this financing is used to fund operations, purchase equipment or acquire realestate.

Based on the time they are borrowed credit can be short term loan, medium term loan and
longterm loan.

Shortterm loan isthe loanthatisprovidedfora shortperiod of time.Mostof the time shortterm loan
isprovided foroneyearandless.

Mediumtermloanisthetypeofloanthatisprovidedaboveoneyearandlessoffiveyear.

Long term loanis the loan that is providedfor long term times.Most of the time long
termloanisprovidedmorethanfiveyear loans(ShelaghHeffernan, 2005).

2.1.3 Dimensionofcreditmanagement
AccordingtoIMPandey,2010creditmanagementparticularlyperformsthe followingcoreconcepts in
related tocreditpolicy:

i. Formulationofcreditpolicy:-
forfirmswithusualcreditsalestheprimeresponsibilityisformulationofcreditpolicywhich
includesthedecisionaboutthreecredittermsthatis

8
 cash discount, discountperiod and credit period.Credit term refers to the duration ofcredit
and the term payment customers including discount if any credit standard
specifiestheattributescustomer shoulddemonstratetogetcredit.
ii. Evaluationofcreditpolicy:-
theseinvolveevaluatingthecreditapplicant’sworthiness.Itinvolves threesteps:
1. Collectionofcreditinformation
2. Analyzingandevaluatinginformation
3. Makingofcreditdecision
iii. Implementationofcreditpolicy:-oncecreditpolicyisformulatedandevaluatedthenextstep is
adaptingitand useit.
iv. Administeringandcontrollingcreditpolicy:-
thepurposeofthisstepistocheckandcontrolwhetherimplementedpolicyisproperly workingor
not.

2.1.4 Methodofcreditdeliveryandrepaymentmethod
MethodsofcreditdeliverycanbegenerallydividedintothetwobroadcategoriesaccordingtoJoannaLidgerw
ood.Theseare individual loansandgroupbasedloan.

Individualloansaredeliveredtoindividualsbasedontheirabilitytorepaytheloanwithinanagreementperiod.

Groupbasedlendinginvolvestheformulationofgroupsofpeoplewhohaveacommonwishtoassess
financialservice.

InotherwayrepaymentmethodsofcreditisdividedintotwomethodsaccordingtoTheodoreNBeckman and
RonaldSFoster:

Installmentmethod:-isthewayinwhichtheborrowerrepaystheloanperiodically.

Lampsum:istheotherwayofrepaymentmethodinwhichtheborrowerrepaytheloanoncetotally.

2.1.5 Variablesofcreditpolicy
theprincipalfactortobetakenintoconsiderationindecidingwhetherornottograntcredit,inwhatamountando
nwhattermsandconditionscomprisewhatarecommonlyreferredtousin

9
 the credit profession as the “ five C’sofcredit”.That is character, capacity, capital, condition,and
collateral(TheodoreN.Beckman andRonaldS.Foster).

Charactercomprisesthosequalitiesofcreditriskwhichmakehimortheindividualwantorintend to pay
whendebtis due. The character of an individualis the aggregate of mental andmoralqualities
whichidentifyhim.

Capacityincreditsignifiestheabilitytopaywhendebtisdue.

Capitalshowsthefinancialpositionofthefirm.Italsoshowstheprofitabilityofthecompanybyevaluatingd
ebtto equityratio.

Conditionreferstoanalyzetheeconomic,industry,businessandfirm’slevelofconditionofbusiness
undertaking.

Collateralistheanalysisofassetavailableforcollateraltosecureobligations.Itisanassetpledgedfor
securityincase ofdefault of paymentofcredit.

2.1.6 Functionsofcredit
AccordingtoTheodoreN.BeckmanandRonaldS.Fostercreditperformsfunctionswhichmaybeclassifie
d aseconomic,socialand managerial.

The first economic functionof creditis tosecure as amedium of exchangeinthe economy.Money

exchange is cultural stage ahead of barter, but a credit economy is a step in advance
ofmeremoneyeconomy.

The second function of credit explained by this book is to make independence of thought
andaction for social purpose. Credit bridges the gap between capital and labor enabling the latter
tosecureassistance in attemptatindependententerprise.

Theotherfunctionismanagerialfunction.Forbusinessmanagercreditperformsseveralfunctions. It is a
tool of business promotion with which he may expand his business to customerswho
wanttobuytheir merchandizeoncredit.

2.1.7 Componentsofcreditpolicy

10
There are three components of credit policy. They are credit standard, credit terms and
collectionpolicy(IMPandey,2010).

i. Credit standard: - is the guidelines issued by a company that are used to determine
ofpotentialborroweriscreditworthy.Creditstandardsareoftencreatedaftercarefulanalysis of
past borrowers and market conditions, and are designed to limit the risk of
aborrowernomakingcreditpaymentsor defaultingonloanedmoney.
ii. Credit term: - specify the length of credit period and the discount given early
payment.The common credit term for the firm to offer of “net 30” or “2/10 net 30”. Net 30
meansthe customer must pay its bill within 30 days of the invoice date. Term 2/10 net 30
meansthe customer is offered a 2% discount if payment is made within 10 days of the
invoicedate. Otherwise the full amount of the receivables is due in 30 days. The stated
terms ofcredit extension will have a strong impact on the eventual size of the accounts
receivablebalance
iii. Collectionpolicy:-referstotheproceduresthatfirmsfollowtoobtainpaymentofpastdueaccount.
Asageneralrule,themorequickaccountreceivableisconvertedintocashthegreaterwill be the
profit. Collection policy is final element in credit policy. It involves to
spottroubleinobtainingpaymentofpastdueaccounts.

𝑐‫𝑐𝑐𝑐𝑐𝑐𝑐݋𝑐𝑐𝑐𝑐=𝑐݋݋𝑐𝑐𝑐𝑐݋݋𝑐𝑐𝑐𝑐𝑐݋‬365𝑐𝑐𝑐𝑐/𝑐𝑐‫𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐݋݋݋𝑐𝑐𝑐݋‬

Thisformulashowshowmanydays,salesamountaretiedupinreceivables.

2.1.8 Creditplanning
The concept of the credit planning has gained importance during recent years. The term
creditplanning is used to mean the allocation of financial resources from which over source they
areavailable. In such way that the plan target of output and investment are achieved in full
anddistributionoftheseresourcesdoesn’thampertheimplementationofplanprogrammers(www.busine
ssdictionary.com).

Viewed from this angle credit planning at each level of the banking system is a subsidiary
onesince the bank credit is only one of the financial resource available from several sources.
Bankcredithoweveroccupiesaveryprominentpositionandassuchnationalallocationofthe

11
resourcesavailablewithbankisanimportantaspectofeconomic planning
andpolicy.Thesignificanceofsuchplanningisenhancedwhenbankshavetooperateprincipally
withthedeposit(Shekhar,1961).

2.1.9 Collectionprocedures
AccordingtoIMPandey,2010firmsusedifferentcollectionproceduresoftheirreceivablesfromcreditcusto
mer.

✓ Writeletterstoremindcustomer
✓ Telephonecalls
✓ Personalvisitbyfirmscollectionpersonnel
✓ Collectionagentassign
✓ Legalnoticetocustomer
✓ Legalactionbycourt

2.2 Empiricalreview
Many researchers have studies on credit management practice in bank from different
directionviews.The followingwereusedfor myresearch;

James Christopher(2011)reviewsempiricalevidence onthe useofbank linesofcreditasasourceof

corporateliquidity.Traditionalexplanationforlinesof creditisthatthey provideinsurance against
liquidity shocks in much the same as way of loading cash does. However, thisresearch
suggeststhat assess to lines of credit iscontingent onthe credit quality of the borroweras well as the
financial condition of the lender. These finding suggest that lines of credit are
animperfectsubstituteforcashasasourceofcorporateliquidity.Non-
performingloanratios(NPLs)areloansespeciallymortgageswhichorganizationslendtoborrowersbutdo
notcapitalize on.In other words the borrower cannot pay loan back in full or even enough for
thebanktomakeprofit.

According to the IMF (2001) poor risk management and plain bad luck in form of
externalindependent factors are the two main causes of NPLs. In fact, there is abundant evidence
that thefinancial/banking crisis in East Asia and Sub-Saharan Africancountries were preceded by
highnon performing loans. The current global financial crisis which originated in the US was
alsoattributed tothe defaultofsub-prime loans/mortgages.

12
Brewer et al (2006) use non-performing loan ratios as an important economic indicator.
Efficientcredit risk management implies that lower NPLs ratios are associated with lower risk and
lowerdeposit rate.However,it also implies that in thelong runrelatively high depositrate
increasesthedepositbaseinordertofundhighriskloans.ThisincreasesthepossibilityofNPLs.Thestudysh
owsthattheallocationoftheavailablefundanditsriskmanagementheavenlydependonhowthecreditrisks
arehandledanddiversifiedtodecreasetheNPLsamount.

TakingFelixAchouandNtuiClaudineTenguh(2008)studiedthelinkbetweenbankperformance and
credit risk in Qatar. The main concern of their thesis was to determine to
whatextentbankscanmanagetheircreditriskandtowhattheirperformancecanbeamplifiedbyproper risk
management policies. They did a time series analysis of a five year financial data toattain their
research objective. The study should that indeed there is a significant
relationshipsbetweenprofitabilityandcreditriskmanagement.Theyarguedthatbettercreditriskmanage
ment leads to better bank performance. In other words, they argued that banks with goodpolicies
on credit risk management have lower loan default ratios (bad loans) and higher
interestincome(profitability).Furthermore,thestudyrevealedthatthereisadirectbutinverserelationship
betweenprofitability andratioof non-performing loanstocapital. They
concludedthatconclusionthatbank withhigher interestincome have lower non performing loans,
hencegood creditriskmanagementstrategies.

ThisconfirmstheworkofSamHakimandSimanNeime(1998)whoinvestigatedtheperformance and risk

in Egyptian and Lebanese banks. They used annual observations of
43Lebaneseand62Egyptianbanksandanalyzedsameusingapaneldataestimationtechnique.The study
revealed that return on equity in banking is a direct and an increasing function of thebank’s
lending activities irrespective ofLebanon and Egypt.In conclusionJames Christopher(2011)
suggestsaccesstolivesof credit iscontingent onthe credit quality of the borroweraswell as the
financial condition of the lender. Brewer et al (2006) shows the allocation of theavailable fund and
its risk management heavenly depend on how the credit risk is handled anddiversified to decrease
the NPls amount. Taking Felix Achou and Ntui Claudine Tenguh (2008)argued that banks
withgood policies on credit risk managementhave lower loan default
ratios(badloans)andhigherinterestincome(profitability)bystudyingthelinkbetweenbankperformance
andcreditriskinQatar.SamHakimandSimanNeime(1998)revealedthatreturn

13
on Egypt in banking is a direct and an increasing functionof the bank’s lending activities
bytakingannualobservationof43Lebaneseand62Egyptianbanks.Myobjectiveistoassesscreditmanage
mentpracticeasgeneralobjectivewithsomeofthespecificobjectiveslikeidentification of the type of
load provided by bank, method of bank uses while they deliver creditbytakingasampleof
10employeesfromthe bank.

14
CHAPTERTHREE

3. ResearchMethodology
Inthelasttwochaptersthestudyfocusedontheintroductionofthestudy,objectiveandreviewofrelatedliter
atureiswidelyexplained.Butinthischapterthestudywasfocusedonthemethodologyofthestudy.

3.1 Typeandsourceofdata

ToconductthisstudyIusedbothprimaryandsecondarydatatoitssuccessfulaccomplishment.Theprimar
ydatawasgainedfromemployeesofcommercial bank Ethiopia at dire dawa branch
byusingquestionnairewhilethesecondarydatawasgainedfromdifferentbankswrittenmaterialslikemag
azine,journals,bankswebsite andotherrelevantmaterials.

3.2 Methodofdatacollection

The primary data was gathered through self administrative questionnaire which was prepared
foremployees of commercial bank of ethiopia at dire dawa. The secondary data was
collectedfromdifferentwrittendocumentssuchasjournals,books,publishedandunpublishedmaterials.

3.3 Samplingtechnique

Inordertocollectprimarydatatheresearcherusedthejudgmentalorpurposivesampling.Because,theres
earcheruseshisjudgmenttoselectpeoplethathefeelsarerepresentativeofthepopulationtohaveaparticu
larexpertiseorknowledgewhichmakethemsuitableandselecttargetrespondentthat provide
therelevant information.

3.4 Samplesizeandpopulation

ForthepurposeofidentifyingthenecessaryinformationaboutcreditmanagementtheBanktotalemploy
eesare23.Outofthistheresearcherselected10employeeswhoaredecidedthatthey
fittheareaofthestudy.Therespondentswereselectedbasedonjudgmentalsamplingmethod.Thereason
forusingjudgmentalsamplingistoinvolvethepersonnelwhohaveunderstandingaboutthetopic under
thestudy

15
3.5 Methodsofdataanalysisandprocessing

Dataprocessingimpliesediting,codingandclassificationofthecollecteddata,sothat,itissuitableforfurth
erresearchanalysis.Themethodofdataanalysisusedwasdescriptiveanalysisincludingtableandpercent
ages.Therationaleforchooseofthesemethodofdataanalysiswasthat
itallowsdescribing,summarizingandpresentingthequantitativedata.

Datawillbeanalyzedbytablesandpercentages.Finallydatawaspresentedinunderstandablewayto
drawconclusionandinterpretation.

16
CHAPTERFOUR

4. Datapresentationandanalysis

Theprimarydatausedforthisstudyiscollectedfromemployeesofthebankworkingonloanincommercial bank of
ethiopia at dire dawa branch
.Structuredquestionnairewerepreparedanddistributedtobranchemployeesinanopenandclosedendedquestions
formasaresulttheanalysismadeonthevalidofresponsesonly.Secondarydatausedforcollectedfromseconda
rysourcessuchasmanuals.

4.1 Analysisandinterpretationofquestionnaireresultintableform

In this point of the study the data gathered from primary sources are analyzed and interpreted.
Atotal of ten (10) questions were distributed to the employees of the bank which is related to
theproblem ofthestudyarea.

Table 4.1 Demographic information or summary of the number and percentage of respondent
byage,sexand educational qualification.

Respondents
Item Numbers Percentage(%)
Male 8 80
Sex Female 2 20
Total 10 100
Lessthan20years - -
21–30years 6 60
Age 31–40years 3 30
41–50years 1 10
Greaterthan50years - -
Total 10 100
Highschoolgraduate - -
CollegeDiploma 3 30
Educational MasterDegree - -
qualification Technicalschoolgraduate - -
17
 BA/BSC 7 70
PHD - -
Other - -
Total 10 100
Source:questionnaireresultandowncomputation

Theabovetable(table4.1)showsthattherespondentsbackgroundwhichincludethreeclassesthat are sex,

age andeducationalqualification.Aswe cansee from the table 80% ofrespondentsare male and 20 %
are female. This shows that most of the employees of the bank are male. Alsothe researcher can
see the second item of the table which is age range of the respondents. Out
ofthetotalnumberofrespondents60%belongstoagegroupof21–30years,while30%belongsto the age
range of 31 –40yearsand the remaining 10 % belongsto theage range of 41–
50yearsandthisshowsthatmostofthebankemployeesarefoundintheadultage.Thisimpliesthat most of
employees of the banks are fresh and they are not still equipped with necessaryexperience of best
credit management practices.Finally, the researcher had seen the
educationalqualification.Asweknoweducationisthebestinstrumentforthedevelopmentofthecountry.T
he credit activities are facilitated easily if the people involved are educated. AndAccording tothe
sample of the respondents about 70% of respondents are BA/BSC Degree holder 30% of
therespondentsareDiplomaholder.Sothattheresearchercanconcludethatmorenumberofemployees of
thebankswasliteratebut notenough.

Table4.2Jobexperienceinthebankwithcurrentjob

Respondents
Item Numbers Percentage(%)
Lessthanoneyear 2 20
Jobexperienceintheban 1–3years 5 50
kwithcurrentjob 4–6years 3 30
Total 10 100
Source:surveyresultandowncomputation

18
From table 4.2 we view the experience of each respondent in the bank under their current job.
Ithas been 20% of respondents working experience is less thanoneyear,50%is between1-3years
and 30% of respondents are between 4 - 6 years. From this the researcher can
concludethatmostoftheemployeesofthebankarenotnewforthebankserviceandknowaboutthestudy
area and this is good for researcher in order to get full information about the problem understudy.

Table4.3Borrowerspaybackornotpaybacktheloanexactlyontime.

Response Numberofrespondent Percentage

Pay backloanontime - -
Notpaybackloanontime 10 100
Total 10 100
Source:surveyresultandowncomputation

. As indicated in table 4.3 100% of respondent responded borrowers do not pay back the
loanexactlyon thematuritydate.

Themainreasonfornottopaybacktheloanonthetimemay bedueto:

✓ Fluctuationsofpriceofcommodities
✓ Failureofthemarket
✓ Weathercondition

Table4.4Sectoruseofthebankcredit

Items percentage
Agricultural -
Sectorwhichisthemostuse Industry -
rofthebankcredit Hotel 20
Construction 10
Others 70
Total 100

19
Source:surveyresultsandowncomputation

As we have seen from table 4.4, the most user of the credit of the bank was other sector
(servicesector and domestic trade) which is 70% and 20% is Hotel sector and the remaining 10%
isconstruction purpose. This indicates thatthe users of the bank credit are very limited sectors,
sothebankis exposedtoaccumulated riskonfewareas.

Table4.5RepaidloanandusedMethod

Methodofloanrepayment Numberofrespondents Percentage(%)

Installmentmethod 8 80
Lampsummethod 2 20
Other - -
Total 10 100
Source:surveyresultsandowncomputation

Asindicated in the above table the numberof respondentsindicatesthe major part ofthe loanwas
repaid by installment methodon. As indicated in the above table about 20% of loan wasrepaid on
lamp sum method while the remaining 80% is on installment method. The
researcherconcludesthatthemethodwhichispreferableisInstallmentmethod.Thisismaybedueto:

✓ TheborrowerusesthemoneyandrepaysperiodicallyTable4.6Typesoftheloanextended
bythebankandpurpose ofthecredit provision

Respondents
Items Numbers Percentage(%)
Shorttermloan 3 30
Whattypeofloanadvancedorgra Mediumtermloan 6 60
ntedbybank Longtermloan 1 10
Total 10 100
Realstatepurpose 2 20
Purposeofcreditprovision Consumptionpurpose 1 10
Agriculturepurpose 1 10

20
 Businesspurpose 6 60
Otherpurpose - -
Total 10 100
Source:surveyresultsandowncomputation

Asindicatedontable4.6,mostofthetimebanklendsmediumtermloanwhichisabout60%ofthe
respondents’ response, while 30% is short term loan and 10% shows the long term
loanresponse.Thisisconcludedasthebank providemedium termloanasamajorconcern.

Inotherway,table 4.6also shows the purpose of the loangranted. Asitis observed from thetable
about 60% of borrowers used the loan for the business purpose, 20% for real state
purpose,10%forconsumptionpurposeandtheremaining10%isforagriculturalpurpose.

Table4.7Itemsrequestedtoguaranteealoan

Respondent
Item Number Percentage(%)
Vehicle 1 10
Building 7 70
Type of collateral Land - -
doesthebankrequestfrom Educationaldocument - -
theborrower Cashdeposit 2 20
Other - -
Total 10 100
Source:surveyresultsandowncomputation

From this table we can consider what types of collateral is bank request from the
borrower.Accordingly to the responses of the sample study 70% of the bank collateral is building,
20% iscash depositand 10%isvehicle.

21
Table4.8Customerguidanceandadvisoryservicegivenbythebank

Respondents
Items Numbers Percentage(%)
Doesthebankprovideadequatecustom Yes 10 100
erguidanceandadvisoryservicetocust No - -
omer total 10 100
Source:surveyresultsandowncomputation

The above table shows the 100% of respondents’response the bank provide
customerguidanceandadvisoryservicetocustomer.Generallytheresearchercanconcludedfromtheabov
equestion that the majority of respondent or all are response they give the consultation service
fortheir customer. Thebankadvice theborrowersinthefollowingways:

✓ Do not shifting the field of business activities to other field of business

activitieswithout the permission of the bank. Some of the borrowers borrowed
money frombank for the purpose of trading activities but shifting this purpose for
the buildinghouse.Insuchcasethereisa problem of nonpayback of loan.
✓ Donotdoingillegalbusinessactivitieswhichisblockedbythegovernment.
✓ Yourbusinessactivitiesshouldbeprofitable
✓ Pay backloanontime.

4.2 Sequencesofprocedureforborrowerswhosepaymentsareoverdue

Forthisquestionalmostalloftherespondentslisttheirviewasfollows:

✓ The bank send out delinquency letter information to the customer of the past
duestatus of the account an account receivables becomes overdue a certain number
ofdays.Thebanknormallysendsapoliteletterremainingthecustomerofitsobligation.
✓ Itmakesphonecalltothecustomerifletterprovesuccessful,atelephonecall
may be made
tothecustomerstorequestimmediatepayment.Suchacallistypicallydirectedtothecusto
meraccountspayabledepartmentwherethecorrespondingemployeeactsoninstitutionof
his/herboss.

22
 ✓ Itemployedcollectionagency:afirmcanturncollectableaccountsoveracollection
agencyoranattorneyfor collection.
✓ Ittakesalegalactionagainstthecustomer:isthemoststringentstepinthecollection
process. It is an alternatives collection agency not only indirect
legalactionbutitmayforcethedebtorintobankruptcy,therebyreducingthepossibilityfort
unebusinesswithoutgrantingtheultimatereceiptoftheover.

4.3 Creditgrantingcriteriausedbycommercial bank Ethiopia

RegardingthecollateralacceptedbythebankofcommercialofEthiopia at dire dawa branch

respondents’responseasthebankevaluatesfivethingsbeforetheygivetheloantotheapplicants.Theseare:

Character:-
borrowers’honesty,responsibility,integrityandconsistency.Thisshowtheborrowerswillinpresstopaya
nddateremindbytaking therecordofpayingbehavior.

Capacity: -theability ofborrowers to pay theirfinancialobligation.Ability to

paycanbejudgedbyassessingthecustomers’capitalandassetswhichhe/shemayofferassecurity.

Capital: - the customersfinancial resource or financial condition of borrowers.It is the

amountofassetsthatcan be liquidatedfor thepayment ofdebt.

Collateral:-anassetpledgedforsecurityincaseofdefaultofpaymentofcredit.

Condition: - the banker is going to assess the conditions the company to determine the key
risksfacing in the company and also whether or not these risk are sufficiently mitigated. Even if
thecompany’s historical financial performance is strong, the bank wants to be sure of the viability
ofthecompany.

Based on the question about mechanism or credit granting criteria almost all of the
respondentresponses that the bank uses the above five credit granting criteria that are used to grant
credit tocustomer.

Table4.9FinancialhighlightsasDecember31,(2011-2015)inmillionBirr

23
Year Deposit Loanandadvance
2011 3,508 2,529
2012 5,302 2,713
2013 6,456 3,146
2014 8,045 3,986
2015 9,565 5.05
Source:Financialstatementsofcommercial bank Ethiopia

Asitisobservedfromtheabovetableorthelisteddata(depositdataandloanandadvance)itispossibleto
saythat:

✓ Theamountsofdepositofcmmercial bank of ethiopia increasesfromyear2011–

2016/17bydifferent amountofrange
✓ Theloansandadvancesgrantedbycommercial bank of ethiopia
wasincreasesforthepast fouryearbysomedifferent amountrange.

Theabovedataisdisplayedonthegraphasfollows

financialhighlights2011-2016
16000

14000
deposit/loaninmillionsofBirr

12000

10000

8000

6000 Deposit
loan&advance
4000

2000

0
2011 2012 2013 2013 2015

Source:Financialstatementofcommercial Bank of ethiopia andowncomputation

24
Totaloutstandingloanandadvancesreachedabout5.6millionin2015.Thishighgrowthofloansandadvances
issupportedbythegrowthofthebanksdepositduring2011/12.

25
 CHAPTERFIVE

5. Summaryoffinding, conclusionandrecommendation

In the previous chapter the researcher tried to investigate problems, weakness and
strengthofcommercialBankofEthiopia
regardingcreditdeliverysystem.Inthischaptertheresearchersummarizethe
findingsresult,conclusionandrecommendation.

5.1 Summaryoffinding

Loan is the main factor for the development of an economic activity of one country. Commercial
Bank of Ethiopia at dire dawa branch isone of the financial institution that provide short termloan,
medium term loan and long term loan t o different sectors of the economy such as
industry,agriculture and other service sectors. Commercial bank of ethiopia at diredawa branch
plays its ownroleincontributingtoeachsectoroftheeconomy.

Sofar,theresearcherhassummarizedthemajorfindingofthestudyasfollows:

✓ About 100% are not pay back loan on maturity date on the payment of the
loanaccordingschedule
✓ Morethanhalfoftherespondent’sresponseisshowsthatthemostuserofcredit
ofthebankwasservicesectoranddomestictradesector.
✓ About 80% of respondents collect the loan on installment method and 20%
ofrespondentson lampsum method.
✓ 60% respondent response show the for bank lend medium term loan, 30%
shortterm loanand10%islongterm loan
✓ Asthe data showsthe bank provide a creditmore for businesspurpose around60%,
20% for real state purpose, 10%for consumption purpose and 10%
foragriculturalpurpose
✓ About70%ofrespondentssaythebankrequestbuildingfromtheborrowerasa
collateral,20%cashdepositedinthebankand10%vehicleasacollateral
✓ As the data show 100% of respondents say the bank provide adequate
customerguidanceandadvisoryservice.

26
 ✓ Thesequenceofproceduresforborrowerswhosepaymentareoverdueareastheresearcher
getfromopenendedquestion:
SendpoliteletterMak
etelephonecall
EmployscollectionagencyF
inally takealegalaction
✓ Mechanism/creditgrantingcriteriabeingusedbyAwashInternationalBank:
Character
Capacity
CapitalCo
llateralCo
ndition
✓ Asthedatashowtheamountofdepositofthebankgrowthfromyeartoyear
✓ Theloanandadvancegrantedbythebankincreasefromyeartoyear

`5.2Conclusions

Alldata analysis and detailed discussion made in preceding part of this study aremeans to leadthe
researcher to possible conclusion andrecommendation, so thatthe fact and solutions
areaimedtostateexplicitlyformeasurestobetakenupon.Oncethoseimpactsareknown,effortscan be
made to avoid such impact credit management practice of commercial Bank of Ethiopiaat
diredawa
branch.Thebankshavetoidentifythenegativeandpositiveimpactandtoensurecontinuedinclusionofthos
e impacts which have a positive relationtothe credit
management.Theresearcherconcludesallthefindingaswellas:

✓ Education levels are the determinant factor in the delivery of credit service. But
largenumbersofrespondentsofthebank areDegreeratherthanDiploma.
✓ Most of the time the bank request building for settlement of outstanding debt
ratherthangivingadditionalloan.
✓ According to the majority of respondents the bank gives adequate customer
guidanceandadvisoryservicetoitscustomer.Thisinturndecreasestheamountofuncollectabl
eloan.

27
 ✓ The bank follows the sequence of procedures for borrowers whose payments
areoverdue.
✓ The bank follows all 5C’s of credit granting criteria while they give credit to
itscustomer.
✓ According to the majority of the respondents most of the customers of the bank
orborrowerrepaybacktheir
loanonlampsummethod.Thisinturndecreasestheinterestwhichischargedontheloanuntilth
e maturitydate.
✓ Thebankdeposit,loanandadvancesincreasingfromtimetotime

5.3 Recommendation

Basedonthefindingsofthestudythefollowingpossiblerecommendationswereforwarded.

✓ Toincreasehighqualityofcreditservice,allstaffworkingontheloanshouldgetadequate training
on areas of loan disbursement and collection. The training should begiven on continuous
basis like every six month and every year to refresh what they
knowandthroughgroupdiscussiontheymaysharetheirideasandfinallycometosomesolution
forcustomerproblem.
✓ Beforegivingtheloantocustomer, evaluationoftheirplanofperformanceandthe
collateraltheyretainforthebankisimportant.
✓ Although the bank gives some advices to its customers on how to use the amount
theyborrowfromit.sometimesdefaultofrepaymentbycustomersisseen.Thisaffectsprofitof the
bank so the bank should give intensive technical advice to borrowers and
seriouslyfollowupthe properutilizationthe borrowedmoney.
✓ Thebankshouldassignloanofficertodifferentplacesoperationareaofthebankbranch
with the specific term of references to do all the best in the area of evaluating
projectsinspectionandfollowupoftheactivity ofthecustomerperformanceontime.Withspecial
emphasis to accelerating payback period of loan and purchasing new policies orcancelling
unnecessarily one and prepare necessary information and availing
documentrelatedtononperformingloanstosupervisitingauthorityasandwhenrequested.
✓ Thebankalsotrytoexpandtheserviceofautomatictellermachine(ATM)serviceand
interbank transfer service sinceit is better forcustomersbecausecustomerprefers thebank
accordingto performance andtechnology.
28
Reference

TheodoreN.BeckmanandRonaldSFoster(1924),creditsandcollection,8thedition.IMPand

ey,financialmanagement,10thedition.

Joannaledgerwood(1998),aninstitutionalandfinancialperspective.RamamurthyV.E,

workingcapitalmanagement

Chennai(1976),institutionforfinancialmanagementandresearch.

RosswesterfieldJordon(2000),fundamentalofcorporatefinance,5thedition,bymcgrow–
hillcompanyAmerica.

JamesChristopher(2011)reviewfundamentalcorporatefinance,(Meaza

,2010)saidthegroupbasedlendingmethod.

TakingFelixAchouandNtuiClaudineTenguh(2008)studiedthelinkbetweenbankperformanc
eand creditriskin Qatar.

Breweretal(2006)usenon-performingloanratiosasanimportanteconomicindicator.

29
 Appendix:-Questionnaires

Dire dawa university

CollegeofBusinessandEconomicsDepartm
entofAccountingandfinance

Questionnairetobefilledbystaffsofcommercial bank of ethiopia at diredawa branch

Researcher:MULUKEN wondimu

ResearchTopic:Anassessmentofcreditmanagementpracticeincaseof commercial bank of ethiopia at

diredawa branch

Dearrespondents

Iwouldliketoshowmyheartilyrespectforyourgeneroustimeandhonestaswellasimportantresponses.

Objective

Thepurposeofthisquestionnaireistoobtaininformationconcerningcreditmanagementpractice of the
bank. The information shall be used as a primary data in my case study
researchwhichIamconductinginpartialfulfillmentoftherequirementofthecourseresearchinaccounting
andfinance(ACCT441)atdiredawaUniversityforcompleting my
BAdegreeinaccountingunderthecollegeofbusinessandeconomics.Thereforethisresearchistobeevalua
tedin terms of its contribution to our understanding ofcreditmanagement inyour
bankandintermsofitscontributioninfilling theknowledgegapthatexistsinthearea.

Generalinstruction

✓ Thereisnoneedofwritingyourname
✓ Inallcasewhereansweroptionsareavailablepleasetick(x)intheappropriatebox.
✓ Forquestionsthatdemandsyouropinion,pleasetrytohonestlydescribe
asperthequestiononthespaceprovided.

Confidentiality

IwanttoassureyouthatthisresearchisonlyforacademicpurposeauthorizedbythediredawaUniversity.
Noother personwillhave access to data collected.Inany sortof reportImight publish. I willnot
include any information that will make of possible to identify anyrespondent.

30
 Others
DECLARATION

This is to certify that this research paper entitled”assessment of credit management practice
ofawashinternationalbanksharescompany(incasestudyofdiredawa branch)

Accepted in partialfulfillmentofthe requirements for the award ofthe BA in Accounting,

donebyMisbaJehadisagenuineworkcarriedoutbyhimundermyguidance.Thematterembodiedinthisres
earchpaperworkhasnotbeensubmittedearlierfortheawardofanydegreeordiploma.The assistance and
help received during the course of this investigation have been dulyacknowledged. Therefore, I
recommend that it can be accepted as fulfilling the research paperrequirements
NameSigMuluken wondimu: DateofSubmissionJune,2024

Place:diredawa university. Diredawa

Advisor jundi Date

31