DIRE DAWA UNIVERSITY

SCHOOL OF BUSINESS AND

ECONOMICS
DEPARTMENT OF ACCOUNTING

ASSESSMENT ON LOAN RECOVERY PERFORMANCE

(IN CASE OF DEVELOPMENT BANK OF ETHIOPIA, DIRE
DAWA BRANCH)
SENIOR ESSAY IN PARTIAL FULFILMENTS OF THE
REQUIRMENT FOR BA DEGREE IN ACCOUNTING

PREPARED BY: GOBENA DUGASSA

ADVISOR: GEDION M. (MCS)

JUNE 2012
DIRE DAWA
ETHIOPIA
 Acknowledgement
First and for most I would like to thanks my god for
endowing me the endurance and courage of going all ups
and downs to reach the stage where I am now. Then, I
would like to take express my advisor Mr. Gedion M
(MCS) for his technical and professional guidance in
writing this paper. Next my best thanks goes to Ato
Teshome, the manager of development bank of Ethiopia,
Dire Dawa branch and the employees of that organization
for their corporation and unreserved help.
Finally, I would like to thanks my father Ato Dugassa
Ararso and my mother w/r Sogide Taressa who support
me financially to accomplish this research paper.
 Abstract
This research paper has been entitled the loan recovery
performance of development bank of Ethiopia Dire Dawa
branch.
This paper has been included introduction, statement of
problem, objective of the study, significance of the study,
scope and limitation of the study, literature review and
research design and recommendation. Under the
objective of the study, the researcher question that the
researchers where emphasized to answer has been
raised. The literature part which are directly related to
loan recovery performance has been reviewed from
several source.
Finally, for data analysis purpose, source of data, method
of data collection and sampling techniques has been
stated. Then based on analyzed data appropriate
conclusion and recommendation have been suggested.
 Chapter 1
Introduction

1.1 Background of the study

Lack of financial resources usually regarded as a major bottleneck

to the development of many developing countries. The government
has set policies and strategies to extricate the country from poverty,
backwardness and anti-domestic practices. Among the policies and
strategies adopted by the government, civil service reform program is
one of them. Civil service reform program (CSRP) is devised to
investigate and examine the status and competence of public
institution. The program ascertains compatibility to effectively and
efficiently. Civil service reform program in general and financial sector
reform program in particular is believed to provide good opportunity
for smooth credit operation of the development bank of Ethiopia
(annual placed and budget for 2006/7, august 2006).
According to regulation 200/1994, the main objective of DBE is
mobilization of funds from national and international sources and
provision of short, medium and long term investment credits. To
achieve its stated objectives the bank has to be sustainable by
generation sufficient profit from its operation. This rests on efficiency
and effectiveness of loan able fund mobilization, credit provision and
ultimate collection of loans which has direct impact on the banks
profitability and liquidity.
Credit recognized as the important financial service that contribute
to the success of business venture. This success in turn, believed jot
contribute towards economic development, however the existence of
credit facility alone does not necessarily. Result in supporting
economic development unless and otherwise it is combined by the
existence of factors conducive to the efficient utilization of credit
funds. For instance, if the abdicative of making loan able funds
available to these who want them for productive purpose on
continuous basis to be met, a loan has to be rapid on time, chronic
over due
Becomes irrecoverable as a result of the next worth of the lending
institution will be eroded and it will have a serious impact of the
volume of lending activity.
In the light of above factors, the study is important to assess some
dimensions and to suggest suitable remedies that should help to loan
recovery performance of the development bank of Ethiopia under the
trade 2007/2008 to 2010/2011.

1.2Statement of the problem

Our country Ethiopia is characterized by under utilization of land
capital and abundant man power resources. There is scarcity of capital,
lack of investment opportunity and unemployment. Considering this
fact, development bank of Ethiopia Dire Dawa branch provide credit for
establishment and expansion of agricultural, industrial and other
services with the objective of economic development in the country.
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 increase demand for credit and to keep the bank
in sound financial health. Both the principal and interest to meet the
operation cost mist be recovered. The bank collects the principal and
interest from the client during the due date but defaults may occur on
the side of the client due to various reasons if there is a high incidence
in the deficit of client, this leads the bank to be insolvent and weaken
its financial position. This situation will paralyze the investment
program as well as the economy as a whole. In this study the
researcher focus on evaluation the credit repayment performance of
development bank of Ethiopia ,Dire Dawa branch between the period
2007/2008 to 2010/2011.
 What is the reason for the defaults of the client?
 Does the bank collect its loan effectively on time?
 Which sectors are more effective in returning of their debt?
 How loan is recovered among different sectors?

1.3 Objective of the study

1.3.1 General objective
The main objective of the study was to examine and assess the
loan collection performance of development bank of Ethiopia Dire
Dawa branch.
1.3.2 Specific objective of the study
The specific objectives of this study was:-
1. To examine loan recovery performance among different sectors.
2. To see weather the bank collects its loan on time or not?
3. Which sectors are more effective in repayment of loan?
4. What are the factors that results in non repayment of loan?
1.4 Significance of the study
The findings of the study would have some important contribution to
the manager of development bank of Ethiopia Dire Dawa branch in the
assessment of loan granted procedure of the bank, the credit
worthiness of borrowers and other interested parties about the
performance in the bank.
1.5 Scope and limitation of the study
 The study would have focused on assessment of loan collection
performance of development bank of Ethiopia Dire Dawa branch.
Hence, this study would only addresses issues relates to loan
repayment and collection in development bank of Ethiopia Dire Dawa
branch. The problem will face in conducting this research is insufficient
time to investigation more facts and information and also limited
availability of all sorts of resources.
1.6 Methodology
1.6.1 Data type and sources
To gather information about this research the researcher would
be use both primary and secondary data sources. The primary data
would be collected by using questionnaires distribute to loan
repayment department of development bank of Ethiopia Dire Dawa
branch and secondary data would be collected from the organizational
historical records relates to loan repayment performance.

1.6.2 Sampling method

To collects available data the researcher would be prepare
questionnaires to distribute to the respondents by using simple
random sampling technique, taking the sample size of eight from the
total population of nineteen. The reason for used this type of sampling
technique would be less costly and less time consuming.
1.6.3 Method of data analysis
The researcher designed is descriptive type and data is both
quantitative type in nature. The researcher would be use tabulation,
percentage and graphics to analysis the data collected.
 CHAPTER TWO
Literature Review
2.1 What is loan?
Is an arrangement in which lender gives money or property to a
borrower and the borrower agrees to return the property or repay the
money, usually along with interest, at some future points in time,
usually there is a predetermined time for repaying a loan, and
generally the lender has to bear the risk that the borrower may not
repay a loan (through modern capital markets have developed many
ways of meaning this risk).
An amount of money advanced to a borrower to be rapid at a later
date, usually with interest. Legally a loan is a contract between a buyer
(a borrower) and a seller (a lender enforceable under the uniform
commercial coder most status. The term and conditions for repayment
of a loan including the finance charge or interest rate are specified in a
loan agreement. A loan may be payable on demand (a demand loan) in
equal monthly installments (an installments a loan). (wiki.
answers.com).
2.2 debt recovery low
The recovery of debts is to reclaim that which is owned from a
contractual debtor. A debtor can be either a business or single
individual recovery can be sought through many legal channels but
direct negotiations are always required before legal procedure can
take place
 2.2.1 Lender liability low
In entering a contractual agreement as a lender, the providing party
becomes subject to liability low, enforcing the fair treatment of
borrowers.
In the event that a lender breaches regulations set out in lender
liability low they may be subject to borrower litigation under a Varity of
legal claims. Recent years have seen a progression of liability claims,
paralleling the alternate action of previous years. A large proportion of
claims now involve a breach of contact and/or fraud claims.
Similarly to any other contract, a loan agreement can not be formed
of anything less than mutual consent; neither may it be fraudulently
induced. In the event that an agreement is set out conflicting with
either of these rules, the contract is not considered legitimate and can
not be enforced. When a contract is breached the offending party may
be liable to legal action under breach of contract.
2.2.2 Recovering debt through court
Court proceedings should only be a last resort in reclaiming debt often
threatening legal action is enough to induce payment, only in the
event that proven negotiations with the opposing party have failed can
court action take place.
Initially, alternative dispute resolution (ADR) must be considered i.e.
negations, mediation or arbitration, resolution may already be
specified with in the contract, so through checks must first be
administered.
Through channeling disputes through ADR processes, costs can be
control and conformational proceedings may be avoided.
It appropriate, in recovery situations the supplier could consider taking
back goods or services, however mediation is preferable using an
independent third party as a mediator aiding a mutual agreement, an
actual member can often be beneficial. Any mediation arrangements
can help maintain goods relations.
Negotiations can commonly involve representatives i.e. solicitors and
is when two opposing parties discuss the matter until reaching a
solution that is agreeable to both sides.
Arbitration, not dissimilarity to mediation, is involving a third party who
is independent, but in this instance deciding up on presented evidence
here fault lies and consequential action, as opposed to drawing a more
mutual agreement conciliation, following closely to mediation, seen as
independent adjudicator (the conciliator) aid parties in dispute
resolution.
Early neutral evaluation (ENE) is when opposing parties send evidence
to an independent third individual who gives their judgment on the
disagreement. ENE may be used to supply information to individuals
prior to negotiations and can be considered a form of ADR.
2.2.3 Wind up orders
Debt recovery through wind up is to seek debt repayment from a
liquidated source through an official receiver (OR)
A partnership must have at least three years trading in England/Wales
prior to a creditor applying for a winding up order ( www.bussiness
link.gov.uk)
2.3 The nature & role of credit market
Credit is the device for facilitating transfer of purchasing power from
one individual or organization to another. It indicates that 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 resolves and
though who have substantial resource but lack of entrepreneurial
abilities (Oyatoya, 1983).
There are two important respects that a credit market differs from
standard market for goods and services. First standard markets, which
are focus of classical competitive theory, involve a number agents who
are buying and selling a homogenous commodity. Secondly in standard
market, the delivery of a commodity by a seller & payment for the
commodity a buyer occur simultaneously. In contrast credit received to
day by an individual or firm in exchange for promise of payment in the
future. A loan is a type of debt. Like all debts, a loan involves the real
allocation of money over a period of time between the borrower and
the lender. This money is paid back either in full or regular installment
(with interest of course). Acting as a provider of loans is one of the
principal task for financial institutions such as a bank. For banks, loans
are generally found by deposits. That is how banks usually learn. Their
deposits are loaned out and when the borrowers pay with interest
earning for the bank. Other types of dept include mortgages, credit
card debt, bonds and lines of credit. A mortgage is a very common
type of debt used by many individuals to purchase housing. In this
arrangement, the money is used to purchase the property. The bank,
however, is given the title to the house until the house and sell it, to
get their money back.
2.4 Economic benefits
Recovery should be made at the time when the borrower is most likely
to have money. According to Charles Mensh(1999) credit can generate
accelerate economic growth only when the amounts taken are rap it in
time. The problem of accumulated over due and arrears of interest
amount need to be solved immediately and once for all. The
accumulated over due have passed many problems and if not solved it
would continue to oppose problems in to the issuance of future loans.
He also revealed that the regional rural banks, being an organization
for development, provide cheep credit to the deserving target group
with objective that the loan less who shall repay the loan in easy
installments in accordance with phased repayment schedule.
“There are two problems that are major causes of poor loan recovery
performance; credit project design problems and credit project
implementation problems. Credit project design problems in clued debt
versus equity realism versus aspiration (how realistic the projection of
the product designer is), expected value versus dispersion (details
consideration of the variety of results which occur in the field), book
keeping convenience versus borrower cash flow pattern, collection
mechanism, institutional scope or range of service offered and interest
rate credit project implementation problems included low services
levels, coordination access (i.e. information problem & lack of decision
making experience in the lending to specific target groups) and
financial recording.
“Strong recovery of loan plays a very important role in the entire
economy and builds confidences of general public in the soundness of
the banking system. It also reduces the cost of credit operations
appreciable by avoiding litigation. It also improves the efficiency of the
operations staff & helps them to devote more for development work
rather than keeping them selves busy in recovering loans”.
2.4.1 The importance of qualification recovery
performance
Discussion of recovery performance are vital because most attempts at
its quantification conducted by development banks different banks
experienced with the qualification of loan recoveries performance for
the purpose of monitoring the collection of institutions. Development
banks of Ethiopia also experienced their own loan recovery
performance quantification method. Records must be timely and
clearly kept disclosure in report should not be selective and sanitized.
“Mathematical problems usually associated with measures of
repayment performance. For example a popular repayment ratio
divides the amount collected during a given period by the sum of
amounts falling due during the period plus amount over due at the
beginning of the period (called demand in south Asia’s countries). This
ratio continually declines as bad debts accumulated. It declines even
though there is no change in the collection of amounts falling due each
year. Accommodation of amounts that likely even to be collected
eventually dominates.
The effect can be managed by writing of amounts that unlikely to be
recovered, writing off removes such amounts from the denominator,
raising the arrears would display no over due carried from one year to
the next and demand equals to amounts reflective of actual
performance, providing transparency, which in most endeavors help to
finish collectives for remedial action & strategic reconsideration (to
Jacob garon, 1997). But according to Jacob developing countries
financial institution supported by donor are generally very reluctant to
write off bad and doubtful debts. This reluctant has several sources.
 Instructions given by the central bank of financial ministry,
possible to make it difficult for bankers to reduce their profits and
hence their tax liabilities.
 Statutory limitations on state owned lenders that interpret write
offs as a use of public fund which only parliaments has the
authority to approve.
 Lenders internal rules that prohibits writing off amount in
litigation and legal systems that take a very long time to deliver
judgments.
 The mistake belief that writing off or even making a provisions
against doubtful loans, accounting procedures that help to keep
accounting values consistence with the actual value of a loan
 portfolio means that no further efforts is to be made in collecting
written off loans. This relevant confuse good accounting practices
with the demonstrative or strategic decisions to continue to press
defaulter for payment.
 The fear that the public knowledge of write offs will only
encourage borrowers not repay.
 Incentives to pretend that the portfolio is healthy when in fact it
is deteriorating.
 The use of demand in the denominator challenges the validity of
simply, comparing collection with amounts taking due, because it
is distorted by the burden of arrears. An alternative would be to
include separate calculation of collection of over due amount with
the arrears on the book at the close of the reporting period.

2.5 Borrowing requirement and procedure

Borrowing requirement and procedures vary from bank to bank but the
procedure described here illustrate what can generally be expected
when an entrepreneur approaches a bank to obtain credit i.e. get a
loan.
2.5.1 Application form
The loan application form is the instrument through which is a client
formally applies for a loan. The application form serves for several
purposes. First it is an expression of the clients desire to borrow from
development banks and it is an expression of the development band
acceptance of the application. Finally as accounting documents, it is
both a requisition for payment and an acknowledgment of payment.
When applying for a loan you must prepare a written loan proposal
make you best presentation in the initial loan proposal and application
you may not get a second opportunity.
Always begin your proposal with a cover letter or executive’s summary
clearly & briefly explain who you are. In clued all there is to know
about you. Your business background, the nature of your business, the
amount and purpose of your loan request, your requested terms of
repayment, how the funds will benefit your business, and how you will
repay the loan keep this cover page simple and device.
Many different loan proposal formats are possible you may want to
contact your commercial lender to determine which format is best for
you were writing your proposal don’t assume the readers is failure with
your industry or your industry business. Always in clued industry
specific details so your reader can understand how your particular
business is run what industry trends affect it.
Loan repayment: provide a brief written statement indicating how the
loan will be repaid including repayment sources and time requirement.
Cash-flow schedules, budgets and other appropriating information
should support this statement.
Existing business: provide financial statement for at least the last three
years plus a current dated statement including balances sheets, profit
& loss statements & a reconciliation of net worth. Again of accents
payable & account receivables should be included as well as a
schedule of term debt. Other balance sheet items of significant valve
contained in the most recent statement should be explained.
Projects show how your operations will make money, including earings,
expresses and reasoning for these estimates. The projection should be
in profit or loss format. Explain assumptions used it they are different
from trend or industry standards & support your projected figures with
clear, domination explanations.
Collateral:- list real property and other assets to be held as collateral
basically, collateral is the banks way of injuring that they will get some
thing back from if you are unable to pay back the loan. Few financial
institutions will provide non-collateral based loans. All a loan should
have at least two identifiable sources of repayment. The first source is
ordinarily cash flow generated from profitable operations of the
business the second source is usually collateral pledged to secure this
loan.
Your bank is in business to make many. Consequent, when a bank
lends money it wants to ensure that it will be paid back. The bank
considers the five “C’S” of credit each time it makes a loan.
Capacity to repay is the most critical of the five factors. Capital is the
money your personally have invested in the business & is an indication
of how much you will loss should the business fail.
Collateral or guarantees are additional form of security you can provide
the lender. I the business can not repay its loan, the bank wants to
know there is a second source of repayment conditions focus on the
intended purpose of the loan. Character is the personal impression you
make on the potential lender or investor.
In general, the following information is usually asked when
entrepreneurs apply for a loan Name, Address, Telephone No, regal
form of and nature of the business, registrations with government
business registries such as the security and exchange commission
(SEC). the department of trade and industry, or the city of municipal
government, product lines, amounts of capitalization. Name of owners
(partners) stock holders, type, amount purpose of loan applied for and
description of collateral offered.
2.5.2 Documentary requirement
The request papers should preferably be prepared for be fore applying
for a bank loan, incomplete documents can cause delays. The following
documents are commonly asked for.
  Residence certificates tax players’ identification number. BIR
stamped tax declaration for the past three years, financial
statement for the past three years, bank & grade references.
 Mini-business plans or projects feasibility study; especially for
borrowers who are just starting in business. The business
basically contains for cast in term of money of what the business
is going to be like for each month of a given year. It gives
estimates of production expenses and expected sales revenues.
 Business registration papers for single proprietorship, registration
with the department of trade and industry and with the municipal
office. For partnerships, articles of partnership and joint
resolution to borrow-for corporations, security and exchange
commission critical articles of incorporation with by-laws, boar
resolution to borrow and stock holder bio data for corporative,
registration with the because of cooperative department.
 Paper pertaining to collateral: for real estate mortgage copy of
TCT location plans with vicinity map, tax clearance, tax receipts,
tax declaration, insurance floor plan or pictures. For chattel,
registration certificates, insurance loan (credit) evidencing
payment in the case of important equipment for exporters’ letters
of credit, confirmed purchase orders and sales contracts.
2.5.3 Credit investigation
 The company’s background and history covering the date of
registration (in corporation), the type of business organization,
records of registration name of incorporators, and a summary of
operating records.
 Financial condition: the current break down of financial statement
reflecting the result of operations for the past three years. It also
includes schedules, explanation of extra ordinary items, break
 down of merchandise and receivable and full explanation of all
inter-company loans, and merchandise transactions.
 Dealing with government agencies; the lending bank checks on
the credit availed of by the applicant form lending government
agencies, the nature of the loan. Collateral offered, and
installment payment, including arrear ages if any.
 Banks experience with the borrower if the applicant is old client.
 Court asset; the bank cheeks on civil and criminal case involving
credit applicants. It also obtains information of the applicant from
compotators. After the credit investigation and supporting have
been accomplished and evaluated, a recommendation for
approval is prepared and the release of the loan is facilitated.
 CHAPTER THREE
Data analysis, Interpretation and Discussion
This chapter contains analysis and interpretation of data collected on
the credit recovery performance of DBE Dire Dawa branch in the period
of four years that is the period from 2007/2008 to 2010/2011. The
analysis is made using statistical tools graphs, tables and ratio to
assess the loan recovery performance of the bank.
3.1 general characteristics of the respondents
Table 3.1.1 respondents sex structure
Sex No of respondents Percentage %
Male 6 75%
Female 2 25%
Total 8 100%

The above table 3.1.1 shows that about 75% of the respondents of the
organization employees are male and remaining 25% of the employees
are female. From the above table 3.1.1 the researcher concludes that
most of the respondents are male.
Table 3.1.2 Educational level of the respondents
Educational level No of respondents Percentage %
Above degree 1 12.5%
Degree 4 50%
Diploma 3 37.5%
Certificate - -
Total 8 100%

Table 3.1.2 reveals that 50% of the banks employees are degree
holder, while 37.5% and 12.5% are diploma and above degree holders
respectively on the other hand there are no employees who are
holders of certificate. So this implies that the employees are
competent to carry out their responsibilities or duties.
Table 3.1.3 responses given by respondents
No Question No of respondents Percentage %
who say
Yes No Yes No
1 DBE examine 8 - 100 -
the
potentiality of
the clients
before giving
the loan
2 Does the 6 2 75 25
organization
collect and
recover all
loans at due
date?
3 Are there 8 - 100 -
factors
responsible
for non
payment of
loan?

As shown on table 3.1.3 above, for item number question out of eight
respondents all of them responded by saying yes. This implies that the
organization or the bank examine the potentiality of customer before
giving the loan. Similarity to this, besides the respondents mentioned
some of the criteria’s such as trade license, master plan, kind of
project, professional experience, legal registration certificate, sire plan,
5cs such as character, capacity, capital, collateral and condition of the
clients and the like that the bank provide for evaluation of clients back
payment capabilities.
Based on the above information the researcher suggested that the
bank holders a collateral, which is at least equivalent to disbursed
amount.
According to the above table 3.1.3, for item number two question 75%
of respondents replied that the bank collects and recovers all loans on
the due date. Contrasting to this, the remaining 25% of the
respondents responded that the bank does not collect all loans on the
due date. Based on the above responses the researcher concludes that
the bank collects and recovers the loans on the due date.
As indicated on the table 3.1.3 for item number three question 100%
implies or reveals that all of the respondents responded that there is
factors responsible non repayment of loan.
As the respondents explain that the main factors responsible for non
repayment of loan are spending of the loan an intended project,
incremental of the price of the raw materials, lack of raw material on
the market, internal problem of the organization, an for seen
occurrence and negligence of the clients because most of the loan
provided to customers are long term loan.
Generally, the respondent’s responses which are mentioned above
indicate that as there are different bottlenecks on the collection and
recovery of the loan against disbursement.
Table 3.2 types of service provided by the bank
No Description Respondent Percentage %
response
1 Short term - -
2 Medium term - -
3 Long term - -
4 All type 8 100%

As indicated on the above table 3.2 the respondent’s response reveals that 100% the bank can
provide all types of loan service that is short term, medium term and long term loan to its
customer or client. – Their composition is also indicates as follows;-
No Description Percentage %
1 Short term 12.5%
2 Medium term 25%
3 Long term 62.5%
Total 100%

Based on the information provide on the above table the researcher

summarized that the bank can provide a widely loan service.
Among the loan service which is provided by the bank, the largest
portion of the loan is covered by long term loan, that is about 62.5%
and it is followed by the medium term loan which is about 25%.
Generally, the bank gives the loan for its customer in long term that is
above five year.
Source of funds for the bank to give loan service
For the question raised for the respondents about the source of fund
bank to provide loan service the respondents provided the following
response.
According to their responded, the banks gets the fund from the
government budget, domestic loan, foreign loan, loan interest and
other service income, based on the above information the researchers
can conclude that the source of fund for the bank are domestic and
foreign source.
The major factors for the ban in provision of loan
For the question provided for the respondents about the factors of the
bank to disburse loan service for loan demanders, the respondents
replied as follows.
As the respondents responded, the major factors of the bank is failure
of providing loans service to an individual because the government
gives priority for limited sectors. As the result an individual who wants
to borrow could not get loan.
Based on the above information the researchers conclude that even
through the bank provides loan service it could not have capacity to
provide loan for all loan demander.
 3.3 Over all credit recovery performance of DBE
Table 3.3.1 over all credit recovery performance of DBE
Description 2007/2008 2008/2009 2009/2010
Principal Interest Total Principal Interest Total Principal Interest Total

1.total 274,650.00 26,091,75 300,741,75 1,413,997,00 134,329,71 1,548,326,71 1,282,557,00 121,842,91 1,404,3
disbursemen 0 0 0 0 5 5 0 5 99,915
t
2.recovery 154,243,44 11,436,01 157,468,38 1,364,365,70 77,951,534 1,326,451,49 1,070,422,07 115,373,05 1,246,2
against 0 4 0 4 7 2 6 64,485
disbursemen
t
3. recovery 56.16% 43.83% 52.36% 96.49% 58.03% 85.67% 83.46% 94.69% 88.74%
rate
4. balance in 120,406,56 14,655,73 143,273,37 49,631,295 56,378,181 221,875,218 164,295,552 6,469,859 158,135
arrears 0 6 0 ,430
5. 43.84% 56.17% 47.64% 3.51% 41.97% 14.33% 12.81% 5.31% 11.2
percentage 6%
in arrears to
total
disbursemen
t
Description 2010/2011 Total(2008/2009-2010/2011)
Principal Interest Total Principal Interest Total

1.total 252,737,000 24,010,015 276,747,015 3,223,941,000 306,274,395 3,530,215,395

disburseme
nt
2.recovery 191,928,478 16,780,599 209,110,045 2,780,959,694 198,496,435 2,247,688,142
against
disburseme
nt
3. recovery 75.94% 69.89% 75.56% 63.38% 64.81% 63.67%
rate
4. balance 60,808,522 7,229,416 676,370 1,180,607,194 107,777,960 1,282,527,253
in arrears
5. 24.06% 30.11% 24.44% 16.62% 35.19% 36.33%
percentage
in arrears
to total
disburseme
nt
Figure 3.3.2 DBE’s average recovery ration trends from year
2007/2008 to 2010/2011
As shown in table 3.3.2 above total disbursement for the period under
review 2007/2008 -2010/11 was about birr 3,530,215,395 of which birr
3,002,500,897 was recovered. The over all average recovery rate
during the four year was only 63.67%. Apportioning this figure in to
principal and interest, the average recovery rates comes about 63.38%
and 64.81% respectively.
The total disbursement shows a various trend for period to period.
Principal disbursement was increasing through out the period. Interest
disbursement for the period shows a fluctuation trend. From the period
2008/09 – 2009/10 and 2009/10 shows declination.
As indicate in figure 3.3.2 and table 3.3.2 above recovery rate was
increasing except in the period of 2010/11, similarly to the recovery
rate the interest rate was also indicate an increasing trend with the
exception of the 2010/11.
Constructing to recovery rate and interest rate amount in arrears rate
was decreasing continuously for the first three years except for the
period 2010/11 the principal recovery rate was increasing through out
the four year.
This implies that the recovery performance of the bank in its principal,
interest and the total recovery rate shows an improvement
performance during the period 2007/08 – 2010/11 indicated decline for
interest rate and recovery rate.
Credit recovery performance of the agricultural sector
to understand the recovery performance of the DBE it is important to
see its loan recovery rate by sector the following table shows the
recovery performance of the development bank of Ethiopia Dire Dawa
branch in the agricultural sector.
Table 3.4.1 credit recovery performance of the agricultural sector
Description 2007/2008 2008/2009 2009/2010 2010/2011 Total
1.total 960,00 85,000 4,705,000 600,000 6,350,00
disbursemen 0
t
2.recovery 415,000 46,248 566,482 193,200 1,220,93
against 0
disbursemen
t
3. recovery 43.23% 54.41% 12.04% 32.20% 31.46%
rate
4. balance in 545,000 38,752 620,118 406,800 1,610,67
arrears 0
5. 56.77% 45.59% 87.96% 67.80% 68.54%
percentage
in arrears to
total
disbursemen
t
As shown in table 3.4.1 the total disbursement for the period
2007/2008 to 2010/2011 was about birr 6,350,000 of which birr
1,220,930 was recovered. The total disbursement for agricultural loans
indicates a fluctuating trend the total disbursement for agricultural was
increasing except in the period of 2009/2010.
The recovery against disbursement for this sector shown as an
increasing through out the whole studied period, the recovery rate of
this sector indicates an increasing trend from 2007/2008 to 2008/2009
and decline in the period of 2009/2010 but it increase in the
subsequent year. In the specified year that is 2009/2010ther was an
inflation and other related bottlenecks in the country. Due to this
factors the recovery rate of the bank was declined however due to the
interference of the governance in to the market in the following
subsequent years the inflation reduced and the market partially
become stabilized. So this indicates that the recovery performance of
the agricultural sector is rises and the bank shows an improvement
performance.
3.5 Credit recovery performance of Industry sector
The development banks provide loans for financing the establishment
and expansion of industrial sector for the national economy. The
following table indicates the recovery performance of the industrial
sector with in the development bank of Ethiopia Dire Dawa branch.
 Table 3.5.1 loan recovery performance of the industrial sector

Description 2007/2008 2008/2009 2009/2010 2010/2011 Total

1.total 208,520,000 1,278,230,000 1,059,982,000 128,835,000 2,675,567,0000
disbursement
2.recovery 146,550,000 337,033,000 429,612,000 83,888,000 997,083,000
against
disbursement
3. recovery 70.28% 73.63% 40.53% 65.11% 82.38%
rate
4. balance in 61,970,000 941,197,000 630,370,000 4,497,000 213,537,230
arrears
5. percentage 29.72% 26.37% 59.47% 34.89% 7.98%
in arrears to
total
disbursement

As indicated in table 5.3.1 the total disbursement for the industrial

sector was birr 2,675,567,000 of which birr 997,083,000 was
recovered. The overall average rate of the sector during the four year
was 82.38% the total disbursement indicated an increasing trend
except for a decline in the period of 2010/2011.
The recovery rate shows fluctuating trend from period to period. Even
though, the recovery performance of the industrial sector shows a
decreasing rate in the period 2009/2010, the recovery performance of
the bank was rise or improved in the year 2010/2011. This implies that
the recovery performance of the industrial sector is satisfactory.
3.6 Credit recovery performance of the service sector
The service sector advances constitute a major part of the priority
sector advances. It is the activities of the development banks were
advances of several types for increasing the production and providing
employment can be made for economic development.
In this sector, the bank provides loan to transport, communication,
mining and energy, education, health, hotel and tourism sector of the
national economy. In evaluating the recovery performance of
development bank of Ethiopia Dire Dawa branch, the following table
shows recovery performance of the sector.
Table 3.6.1 credit recovery performance of the service sector
Description 2007/2008 2008/2009 2009/2010 2010/2011 Total
1.total 65,170,000 135,682,00 217,870,00 123,302,00 542,024,00
disbursemen 0 0 0 0
t
2.recovery 46,222,000 82,003,000 91,336,000 51,078,000 270,667,00
against 0
disbursemen
t
3. recovery 70.924% 60.44% 41.94% 41.42% 49.94%
rate
4. balance in 18,950,000 53,679,000 126,504,00 72,224,000 271,357,00
arrears 0 0
5. 29.08% 39.56% 58.06% 58.86% 50.06%
percentage
in arrears to
total
disbursemen
t
As shown in table 3.6.1 the total disbursement for the period under
review 2007/2008 to 2010/2011 was about birr 542,024,000 of which
birr 270,667,000 was recovered from the sector. The total
disbursement for the period shows an increasing rate except decline in
the year 2009/2010 from 217,870,000 to in 2010/2011 birr
123,302,000. But the recovery rate shows a continuously decline for
the four subsequent years.
In general, as indicated in the above table the recovery rate was
decreasing from the period 2007/2008-2010/2011. Based on this
information the researchers summarized that the recovery
performance of the service sector is not effective that much.
 CHAPTER FOUR
Conclusion and Recommendation
4.1 Conclusion
The aim of this research paper was top examine and assess the loan
recovery performance of the development bank of Ethiopia Dire Dawa
branch. Thus based on the findings presented in chapter three the
following conclusion has been drawn.
Timely and planned recovery of loans contributes to the profitability as
well as financial sustainability of any lending institution, the strength of
which is believed to enhance economic development effort. Hence,
lending institutions like development bank of Ethiopia are expected to
have good loan recovery performance comparable to their counter part
else where.
The development bank of Ethiopia examines the potentiality of the
customer before giving the loan depending on the criteria stated.
The DBE collects and recovers most of its loan on the due date and the
remaining portion of the loan which is uncollected on the due date is
recovered after the due date.
The major source of capital for the bank to provide loan service is from
domestic and foreign source. The DBE is used lock box system to
recover its loan from different sectors.
As over all repayment performance of the bank shows the table
disbursement for the period under reviewed (2007/2008 to 2010/2011)
was about 3,530,215,395 of which birr 2,247,688,142 was recovered.
The over all average recovery rates during the four years period
was only 63.67%. Apportioning this figure in to principal and interest,
the average recovery rate comes to about 63.38% and 64.81%
respectively.
The gap between the total disbursement and the total recovered over
the period under the consideration was significant. The recovery rate
was increasing except in the period of 2010/2011. Similarity to the
recovery rate the interest rate was also indicates an increasing trend
with the exception of the year 2010/2011. this implies that the
recovery performance of the bank in its principal, interest and the total
recovery rate shows and improvement during the period 2007/2008 to
2010/2011 except the period 2010/2011 indicating decline for interest
rate and recovery rate.
In the sector wise recovering, the development bank of Ethiopia
recovered 1,220,930 to the total disbursement in the agricultural
sector during the period 2007/2008 to 2010/2011 constituted birr
6,350,000. the country is industrially backward and the performance of
DBE in this sector is relatively better performance. It has a total of birr
2,675,567,000 and only birr 997,083,000 is recovered during the
period under consideration.
There fore, the performance of DBE in the industry sector is
satisfactory relative to other economic sector. Next to industry sector,
agriculture sector is better recovering performance than the service
sector which has a total disbursement of birr 542,024,000 of which
only birr 270,667,000 was recovered.
4.2 Recommendation
Based on the for going and conclusion, the following are
recommended for management decision so as to help the bank to
improve its loan recovery performance
In order to improve the quality of project appraised reports and to
provide sufficient technical instance of borrowers, the bank should
allocate sufficient budget or find funds to upgrade the knowledge and
skill of its staff.
In order to select potential and risk taking applicants the bank should
have adequate applicant screening criteria such as credit discipline or
repayment history current capacity to repay loan personnel behavior
and business experience should be considered at the time of applicant
screening.
The bank should revised and update the loan processing parameters
and formats that are used by lending department so as to be clearly
understand able to the clients.
The bank should set conditions that enforce clients, especially clients
with big project, to present project execution contact document and
recent managerial and technical staff or their project.
The government has to re-capitalization the bank to solve the problem
of capital in adequate and there by to satisfy the capital adequacy
requirement of international lenders by making additional investment
or some other means.
Finally, the researcher strong recommends further detail research in
loan operation specifically credit recovery performance of the bank
which are problems area and core activities of the bank.
Dire Dawa University
School of business and economics
Department of Accounting

Questionnaires to be filled by employees of development bank

of Ethiopia Dire Dawa branch at loans repayment department.
 We would like to thank you for your cooperation and willingness
to fill up the following questionnaires.
 Your information is used only for research purpose.
 All your response are valuable for the study.
N.B:- please write the necessary information in the space provided and
put a tick () mark in the box.
1. Age ------------------------
2. Sex
M F

3. Educational status
Diploma  Certificates 
Degree  above Degree 

4. What are the sources of capital for the organization to give a loan to
clients? _______________________________________
5. What are the major factor of the bank concerning to loan service?
_________________________
6. What kind of loan service can the DBE gives to the customer?
Short term  Medium term 

Long term  all 

7. DBE examines the potentiality of the clients before giving the loan?
Yes  No 
8. If you say yes for the Q.8 what criteria’s does the DBE use to
evaluate them?
______________________________________________________________
9. Does the organization collection and recover all loans at the due
date?
Yes  No 
10. If you answer for Q.10 is no what are the reason for non
collectivity?
______________________________________________________________
11. Which sectors are more effective in returning of their debt?
12. Are there factors responsible for non repayment of loan?
Yes  No 
13. If your response for Q.13 is yes, what are the factors? Please state
that.
________________________________________________________________________
________