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JUNE 2012

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.

This research paper has been entitled the loan recovery
performance of development bank of Ethiopia Dire Dawa
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

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
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.
1.2 Statement 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
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
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.
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 theSUPPLIER 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.bussinesslink.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
“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
 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
 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
 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.
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 of respondents
Percentage %
No Question who say
Yes No Yes No
DBE examine
1 8 - 100 -
the potentiality
of the clients
before giving
the loan
Does the
collect and
2 6 2 75 25
recover all
loans at due
Are there
3 responsible for 8 - 100 -
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
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 Percentage %
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
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
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
2007/2008 2008/2009 2009/2010
Principal Interest Total Principal Interest Total Principal Interest Total

274,650.000 26,091,750 300,741,750 1,413,997,000 134,329,715 1,548,326,715 1,282,557,000 121,842,915 1,404,399,915
against 154,243,440 11,436,014 157,468,380 1,364,365,704 77,951,534 1,326,451,497 1,070,422,072 115,373,056 1,246,264,485
3. recovery
56.16% 43.83% 52.36% 96.49% 58.03% 85.67% 83.46% 94.69% 88.74%
4. balance in
120,406,560 14,655,736 143,273,370 49,631,295 56,378,181 221,875,218 164,295,552 6,469,859 158,135,430
5. percentage
in arrears to
43.84% 56.17% 47.64% 3.51% 41.97% 14.33% 12.81% 5.31% 11.26%
Table 3.3.1 overall credit recovery performance of DBE
2010/2011 Total(2008/2009-2010/2011
Principal Interest Total Principal Interes

252,737,000 24,010,015 276,747,015 3,223,941,000 306,27
against 191,928,478 16,780,599 209,110,045 2,780,959,694 198,49
3. recovery rate 75.94% 69.89% 75.56% 63.38% 64.81%
4. balance in
60,808,522 7,229,416 676,370 1,180,607,194 107,77
5. percentage in
arrears to total 24.06% 30.11% 24.44% 16.62% 35.19%
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%
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
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
960,00 85,000 4,705,000 600,000 6,350,000
against 415,000 46,248 566,482 193,200 1,220,930
3. recovery
43.23% 54.41% 12.04% 32.20% 31.46%
4. balance in
545,000 38,752 620,118 406,800 1,610,670
5. percentage
in arrears to
56.77% 45.59% 87.96% 67.80% 68.54%
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

208,520,000 1,278,230,000 1,059,982,000 128,835,000 2,675
2.recovery against
146,550,000 337,033,000 429,612,000 83,888,000 997,0
3. recovery rate 70.28% 73.63% 40.53% 65.11% 82.38
4. balance in
61,970,000 941,197,000 630,370,000 4,497,000 213,5
5. percentage in 29.72% 26.37% 59.47% 34.89% 7.98%
arrears to total

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
65,170,000 135,682,000 217,870,000 123,302,000 542,024,000
against 46,222,000 82,003,000 91,336,000 51,078,000 270,667,000
3. recovery
70.924% 60.44% 41.94% 41.42% 49.94%
4. balance in
18,950,000 53,679,000 126,504,000 72,224,000 271,357,000
5. percentage
in arrears to
29.08% 39.56% 58.06% 58.86% 50.06%
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
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.
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 Ethiopiarecovered
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
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
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


AnonymousMay 30, 2013 at 6:35 AM

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MikiasJune 3, 2013 at 4:08 AM

Thanks for your comment



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Apoorva KumarFebruary 11, 2015 at 11:44 PM

You have described literally everything about loan. Every bank is in business to make money. When it lends
money it wants to ensure that it will be paid back. That says everything else pretty well. Thank you for this
informative post.

HCBL Bank - Tathastu


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