ASSESSMENT OF CREDIT AND RISK MANAGEMENT (IN

CASE OF COMMERCIAL BANK OF ETHIOPIA IN JIMMA

MAIN BRANCH

A RESEARCH PAPER SUBMITTED IN PARTIAL FULFILLMENT

OF THE REQUIREMENT FOR THE BA DEGREE IN
MANAGEMENT.

BY:-BULCHA DEGEFA

ADVISOR: -KASSA. A (MBA)

HAWASSA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF MANAGEMENT

JUNE, 2015
HAWASSA,
ETHIOPIA
 Acknowledgement

First of all, I would like to thank my almighty Allah for his protection and help me at every steps
of my life and success in my work.

Secondly, I would like to express my sincere gratitude to my advisor Mr. Hayelom Nega(MBA)
for his valuable comments to complete this research proposal.

Thirdly I would like to say my appreciation to my mother not only for their financial support but
also encouraging my education. Finally I would like to thank my secretary w/roFitsum Asrat.

I
 Abstract

This study was conducted on the assessment of credit and risk management in commercial bank
of Ethiopia jimma branch. The objective of the study is assesed the credit and risk management
in the CBE jimma main branch.

In conducting this research paper, the research used convenient sampling techniques and both
primary and secondary data.

The primary data was collected through formal questionnaires and interview. The second data
was collected from different documents and other manuals of published and un published
documents. To analyze the data the researcher were used descriptive data analysis method based
on the available in which is important to conduct and complete this study.

II
 Table of content

Acknowledgement ............................................................................................................................. I
Abstract ............................................................................................................................................ II
Table of content............................................................................................................................... III
List of
table……………………………………………………………………………………………………………………………………………..Iv
CHAPTER ONE ....................................................................................................................................1
1. INTRODUCTION ..........................................................................................................................2
1.1 Back ground of the study ..........................................................................................................2
1.2 Back ground of the
organization………………………………………………………………………………………………………
1.3 Statement of the problem .........................................................................................................3
1.4 Objective of the study ...............................................................................................................4
1.4.1. General objective ..............................................................................................................4
1.4.2. Specific objectives .............................................................................................................4
1.5 Significance of the study ..........................................................................................................4
1.6 SCOPE OF THE STUDY ...............................................................................................................5
1.7 limitation of the
study………………………………………………………………………………………………………………………..
1.8 organization of the
study…………………………………………………………………………………………………………………..
CHAPTER TWO ..............................................................................................................................6
2. LITRATURE REVIEW ................................................................................................................6
2.1 Type of loan..............................................................................................................................6
2.1.1 Term loan ..........................................................................................................................6
2.1.2 Merchandise loan...............................................................................................................7
2.1.3 Personal loan .....................................................................................................................8
2.1.4. Overdraft loan..................................................................................................................8
2.2. Definition of non performing 1oan ...........................................................................................9
2.3. What is risk management? .......................................................................................................9
2.4. Meaning of risk ...................................................................................................................... 10

III
 2.5. Meanings of risk management ............................................................................................... 10
2.6. Method of handling risk ......................................................................................................... 10
2.6.1. Avoidance ....................................................................................................................... 10
2.6.2 loss
control…………………………………………………………………………………………………………………………………….
2.6.3 Retention
……………………………………………………………………………………………………………………………………..
2.6.4. Insurance transfers ................................................................................................................. 11
2.6.5. Insurance ........................................................................................................................ 12
2.7. Nature of credit risk ............................................................................................................... 12
2.8. Obstacles to credit risk management ......................................................................................... 12
2.9. The 5cs of credit .................................................................................................................... 13
2.10. Main factors affect in credit risk management ...................................................................... 13
2.11. Methods of reduction of credit risk ...................................................................................... 14
2.12. Collateral ............................................................................................................................. 14
2.12.1. Type of collaterals ......................................................................................................... 15
2.13. Loan document management ............................................................................................... 15
2.14. Role of bank in economic development ................................................................................ 16
CHAPTER THREE ............................................................................................................................... 17
3. RESEARCH METHODOLOGY ....................................................................................................... 17
3.1. Research Design .................................................................................................................... 17
3.2. Source of Data ....................................................................................................................... 17
3.3. Target population and sampling size ...................................................................................... 17
3.4. Sampling techniques .............................................................................................................. 17
3.5. Method of Data Collection ..................................................................................................... 17
3.6. Method of Data Analysis and processing ................................................................................ 17
CHAPTER FOUR ................................................................................................................................ 18
4. DATA PRESENTATION, ANALYSIS AND INTERPRETATION ............................................................... 18
4.1The process of credit acceptance fromborrowers ..................................................... 18
4.1.1 pre application interview ………………………………………………………………………………………………………..
4.1.2 Document requirements…………………………………………………………………………………………………………..

IV
4.1.3 financial
statement…………………………………………………………………………………………………………………………
4.1.4 The loan
application…………………………………………………………………………………………………………………………
4.1.5 Business
visit…………………………………………………………………………………………………………………………………….
4.1.6 Additional
information…………………………………………………………………………………………………………………….
4.1.7 Analysis and
evaluation…………………………………………………………………………………………………………………….
4.1.8
negotiation……………………………………………………………………………………………………………………………………….
4.1.9 Purpose of end use of the loan……………………………………………………………………………………………………….
4.2 Overview of employee and customers………………………………………………………………………………………………..
4.2.1Data analysis and interpretation form questionnaries and interview ....................... 19
CHAPTER FIVE
5 CONCLUSION AND RECOMMENDATION…………………………………………………………………………………………………
5.1 CONCLUSION………………………………………………………………………………………………………………………………………
5.2 RECOMMENDATION…………………………………………………………………………………………………………………………….
Reference .................................................................................................................................................... 28
APPENDIX .................................................................................................... Error! Bookmark not defined.

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6
 LIST OF TABLES

Table Page

4.2 Back ground information about employees……………………………………

4.3Back ground information about customers…………………………………….

4.4 Analysis of non performing loan ,liquidity ,how to manage its

risk…………………………………………………………………………………………………….

4.5 Analysis credit service and other related problems……………………..

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 CHAPTER ONE

1. INTRODUCTION
1.1 Back ground of the study
Loan is the thing that is leant specially a sum of money the action of lending something or the
state of bang lent. For each lender a loan is an investment comparable to bonds, stick or other
asset one the other hand, for each borrower a loan is a debt an obligation to repay the borrowing
money plus interest. Banks grant loans to borrowers assuming that will pay the agreed interest
and principal amount according to their contractual agreement. However, the borrower may fail
to do these results in nonperforming loan.

Credit risk is defined as the that debtor will not be able to pay interest or repay the principal
according to the terms specified in a credit agreement, credit risk means the payment may be
delayed or ultimately not played at all which can in term cause cash flow problems and effects a
banks liquidity. It exists in all banks on balance sheet account.

Risk management is a managerial process that involve the executive function of planning,
organizing, leading and controlling those activates in affirm that deal with specified type of risk
in order to maximize the value of on organization. The risk management is charged with
minimizing the adverse impact of losses on the achievement of the campo’s goal.

Risk management is a scientific approach to dealing with pure risk by anticipating possible
accidental losses and designing and implementation on procedures that minimize the occurrence
of loss or the financial impact of losses that t do occur.

It is as systematic process for the identification and evaluation of pure loss exposure faced by on
organization or individual for the selection and implementation ion the most appropriate
techniques for treating such exposures.

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It focuses on a part of total bundle or risk. Those are classified pure risk. Not speculative risk and
all pure risk are considered including that are un insurable. James and Iustalson (1998).

Risk management is a general management function that seeks to identify assets and address the
cause and effect of uncertainty and risk is an organization in order to attain goal and objectives
or that organization ion the most direct, efficient and effective paths. It is a systematic way of
protecting aims are reached without interruption real, JT. Smith (1998)

According to some scholars as detail in the above they give their suggestion about the cause and
effect of non-performing and other related risk that existing in the banking inductor, based on
this case researcher will try to assess about this problem.

1.2. Statement of the problem

Loan is a thing that is leant, specially a sum of money. Banks grant loans to borrowers assuming
that will pay the arid interest and principal among according to their contractual agreement.
However, the borrower may fail to do these results in nonperforming loan.
(http://www.com.banket.et)

Credit risk is the potential variation in net income and market value of equity resulting from
nonpayment or delayed payment other loan by the customer. Different types of asset have
different risk probability. Among these, a loan typical exhibits the greatest risk in the bank and
affects banks liquidity.

Risk management is a scientific approach to dealing with pure risk by anticipating possible
accidental losses and designing and implementation on procedures that to do occur, James (1998)

According to the CBE annual report published material at the ends of 2004 E.C talk about the
problem of nonperforming loan and other related risks extensively and this problem are the
major risk for banking industry.

The commercial bank of Ethiopia suffers the problem of risk management strategies and has lack
of techniques required for handling these risk associated is the bank. As the result the study will
try to answer the following research questions.

1. What is the importance of credit and risk management in CBE?

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2. What are the mechanisms of credit and risk management in CBE?

3. What are the main factor that affects credit and risk management in CBE?

1.3. Objective of the study

1.3.1. General objective
The general objective of this study is to assessed the credit and risk management system in
commercial bank of Ethiopia in Jimma main branch.

1.3.2. Specific objectives

 To examine the importance of credit and risk management in CBE (commercial bank of
Ethiopia)

 To investigate the mechanism of credit and risk management in CBE (commercial bank
of Ethiopia)

 To point out the main factors that affects credit and risk management in CBE?

1.4. Significance of the study

Credit diversion that is using the borrowing loan other than the line of business has the critical
cause for the mush rooming non performing loan in the CBE (commercial bank of Ethiopia) in
Jimma main branch. Different studies and training on how to manage such division contributes a
significant role in credit and risk management.

Generally this study is significant to provide the following points;

 This study is intend to assess investigation, to analysis its method and to pave its credit and
risk management.

 Protect the bank from unstudied losses.

 Better understanding of the process of intensive business research.

 It will help them to know what kind of problems exists around the business industry.

 It will help researcher to be familiar with research operation.

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1.5. SCOPE OF THE STUDY
The scope of the study has encompassed only factors that affect credit and risk management in
CBE (commercial bank of Ethiopia) in hawassa branch due to the diversification of balance in
different parts of the country. Time and money are also the other factors that limited scope of the
study.

1.7 LIMITATION OF THE STUDY

Since the researcher could not find any research which written on this specific topics. in addition
to this the other limitations are :

 The short period of time that available for data collection had been the impact on the
overall study.

 Shortage of secondary data materials on the topics

 And some respondents may not be easily accessible are some of the expected limitation.

1.8 ORGANIZATION OF THE PAPER

This research paper is consisting of five chapters. The one chapter is the introduction part. Under
this chapter, there would be background of the study, background of the organization, statement
of the problem, objectives of the study, significance of the study, scope of the study, limitation of
the study, and organization of the study. Chapter two had literature review, which contains ideas
related to the paper. Chapter three had the part of methodology of the study. Chapter four had
contained the main body of the research discussion and analysis. Chapter five had the part of
conclusion and the recommendation part of the study.

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 CHAPTER TWO

2. LITRATURE REVIEW

2.1 Type of loan

Commercial bank of Ethiopia Jimma main branch provides different types of loans. Classifying
loan in to various groups depend on the type of parameter used to categorized the loans. The
parameter could be the period a given loan is bounded to the functional of loan is intended for
the type of collateral held for the loan. The researcher has identified the following type of loan
and described them under the following manner. (http;//www.com.banketh.et/)

2.1.1 Term loan

A term loan granted for working capital and project financial to be repaid within a specified
period of time with interest. The loan is repaid in a lump sum on maturity or in periodic
installation (i.e. monthly, quarterly and semi -annually) depending on the nature of business and
its cash flow. The bank extends short term loan, medium term loan and long term loan.

Depending on the nature and cash flow of the business, the bank may provide cash flow of the
business the bank may provide a maximum grace period of three months for short term loan; two
years for medium term loans and three years for long term loans-grace period is period during
which the borrowers received from principal and interest repayment.

6
For project term loan requested, the interest accrued during the implementation period shall be
payment of bank financing, but the loan amounted to be dispersed by the bank shall be net of
interest accrued during the implementation period, otherwise in order to consider the interest as
cueist contribution, the borrower shall deposit it in a brookedallowed before dispersement of the
loan.

2.1.2 Merchandise loan

Merchandise refers to a specific product or group of product or goods manufactured or acquired
by at riding business for the purpose of sale.

Merchandise loan is a short term credit facility provided bank against which the merchandise or
documentary evidence (Railway receipt, ware house receipt and air way bills) is held as pledge
or collateral for the loan.

The purpose of in merchandise loan facility is to relieve the customers from cash flow problems
arising from money being tied up in the merchandise. Merchandise loan facility shall be renewed
every year unless the bank demands it to be reviewed by the credit approving team for any
remedial action when the performance of the account is deteriorating. Each advanced shall be
selected within ninety days except for the merchandise loan facility against export standard
coffee that is one hundred eighty days.

The amount of merchandise loan facility has to be up to a maximum of 80% advance rate,
depending on the type of merchandise customer classification and credit risk grading level.
However, for customers the facility beyond 80% advance rate.

The bank extends one time or revolving merchandise loan facilities

 A one- time merchandise loan is a credit facility where by the loan contract remains enforce
only until the maturity period of the loan.

 A revolving merchandise loan facility is similar to one- time merchandise, except that it can
be renewed periodically period to maturity.

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2.1.3 Personal loan
Personal loan are collateral based loan granted for the purpose of covering applicants urgent
financial requirements like expenses for domestic or foreign travel medical treatment of self or a
family member of meeting financial liability and any kind of person expenses.

The loan can be granted for a maximum period of three years repayable in equal regular
installment of principal interest.

The amount of the loan would be determined by the income and repayment capacity of the
borrowers.

The minimum and maximum amount of the loan is birr 1500 and birr 300,000 respectively. The
loan shall be secured against buildings located in major towns (where the collateral property has
good market ability in case of default) with minimum collateral coverage of 150%
(http://www/combanket.et).

2.1.4. Overdraft loan

An over draft is a form of credit facility by which a customer may be allowed to draw beyond the
deposits of to current accounts for the sole purpose of the day – to – day operational needs of
avaible and ongoing business.

The over draft is repayable on demand by the bank; it is financed for a limited duration normally
for one year.

Based on strict and continuous follow-up, the bank will call back the outstanding overdraft loan
balance at any time when its performance is unsatisfactory.

Over draft facility is reviewed every year unless the bank dements it to be reviewed by the credit
approving team for any remedial action when the performance of the account is deteriorating.

In tersest is changed on the over draft facility’s over standing balance on a daily basis.

The customer or his/her legal agent must summit renewal request one month priority the expertly
date, and the concerned customer relationship manager should advice the customer accordingly.
(http://www.combanketh.et)

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2.2. Definition of non performing 1oan
A non- performing loan is a loan that is in default or close to being in default. Many loans
become nonperforming after being in default for 90 days, but this can depend on the contract
terms.

A loan is nonperforming when payment of interest and principal are past due by 90 days or more,
or at least 90 days of interest payments have been capitalized, refinanced or delayed by
agreement, or payments are less than 90 days overdue, but there are other good reasons to out
that payments will be made in full.

By bank regulatory definition non- performing loans consist of

 Other real estate owned which is taken by force loser or added in lieu of foreclosure.

 Loans that are 90 days or more past due and still accruing interest.

 Loans which have been placed on nonaccrual (i.e., lands for which interest is no longer
accrued and pasted to the income statement).

In India, non- performing loans are usually the loans given to the agricultural sector where the
formers can’t pay back the loan or the interest amount due to lack of rain due to which they don’t
have any carhops to sell, due to floods etc. (http://www.combanketh.et)

2.3. What is risk management?

The risk management of a business, large or small, is a complex task in evolving a variety of
management functions, one of this function is risk management, the risk management process
and it contributions to profit and stability of a business is the main tasks. Risk management
requires the drawing out plans. The organization of material and individuals for the
understanding, the main tainting of activity among personal for the objective in evolved, the
binding to gather and unifying of all the activities and efforts and finally the controlling of this
activity and seeing that everything occurs in conformity with established rules and objectives.

All activity’s to which industrial under taking give rise can divide in to six basic functions:-

1. Technical activities (production, manufacture, adaption)

2. Commercial activities (budging, selling, exchange)

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 3. Financial activity (search for an optional use of capital)

4. Security activities (protection of property and person)

5. Accounting activities (stock taking, financial statements, costs statues)

6. Managerial activities (planning, organization, command, coordination, control). Jr.

Richard (1995).

2.4. Meaning of risk

Is traditionally has been defined in terms of uncertainty, based on this concept, risk is defined
here as uncertainty concerning the occurrence of a loss. Also risk is defined as uncertainty. (E.
Rejda (2008)

2.5. Meanings of risk management

Risk management can be defined as systematic process for the identification and evaluation of
pure loss exposures faced by an organization or individual, and for the selection and
administration of the most appropriate techniques for treating such exposures, it is a discipline
that system actually identified and analyzes the various loss exposure consistent with the
organization goals and objectives as a general rule, the risk manager is concerned only with
management of purple risks, not speculative risks. All pure risks are treated, including those that
are uninsurable. (E.Rejda; 2003)

2.6. Method of handling risk

As we stressed earlier, risk is burden not only to the individual but to society as well. Thus, it is
important to examine some techniques for meeting the problem of risk. There are five major
methods of handling risk.

2.6.1. Avoidance
is one method of handling risk, for example you can avoid the risk of being mugged in a high
crime rate area by staying out of the area, a business form can avoid the risk of being sued for a
defective product by not producing the product and bank can avoid the risk of un profitable loss
by not providing the money to customer not all risks should be avoided.

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 2.6.2. Loss control
Consist of certain activate that reduce both the frequency and severity of loss, loss control has
two major objective;.

I. Loss prevention: - loss prevention aims at reducing the probability of loss so that frequency
of loss is reduced, loss prevention is also important for business firms.

II. Loss reduction: - strict loss prevention effects can reduce the frequency of loss, yet some
losses will inevitably occur.

2.6.3. Retention
A third method of handling risk an individual or a business form retains all or part of a given risk
retention can be either active or passive.

I. Active retention: - an individual is consciously aware of the risk and deliberately plans to
retain all or part of it. Active retention issued for two major reasons, first it can save money.
Insurance may not purchase at all. Second the risk may be deliberately retained because
commercial insurance is either unavailable or unaffordable.

II. Passive retention: - risk can also be retained passively certain risk may be un knowledge
retained because of ignorance, indifferent or laziness. Passive retention is very dangerous if
the risk retained has a potential for estranging your financially.

2.6.4. Insurance transfers

Is another technique for handling risk. The risk is transferring to party another than an insurance
company’s risk can be transferred by several methods among which are the following.

i. Transfer of risk by contracts: - unwanted risks can be transfer by contracts; a risk

can be transferred by hold harm less clause.

ii. Hedging price risks: - is another example of risk heeding is a technique for
transferring risk of unfavorable price flections to the secular by purchasing and
selling further contract on an organized exchange.

iii. In corporate of a business firm: - in corporation is another example of transfer. If a

firm is sole proprietorship, the owner’s personal assets can be attached by creditors
for satisfaction of debts.

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2.6.5. Insurance
For most people insurance is the most practical method for handling major risk. Although private
insurance has several characteristic, three major characterize should be emphasized.

i. First, risk transfer is used because spur risk is transfer to the insurer.

ii. Second, the pooling technique is used to spread the loss of the few over the entire
group so that average loss is substituted for actual loss.

iii. Finally the risk may be reduced by application of the law of large number by which
an insurer can predict future loss experience with greater accuracy( E.Rejda; 2003)

2.7. Nature of credit risk

Among the transaction risk, the most important are liquidity risk and credit risk; credit risk is in
the rent in banking. Banks are successful when the risk, they take are reasonable, chat rolled and
within their financial resource and competence.

Credit risk covers all risks related to a borrower not fulfilling his obligation on time, even where
assets are exactly matched by liability of some maturity, the same interest rate conditions and the
some currently, the only on balance sheet risk reaming would be credit risk. Credit risk exposure
is measured by the current mark to market value. The magnitude of credit risk depends on the
likelihood of default by counter party, the potential value of outstanding entrants and the extent
to which illegally enforceable binding arrangements allow the value of offsetting contracts with
that counter party to be hilled against each other or the value of collateral hold against the
contracts.

2.8. Obstacles to credit risk management

The task of management of credit risk is rendered difficult restrictions market disruption delays
in production schedules and frequent instability in the business environment undermining the
financial condition of the borrower’s further financial information is unreliable and regal from
work. Dos not support department recovery. The difficult external context reinforced by internal
weakness of banks further undermining the asset quality.

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2.9. The 6cs of credit

The evolution of the loan require by the bank in valves 6c’s of credit

 Character (borrower personal characteristics such as honestly, attitude about willingness

and commitment to pay debts)

 Capacity (the success of busies)

 Capital (financial condition)

 Collateral

 Condition (economic)

 Compliance (laws and regulation) (Hr. machraju (1998)

2.10. Main factors affect in credit risk management

Common factors observed in credit risk management in bank are:

 Absence of written policies.

 Absence of port folio concentration limits.

 Poor industry analysis.

 Inadequate financial analysis of borrowers.

 Credit rationing contributing to deterioration of loan quality.

 Excessive reliance on collateral

 Concentration of lending authority..

 Inadequate checks and balance in the credit process.

 Absence of loan supervision.

 Failed to country and audit the credit process effetely.

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Bank should maintain desirable relationship among loans; deposit and other liability are capital;
loan quality is fostered by sound credit policy. A banks credit policy objective should encompass
the regulatory environment the availability of funds, the selection of risk and loan portfolio
banked and term structure of the liabilities.

2.11. Methods of reception of credit risk

Banks can reduce credit risk by;

 Raising credit standard to reject risky loans.

 Obtain collateral and guarantees.

 Ensure compliance with loan agreement.

 Transfer credit risk by selling standard loan.

 Transfer risk of changing interest rate by hedging in financing futures, option by using
swaps.

 Create synthetic loans through a hedge and interest rate futures to convert a floating vote loan
in to fixed rate loan.

 Make loan to a variety of firms whose retunes are not perfectly positively correlated (HR.
marchiraju; 2003)

2.12. Collateral
Collateral is asset, normally movable property pledged against the performance of an obligation.
(Pledge is mort gage of movable property which require delivery of position where as
hypothecation does not require delivery). Example of collateral are accounts receivable, bankers
acceptance, time draft like post dated cherub accepted by suitability of important bank (used in
foreign trade to make payments) building, marketable securities and their parity guarantee. Bank
can sell the collateral if the borrower defaults. Why collateral reduces banks risk it enhances
costs in terms of documentation and monitoring the collateral.

The factors that determine suitalitiy of collateral are standardization durability, identification
marketability and stability of value. Standardization helps in identify the nature of asset that is

14
being used as connatural; identification is possible if the collateral has definite characteristics
like building or a serious number (motor vehicle).

Marketable collateral a lone if value to the bank if it has to sell it has to sell it; the value of
collateral should remain stable during the currency of loan.

2.12.1. Type of collaterals

Buildings be private, public, used for residence, office, store, factory operation. If under
construction, it should be at least 40% complete;

I. Deposit bank: - savings, demand and time depots.

II. Merchandise: - the merchandize is exportable or imported item and is to perishable.

III. Corporate or personal guarantee: - is a legally binding written commitment issued

by a legal entity stating that guarantor wills cover any outstanding loan repayment in
case of deformity by the borrower.

IV. Lease land:- can be accepted as collateral if some construction is completed

performed otherwise, only certain percent of the value will be considered. (HR.
marchrahuy; 2003)

2.13. Loan document management

Weather originating or processing or setting loan transaction, the processes are supported by
large volume of unstructured information. Such as paper documents, faxes and emails, in
addition to information complexity a customer file is often is auctioned by multiple team
contributing to processing error and time lags that increase customer sales and broker
satisfaction.

The efficient management of loan document eliminate operational bottleneck and drives
customer acquisition results solution s that out mate document generational and loan processing
is an essential source of competitive advantage for organization.

15
2.14. Role of bank in economic development
Banks play an important role in the country’s economic development. Banks control a large part
of the supply of money in circulation and can stimulate the economic progress by supplying
funds to those who have productive use of the financial resources.

I. Capital formation; the capital formation depends upon saving of individual or organization.
Banks offer facilities for saving and thus, encourage the habit of thrift and industry among
people the mobilize the idle funds of a community and make it available for productive
purpose. The banks have developed a variety of schedules to attract potential customers to
save in their bank.

II. Creation of money: is a unique feature of commercial banks and is of great economic
importance. They are factories of credit and multiple the money in circulation.

III. Provision of long term loan; - investment activities are on the basis of long term loan. By
providing loan term loan they encourage investment which can be in agriculture or small
scale and large scale industries.

IV. Effective implementation of monetary policy: the effective implementation of monetary

policy can be done only through properly organized banking system of the country. Banks
make possible the implementation of monetary policy of national bank.

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 CHAPTER THREE
3. RESEARCH METHODOLOGY

3.1. Research Design

Based on the purpose of the research, conducted this research is classified as descriptive research
because it describes nature of affair credit and risk management system

3.2. Source of Data

To conduct the study the data was collected from both primary and secondary data sources. The
primary data was collected by using the formal questionnaires and interviews. The secondary
data was collected by using published and unpublished documents of the bank.

3.3. Target population and sampling size

As much as possible the concerned parties are covered under the study accordingly customers
and employees of the bank include. Here, the researcher found it difficult to determine the exact
population. Based on the researcher’s convincible the sample size for the study were 40
customers and 20 employees.

3.4. Sampling techniques

In order to collect data from customer non-probability sampling techniques, especially
convenience sampling technique was used to its easiness, cheapest and accessibility to research.

3.5. Method of Data Collection

The researcher was collected primary data like questionnaire with customer and interview for
employee of the bank, and secondary data was collected documents analysis of the bank.

3.6. Method of Data Analysis and processing

Data processing is to make raw data suitable for further analysis, editing and classification was
made, and the researcher will use both quantitative and qualitative method of data analysis. To
analysis quantitative data the researcher used table and percentage, where as qualitative data
were analyzed through statement forms.

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 CHAPTER FOUR

4. DATA PRESENTATION, ANALYSIS AND INTERPRETATION

The focus of this chapter is to make an analysis of the data which are collected from employees
and customers. as detailed in the proposal part of the study. The data that are used were collected
through interview and questionnaire. The first part of analysis is about credit and risk
management by employees and customers of the CBE in Jimma main branch and then the data
which were collected from the manger by interview is analyzed. The data were collected from
employees out of 20 questionnaires distributed to respondents only 17 were returned and the
remaining 3 were un returned and the data were collected from customers out of 40 questioners
distributed to respondents only 32 were returned and the remaining 8 were un returned.

4.2. Background information about employees

Employees
No Item No respondents Percentage %
1. Sex
Male 10 58
Female 7 42
Total 17 100
2. Occupation
Degree 9 53
Diploma 3 18
Master 5 29
Above master
Total 17 100
3. Education level
Customer service 5 29
Credit committee 3 18
Credit analysis 5 29
Other profession 4 24
Total 17 100
4. Year of service in CBE
0-5 4 24
5-10 6 35
Above 10 7 41

18
 Total 17 100
Source: Primary data 2015`

According to the above table 4.2 item one of the describes sex of the
respondents of employees in commercial bank of Ethiopia Jimma main branch
that out of the 17 respondents of employees 10(58%) were males where as the
rest 7(42%) were females. And from the 17 respondents of employees 3(18%)
were diploma holder, 9(53%) and 5(29%) respondents were degree and maser
holder respectively. But there is no above master. according to this information
this organization operation its activity more by degree holder.

From 17 respondents of employees 5(29%) were on customer service

occupation on the other 5(29%), 3(18%) and 4(24%) respondents were on the
occupation of credit analysis, credit committee and other profession
respectively. According to this information researcher understand there is no
equal labor division to execute each activity.

Among the employees the number of years worked in CBE Jimma main branch
out of 17 respondents 4(24%) were worked from 0-5 years whereas 6(35%) and
7(41%) were worked 5-10 years and above teen years respectively in the bank.
According to this information the researcher understand the organization has
more experienced employees to achieve their goals.

4.3. Background information about customers

Employees
No Item No respondents Percentage %
1. Sex
Male 17 53
Female 15 47
Total 32 100
2. Age
18-30 21 66
30-40 9 28
40-50 2 6

19
 above 50 -
Total 32 100
3. Educational level
12th grade 17
Diploma 9 53
Degree 6 28
Master - 19
Above master -
Total 32 100
Source: Primary data 2015

According to the above table 4.3 item one of the describes sex of the
respondents of customer in CBE Jimma main branch that out of 32
respondents 17 were male whereas the rest 15 were females which reflects 53%
male and 47% female.

From the 32 respondents of customer 17(53%) were 12th grade, 9 (28%) and
6(19%) respondents were diploma and degree but there is no master and above
master. According to this information the customers of credit service activity is
more by 12th grade.

Among the customers the age of the respondents out of 32 respondents

21(66%) were around from 18-30 whereas 9(28%) and 2(6%) respondents were
around 30-40 and 40-50 respondents respectively but there is no above 50.
According to this information the researcher understand that there were more
young customers to use the credit service.

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Table 4.4 Analysis of nonperforming loan , liquidity and how to manage its risk

Employees
No Item No respondents Percentage %
1. Major types of risk that the
branch is entitled by providing
Insurance coverage 4 23
Collateral 3 18
Non- performing 8 47
Other 2 12
Total 17 100
2. The loan that has more risky?
Term loan 2 12
Merchandise loan 7 41
Personal loan 4 23
Over draft loan 2 12
Other 2 12
Total 17 100
3. Is liquidity problem to borrower
Yes 10 58
No 7 42
Total 17 100
4. Are they any challenges
encounter while managing the
risks related with credit service
Yes 4 24
No 7 35
Total 17 100
5. Can those challenges can be
eliminated
Yes 11 65
No 6 35
Total 17 100
6. How the bank organized to
manage credit risk?
Good way 4 24
Average way 8 47
Poor way 5 29
Total 17 100

21
7. Basics for rise of non-performing
loan
Foreign exchange export 3 18
Interest rate is match 5 29
Declining investments 3 18
All 6 35
Total 17 100
Source: primary data 2015

Among the 17 respondents of employees 8(47%) respondent places of the non –

performing loan which is risky for credit service to customer comparing to the
others, on the other hand 4(23%), 3(18%) and 2(12) of the respondents indicate
the risk of credit service in the bank as insurance coverage, collateral and other
non-performing loan are more risky than other because most of the time the
borrowers fails or if the business is not profitable as needed. The borrowers
fails to pay the repayment so the loan may face non-performing.

In addition to this, among the those respondents of employees 10(58%)

respondents say yes there are challenges encountered while managing the
risks related with credit service and the others 7(42%) respondents say no and
as the researcher obtained from the interview question there are some
challenges encountered from those challenges most borrowers do not have
audited financial statement, confused to differentiate cash flow statements and
cash flow forecast most of the borrower are semi-literate which do not clearly
show liquidity and ability to generate profits, customers are unwilling to
provide geniuses in formation, they use the direction of funds to other purpose
and the customer did not disclose what they want to do, according to this
information the researcher understand that there are challenges in managing
the risks related with credit service.

With regard to the challenges be eliminated in managing the risks related with
credit service, 11(65%) challenges can be eliminated but the other 6(35%)
respondents are indicate no, if cannot be eliminated and from the interview

22
credit analysis should properly appraise and try to identify those problem
before lending the money but the analysts does not most of the time analyze
financial statements sub mitted by borrowers and enjoy medium and small
amount of loan.

According to this information the researcher understand the bank can be

eliminate those challenges by using proper credit procedure. According to the
respondents on the distributed questionnaire 8(47%) were respondents
described that the bank is average organized to manage their credit risk, at the
rest 5(29%) and 4(24%) were respondent described that the management of the
bank poor way and good way to reduce about the credit risk. According to this
information the researcher understand the bank manage the credit risk in
average way. From the interview question researcher obtain that at this time
there is no that much risk because the management were more organized. It is
difficult to control all over the credit to them, but the responsibility to manage
risk in the hands of all people in the organization.

Regarding to the liquidity problem to meet its immediate obligation from

depositors and existing borrows, about 10(58%) were the respondents indicate
that the problem is still occurring and this lead to a continuous polling up of
the non-performing loan and the rest 7(42%) were no liquidation problem in
the borrows.

According to this information the researcher understand that there are liquidity
problems.

From 17 respondents of employees more risk exposure of credit 7(41%) were

merchandise loan, Whereas 2(12%) and 4(23%), 2(12%) and 2(12%) were term
loan, personal loan, over draft loan and other types of loan respectively.
According to this information the researcher understand the merchandise loan
as the most risk from the others loan, because of this the bank fears to give the
borrowers.

23
The respondents of the branch reveled the foreign exchange exposure and
interest rate mismatch were 3(18%) and 3(18%) respectively and the rest
declining investment were 5(29%) they said all of the above basic for rises of
non-performing loan. According to this the researcher understand all the
factors that affect the credit and the rises of non-performing loan.

Table 4.5 analysis of credit service and other related problems

Employees
No Item No respondents Percentage %
1. Are you happy for the user of
CBE ?
Yes 27 84
No 5 16
Total 32 100
2. What do you think the problem of
CBE related to credit service
providing?
Lack of delivery fast service 19 59
Lack of sufficient man power 4 13
Lack of experience 7 22
Other 2 6
Total 32 100
3. Do you think the credit procedure
used by the organization is
appropriate?
Yes 23 72
No 9 28
Total 32 100
4. Does the organization credit
service facilitate development
Yes 20 63
No 12 37
Total 100
5. Do you think the structure of the
organizations fair to credit
services rendered by the
organization

24
 Yes 20 63
No 12 37
Total 32 100
6. Are there any advantages you get
by using the credit service?
Yes 27 84
No 5 16
Total 32 100
7. Do you pay back the loan
periodically ?
Yes 20 63
No 12 37
Total 32 100
Source: primary data 2015

Among the 32 respondents of customers regarding to the fairness of

organization structure for credit service 20(63%) of customer respondents
indicated that the organizational structure is good for working appropriately,
the rest 12(38%) were place no good organization structure.

According to this information the researcher understand that organizational

structure is good because there is no bias, confusion and corruption on the
credit service.

Similarly as the researcher obtained from the interview question at this time
the organization structure is strongly structured than previous period as a
result of this credit service are started to done on the fairly way than the
previous so nothing is done wrongly that much.

With regard to the organizational credit service facilitate developments 29(91%)

of respondents indicate that based on credit service there is more facilitation
on development whereas 3(9%) were said has not facilitation on development.
According to this information the researcher understand that by giving credit
service to the borrower can expand any development.

25
Regarding to the advantage by using the credit service 27(84%) were
respondents indicate that the using of credit service is more advantageous than
the opposite, whereas 5(16%) were said has not advantage. In general it implies
that using credit service has advantage based on it has low interest rate for the
borrower other than the other bank. The borrower can get the service
everywhere because this bank has more branches.

In addition of this, among the 32 respondents of customer 19(59%) were lack of

delivery fast service, at the rest 4(13%), 7(22%) and 2(6%) were lack of
sufficient man power, lack of experience and other respectively.

According to this information the researcher understand that lack of delivery

fats service is the major problems of CBE related to credit service providing.
With regard to the credit service procedure used by the bank 23(72%) of
respondents were indicate that this procedure is providing the service on good
and fair way, where as 9(28%) were said has not appropriate credit procedure.

Similarly as the researcher obtained from the interview there is different

between the old and today procedure of the bank because the previously period
most credit service process is done only by one or some personal. According to
this information the researcher obtained from customer and credit analyst to
days banking procedure of CBE is appropriate for credit serviced of customers.

Regarding to the pay back of loan periodically about 20(63%) were respondents
indicate that most borrowers were paying back on time and the rest 12(37%)
respondents were not paying back periodically and the researcher obtained
from the interview question if the customer of credit users were not honesty for
the bank this is immediately go to rule, recovery class and they asses them
then give a decision based on agreement between creditor and borrower.

According to this information the researcher understand that most borrowers

were honest for the bank but there were some problems about the borrowers
who cannot pay on time.

26
Among the 32 respondents of customers regarding to satisfaction for the users
of CBE, about 27(84%) respondents were indicate that still they want to use
this and at the rest 5(16%) customer were not satisfy the use of this bank.

According of this information the researcher understand this bank were more
preferable to customer because it is located all places of the country and this
bank has more branch than the other.

27
 Chapter Five

5. Conclusion And Recommendation

5.1 conclusions

 The following conclusion is drawn based on primary data that the research
captured through. Observation interview and questioner.
 As most of the borrowers of the lending branch are semiliterate, they present
financial statement, which do not cleanly show their liquidity and ability to
generate profile their business survival and their business major obstacle in
making profits.
 Even though the credit analysis at distinct or head office making financial
analysis, if was also found that the analysis does not most of the time analyze
financials statement submitted by borrows and enjoy medium and small amount of
loans.
 Since most of the borrowers do not have audited financial statement to justify their
loan request they do not get the exact amount of loan they apply for as the
approving body reduced the amount they request. These affect the business
relation of the borrowers and the bank.
 Due to poor evaluation and analysis of borrowers business, the practical
observation to records reveled sometimes the bank was over lending to dishonest
borrowers whose loans become bad loans.
 The borrowers are even confuse to differentiate cash flow statement and cash flow
forecast that the former accompany the balance sheet and income statement
showing use of the financial resources during the period covered, while the later
one is future cash flow of the borrowers to determine future loan repayment.
 During the applicant business visit by the credit team gathering qualitative
information the profitability of the business location compared to market and the

28
 collateral offered are too well studies and causes the occurrence of non performing
loans which reduces the profit of the bank.
 Due to lack of delivering fast service of the organization to the borrower, the
bank was lengthening the time and process of the credit.
 .In the case of the managing the risks the borrower will fade up of communicating
again and again with the concerned organ to repay the debts.
The costumer are not willing to provide genuine information and no financial
information is prepared by the costumer poor accounting system .They use the diversion
Of fund to other purpose and the costumer did not disclose what they wan

 The bank cannot control all over the credit risk even if the responsibility to
manage the credit risk is in hands of all persons in the organization.

5.2. Recommendation

This part contains solution or recommendation about the problem that identified in CBE
Jimma main branch in relation to the problems those are identified,

 Even though most borrows are not able to support their loan request by providing
proper financial statements, the lending bank should teach, Advice and encourage
borrowers to flows proper accounting system.
 The bank should give a major emphasis to overcome the problem of non-
performing loan which rise in loses due to foreign exchange exposure , interest
rate mismatch and decline in the value of investment ,so that be successful in the
profit of their credit service.
 The bank should manage the credit rating system significantly and intended to
focus during application of credit and evaluation of collateral’s form gathered
information.
 Up on receiving borrower’s financial statements, the credit analyst should conduct
detail quantitative ratio analysis for both small and medium loan amounts as most

29
 of individual’s borrowers full under these categories. This enables the bank to
reduce fund diversion.
 The bank should advise the borrows to present audited financial statement
which are prepared by professional accountants, rather than reducing or refusing
to extend their loan request.
 The lending bank should advise his borrowers to employ their own accounts who
compare cash flow statements and cash forecast by knowing their difference.
 The leading bank should meet the credit need of costumers through providing
proper advice and consultancy on the credit standards of the bank.
 Since managing the risk is the important issue in the business industry the bank
should have a well organized credit and risk management unit to reduce the
implementing credit rating and unstudied collateral based credit system.
 To protect non- performing loan and other related risks connect to the credit the
bank must be uses different kinds of risk tools .It has the important role to prevent
the unnecessary risks.
 The bank must have good follow up the customer or borrow business repayment
capacity and profit performance to alleviate the problem of non-performing loan.
The credit analyst should properly appraise and try to identify those problems before.
lending the money and the credit service must deeply analyzed by analysts .

Reference

1. William, James and Lustaison (1998) Risk Management And Insurance Singapore, US
America publishing co.
2. George E.Rejda (2003): risk management and insurance western India publishing co.

30
3. George E.Rejda (20080: risk management and insurance western India publishing co.
4. HR, Marchiraju (2003) modern commercial bank: western India publishing co.
5. JR, Richard M, Hense 91998)
6. (http://www.combanket.et)
7. Trieschman, James and Lustqusion 91998) risk management and Insurance, south eastern
college publishing co.

31
 MEKELLE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT

Questionnaire to be filled by the employees of commercial bank of Ethiopia in mekelle main-

branch.

Dear respondent, I am a student at mekelle university in the faculty of Business and economic
department of management. This questionnaire designed to carry out research entitled the
assessment of credit and risk management offered by for the fulfillment of bachelor degree.

Your views are very important for the success of the research. So you are kindly requested to
provide guanine response, since it contributed a lot for the success and reliability of the research.

Part one

1. No need of writing your name

2. Choose and circle for alternative multiple choices

3. Put () sign for alternative answer by reading carefully

4. Write your answer on the space provides if necessary

1. Sex Male  Female 

2. Education level 12th certificate diploma  first degree  Master  Above

Master 

3. Occupation

Customer service  credit committee 

Credit analysis  other profession 

4. Year of service in commercial bank of Ethiopia? 0-5  5-10  above10 

5. Major types of risk that the branch is entitled by providing the credit service to customer?
Insurance coverage  collateral non performing loan  others

6. The loan that has more risky?

32
 Term loan  merchandise loan  personal loan  over draft loan 

7. Are there any challenges encounters while managing the risks related with credit service?

Yes  No 

8. Can those challenges be eliminated? yes  No 

9. How the bank organized to manage credit risk?

In a good way  average way  poor way? 

10. Is there any liquidity problem to borrowers? Yes  No 

11. Basics for rise of nonperforming loan? foreign exchange export 

Interest rate mismatch  declining investment  all □

Thank you!

33
 MEKELLE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT

QUESTIONNAIRE FOR CUSTOMER

Dear respondent,

I am a student at Mekelle University in the faculty of Business and economic department of

management. This questionnaire designed to carry out research entitled the assessment of credit
and risk management offered by for the fulfillment of bachelor degree.

Your views are very important for the success of the research. So you are kindly request to
express your opinion, felling, and experiences as honestly.

 Write your answer on the space provided with the sign (x)

 If you are additional idea write in the space provided

I. personal background

1. Sex Male  Female 

2. Age 18-25  25-36  35-45  above 45 

3. Education level 12th grade  Diploma  degree  Master andabove

4. Are you happy for the user of commercial bank of Ethiopia (CBE)?

Yes  no 

5. What do you think the problem of CBE related to credit service providing?

Lack of delivering fast service 

Lack of sufficient man power 

Lack of experience 

Other specify

34
6. Do you think that the credit procedure used by the organization is appropriate?

Yes  no 

7. Do you think that the structure of the organizations s fair to the credit service rendered by the
organization?

Yes  no  Why?

8. Does the organization credit service facilitate development?

Yes  No 

9. Are there any advantages you get by using the credit service?

Yes  No  why?

10. Do you pay lack the loan periodically?

Yes  No  why?

Thank you for devoting your preciously time and highly appreciate!

35
 Declaration

I under signed declare that this student research is my original work and has not been presented
for a degree in any other University, and all the materials used for this study have been duly
acknowledged.

_____________________ ___________________

Name of student Signature

This student research proposal has been submitted for examination with my approval as
University advisor.

Name of advisor Signature

_____________________ ___________________

Date _________________ Date _________________

36