ASSESSMENT OF CREDIT RISK MANAGEMENT SYSTEM (IN

CASE OF DASHEN BANK SAMARA LOGIA BRANCH)

A SENIOR ESSAY RESEARCH PAPERSUBMITTED IN PARTIAL FULFILLMENT FOR THE

REQUIREMENT OF B.A DEGREE IN ACCOUNTING AND FINANCE

Prepared by Demeke kefie

ID NO 1000291

ADVISOR:Abibual .g

DEPARTMENT OF ACCOUNTING & FINANCE

COLLEGE OF BUSINESS AND ECONOMICS
SAMARA UNIVERSITY

FEBRUARY, 2019
SAMARA, ETHIOPIA

Declaration
This research paper entitled “Assessment of credit risk management in case of dashen bank
branch is our original work, effort and study. All source of material used for the study have been
fully acknowledged. We have produced it independently except for the guidance and suggestion
of the research paper.

As the information we have this study has not been submitted for any degree in this university.

Date _/07/2019

This original research paper is co ________

___________________ _________

___________________ __________

___________________ ___________

___________________ ___________

Confirmed by:

Advisor Name ________________ Signature____________

Approved by:

Examiner Name_____________ Signature__________

ABSTRACT
The aim of this study was to evaluate the credit risk management system in samara logia
branch.Banks like CBE’s which has an objective of benefiting the wider society rather than
simply profit making, through active participation in financing economic development
programs and long term project of the country, will inevitably require credit risk
management strategy. The study design was descriptive, research applies qualitative research
method, both primary data and secondary data was collected to meet the objective of the study.
Both open ended and close ended questionnaires were distributed to respondents to collect
primary data. Secondary data was collected using the bank’s manual, and brochure. Finally the
data was analyzed using frequency table and qualitativemethod.Collateral, establish credit limit,
and make the credit term clear were the major procedures of the bank. Thoroughly a new
customer’s credit record, use credit insurance, segregation of duty and responsibility are the
major credit risk controlling procedures of the bank. The bank was weak in creating awareness
for all employees.Government policies, infrastructural facility, background of society, global
economic crisis, and level of economy have both negative and positive effect on managing credit
risk.The researcher recommended that the bank gives special considerations for loans to
agricultural sectors to reduce the nonperforming loans, and the bank should continue to
diversify its lending activities and should allocate more funds to the productive sectors of the
economy.
 ACKNOWLEDGEMENT

First and foremost great thanks given to GOD who keep us conducting this senior essay
research and help us in every aspect of our life. Second, it is a pleasure and an honor to us
to record a deep hearted in debt engages to our advisor abibual g. for his valuable
criticism, suggestion and guidance that make this work possible. Third, words cannot
express the gratitude we have for ourfamily, without their encouragement, moral and
financial support during our stay in the university, the achievement is not possible.
Finally, we are also grateful in the staff members of dashen bank in samara logia branch
who had assisted us in giving the necessary data and also we would like to thank our
friends.

TABLE OF CONTENTS
Contents Page

CHAPTER-ONE

1. Introduction

This section provides the general overview of the study.The general information included in this
chapter are the background of the study, statement of the problem, the research question,
objective of the study(general and specific objective), signfcance of the study, scope of the
study, as well as organazatuion of the study ,

1.1Back Ground of the Study

Banks are a financial institution that established for lending, borrowing, issuing,exchange and
taking deposit. Lending is the principal business activity for most comericial banks. The credit
portfolio is typically the largest asset and the predominate source of revenue. As such, it is one of
the greatest sources of risk to a bank’s safety and soundness. Lending repr.esents the heart of the
banking industry. Loans are the dominant asset in most depository institution’s portfolios and
represent 50 to 75 percent of the total amount at most banks, generate the largest share of
operating operating income and represent the banks greater risk exposure (Donald & Koch,
2006). Moreover, its contribution to the growth of any country is huge in that they are the main
intermediaries between depositors and those in need of fund forin their feasible projects
creditors) thereby ensure that the money available in economy is ( always put to good use. Credit
creation is the main income generating activity for the banks (Chinwe,2015).Therefore,managing
loan in a proper way not only has positive effect on the banks performance but also on the
borrower firms and a country as a whole. Failure tomanage loans, which make up the largest
share of banks assets, would likely lead to non-performing loans.
Banks have an intermediation role in one’s country that they collect money from those who have
others who need it for their investment. Availing credit excess and lend it to to borrowers is one
means by which banks contribute to the growth of economies. An efficient and well-functioning
financial sector is essential for the development of any economy, and the achievement of high
and sustainable growth. One of the indicators of financial sectors health is loan qualities. Most
unsound financial sectors show high level of NPLs within a country. A bank with high credit risk
has high bankruptcy risk that puts the depositors in jeopardy. Among the risk that face
banks,credit risk is one of great concern to most bank authorities and banking regulators. This is
because creditrisk is that risk that can easily and most likely prompts bank failure. Credit risk is
the king
of all risks. Many authors ranked the types of risk in terms of importance for the banks and
credit risk got the first rank (Atakelt & Veni, 2015’, Hussain & Al-Ajmi, 2012’, Alam
&Masukujjaman 2011). 2012’, Alam & Masukujjaman, 2011). Credit risk can be defined as
‘the potential that a contractual party will fail to meet its obligations in accordance with the agre
ed terms’. Credit risk is also referred to as default risk, performance risk or counterparty risk cre
dit risk is also referred to as default risk, performance risk or counterparty risk (Ken default
across different& Peter, 2014). Different countries and researchers find out different causes for
loan& Peter, 2014).

Different countries and researchers find out different causes for loan default across different
countries and have a multidimensional aspect both, in developing and developed nations.
Adequately managing credit risk in financial institutions (FIs) is critical for the survival and
growth of the FIs. In the case of banks, the issue of credit is of even of greater concern because
of the higher levels of perceived risks resulting from some of the characteristics of clients and
business conditions that they find themselves in.Management of credit risk is the process of
controlling the potential consequences of credit risk (Ken & Peter, 2014). Assessing the
determinants of credit risk is the cornerstone for the effectiveness of risk management
cornerstone for the effectiveness of risk management system and practice (Atakelt & Veni,
2015). reduce the bank profitability, affects the quality of its assets and increase loan losses
and non-performing loan which may eventually lead to financial distress (Chinwe, 2015).
Regarding factors leading tononperforming loans with particular reference to banking sectors
Bercoff, Julian,Giovanni & Franque (2002) identified the following: Depressed economic
conditions,high real interest rate, inflation, lenient terms of credit and credit orientation, high
credit growth and risk appetite, poor monitoring and follow up among others. Among the
financial distress that come from the significant amounts of non-performing loans emanating
from lack or poor credit risk management system could hinder development and expansion of the
Banks.

1.2. Statement of the problem

Banks established to provide financial intermediation services while at the same time endeavor
to maximize profit and shareholders' value. Credit creation is the main in income and constitutes
their major assets, it is risky area of the industry. That is also why credit risk management is one
of the most critical risk managementactivities carried out by firms in the financial services
industry. In fact, of all the risksbanks face, credit risk is considered as the most lethal as bad
debts would impair banksprofit. It has to be noted that credit risk arises from uncertainty in a
given counterparty’s ability to meet its obligations. Lending is very risky in that repayment of the
loans is not always guaranty and if this loan is not managed which lead to the largestshare of the
bank’s asset, would likely lead to high levels of non-performing loans. If the management delays
on collecting cash from debtor, it has serious financial problem since it increased bad debt and
affect customer relation with the bank. According to Hunt (1986) as citied by (Hagos, 2010)
default problem destroy lending capacity as the flow of repayment declines. Credit default may
also deny new applicant access to credits the bank cash flow management problem augment in
direct proportion to increase default problem.

As per NBE directives loans and advances are regularly reviewed and classified in a manner
consistent with regulatory standards. Loans and advances which are not performing in
accordance with contractual repayment terms are recognized and reported as past due in a
manner consistent with regulatory standards. Accrued but not uncollected interest on loans or
advances is accounted for in accordance with international accounting and regulatory standards.
Timely and adequate provisions are made to the provisions for loan losses account in order to
accurately reflect the risk inherent in lending activities and to ensure that disclosed capital and
earnings performance are accurately reflected. Directives of National Bank of Ethiopia
(2012)stated that non performing loan (NPL) is a loan that is not earning income or ful lpayment
of principal and interest is not longer anticipated i.e. principal or interest is 90days or more
delinquent. Dashen Bank annual activity report 2010-2016 and corporate budget proposal for the
year 2017/2018 indicates that NPL has a significant negative impact on the financial
performance of the bank. NPL rate varies ranges from 4.39% in 2010 to about 4.4% in2017
which is below minimum requirement 5% set by NBE, still there is considerableamount of loan
found under irregular loan repayment status but above the target rate of3% of the company. The
bank states in its credit procedure manual that maximum NPLposition allowed for the corporate
position of loans and advance is 3%; any measure ofcredit asset performance above this figure is
accounted as holding a deteriorated assetquality. Besides, as per the bank’s annual report, its
provision for doubtful loans andadvances for the last four years (2014 to 2017 G.C) is increased.
Different studies onissues of non-performing loan indicates that loan default disallow new
applicant’saccess to credit as the banks cash flow management problems increase in
directproportion to the increasing default problem. The goal of credit risk management is to
maximize a bank’s risk-adjusted rate of returnby maintaining credit risk exposure within
acceptable parameters. Banks need tomanage the credit risk inherent in the entire portfolio as
well as the risk in individual credits or transactions (Basel, 2000). Banks carry out credit risk
management as ameasure of administering its credit risk. This is done by having a well-
developed creditmechanism and procedure, that is to say, credit appraisal, training staff and
terms tooff set the possibility for loss and improve on financial performance (Grace, 2010).

Many researches were conducted in Ethiopia in the area. For instance, Girma (2011)conducted
on credit risk management and its impact on performance of Ethiopian Commercial Banks.
Similarly, Tibebu (2011) studied about credit risk management and profitability of Commercial
Banks in Ethiopia. Azeze (2014) is also studied an assessment of the impact of non-performing
loan on Dashen Bank profitability. Addis(2016) conducted the study on non-performing assets
and their impact on financial performance of Commercial Banks in Ethiopia and Kokeb (2015)
on assessment of the Dashen Bank’s credit administration, practice, problem, and prospects.
Furthermore, some researches such as G/Wahd (2016) and Solomon (2013) conducted on the
specific topic but were conducted in different banks other than Dashen Bank.

AccordingtoShimelesB.(2012during this study,to examine how to asses credit risk management

system in awash bank and alsotry to examine how the bank know borrower sand to estimate its
credit worthiness of the lende.The past researche ruses both primary and secondary source of
data but it collects the primary data through in terview and in addition to this the approach is
mixed.When those researchers collect the data thorough interview by using personal interview of
selected division head of the bank /management of the bank officer .And it takes descriptive data
analysis method is employed to assess the credit risk management system and it reaches at their
finding by using all above listed information.

According to Hilina .G.(2015)who study to examine how to assess credit risk management
system in nib international bank and alsotry toexamine how the bank know borrowers and
estimate its credit worthiness of the lender.It ssource of data ,approach and data analysis method
almost the same as Shimelis Bogale that study in awash bank

According to Birhanu G.(2017)during this study,try to examine credit risk management system
of dashen bank in Bahirdar to wnandits effective management of credit risk is critical component
of a comprehensive approach to risk management and essential to the long term success of
dashen bank.The researcher use primary source of data and collecte dthrough closed
questionnaires and unstructure dpersonal interview.And uses descriptive method of data analysis
to transform of raw data in to form and would made easy to understand to the reader and
enterprise.

According to Hunt (198 )ascitied by (Hagos,2010)default problem destroy lending capacity as

the flow of repayment declines.Credit default may alsodeny new applicant access to credit as the
bank cash flow management problem augment in direct proportion to increase default
problem.,Girma(2011)conducte done credit risk management and its impac to nperformance of
Ethiopian Commercial Banks.Similarly,Tibebu(2011)studied about credit risk management and
profitability of Commercial Banks in Ethiopia .Azeze(2014)is also studied an assessment of the
impact of non-performing loanon Dashen Bank profitability.Addis(2016)conducted the study on
non-performing assets and their impact on financial performance of Commercial Banks in
Ethiopia and Kokeb(2015)on assessment of the Dashen Bank’scredit
administration,practice,problem,and prospects.Furthe rmore,some researches such as
G/Wahd(2016) and Solomon( 2013)conducted on the specific topic but were conducted in
different banks other than Dashen Bank.

Hence, the problem stated above and most of the researches is focused on part of the credit risk
management and even some are focused in the specific topic but still no comprehensive work has
been carried out in Dashen Bank and these calls to a research to assess the credit risk managment
practice in DB, and to narrow the research gap by paying attention to the topic and seek answers
to the following basic questions

The reserchers will have interested to overcome some problems that hinder the assessment of
credit risk management system in dashen bank. The past researcher collects data through
personal interview of selected division of the bank. But this not preferable because personal
interview is not economical /expensive, and the interview is focus only selected division of the
bank, so this is not preferable b/c other employees are not participate in the interview as a result
this not fair in order to assess the credit risk. And the communication way is one to one and it is
difficult to ask each individual by oral and the respondents not answer the questions by their own
freedom. Generally by considering the above past researcher’s druses /gap and to fill up the
druses the researcher collect the data through questionnaires in order to limit the cost and to give
the chance not only selected division of the bank /management of the officer but also to
addressed the questionnaires to existing employees and in questionnaires the questions are no
pressure on the side of employee and the respondent is answer freely the question and
communication way is one to many and It is appropriate if the question is addressed in the form
of questionnaires rather than personal interview.

1.3. Research Question

The study will be expected to address the following research questions

• what are the Credit risk exposure of dashen bank

• How the bank does identify and evaluate it credit risk?
• What are the dashen banks preventive techniques and control procedures of credit risk
management?

1.4. Objective of the Study

This study had address two objectives general and specific objectives.

1.4.1. General objective

The General objective of the study will be to assess credit risk management system of dashen
bank in Logia branch.

1.4.2 Specific objective

The specific objective of the study will:-
• Identify credit risk exposure that face by dashen bank
• To evaluate the credit risk of dashen bank
• To examine the preventive technique for credit risk process used by dashen bank.

1.5 Significance of the Study

Banks need to predict scientifically the exact level of risk they are going to assume by entering
in to a contract in availing credit to the customer (paul, 1991:78)
The following are the significance of the study
• It would serves as a ground stone for the coming research who want to conduct further
research.
• Stake holders such as research, policy makers, professionals, and managers can use the
 research to guide future research, reappraise a rent banking industry practices, and
provided basic guide line for banks credit risk management.
• This study will attempt to find out problems that relate with credit risk management.
• To provided relevant recommendation and conclusion by assessing a theoretical and
description for better decision (method) for credit risk management practice in the
organization.

1.6 Scope of the Study

This study will entitle, Assessment of credit risk management system in case of Dashen Bank in
Logia branch.
• The study will be only delimited to the credit risk management aspect of Dashen
Bank in logia branch.

1.7. Organization of the Study

The research papers will be organized in to five chapters. The first chapter provided about
introduction part including bank ground of study, organization, statement of the problem,
objective of the study, limitation of the study and organization of the paper. The second chapter
focuses on literature review about credit risk management.Chapter three deals about
methodology of the study. The fourth chapter contains data analysis interpretation and chapter
five contains conclusion and recommendation.

CHAPTER TWO2. Review of Literature

2.1 Introductoin

this chapter relates to the existing literature that helps in the study of assessment of credit risk
management system and case of dashen bank. This chapter related to detiled study of assessment
of credit risk management system that exists in organization and in case of dashen bank in logia
branch.

2.2. Theoretical of Literature

Banks make money by providing services that their customer wants and by granting them credit.
There is some risk with these services and the most significance risk is credit risk.
Credit risk is the risk of loss due to the financial weakness of the bank’s customers. Generally
that the customers will not be able to provide fund, to settle its transaction usually due to
bankruptcy or some other anther liquidity crisis. In also defines credit risk by anther author as
follows. (Poul, 1990)
It is the risk that a borrower will be unable to meet its obligation. A bank reflects and aims to
profit from taking credit risk by change higher interest margins on loans to those customer that is
consider present a higher risk.

2.2 The Need of Credit Risk Ranagement

Bank oil the wheels of the economy, and they play a pivotal role in mobilizing saving. In doing
so, they face risk a rising from credit, traders rate, liquidity, exchange rate transaction,
compliance, strategic and reputation. Banks key challenge in managing risk in understanding the
interrelation of this risk factors they may be positively or negatively correlated. To be consistent
with the research them the focus there is on credit risk which is the risk repayment that is the
possibility that an obligor will fail to perform as agreed. Bank led to individual, corporals and
government who in turn contribute to growth, employment and better socio economic conditions.
(Boating,2009).
The goal of credit risk management is maximize a bank’s risk adjusted rate of return by
maintaining credit risk exposure within acceptable parameters. Bank need to manage the credit
risk inherent in the entire port folio as well as the risk individual credit or transaction. Bank
should also consider the relationship between credit risk and other risk the effective management
of credit risk is critical component of a comprehensive approach to risk managements and
essential to the long term success of any banking organization, for most banks. Loans are the
largest and most obvious source of credit risk. However, other sources of credit risk exist
throughout the activities of a bank including the trading book and both on and off the balance
sheet. Banks, are increasing facing credit risk (countered) party risk invar bus financial
instruments other than loans including acceptance, interbank transaction, trade financing foreign
exchange transaction, financial future, swaps, bands equities options and in the extension of
commitment and guarantees, and the settlement of transaction (Machiraju,2008).
The taking of credit risk is a principal function of banks. How a bank approaches credit risk
represents one of its important policies. The willingness of banks to take credit risk has provided
a major service to market economics throughout banking history. The help of banking business is
assessing credit risk not necessarily taking risk but assessing them. The help of banking business
is assessing credit risk not necessarily taking risk, but assessing them. The help of banking
business is assessing credit risk not necessarily taking risk, but assessing them. The destination is
important because the ability to assess is asking and whether the credit risk are taken or not taken
is a management decision.(Ajun, 2009).
Since exposure to credit risk continuous to be leading sources of problems in banks and their
supervisors should able to draw useful lessons from post experience. Banks should now have a
keen awareness of a need to identify measure, monitor and control credit risk as well as to
determine that the hold adequate capital against these risks and that they are adequately
compensated for risk incurred.(Richard.S, 2010)
A further particular insurance of credit risk relates to the process of setting financial transaction.
If one side of transaction is to settling but the other fails, a loss may be incurred that is equal to
the principle amount of the transaction. Even if one part simply that in setting the other party
may incurred relating to missed investment opportunities settlement risk (i.e., the risk that
completion of settlement of financial transaction will fail to take place as expected) thus includes
elements of liquidity, market, operational and reputation risk as well as credit risk. The level of
risk is determined by particular arrangement for settlement. Factors in such arrangement that
have a bearing on credit risk include. The timing of the exchange of value payment settlement
finality.(George.E.Radja,2011).

2.3 Principles of Credit Risk Management

The Basel committee is the primary global standard setter for the prudential regulation of banks
and provides a forum for cooperation on banking supervisory matters. The Basel committee was
established by the central bank governors of the group of ten countries at the end of 1974 and
established to enhance financial stability by improving the quality of banking supervision world
wide. BCBS (Basel Committee of Banking Supervision) has issued three accords named Basel 1,
Basel 2 and Basel 3 Of which, credit risk is considered in Basel 1- principles for the management
of credit risk which was publicized on 2000. According to Basel committee (September 2000),
credit risk ismost simply defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms. The goal of credit risk management is to
maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within
acceptable parameters. The effective management of credit risk in a critical component of a
comprehensive approach to risk management and essential to the long-term success of any
bankin g organization . Banks should be eager for awareness of the need to identify, measure,
monitor and control credit risk as well as to determine that they hold adequate capital against
these risks and that they are adequately compensated for risks incurred. 2.1.6.1. Principles for the
assessment of bank’s credit riskAccording to Basel committee (September 2000), the goal of
credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining credit
risk exposurewithin acceptable parameters. All members of the Basel Committee agree that the
principles set out in this paper should be used in evaluating a bank’s credit risk management
system. The Committee stipulates the following principles for banking supervisory authorities to
apply in assessing bank’s credit risk management systems.

2.3.1. Establishing an appropriate credit risk environment

Principle 1: The board of directors should have responsibility for approving andperiodically (at
least annually) reviewing the credit risk strategy and significant creditrisk policies of the bank.
The strategy should reflect the bank’s tolerance for risk and the level of profitability the bank
expects to achieve for incurring various credit risks .
Principle 2: Senior management should have responsibility for implementing the credit risk
strategy approved by the board of directors and for developing policies and procedures for
identifying, measuring, monitoring and controlling credit risk. Such policies and procedures
should address credit risk in all of the bank’s activities and at both the individual credit and
portfolio levels (Basel committee, September 2000).
Principle 3: Banks should identify and manage credit risk inherent in all products and activities.
Banks should ensure that the risks of products and activities new to them are subject to adequate
risk management procedures and controls before being introducedor undertaken, and approved in
advance by the board of directors or its appropriate committee.

2.3.2. Operating under a sound credit granting process

Principle 4: Banks must operate within sound, well-defined credit-granting criteria. These criteria
should include a clear indication of the bank’s target market and thorough understanding of the
borrower or counterparty, as well as the purpose and structure of the credit, and its source of
repayment.
Principle 5: Banks should establish overall credit limits at the level of individual borrowers and
counterparties, and groups of connected counterparties that aggregate in acomparable and
meaningful manner different types of exposures, both in the banking and trading book and on
and off the balance sheet
.Principle 6: Banks should have a clearly- established process in place for approving newcredits
as well as the amendment, renewal and re-financing of existing credits.
Principle 7: All extensions of credit must be made on an arm’s-length basis. In particular, credits
to related companies and individuals must be authorized on an exception basis, monitored with
particular care and other appropriate steps taken to applicant’saccess control or mitigate the risks
of non-arm’s length lending (Basel committee, September2000).

2.3.3 Maintaining an appropriate credit administration, measurement and

monitoring process
Principle 8: Banks should have in place a system for the ongoing administration of their various
credit risk-bearing portfolios.
Principle 9: Banks must have in place a system for monitoring the condition of individual credits,
including determining the adequacy of provisions and reserves.
Principle 10: Banks are encouraged to develop and utilize an internal risk rating system in
managing credit risk. The rating system should be consistent with the nature, size and complexity
of a bank’s activities.
Principle 11: Banks must have information systems and analytical techniques that enable
management to measure the credit risk inherent in all on- and off-balance sheet activities. The
management information system should provide adequate information on the composition of the
credit portfolio, including identification of any concentrations of risk.
Principle 12: Banks must have in place a system for monitoring the overall composition and
quality of the credit portfolio.
Principle 13: Banks should take into consideration potential future changes in economic
conditions when assessing individual credits and their credit portfolios, and shouldassess their
credit risk exposures under stressful conditions (Basel committee,September 2000).

2.3.4. Ensuring adequate controls over credit risk

Principle 14: Banks must establish a system of independent, ongoing assessment of the bank’s
credit risk management processes and the results of such reviews should be communicated
directly to the board of directors and senior management.
Principle 15: Banks must ensure that the credit-granting function is being properly managed and
that credit exposures are within levels consistent with prudential standards and internal limits.
Banks should establish and enforce internal controls and otherpractices to ensure that exceptions
to policies, procedures and limits are reported in atimely manner to the appropriate level of
management for action.
Principle 16: Banks must have a system in place for early remedial action on deteriorating
credits, managing problem credits and similar workout situations.

2.3.5. The role of supervisors

Principle 17: Supervisors should require that banks have an effective system in place to identify
measure, monitor and control credit risk as part of an overall approach to risk management.
Supervisors should conduct an independent evaluation of a bank’sstrategies, policies, procedures
and practices related to the granting of credit and the ongoing management of the portfolio.
Supervisors should consider setting prudentiallimits to restrict bank exposures to single
borrowers or groups of connected counterparties (Basel committee, September 2000).
2.4 .Credit Risk Ranagement Approach
Banks manage their credit risk based on three approaches. There are minimizing risk, price risk
and diversity of risk approach. All approach requires an ability to assess credit risks. The
difference between the three approaches is the way assessment of risk is used by the banks
(Herrick, 1990:135).

2.4.1 Minimal risk approach

The minimal risk approach to credit risk management attempts to separate loans, securities and
other assets in to two groups includes credit in which there is no reasonable doubt that the asset
will be redeemed at face value, or in the case of equity investment, no reasonable doubt that the
environment will provide a significant return over a pried of years. The other group include all
assessments of credit risk where it appears that a credit not provide a good return. Many young
banker of the time told themselves that they would do that whatever was needed to prevent the
experience from happening again. Done about past loan many of them were either on the
workout basis or on salvageable. But new loans and some renewed loan were the type of
business over which a banker had some One preventive measure was to look carefully at quality
the loan application. Little could be discretion. Banker did not feel confident about drawing fine
lines of various degree of risk and credit worthier loan which were not likely to be repaid beyond
reasonable doubt simple were not made.
The minimal risk approach relies on the classic three C’s of credit character, capital and capacity.
The risk approach to credit risk requires that bankers act as a helpful friend, a consultant and an
advisor who user firm persuasion when necessary. This informal relationship adds a subtle, but
strong, pressure to the management of any organization to keep it affairs in good shape.
Moreover, if a banker approach credit risk from the minimal risk from occurring. There is no
place in his thinking for lasses and he makes extra ordinary efforts to full this outlook .with this
credit risk approach and with dedication to his customers, there is often a feeling of person’s
failure if loss accurse. This psychological incentive to prevent losses provides an important part
of attitudes of bankers with a strategy that strives to minimize risk. The effect of the minimal risk
approach is that it tends to keep activities restricted to areas that are already well known to a
bank new areas of banking involve greater uncertainties then areas that are part of daily banking
activity. A step outside this circle of knowledge and friends reduces the value of years of banking
acquaintance in other established areas of business or government. Although the minimal risk
approach has important limitation built in to its philosophy, many banks have very successful for
many years following this policy of credit risk. (Herrick,1990:135).

2.4.2 Price for Risk Approach

Risks pricing recently has developed as an alternative approach to credit risk. The interest that
charged for a loan of greater risk. In recent years, this approach also has retired on the basic
method of credit analysis noted with the minimal risk approach but carries the conclusion much
further.
The risk pricing approach looks at all degrees of risk as a normal part of the banking business. In
effect, it views the assets of the bank loans, securities, and investment in various shades of white
and grey and accepts all of them as legitimate worthwhile assets. Assets of greater credit risk
involves greater risk of loss but these of greater credit risk involves greater risk of loss but these
assets are expected to be priced to earn enough more interest income to offset their credit risk, a
profit for the bank. Assets of little credit risk involve low risk of loss.
These assets are expected to earn lower interest rates and also earn profit for a bank. If risk
pricing is done properly, assets of all types of credit risk should show approximately the same
profit to a bank. The risk pricing approach reflects two trends in during the past decade.
First, has been a growing assurance among many banks that they possess the technical
capabilities of assessing risk to greater extent that did an earlier generation of bankers. New
techniques rave been applied to banking that did not exist a generation ago. Computers rave
enabled banks to handle much greater quantities of information operations research and system
research have opened new ways generation of analyzing information. Operations research and
system research have opened new ways generation of analyzing information.
A new generation of thinking has raised which believer that it can make more accurate
conclusion based on fractural experience that on the rule-of- thumb guides and the personal
judgment of credit officer’s loans officers and security trader.
Many banker have been emboldened developed their confidence developed their confidence
above “motivating” people. All of these approaches to knowledge rest on supreme confidences
that are highly refined ways of conducing operation that will bring superior results. The second
trend underlies the growth of risk pricing is the recent emphasis for the banks to show strong
earnings gains.
Risk pricing opens the door to major expansion is banking. Business a large proportion of a
business that world is turned dawn on the basis of the minimal risk approach choices bankable
business. To work successfully over a long period, the risk price, approach requires three
conditions. The first requirement is need for a larger number of assets in the bank asset portfolio.
The basis of risk pricing is that a banker does not know which loan security or investment will
require emergencies efforts reduced terms of fail, but he should have goad idea of likelihood that
these difficulties could occur in large part folio.
The second requirement is that the bank needs a staff will considerers analytical skills. The
process of assessing various degrees of risks is not a task that a one or two main credit
department can easily handle. The development or risk pricing format for a bank involves major
statistical operation. Moreover, the risk pricing format for one bank would not necessarily be
appropriate for another bank.
A risk pricing formal provides specific guidelines shown the way particular bank will price a
loan, security, or investment and reflects the franchise of a particular bank, its personnel and its
ongoing business relationship with customer.
The third requirement is that banks need to possess an out sanding forecasting capability. Risk
pricing is concerned about the future and must make much more complete and accurate
Assumptions concerning the future conditions of credit markets, business activities and attitude
of debtors.( Herrick,1990:135)

2.4.3 Diversity of Risk Approach

Credit risk management often diversifies a portfolio a loans, securities and investments at a
simple yet Effective way of keeping problems of credit risk under control. However, the
approach is sometimes mistakenly used to justify taking greeter individual credit risk or slimmer
risk price premium than otherwise would be justified, which is mistaken.
In fact, diversity can only partially control risk and it is not an approach to risk that can stand
independently of other approach. For example, if credit department of bank is covered by other
departments or is not well managed, and loan quality asset are acquired with not eliminate their
risk. It would mean that the bank would hold wide variety of low quality assets. Diversity
permits the more fundamental approaches to credit risk minimal and risk pricing to be fulfilled in
true colors. If reduces the likely hood that random or accidental occurrence will hove an
appreciable effect on one of these fundamental policies. A major practical problem in
diversifying credit risk is deterring what constitute diversity. There are literally thousands of
ways of classifying assets and a case could be made that many of the categories represent
diversity on logical ground. Yet to be effective, risk diversity requires relevant categories and the
determination of the relevant categories is not an easy matter. (Herrick, 1990:135)

2.5 Credit Risk Management Cost

According to Pony von vestal,2014 the starting point for efficient credit control is recognition of
the cast of credit and its potential affects profile and liquidity. Techniques for managing
operating credit risk build on the bard principles of risk management that are already deeply
ingrained in banking to consider. They are:-
• Exposure reduction: this exposure could be eliminated by requiring the customer to
provide collateral or guarantees. Bank, have their own specialist lenders and credit risk
assessors who have the skills and experience to assess risk reduction. Although exposure
reduction techniques are generally not expensive for banks to implement, they result in
higher customer cost.

• Risk control:- programs to control risk on the other hand can involves a change on
operations and are often expensive to implement. This is designed to monitor the actual
level of risk or it changes and to refer to transaction to the proper credit authority for
approval before the exposure is carted.

• Loss funding – provision must also be made for any losses that do occur: Although banks
ensure loans by deducting a provision from earnings to create are sere, must do or use
this mechanism to ensure against losses from operating services. Ideally, reserves should
be built and capital allocated to operating services in proportion the risk they incur.

The determine the level of credit risk to be funded, the following have to be considered: how
much risk remains after implementing exposure reduction and risk control procedures, the
operation dependability of the efforts and an analysis of the likelihood of loss from the remaining
exposure.( Pony von vestal,2014).
Prior to issuing a loan, a lender reducer credit risk through control that reduce the potential for
delinquency or loss commonly known as preventive steep before issuing a loan and to includes:
loan term, loan amount requesting the clients repayment capacity, legibility, criteria for a loan
request, repayment frequencies, collateral, ability and willingness of borrowers to ready a loan
and check credit history with suppliers and other credit organization.
Once the loan is issued a lenders risk management expands control that reduce actual losses,
commonly known or controls after extending loans. It includes the following factures
• Periodically analyzing the portfolio quality with intent to modify procedures and
polices before the loan quality deteriorates.

• Filed staff and clients must understand that late payments are not acceptable and
clients should be penalizing for the late.

• There should be effective follow up procedure

• The consequence of loans default must be successfully unappealing to clients

All credit departments should have credit management manual In order to standardize
procedures. The manual should be regularity up date to account for changes in procedure and
circumstances. The manual contains:- statements of credit policy, Methods of payment for
various of account, specimen of management information forms and report and the time table for
completion and procedures for account collection, credit sanction, legal action, disputed, bad
debts, credit limits etc.

2.6 Credit Risk Management Function

Credit risk managements is the core to achieve the desired objective credit risk management
contains three basic functions and these are: credit analysis and appraisal, credit monitoring and
review and work out procedure.(Basel commitie, 1999).

2.6.1. Credit analysis and appraisal

According to( Lapteva.M.N,2009) having compiled a basic file of information and investigated
revenues suggested by inconsistencies, derogatory comments, and favorable opinions, the
analysis assess the willingness and ability of the applicant to repay. Each of these describes an
area of the person or firm’s credit worthiness. In addition to the bank have traditionally focus on
the principle of five “C”s to estimate borrowers credit worthiness, these five “C”s are:
• Character: - The quality of desiring to repay debates when due is tanked above all other
considerations of course, honesty is a necessity, but character implies integrity and empathy
for the lender position as well. An established credit record (substantial) borrowing and
voluntary repayment) is one of the best evidences of business or individual willingness to
repay, Also character is implied by the applicants’ position of trust accepted and full filled in
 business and social organization follows that of top management, its facilities for keeping
records, the reutilization of office function and relation with employees.

• Capacity:- Capacity is the ability to repay debuts as schedules for households, the employees
of the working member provides most of the income which is spent for consumer expendable
and debt repayment consumer capacity is a reflection of safety margin between income and
committed out flows and the stability of each. The analysis must consider the effect of
unusual events of such as prolonged illness or un employment on the economic sales income
expenditure patterns, and debt commitments, However, the complexities of business
operation are substantially greater than that of household, requiring analysis highly trained in
corporate finance and knowledge about the accounting marketing and financial peculiarities
of the firm and its industry

• Capital:- This faces of the applicant refers to his or her finance strength, that is the ability to
raise funds from the liquidation of assets or other business, As last resort the borrower’s
capital may repay the debt, but such actions generally means the termination of the
borrower’s capital may repay the debt, but such actions generally means the termination of
the borrower’s business and, of course, the relationship with the leading institution.

• Conditions:- Borrowers may be subject to unfavorable economic conditions beyond their

control. Repayment depends not only up on character capacity and collateral. But those
factors over which the borrowers exercise little or no control. The long. Run and short run
business cycle affects nearly all persons and individuals, but certain industrials are especially
prone to oscillate between prospect and depression. Credit analysis monitor industrial
externs, looking for early signs of weariness which load to unemployment, say declines and
operating losses. Income, even strong, honest character may subvert the loan relationship in
order to pressure their economic position one factor for banking crises.

Would over, credit risk has proved to be the most critical of all risk, faced by a banking
institution. A study of bank failure in new emplaned found that of the 62 bank in existence before
1984, which failed from 1989 to 1992 in 58 cases it was observed that loans and advance were
not being record in time. The effect of poor risk management can clearly be seen in the problems
that have arises from the un regulated sub-prime mortgage lending market in the USA were the
loans had been securitized in to ever more complex securities. Which was the housing price
stabilized and stopped increasing led to a huge increasing in defaults of the underlying sub-prime
mortgage. This, in turn lead to massive losses in the sacristies, which had been sold. The reason
mentored above indicated an increased need to manage risk and in particular credit risk and
default predication.
Generally banks face credit, market, liquidity, operational compliance (legal) regulatory and
reputational risk, across county experience evident that credit activates are the main determine
factors for the well being of the financial sectors especially in inter mediation activities such as
banking service.
• Collateral:- is an asset normally moveable property pleaded against the performance of an
obligation. Bank can sell the collateral if the borrower defaults, while collators reduce banks
risk it enhances the cost in terms of documentation and monitoring the collateral. The factor
determines suitability of the collateral is standardization, durability, identification,
marketability and stability of value, standardization helps in identifying the nature of asset
that is being used as collateral. Durable asset make better collateral. Identification is possible
if the collateral has defined characteristics like a building or serial number (motor vehicle)
marketable collateral alone is of value to the bank if it has to sell it. Marketability sale with
little or no loss from current of loan

2.6.2 Work out procedure

Work out procedure is important aspect of credit risk management. If timely action is not taken
to address the problem loans, opportunities to collect poor quality asset will soon vanish, work
out procedure involves loan following process. Identification of the problems loans, reviewing
loan history and documentation and meet the customer and openly discuss the problem.
The first element of workout procedures is to ensure collection. In the absence of ensuring
collecting with in short period of time, arranging new a agreements for the borrower if it helps to
get out of problem is another alternative. The arrangement may be in terms of extending the loan
period for injecting additional capital if the problem is working capital shortage. The last step In
work out procedure is to collect the loan through litigation if possible.(Basel commitiee,1999).

2.6.3 Loan monitoring and review

Proper credit risk management involves due credit analysis, having proposition approved, can
disbursed and ultimately follow up the loan in order to have the extended credit rapid back good
credit could become problem loans unless continua’s follow up is made which enables to detect
signs that reveal difficulties. The objective of credit monitoring and review among other included
ensuring the loan are directed to the intended purpose, ensuring the loan convenient are compiled
with following loan and identifying emerging problem.
Attention should be given to the following while conducting monitoring and review of credit.
Check an early working signal: check the end use of the loan fund, assess all conditions of the
borrowers, assess financial need of the borrower and state finding and interpret them
improvements, deterioration and changes. (Basel committee, 1999).

2.7 Empirical Studies

The assessment of credit risk management system is defined by different researchers in different
place and time and those try to assess the credit risk management system by their own effort.
From those researchers some are:-
Accordingto Shimeles B. (2012) during this study, to examine how to asses credit risk
management system in awash bank and also try to examine how the bank know borrowers and to
estimate its credit worthiness of the lender. The past researcher uses both primary and secondary
source of data but it collects the primary data through interview and in addition to this the
approach is mixed. When those researchers collect the data thorough interview by using personal
interview of selected division head of the bank/management of the bank officer. And it takes
descriptive data analysis method is employed to assess the credit risk management system and it
reaches at their finding by using all above listed information.
According Hilina G. (2015) who study to examine how to assess credit risk management system
in nib international bank and also try to examine how the bank know borrowers and estimate its
credit worthiness of the lender. Its source of data, approach and data analysis method almost the
same as Shimelis Bogale that study in Hawassa university.
According to Birhanu G. (2017) during this study, try to examine credit risk management system
of dashen bank in Bahir dar town and its effective management of credit risk is critical
component of a comprehensive approach to risk management and essential to the long term
success of dashen bank. The researcher use primary source of data and collected through closed
questionnaires and unstructured personal interview. And uses descriptive method of data analysis
to transform of raw data in to form and would made easy to understand to the reader and
enterprise.
According to Hunt (1986) as citied by (Hagos, 2010) default problem destroy lending capacity
as the flow of repayment declines. Credit default may also deny new applicant access to credit
as the bank cash flow management problem augment in direct proportion to increase default
problem. , Girma (2011) conducted on credit risk management and its impact on performance of
Ethiopian Commercial Banks. Similarly, Tibebu (2011) studied about credit risk management
and profitability of Commercial Banks in Ethiopia. Azeze (2014) is also studied an assessment of
the impact of non-performing loan on Dashen Bank profitability. Addis(2016) conducted
the study on non-performing assets and their impact on financial performance of Commercial
Banks in Ethiopia and Kokeb (2015) on assessment of the Dashen Bank’s credit administration,
practice, problem, and prospects. Furth ermore,some researches such as G/Wahd (2016) and
Solomon (2013) conducted on the specific topic but were conducted in different banks other
than Dashen Bank.
Knowledge Gap and Conclusion
Our study will have interested to overcome some problems that hinder the assessment of credit
risk management system in dashen bank. The past researcher collects data through personal
interview of selected division of the bank. But this not preferable because personal interview is
not economical /expensive, and the interview is focus only selected division of the bank, so this
is not preferable b/c other employees are not participate in the interview as a result this not fair
in order to assess the credit risk. And the communication way is one to one and it is difficult to
ask each individual by oral and the respondents not answer the questions by their own freedom.
Generally by considering the above past researcher’s druses /gap and to fill up the druses the
researcher collect the data through questionnaires in order to limit the cost and to give the chance
not only selected division of the bank /management of the officer but also to addressed the
questionnaires to existing employees and in questionnaires the questions are no pressure on the
side of employee and the respondent is answer freely the question and communication way is
one to many and It is appropriate if the question is addressed in the form of questionnaires rather
than personal interview.

CHAPTER THREEE 3. RESEARCH METHDOLOGY

3.1 INTRODUCTION

This chapter contains the important part of how to conduct this research .those includes 3.
Research methodology . 3.1 introducton 3.2 descripition of the study area 3.3 research design
3.4 research approach 3.4 source of data and methods of data collection 3.5.1 source of data
3.5.2 methods of data collection 3.6 sample and sampling techniques 3.6.1 target population of
the study 3.6.2 sampling techniques’ 3.7 data analysis and presentations are included

3.1. Descriptions of the Study Area

Logia are one of the second capital city of in the Afar Region of Ethiopia. The administrative

center of logia is samara.It is located North East Ethiopia .It is located at distance of 5 km from

Samara and 591 km from Addis Ababa. It has 130,000 populations.land is a contentious resource

in the pastoral area in afar regions. Traditional pastoralism is both a mode of production and a

cultural way of life . specially pastoral land in logia has been traditionally administered by the

local communities themselves. The major economy of afar region is pastoralism.(www… goggle

map)

3.2. Research Design

The study was focused on the Assessment of credit risk management system in case of dashen

bank in logia branch. Hence in order to do this research, the researchers was used the most

appropriate design to study, which is descriptive method. Because descriptive method largely

describe or justify the information that express the raw data and convert in to form that obtain

from respondents and describe this raw data using tabulation, charts, and percentage in

communicable and understandable way for the reader.

3.3 Research Approach

The student researcher used mixed research approach(both qualitative and quantitative methods)
because such an approach helps to minimize limitations of applying any of a single approach and
allows to gain a fuller understanding of the research problem and/or to clarify a given research
result as well as creates a synergistic effect. Furthermore, it is a good strategy using mixed
method that helps to achieve a balance since divergent views and limitations are heard among
each methods (Teddlie &Tashakkori, 2003).
3.4 Source of Data and Method of Data Collection

3.4.1. Source of Data

In The study will be collect the primary data will collected through questionnaires and The
secondary data will be collected from manual report, Internet and publication also used as back
up means of collecting secondary information.

3.4.2 Method of data collection

.in the study used to attain the objective of the study Questionnaires with standard set of
questions addressed to managers of the bank and employees. The questionnaires include both
open ended and close ended questions.

3.5. Sample and Sampling Techniques

3.5.1 Target population of the study

According to dashen bank in logia branch on December 2019 there are 8 employees , out of this
two employees work in internal credit risk management system , five employees work in the
bank.and one employees work in bank manager ( , logia dashen bank employees)

3.5.2 Sampling techniques

The sample will be selected by using non probability sampling specifically, Judgmental sampling
technique. There are four reasons for selecting judgmental sampling methods. The first reason is
the researcher needs to deal only the target group who are expertise or judgment on the study and
the type of sampling has its own advantage. Secondly Judgmental sampling is use under the non
probability sampling to collect data from the employee of the bank in line of the research
question. The third one is the rationale behind employing this judgmental sample type is to
identified the employee that have been specialized knowledge of credit risk management system
and to share their understandings about the study.And the last reason is the researcher believed
that employees are representative of interest are appropriate.
So the above four elements are the major reasons for researchers selecting judgmental sampling
techniques than other sampling techniques.
.3.6. Data Analysis and Presentation
The relevant information that was collected from primary and secondary source of data was
depend on descriptive analyses. The reason for researchers use descriptive analyses used to
transformation of raw data in to a form and it was easy for the reader to understand.
Descriptive analyses was largely described or justified the information that expressed the raw
data that obtain from respondents and describe this raw data using tabulation, charts, and
percentage in communicable and understandable way for the reader .

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND

INTERPRETATION.

4.1. Respondents profile analysis and presentation

This part of the analysis is just to provide an insight to readers about all respondents.
16 questionnaires were distributed to respondents all questionaries are returned.

Part 1 personal information

Sex Frequency Percent(100%)

Male 12 75

Female 4 25

Total 16 100

Table 4.1.Frequency distribution of respondents by sex

Source; Data obtained from questionnaire
As shown from the above table-4.1: 75% are in the range of the sex is male, 25% are in the
range of the sex is female.
 Age Frequency Percent (%)

21-25 6 37.5

26-30 7 43.75

Above 30 3 18.75

total 16 100

. Table 4.2: frequency distribution of respondents by age

Source; Data obtained from questionnaire
As shown from the above table 4.2 37.5% are in the range of the age between 21-25, 43.75% are
in the range of the age between 26-30 the remaining 18.75% are above 30. .

Level 0f education Frequency Percent (%)

Diploma 1 6.25
Degree 10 62.5
Master and above 5 31.25
Total 16 100
Table 4.3: frequency distribution of respondents by level of education
Source; Data obtained from questionnaire
Regarding the respondent educational qualification as indicated on the above table-4.3: (6.25%)
of the respondents is diploma, (62.5%) of the respondents is bachelor degree holder and the rest
(31.25%) of respondents are master degree and above holders. From this it is possible to support
that the composition of the respondents include well qualified to explain about the subject matter
of the study.
Part 2 related question
Working position of frequency Percent (%)
respondets
Manager 1 6.25
Maker and checker 1 6.25
Branch manager 1 6.25

Auditor 3 18.75
Customer service agent 2 12.5
Accountant 8 50
Total 16 100
Table 4.4: frequency distribution of respondent by working position
Source: Data obtained from questionnaire
As presented on the above table-4.4 6.25%of them is manager, 6.25% is maker and checker,
6.25% is branch manager, 18.75 is auditor, 50% of them is accountant, and the remaining 12.5%
are customer service agent.
The credit facility for personal loan, agricultural loan, transport loan, domestic teach and service,
construction working capital fund, business loan.(source; data obtained from questionaries’).

The agricultural loan contains the highest level of credit risk in dashen bank samara logia
branch as replied by respondents.

Dose the bank collect enough frequency Percent (%)

information about creditor
before providing the loan
Yes 14 87.5
No 2 12.5
Sometimes - -
Total 16 100
Table 4.5: frequency distribution of respondents by
Source; data obtained from questionarie
As presented in the above table 4.5: 87.5% of the respondents the bank collect enough
information about creditor before providing loan, 12.5% of the respondents are not collected
enough information and the researcher can concluded the bank good performance for provide
loan.
What factor do you consider frequency Percent(%)
in selecting credit applicant
Profitability of the business 3 18.75
Strength of collateral 8 50
Liquidity ratio 4 25
Some other factor 1 6.25
total 16 100
Table 4.6: frequency distribution of respondent
Source; data obtained from questionnaire
As presented in the above table 4:6 % 18.75% of the respondent select in creditor profitability of
the business, 50% of the respondents creditor select in strengthen of collateral, 25% of the
respondents creditor select in liquidity ratio, then the remaining 6.25% of the respondents are
creditor select in some other factor.

Is there any method to idntify frequency Percent(%)

credit risk
yes - -
no 16 100
sometimes - -
total 16 100
Table 4.7: frequency distribution of respondents by
Source; data obtained from questionarie
As presented in the above table 4.7: (100%) all of respondents the bank is not any method to
identify credit risk. The researcher concluded the bank are weak position to identify credit risk
.
What doas the measurments of frequency Percent(%)
the bank use for customer to
give them credit
collateral 6 37.5
condition 4 25
character 2 12.5
capacity 3 18.75
capital 1 6.25
All 5c - -
total 16 100
Table 4.8: Level of credit risk on loan category by Source:
Source:data obtained from questionnaire
As presented in the above table 4.8: 37.5% of the respondents use the bank are collateral, 25% of
the respondents the bank use conditional, 12.5% of the respondents the bank use character,
18.75% of the respondents the bank use capacity, 6.25% of the respondents the bank use capital.
The researcher concluded the bank all of 5c components and highly used in collateral.
What are the risks that faced frequence Percent%
 by dashen bank
Financial risk 8 50
Business risk 2 12.5
liqudity 2 12.5
Credit risk 4 25
If others please specify -
total 16 100
Table 4.9: Level of credit risk on loan category by economic sector
Source: data obtained from questionnaire
As presented the above table 4.9: 50% of the respondents are the bank faced in financial risk,
12.5% of the respondents are the bank faced in business risk, 12.5% of the respondents are the
bank faced liquidity risk, 25% of the respondents are the bank faced credit risk. The researcher
concluded financial risk is highly risk and business risk and liquidity risk are lowest risk in
Dashen bank samara logia branch.
Do you think that the bank frequence Precent%
use any protective
mechanism before occurance
of credit risk
Yes 16 100
No - -
Sometimes - -
total 16 100
Table 4.10: frequency distribution of respondents by controlling procedures
Source: data obtained from questionnaire
As presented in the above table 4.10; all i.e. (100%) of the respondents said that the bank used
different procedures after credit is provided to customers and researchers concluded that the bank
is in good position to manage credit risk after credit is provided

The bank used the following procedures to reduce credit risk after the credit is provided to
customers, thoroughly a new customers credit record, build the customer relationship, make the
credit term clear, use credit insurance, Strengthen internal control system, develop adequate and
reliable policy and procedures, create staff awareness culture, develop skill or capacity of
employees, segregation of duty and responsibility, etc. (source; data obtained fromquestionnaire)

Do you think majority of frequence Percent(%)

 costumer repay thire debt on
time
yes 12 75
No 4 25
Sometimes - -
total 16 100
Table- 4.11 frequency distribution of respondent by
Source; Data obtained from questionnaire
As shown on table 4.11. 75%, of the respondents the customer repay debit on time, 25% of the
respondents the customer not repay debit on time. The researcher concluded the bank have a
good position to collect the credit.
The reason for late payment in the bank is bankruptcy, unwillingness, lack of knowledge, use for
other objective. (source; data obtained from questionarie).
Do you think that dashen bank frequency Percent(%)
properly handle credit risk
Yes - -
No 16 100
total 16 100
Table 4.12; frequency distribution respondents by
Source; data obtained from questionnaires
At the above table 4.12 100% of the respondents are the bank does not have properly handle
credit risk. The researcher concluded the bank are very weak position in properly handle credit
risk.

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION

ANDRECOMMENDIATION

5.1 Summary of findings

The commercial bank of Ethiopia in Bahir Dar branch bank use different criteria’s to providing
credit to its customers among those some of them are as follows: use collateral, see loan amount
reflecting customer capacity i.e. establish credit limit, make the credit term clear, etc.The bank
used the following procedures to reduce credit risk after the credit is provided to customers,
thoroughly a new customers credit record, make the credit term clear, use credit insurance,
Strengthen internal control system, develop adequate and reliable policy and procedures, develop
skill or capacity of employees, segregation of duty and responsibility are the major findings of
credit risk management procedures of the bank.

The bank has advisory service and the bank is strengthened in managing credit risk.The
management of the bank does not create awareness about credit risk management to all
respondents of the bank.The bank use collateral for all types of the loan and the bank use a good
procedure to reduce credit risk and it shows the bank is strengthened in credit risk management.
The bank also used good procedures to reduce its credit risk and it shows the bank is strong in
managing credit risk because lending for perfectly negatively correlated assets makes the bank
effective in collecting the loan it provides to customers. Management of bank does not create
awareness about credit risk for all employees from this show that the management of the bank is
poor or weak in creating awareness about credit risk for its employees these are the major
findings on major strengths and weakness credit risk management procedures of the bank.

Cost of information technology, difficulty in quantifying risk, Lack of knowledge, difficult to

understand the policy and procedure lack of employee’s motivation to implement, and lack of
training within the organization about credit risk management have high effect on managing
credit risk from the highest to the lowest respectively.Government policies, infrastructural
facility, background of society, global economic crisis, and level of economy have both negative
and positive effect on managing credit risk according to the respondents.Background of the
society and global economic crisis are no effect on the credit risk management practice of
Commercial bank of Ethiopia in Bahir Dar branch these are the major findings on the internal
and external challenges of the bank.

• Conclusions
The commercial bank of Ethiopia Bahir Dar branch used both preventive procedures and
controlling procedures to reduce the credit risk in the bank. Credit limit, collateral are the major
preventive procedures of the bank where as thoroughly a new customers credit record is the
controlling procedure of the bank.

Commercial bank of Ethiopia Bahir Dar bank has both strong and weak sides. The strong sides
are assessing the borrowers past financial history and credit worthiness. Details analysis of past
financial history of the borrowers and forecasting of the future prospective development will
enable the bank to identify the capacity of the borrowers and to process loans in the safest
condition this is of the bank’s strong points. The other strong point of the bank is introduction of
the wide area network (WAN) which makes the bank to have efficient communication system
with its branches easily and all current information will reach to the management of time, so that
timely decision will be made without savior damage or loss, and its weakness is it does not creat
awareness for all employees.

The commercial bank of Ethiopia, Bahir Dar branch was challenged by different internal and
external factors from these factors Absence of standard, which creates lack of confidence to the
staffs. Poor credit assessment in determining the viability of a business due to lack of
information and this forced the bank to follow collateral based lending process are the internal
factors whereas, presence of unfavorable economic development like drought, effect of the world
economy. Absence of record keeping, which creates difficulties in preparing true financial
statements and disclosing actual performance of the business are the external factors.

5.2. Recommendation

Based on the finding researchers give the following recommendation to commercial bank of
Ethiopia,Bahir Dar branch.

The bank should continue to diversify its lending activities and should allocate more funds to the
productive sectors of the economy.In order to minimize the risk exposure to the bank, Bahir Dar
branch should give general awareness for the respondents about significance of risk control
procedures and preventive techniques.The bank should ensure that credit officers perform
periodic follow ups on borrowers to ensure that loans are used for the intended purpose.The
Bank should implement effective credit risk evaluation system by designing cost effective and
efficient techniques in order to minimize risk of management cost and increase the overall return
of the Bank.The protection against risk of lending should have to consist maintaining high credit
standards, appropriate diversification and intimate knowledge of borrower’s affairs.

The bank should continue byprovide adequate advisory services to the customers before the
loans are provided and after the loans for the allocation and uses of loans in order to minimize
the nonperforming loans of the bank and the customers default in the due date.Bank’s collateral
system should strength in order to reduce credit risk.The management of the bank should create
awareness for all employees of the bank.

The bank is expected to file the gap by overcoming the challenges in order to insure effective
implementation of the policy at all level credit department of the bank by taking remedial action
in order to improve the gap of employees.The bank should invest more in its; people, technology
and system so as to register better performance in credit risk management.. The researcher also
recommended that the bank gives special considerations of loans to agricultural sectors to reduce
the nonperforming loans, and the bank should continue to diversify its lending activities and
should allocate more funds to the productive sectors of the economy.

References
Aveny B. Robert, Brevoort P. Kenneth & Canner B. Glenn (2009) Credit scoring and its
Effect on the Availability and Affordability of Credit. Journal of Consumer affairs.
Basel (1999), September, (2000 )“Principles for the management of credit risk”,
Consultative paper issued by the Basel Committee on Banking Supervision, Basel.
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 Appendix

Bahir Dar University

College of Business and Economics
Department of Accounting and Finance
Questionnaire

These questionnaires are prepared by third year Accounting and Finance students to prepare
research paper for the purpose of acquiring B.A degree in accounting and finance. Dear
respondents the objective this questionnaire is to collect information about credit risk
management practice in commercial bank of Ethiopia in Bahirdar main branch. Your
answer will be kept confidential and you are kindly requested to fill all questions
properly. Please mark your answer (x or).
Part I. Personal qualification /Respondent profiles
1. Age: 20-30 31-35 36-40 above 40
2. Educational status of employees
Certificate Diploma Degree Others __________
3. Year of service
1-5 year 6-10 year 10 and above
4. Current position: manager credit manager teller other
5. Year of service in current position 1-5 year 6-10 year 10 and above
Part II: Questions related with major credit risk procedures of the bank
You can choose more than one choice in multiple choice questions
• Are there any criteria’s the bank takes to provide credit to clients?
Yes No
• If your answer in number 1 is yes what are the criteria’s the bank use?
------------------------------------------------------------------------------------------------------------
-
• For what kind of sector (s) the bank provide loan?
• Agricultural loan B. manufacture loan C. building and construction loan D. import and
export loan E. others
• Rank the following economic sectors based on the credit risk faced?
N o r i s k Low risk H i g h r i s k Very high risk
Agricultural loan
Manufacturing loan
Import and export loan
Domestic trade and service
loan
 Building and construction
loan

• Does the bank have controlling procedures after the credit is provided to clients?
Yes No
• If your answer in questions 5 is yes what are the controlling procedures the bank
use…………………………………………………………………………………………
……………………………………………………………………………
• Rank the importance of the following tools of credit risk management practice in your
organization?

Most importan Less Not

important t important important
C h a r a c t e
r
C a p a c i t
y
C a p i t a
l
C o l l a t e r a
l
C o n d i t i o
n

Part iii:questions related to major strengths and weaknesses of credit risk

management procedures of the bank
• . Does the bank provide any advisory service to its loan customer?
Yes No

• Does the management of the bank create awareness about credit risk exposure for
employees?
Yes No
• Does the bank make a loan in portfolios diversification?
Yes no
• What types of procedures are used in the bank to motivate borrowers return the credit in
the due date?

Part Four: questions related to major internal and external challenges in managing
credit risk
• Rank the following internal factors in terms of their effect on credit risk management
policy within the bank?

N o e ff e c t Low High Very high

effect effect effect
 Cost of information technology.
L a c k o f k n o w l e d g e .
Lack of training within the organization about credit
risk management
Lack of employee’s motivation to implement .
Difficult to understand the policy and procedure.
Difficulty in quantifying risk

• Rank the effect of the following external factor on the credit risk management practice of
the bank?

Adverse Positive No effect Both positive and

effect effect negative effect
Government policy
Infrastructure facility
Background of the society
Level of Economy
Global economic crisi s

• What are the challenges in the bank while implementing the credit risk management
procedures?
…………………………………………………………………………………………………
…………………………………………………………………………………