ADDIS ABABA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICES

DEPARTMENT OF ACCOUNTING AND FINANCE
ASSESSMENT OF CREDIT RISK MANAGEMENT
SYSTEMS AND PRACTICES OF ETHIOPIAN
COMMERCIAL BANKS. (CASE OF SOME PRIVATE
BANKS
BY
Utban Ashab
ID No UGR/6006/12
A Thesis Submitted to the Department of Accounting and
Finance in Partial Fulfillment of the Requirement for Degree of
Bachelor in Accounting and Finance.
February 2023
Addis Ababa Ethiopia

DECLARATION
I, Utban Ashab hereby declare that the project work entitled “Assessment of Credit Risk
Management systems and Practices- case of selected private banks.
In Addis Ababa Submitted by me for the award of degree Bachelor of Accounting and Finance.
Place: Addis Ababa Signature ______________________
Date: February 2023 Name: Utban Ashab
The these is prepared by Utban Ashab entitled “Assessment of Credit Risk Management Systems and
Practices in Private Commercial Banks of Ethiopia: The Case of Selected Private Banks” has been
submitted for examination with my approval as an Advisor.
Takele Fufa (PH.D)__________________ __________________ ____________
Advisor Name Signature Date

Acknowledgment
First of all, I owe my deepest gratitude to the Almighty God for giving me the path, power, wisdom and
determination to finish this task successfully. I am also deeply appreciative of the guidance and support
of my advisor Dr Takele Fufa throughout this project.
I am especially grateful for the generous advice of my advisor throughout the thesis process.
I owe my parents immense thanks for their unconditional support and tireless efforts during my thesis
work and entire program.
I want to express my sincerest gratitude to all of the respondents who kindly filled out the
questionnaire, without whom this project would not have been possible.
Finally, I would like to acknowledge the many people who provided encouragement and support on my
journey, even though I may not have mentioned their names directly. Without them, achieving this
dream would not have been possible.

Table of Contents
ACKNOWLEDGMENT------------------------------------------------
CHAPTER I
INTRODUCTION
1.1 Background of the Study
1.2 Background of the Banking Industry in Ethiopia
1.3 Statement of the Problem
1.4 Research Questions
1.5 Objectives of the Study
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitations of the Study
1.9 Organization of the Study
 CHAPTER II
Theoretical Review
Definitions and Concepts of Credit Risk Management
Credit Risk Management Process
Empirical Review
Conceptual Framework

CHAPTER III
METHODOLOGY OF THE STUDY
Research Design
Population Size and Sampling Techniques
Sample Size
Data Collection Instruments
Variables and Method of Data Analysis
Reliability Measure

List of tables

No No Description Page
page
Table Gender of respondents

Table Age of the respondents

Table
Marital status of respondents
Table
Educational levels of the respondent
Table
Survey result on BOD & Senior management oversight
Table
Survey result of Sound Credit granting process

Survey result of Credit administration, measurement and monitoring

 Table system

Table survey result on adequate control over credit risk

Table
Respondent's answers on credit risk management practice
Table
Statistical result summary on Model Fitting Information
Table Statistical result summary on Goodness-of-Fit

Table
Statistical result summary on R-Square
Table
survey result summary on all questions
Table
Statistical result summary on mean rank of Banks
Table Statistical result summary on parameter

Figure 1: Model of Credit risk management practice

Abstract
The primary aim of this research was to investigate the credit risk management systems and practices of
private commercial banks in Ethiopia between 2013 and 2018. From 18 private commercial banks, four
were chosen based on two criteria: that they were operational during the study period, and that they
were included in the top 15 banks according to their size. The selected banks were Berhan International
Bank S.C, Bunna International Bank S.C, Debub Global Bank S.C and Enat Bank S.C. . In this study, given
the large number of branches nationwide it could potentially be difficult to manage the research within
the available timeframe and resources. As such, purposive sampling was used in order to select
participants. The primary data for the study was collected using questionnaires distributed to Bank
Managers and Senior Officers involved in loan processing. The data was then analyzed by using SPSS
software version 21 and descriptive statistics. . The findings of this study will provide pertinent
information which can be used to suggest ways in which to improve the current credit risk management
climate in Ethiopian private commercial banks. Issues such as the need for more effective management
information systems, communication and reporting of risk data, as well as reviewing and quantifying
credit risk both at an individual and portfolio level, will require careful consideration. In light of these
findings, this research also provides recommendations for areas of further investigation

Keywords: Commercial banks, Credit risk, Managers, Credit risk Management, Assessing
 CHAPTER I
INTRODUCTION
Background of The study
Credit risk is an important component of financial systems and the banking sector in particular. There is
a need for well-established credit risk management frameworks in order to ensure the safety and
soundness of financial institutions, particularly in developing countries like Ethiopia. This paper will
investigate the current credit risk management practices in Ethiopian private commercial banks by
conducting purposive sampling of bank managers and senior officers. Primary data will be collected from
these participants through questionnaires and analyzed with descriptive statistics and SPSS software
version 21. The results from this study will be used to provide recommendations to improve the current
risk management environment in Ethiopia, as well as useful directions for future research initiatives

It is essential for banks to have a sound and comprehensive credit risk management system in order to
ensure the stability of the financial system. Ethiopian banks, especially private commercial banks, need
to enhance their credit risk management framework in light of the changing environment. New
technologies, competition, regulations and liberalization have resulted in an increase in the number and
type of risks faced by financial institutions. As banking services become more accessible, it is important
for banks to be able to effectively manage the risks they face. This research aims to examine the current
credit risk management practices in Ethiopian private commercial banks with the help of a purposive
sample of Bank Managers and Senior Officers. The results of this study will be used to provide
recommendations to improve the existing risk management frameworks and also to guide future
research initiatives

Credit risk management is a critical component of the banking industry, and is of utmost importance in
developing countries like Ethiopia. Before 2010, there was inadequate attention given to the
development of modern risk management systems that comply with changing environment and global
financial standards. The Risk Management Guidelines published in that year paved the way for the
continued development of credit risk management practices. Banks must have a sound and effective risk
management system, as their funds are highly leveraged and at risk of public losses.
Practicing effective credit risk management is key to protecting consumers, investors and the banking
industry from financial losses and instability.
It can also help improve efficiency through enhancing competitive advantage, mobilizing and deploying
funds, an d optimizing risk-return trade-offs.

According to Poudel (2012), inadequate risk management leads to the accumulation of non-performing
loans, where generated profits are not only eroded through loan provisions, but also the soundness,
safety and stability of the bank is affected. However, effective credit risk management can improve
credit performance by establishing an appropriate credit risk setting, maintaining acceptable credit
limits, and having a careful credit granting process with appropriate monitoring and control of the credit
risk. Thus, it is important to examine the level of credit risk management systems and practices of
Ethiopian commercial banks in order to develop policy measures to mitigate adverse consequences
generated from the credit function
The aim of this research is to explore the level of credit risk management system and practices among
Ethiopian commercial banks, assess the perception and awareness of risk management personnel, and
determine the types of risks and methods of risk identification through a descriptive survey research
approach.

Background of the Banking Industry in Ethiopia

As a result of the agreement reached between Emperor Mimilik II and Mr. Ma Gillivray, representative
of the British owned National Bank of Egypt; modern banking in Ethiopia began in 1905 with the Bank of
Abyssinia, a private company controlled by the Bank of Egypt In 1931. It was liquidated and replaced by
the Bank of Ethiopia which was the bank of issue until the Italian invasion of 1936. During the Italian
occupation, Bank of Italy banknotes formed the legal tender. Under the subsequent British occupation,
Ethiopia was briefly a part of the East Africa Currency Board. In 1943; the State Bank of Ethiopia was
established, with two and practices 3 departments performing the separate functions of an issuing bank
and a commercial bank. In 1963, these functions were formally separated and the National Bank of
Ethiopia (the central and issuing bank) and the Commercial Bank of Ethiopia were formed. In the period
to 1974, several other financial institutions emerged including the state owned: The Agricultural and
Industrial Development Bank (established largely to finance state owned enterprises); The Savings and
Mortgage Corporation of Ethiopia; The Imperial Savings and Home Ownership Public Association (which
provided savings and loan services)

Major private commercial institutions, many of which were foreign owned, included the Addis Ababa
Bank, the Banco di Napoli, the Banco di Roma. However, the banking business could not move further
because of the nationalization of private investments by the Socialist regime (the Dergue regime) that
came into power leaving only three government banks; the National Bank of Ethiopia, the Commercial
Bank of Ethiopia and agricultural and Industrial Development Bank.

This was reversed when the Socialist regime was overthrown in 1991. Following the overthrown of the
Dergue regime in 1991, the EPRDF declared a liberal economic system. In line with this, Monetary and
Banking proclamation of 1994 established the National Bank of Ethiopia (NBE) as a judicial entity,
separated from the government and outlined its main function.

Monetary and Banking proclamation No.83/1994 and the Licensing and Supervision of Banking Business
No.84/1994 laid down the legal basis for investment in the banking sector (www.nbe.gov.com).After the
proclamation of 1994, the first private bank, Awash International Bank was established in 1994 by 486
shareholders paving a way to the establishment of related private banks such as Dashen Bank (1995),
Abyssinia Bank (1996), Wegagen Bank (1997),United Bank (1998), Nib International Bank (1999),
Cooperative Bank of Oromia (2004),Lion International Bank (2006), Oromia International bank (2008),
Semen Bank (2006),Bunna International Bank (2009), Berhan International Bank (2009), Enat Bank
(2011) , Debub Global Bank (2012) and others which are under establishment.

Statement of the Problem

The ultimate success of credit management depends on the bank's credit policy, portfolio of credit,
surveillance, management and tracking of loans and advances. Continuous surveillance, monitoring and
tracking are essential to guarantee timely repayment and reduce defaults. In reality, the credit portfolio
not only makes up the bank's asset structure but is also a vital factor in the bank's success.

In reality, the credit portfolio not only constitutes the bank's asset structure, but is also a crucial factor
of the bank's success. Only proper credit assessment can bring to attention the likelihood of credit loss

due to genuine business components and suggests potential ways to mitigate such a precarious
situation in order to keep it in check (Rana Al Musharraf, 2013). Properly managing credit risk in financial
organizations is of the utmost importance for their survival and development. When it comes to banks,
this issue of credit risk management takes on even greater significance due to the higher degree of risks
associated with certain client characteristics, market conditions, and economic setting.

Credit assessment is an integral process in financial institutions that helps to minimize the risks
associated with lending large sums of money. Proper credit assessment helps bankers understand the
creditworthiness of their potential clients, as well as their ability to repay a loan on time. Having this
knowledge helps ensure that the loan is safe and profitable for the bank. To make sure that a loan
proposal is creditworthy, the lender must consider different aspects of the borrower's financial profile
such as income, assets and liabilities. Furthermore, the lender should also consider other relevant
information such as the company's industry, its past performance, current competition and a detailed
analysis of the loan's repayment terms. By carefully studying all these factors, lenders can ensure that
their loans are desirable and profitable for both their clients and for themselves.

This research will analyses the current credit risk management systems and practices in Ethiopian
commercial banks, and investigate their effectiveness in managing credit risk. The results of this study
will provide insights into the level of credit risk management used by financial institutions in Ethiopia, as
well as ways to enhance their current approaches. Additionally, the analysis will also include an
assessment of the importance of credit assessment techniques used to identify the probability of credit
loss due to genuine business elements.

Research Questions
1. Have the four private commercial banks established appropriate credit risk environment?
2. Have the four private commercial banks undertaken sound credit granting process?
3. Have the four private commercial banks maintained appropriate credit administration, measurement
and monitoring system?
4. Have the four private commercial banks ensured the adequate control over credit risk?
5. Do the four private commercial banks have effective credit risk management system and practice?

Objectives of the Study

General Objectives of the Study
The general objective of the study is to assess the credit risk management systems and practices in
Ethiopian banking, specifically in four private banks: Berhan International Bank S.C, Bunna International
Bank S.C, Debub Global Bank S.C, and Enat Bank S.C

Specific Objectives of the Study

Evaluate the appropriate credit risk environment established by the four private commercial banks.
Review the sound credit granting process undertaken by the four private commercial banks.
Assess the credit administration, measurement, and monitoring process of the four private commercial
banks.
Review the adequate control over credit risk of the four private commercial banks.
Assess the effectiveness of the credit risk management system and practice of the four private
commercial banks.

Significance of the Study

This study is important because it addresses challenges that banks will face in the future.
Due to the fact that interest earned from loans and advances is such a crucial source of income for
banks, it is essential to properly assess loan applications before approval, as well as closely monitor
granted loans to ensure they do not become bad debts.

This study is important in order to help banks combat the present challenges concerning credit risk
management.
By providing banks with clear strategies on risk assessment and control, this study can reduce the
potential of loan losses and ensure a good credit management process.

This study will help reduce bad debts to a minimum by assessing the capacity of bank risk assessment
and credit control processes to provide careful analysis and monitoring of banks' credit administration. It
will also make credit managers aware of the importance of effective risk assessment and control in
credit administration, as well as make important contributions to efficient and effective credit risk
management.

Scope of the Study

This study will assess the commercial banks' credit risk management systems and practices over the
period 2013-2018 for which there are consecutive five years of financial statements available.

Based on this criterion, up to June, 2018, there were eighteen banks in Ethiopia, out of them four banks
were selected for this study at head office level.

Limitations of the Study

The research will have constraints which serve as limitations to the study. Firstly, access to data posed a
great challenge to the research. On numerous occasions, an interview appointment with the Head of
Credit of the bank was unsuccessful because of the tight schedules of the respondent. Feedback will
have to staff respondents was also another constraint due to lack of time, resulting in the case of
unanswered and semi-answered questionnaires. Most of the respondents had to interrupt their work in
order to provide answers to the questionnaires making it a challenge. Meeting higher officials in the
head offices of the commercial banks was another lacuna of our study.

Organization of the Study

The proposed study will have a structure of three chapters. The first chapter will introduce the
background of the study, the research problem, research questions, research objectives, significance of
the research, scope of the study, limitations of the study and the organization of the study. The second
chapter will include a theoretical and empirical review of the relevant literature. Finally, the third
chapter will cover the methodology of the study.

CHAPTER II
REVIEW OF LITERATURE