HIGHLAND COLLEGE,

DEPARTMENT OF ACCOUNTING

ASSESEMENT OF CREDIT RISK MANAGEMENT PRACTICES: IN

THE CASE OFCOMMERCIAL BANK OF ETHIOPIA (IN CASE OF
BALEGZIHABHER BRANCH)

PREPARED BY ; ID
1. Abel Tarekegn ----------------------------------------------HLC/AFN/10/2013
2. Elleni Yeshwas ----------------------------------------------HLC/AFN/42/2013
3. Nathan Tesfaye ---------------------------------------------HLC/AFN/61/2013
4. Soliyana Bekele ---------------------------------------------HLC/AFN/36/2013
5. Fasikaw Mengiste ------------------------------------------HLC/AFN/48/2013
6. Mammye Abebaw ------------------------------------------HLC/AFN/28/2013

ADVISOR: DRBEW

FEBRUARY, 2023

BAHIR DAR, ETHIOPIA

Contents Pages

CHAPTER ONE:

1.
INTRODUCTION ..............................................................................................................
4

1.1 Background of the

study………………………………………………………………………………………..
………..4

1.2 Statement of the problem............................................................................................5

1.3 Objectives of the study.................................................................................................6

1.3.1 General objective...................................................................................................6

1.3.2 Specific objective.................................................................................................6

1.4. Significance of the study............................................................................................6

1.5 scope of the study ……………………………………………………………………………………………….………....6

1.6 organization of the

study .................................................................................................8

CHAPTER TWO

2. LITERATURE REVIEW.............................................................................................8

2.1 Introduction..................................................................................................................8

2.2 Theoretical literature...................................................................................................8

2.2.1 Definition of Credit........................................................................................8

2.2.2 Banks’ overall risk..........................................................................................9

2.2.3 Credit Management process........................................................................11

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 2.2.4 Credit worthiness analysis...........................................................................13

2.2.4.1 Borrower study and status report.....................................................................14

2.2.5 Credit risk management problems................................................................19

2.2.6 Credit risk management techniques.............................................................21

2.3 EMPHERICAL LITRATURE.................................................................................22

CHAPTER THREE

3. Research design and methodology...........................................................................23

3.1 Source of data........................................................................................................23

3.2 Method of data collection......................................................................................25

3.3 Sampling technique and sampling size.................................................................25

3.4 Research approach.................................................................................................25

3.5 Research method....................................................................................................25

3.6 Method of data analysis ........................................................................................23

3.7 Ethical consideration..............................................................................................23

CHAPTER FOUR

4. Budget schedule....................…....................................26

Reference..........................................................................................................................28

Abstract

The objective of this study is to investigate the effectiveness of credit management,

creditworthiness analysis, management of loan repayment, problems of credit risk
management and mechanism of credit risk management. To achieve the objectives the
study both primary and secondary data is use. The result of the study indicates that there
are problems of, insufficiency of collateral for loan, inappropriate system of loan

3
approval and repayment, and there is no a minimum time for the approval of loan and
there is no strong advising service.

CHAPTER ONE:

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Banks are in the business of safeguarding money and other valuables for their clients or
customers. They also provide loans, credit and payment services such as checking
accounts, money orders and cashier’s checks. Banks also may offer investment and
insurance products and a wide whole range of other financial services. Banks engage in a
large number of financial activates and render a wide range of services to customers,
direct lending is one of the primary function performed by them, the one in which they
have a natural advantage over almost all financial institutions. In relation to this, banks
have a chance to face risk. The main risk facing banks are credit risk, market risk,
mortgage risk, interest rate risk, default risk, liquidity risk and operational risk. (Base
committee on banking supervision)

Credit risk is a risk of loss of principal or loss of financial reward stemming from a
borrowers failure to repay a loan or otherwise meet a contractual obligation. It arises
whenever borrowers are expecting to use future cash flow to pay current debt. Most
lenders use their own models to rank potential and existing costumers according to risk,
and then apply appropriate strategies with products such as unsecured personal loans or
mortgage lenders Charge price for higher price for higher risk customers and vice versa.
Loans typically exposure the greatest credit risk changes in general economic conditions
and affirms operating environment alter the cash flows available for debt service. Those
conditions are difficult to predict. Similarly, an individual’s ability to repay debts varies
with changes in employment and personal worth. (HTTP://EN.WIKIPIDIA.ORG)

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Credit management is the process for controlling and collecting payment from the
customers. The credit management system provides connection to credit scores and other
measures of financial risk. This can be important for assessing new applicant for credit,
as well as adjusting accounts in response to changing financial risk. The system may
automatically increase interest rates and other expense associated with an account if the
person starts to default on other debt, for example if someone is caring usually high level
of debt. These changes reduce risk of the creditor.
Credit risk management is exactly what it sounds like; monitoring risk with in a
companies or lenders operations. It’s an essential components of successful business
ventures (especially in high finance), as it controls and guide a profitable business
through transaction. (Credit risk management/index.htm/)

By reducing the problem of credit risk and following sound mechanism of credit
management, the institution can enlarge their advantage.

1.2 Statement of the problem

It’s true that the importance of sound mechanism of credit risk management system
significantly contribute to the enlargement of advantageous of the institutions, thus
proper planning, analysis, implementation and follow up of credit risk management
process are must be emphasized . Sound credit risk management is a means to achieve the
satisfactory advantages. Some of the factors which may be affect the credit risk
management of Commercial Bank of Ethiopia; problem in managing credit grant and
collection, lack of effective mechanisms of credit risk management, problem of good
evaluation process of business proposal and lack of good security for the collateral of
loan.
Thus, this study aims at the following basic research question:
 What processes are involved in credit management at CBE?
 How does CBE evaluate the credit worthiness of the applicants?
 What mechanisms are used in credit risk management at CBE?
 What are the major challenges of Commercial Bank of Ethiopia in credit risk
management?

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1.3 Objectives of the study

1.3.1 General objective

The general objective of this study is to assess the credit risk management practice of
Commercial Bank of Ethiopia.

1.3.2 Specific objective

The specific objective of this study is:

 To identify the process that is involved in credit management at CBE.

 To investigate CBE mechanisms used to evaluate the credit worthiness of the
applicants.
 To identify the mechanisms those are used in credit risk management at CBE.
 To identify the major challenges of credit risk management in Commercial Bank
of Ethiopia.
 To determine the pricing system used by CBE in credit .

1.4 Significance of the study

The main purpose of this study is to give high light on the credit risk management in
commercial bank of Ethiopia. Furthermore, it can serve as bases for making further
investigation on such related issue; the study has the following significance.
The study gives to CBE the chance to revisit its credit risk management and improve
further.

 The study helps officers and experts to understand the problem that exists.
 It is expected to inform decision makers about the potential problems in relation
to credit risk management.
 The findings of the study will initiate other interested researcher to undertake a
better and detailed study in the area.
 In addition, suggest the possible strategies that to minimize the existing problem
have been helped.

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  It also uses for the partial fulfillment of the requirement for the bachelor of art on
accenting and finance.

1.5 Scope of the study

Although there are many banks in Ethiopia, this study focuses on Commercial Bank of
Ethiopia. The study When doing so, the researcher restricted himself to the head office,
which is found in Balegzihabher branch for obtaining the necessary information that help
to make the research meaning full.

1.6 Organization of the Study

This study is organized in to two chapters. The first chapter deals with the problem and its
approach. The second chapter focuses on the literature review followed by the third chapter
data presentation and analysis.

CHAPTER TWO

2. LITERATURE REVIEW

2.1 Introduction
The purpose of this chapter is to describe and document what has been written and
recorded in different manuals, literatures and authors about Bank Credit Management and
Practices. For this particular study, the researcher has been the views, concepts and
definitions forwarded from selected manuals and authors on “assessment of Credit risk
Management Practice”. In short it summarizes the conceptual framework and empirical
review for this study.

2.2 Theoretical literature

2.2.1 Definition of Credit

The word credit is derived from the Latin word ‘creditor’, which means to believe or
trust. In economics, the term credit refers to a promise by one party to pay another for

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money borrowed or goods or services received. It is a medium of exchange to receive
money or goods on demand at some future date. (ML JhiNGan, 2002)

Another definition of credit is that it has originated from the Latin word “Credo” which
means ‘I believe. Credit is a matter of faith in the person and no less than in the security
offered. Credit is purchasing power not derived from income, but by financial institutions
either as an offset to idle incomes held by depositors in the banks, or as a net addition to
the total amount of purchasing power. In fact, no economy can function without credit;
all economic transactions are settled by means of credit instruments today. It is the very
life blood of modern business and commercial system. (G.D.H. Cole, 2000)

2.2.2 Banks overall risk

Banks, like other business entities, are susceptible to various risks but they face higher
and more versatile risk because banks are highly geared and over 80% of their assets are
loans that are, by themselves, subject to other risks such as Interest rates risk and default
risk. According to Sinker (1998) bank risk Management focuses on three key areas,
namely, credit risk, interest rates risk and Liquidity risk. These risks arise from
unexpected changes in the borrower’s ability to repay loans, unexpected changes in
interest rates and unexpected changes in Balance sheet flows respectively. All these risks
need to be managed; the focus of this study will be on “the management of credit risk”.
Banks have managed deferent types of risk to earn profit for making shareholders wealth,
according to Koch (1994).these are: credit risk, liquidity risk, interest rate
risk ,operational risk ,capital or solvency risk ,other risk

1. Credit risk

Whenever a bank acquires an earnings asset, it assumes the borrower will default, that is,
not repay the principal and interest on timely basis. Credit risk is the potential variation in
net income and market value of equity resulting from this nonpayment or delayed
payment. Deferent types of assets have deferent default probabilities. Loans typically
exhibit the greatest risk.

2. Liquidity risk

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Liquidity risk is the variation in net income and market value of equity caused by a banks
difficulty in obtaining cash at reasonable cost from either the sale of assets or new
borrowing .liquidity risk is greatest when a bank can not anticipate new loan demand or
deposit withdrawal and does not have access to new sources of cash.

3. Interest rate risk

Interest rate risk refers to the potential variability in banks interest income and market
value of equity due to changes in the level of market interest rates. It encompasses the
total portfolio compositions focusing on mismatched asset and liabilities maturities and
duration as well as potential changes interest rate.

4. Operational risk

Operational risk refers to the possibility that operating expresses might vary significantly
from what is expected, producing a decline in net income and firm value .a banks
operating risk is those closely related to its burden, number of division or subsidiaries,
and number of employees. Because operating performance depends on the technology a
bank uses, the success in controlling this risk depends on whether a banks system or
delivering products and services is efficient and functional.

5. Capital or solvency risk

Capital risk represent the possibility that a bank may become insolvent .a firm is
technically insolvent when it has negative net worth or shareholders equity .the economic
net worth of a firm is the deference between the market value of its assets and
liabilities .thus capital risk refers to the potential decrease in net asset value before
economic growth is zero .capital risk is closely associated with financial leverage ,which
refers to the use of debt and preferred stock that pay fixed rates as part of a firms capital
structure.

6. Other risks

Banks that deal with international activities often assume additional risks (Koch, 1995).
The most important of these are exchange risk and country risk. Exchange risk arises

9
whenever a bank receives or makes a payment in foreign currency .it will eventually need
to convert the currency to another currency. Exchange risk refers to the unpredictable
value of a foreign currency relative to another currency .in general, losses can arise when
the value of what a bank is receiving falls or when the value of what it is paying arises
beyond that expected. Country risk refer to the potential losses of interest and principal
on international loans due to a country refusing to make timely payments as per a loan
agreement .in essence, foreign government borrowers can default on their loans. Thus the
country risk is a form of risk.

2.2.3 Credit Management process

The most important objective of credit management is to make profitable loans with
minimal risk. In order to achieve this objective, both goals of loan volume and loan
quality must be balanced with banks liquidity requirements, capital constraints, and rate
of return objectives. According to Koch (2000), the credit management process has three
fundamental functions, which reflect the banks credit policy determined by board of
directors. These are
 Business development and credit analysis credit market research, marketing bank
services to existing and potential customers, identification of inherent risks,
collecting information for credit files, evaluating collateral.
 Credit execution and administration: loan approval within limits, documentation,
loan covenants (agreement)
 Credit review: monitoring loan performance, handling problem loans (Koch,
P.1995).
Of these three major functions, credit analysis plays a vital role on credit management
process providing key factors to identify good customer from applicants. These factors
are known as Cs of credit. Hanks called them as 4Cs character, capacity, capital, and
collateral (1956). According to Koch (2000), there are 5Cs to credit character, capital,
capacity, condition, and collateral. Character indicates the debtors honesty, thrust
worthiness, etches, and integrity to repay the loan. Capital is the borrower’s wealth
position and financial soundness. Capacity refers to both the legal standing and
management expertise of borrower’s so as to meet its obligation. Condition involves the

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economic environment or industry-specific supply, production, and distribution factors
influencing the firms operation. Lastly but not the least collateral is the lenders security in
case of default. It is the guarantee provided by the debtor for liquidation in case of fail,
(1995). Here Koch’s approach to credit analysis factors sounds more factor (known as
condition), which helps as to investigate economic and industrial environments that
influence the borrower’s business operations.

In lending process, economic priorities must be taken into account. However, credit
management process highly relies on the banks systems and controlling mechanisms that
allow the management and credit officers to exercise their expertise.

So sustainable credit operation management is possible only through effective and

efficient credit analysis, credit policy implementation, credit monitoring and credit
review. Therefore having well qualified with adequate experience and ethically
conducting credit officers is the life-blood of successful credit operation.

2.2.4 Credit worthiness analysis

Credit analysis refers to the process of deciding whether or not to extend credit to
particular customer. It usually involves two steps; gathering relevant information and
determining credit worthiness (Ross, 1998).

Once a customer requests a loan, bank officers analyze all available information to
determine whether the loan meets the banks risk –return objectives. Credit analysis is
essentially default risk analysis, in which a loan officer attempts to evaluate a borrower’s
ability and willingness to repay (Koch, 1995).

Many authors states in their book that the principal factors which may be taken in to
consideration which extend or using credit .among these authors are (Pandy, 1990 and
Koch, 1995). These authors have deferent number of credit evaluation, i.e. Pandey(1990)
states three Cs of credit , i.e. character , capacity ,capital, condition and sometimes also
condition is added .But ,Koch (1995) mentions five Cs of credit : character ,capital,
capacity, condition and collateral. These five Cs:

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I. Character. This refers to the borrower’s personal characteristics such as honesty,
willingness and commitment to pay debt. Borrowers who demonstrate high level of
integrity and commitment to repay their debts are considered favorable for credit.

ii. Capacity. This also refers to borrowers’ ability to contain and service debt judging
from the success or otherwise of the venture into which the credit facility is employed.
Borrowers who exhibit successful business performance over a reasonable past period are
also considered favorable for credit facility.

iii. Capital. This refers to the financial condition of the borrower. Where the borrower
has a reasonable amount of financial assets in excess of his financial liabilities, such a
borrower is considered favorable for credit facility.

iv. Collateral. These are assets, normally movable or unmovable property, pledged
against the performance of an obligation. Examples of collateral are buildings, inventory
and account receivables. Borrowers with a lot more assets to pledge as collateral are
considered favorable for credit facility.

v. Condition. This refers to the economic situation or condition prevailing at the time of
the loan application. In periods of recession borrowers find it quite difficult to obtain
credit facility.

The formal credit analysis procedures include a subjective evaluation of the borrower’s
request and a detailed review of all financial statements. The initial quantitative analysis
maybe performed by credit department employees for the loan officer.

The process consists of the following

1. collecting information for the credit file

2. spreading financial statements
3. projecting the borrower’s cash flow
4. evaluating collateral
5. writing a summery analysis and making a recommendation
The credit file contains background information on the borrower, including call report
summaries, past and present financial statement, pertinent, credit reports and supporting

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schedules such as an aging of receivables, a break dawn of a current inventory and
equipment, a summary of insurance coverage .if the customer is a precious borrower ,the
file should also contain copies of the past loan agreement ,cash flow
projections ,collateral agreements and security documents ,any narrative comments
provided by prior loan offices /and copies of all correspondence with the customer. The
credit analyst uses the credit file data to spread the financial statements, project cash flow
and evaluate collateral. The last step is to submit a written report summarizing the loan
request, loan purpose and the borrower’s comparative financial performance relative to
industry standards, and then make a recommendation.

The loan officers evaluate the report and discuss any error, omission and extension with
the analyst .if the credit does not satisfy the banks risk criteria ,the officer notifies the
borrower that the original request has been denied .The officer may suggest procedure
that would improve the borrower’s condition and repayment prospects ,and solicit
another proposal if circumstances improve . If the credit satisfies acceptable risk limit,
the officer negotiates specific preliminary credit terms including the loan amount,
maturity pricing, collateral requirements and repayment schedule.

Many small banks do not have formal credit departments of full time analysis to prepare
financial histories .loan officers personally complete the steps activities above before
accepting or rejecting a loan .often loan request are received without detailed information
on the borrowers condition financial statements maybe hand written or unaudited and
may not meet General Accepted Accounting Principles(GAAP).yet the borrower may
possess good character and substantial net worth .in such instances, the loan officers
work with the borrower to prepare a formal loan request and obtain the best financial
information possible . This may mean personally auditing the borrower receipts,
expenditure, receivables and inventory.

Sometimes, five Ps of credit are also linked with these credit principles (pandy,
1990) .These Ps pertain to: Purpose, Person, Productivity-planning scheme or
projections, Payment of installment or repayment and Protection security

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All these characters, in fact, determine the soundness of credit, i.e., generating adequate
income create to purpose and productivity planning scheme or projections, repaying the
same whenever falls due (payment installment) and maintain risk-bearing ability (person
–and protection-security).

2.2.4.1 Borrower study and status report

The study of a borrower is a study of his character, capacity, capital, condition and
collateral as stated before .In order to get a complete picture of the borrower’s credit
worthiness, enquires will have to be made about his business, trade experience, assets and
liabilities, etc. from various sources (Bedis and Hardiker, 1993) .his account with the bank
or other banks will throw light on his personal habits and business dealings. His financial
statement and income tax returns will have to be seen. Probability an interview with will
be necessary to elucidate or supplement the information that may have been
collected .There are hardly any credit agencies in India which assists banks by giving
reports even a report on a borrower obtained throw banks in India is usually brief and
sketch and does not give sufficient information that can be of a practical use .It will
appear that banks could be in a better position to serve in a business community and
themselves. They evolve a system by which detailed credit reports on customer are
communicated to each other.

Status reports on borrowers are sometimes called credit reports, financial reports, bankers
opinion or confidential reports. All these terms carry more or less the same meaning. A
study report is an assessment of the borrower’s character, capacity, capital, condition and
collateral from the point of view of banker.

Sources

Banks get information on borrowers throw various sources enumerated below.

a. Loan application
b. Bazaar reports through friend or rivals mostly from the borrower’s trade of
business.
c. Mode of living
d. Borrowers account with the bank or statement of account with other banks.

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 e. Statement of asset and liabilities .in the case of companies, their balance –
sheet and profit and loss accounts for, say three years, records of the register of
companies, etc.
f. Personal contact including personal interview.
Some of the above sources are discussed below.

a. Loan application
Some banks require borrowers to fill answers to a detailed questionnaire. The consumer
have to state the name of their concern ,its constitution ,the year when established ,place
of business ,names of bankers with detailed of asset owned and particular of charges
there on. They must also state in the application, the purpose, and period of advance
applied for and the sources as well as the term of payment .they have to specially mention
the nature and particulars of the security offered, if any .they have, moreover, to give
their existing liabilities .such an application gives the banker as a starting point to
proceed with the work of making relative inquires .it may sometimes not be practicable to
institution such detailed information will have to be obtained through a personal
interview of other resources.

b. Bazaar reports
Reports can be obtained from the various markets; particularly from businessmen
carrying on the same trade as the borrower, some of when may be his friends, other his
rivals or enemies while others may try to run him down. All such report, sometimes
contradictory to each other, has to be weighted independently and balanced opinion has
to be formed about the character, capacity, condition and collateral of the borrower.

c. Financial statements
The borrower should be requested to supply the latest statements, preferably audited of
his liabilities and assets. It will be very helpful to a banker if two or three previous
statements are available, a copy of his income –tax return will be helpful in enabling the
banks to know the details to his net income .it will be them possible to trace from the
returns the capital resources of the borrower. His wealth –tax statements will similarly
enable a bank to form an estimate, of his assets, his tax- sales return will indicate the

15
figures of his sales .in the case of limited companies, the audited balance sheet and profit
and loss accounts for the last three years should be looked into.

d. Other sources
Other sources of information about the borrower include press report regarding purchase
and sales of property, auctions and decrees .registration, revenues and municipal records
can be also referred to with advantage to verify the properties owned by the limited
company, a search of the records of the register of companies should be made for finding
out if there are any prior changes or wastage on the company’s assets.

e. Personal interview
In addition to the information collected from outside sources, it is advisable and perhaps
preferable to arrange for a personal interview with the borrower .an experienced banker
armed with the reports he already has with him, can gather a lot of information on various
points through an interview and should thereby be in a position to assess the fives Cs of
the prospective borrower. A personal interviews one of the most important duties of
banker and this responsibility should no case be delicate to an experienced officer.

An interview with the borrower may be held in the banks office or outside, say, in a club
where the borrower may be invited, or even at the borrower’s place .It may be formal
with previous appointment or may be arranged through a common friend.

2.2.5 Credit risk management problems

Many credit problems reveal basic weakness in the credit granting and monitoring
process. While shortcomings in underwriting and management of market- related credit
exposures represent important sources of losses at banks, many credit problems will be
reducing or mitigate by a strong internal credit process.(Dereje,2010)

Many banks find caring out a through credit assessment (or basic due diligence)
substantial challenge. For traditional bank lending, competitive pressures and the growth
of loan syndication techniques create time constraints that interface with basic due
diligence. Globalization of credit markets increase the need for financial information

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based on sound accounting standards and timely macroeconomic and flow of funds data.
When this information not available or reliable, bank may dispense with financial and
economic analyses and support credit decisions with simple indicators of credit qualities,
especially if they perceive a need to gain a competitive foothold in a rapidly growing
foreign market, finally banks may need new types of information, such as risk
measurements, and more frequent financial information to assess relatively newer counter
parties, such as institutional investors and highly leveraged institutions.(Dereje,2010)

The absence of testing and validation of new lending techniques is another problem.
Adoptions of untested lending techniques in new or innovative areas of the market,
especially techniques that dispense with sound principles of due diligence or traditional
benchmarks for leverage, have leads to serious problems at many banks. Sound practice
calls for the application of basics principles to new types of credit activity. (Dereje,
2010)

A related problem in that way banks does not take sufficient account of business cycle
effects in lending. As income prospects and asset values rise in the ascending portion of
the business cycle, credit analyses may incorporate quarry optimistic assumptions.
Industries such as retelling, commercial real estate and real estate investment trusts,
utilities and consumer lending often experience strong cyclical effects. Sometimes the
cycle is loss related to general business conditions that the product cycle in relatively
new, rapidly growing sector, such as health care and telecommunications. Effective stress
testing which takes account of business or product cycle effects is one approach to
incorporating in to credit decisions a full understanding of a borrower’s credit risk.
(Dereje, 2010)

Many of the major banking problems encountered worldwide emanate from tax credit
risk management practices. Such problems, therefore, can be effectively controlled and
minimized by implementing efficient risk management process. To this end, the Basel
committee developed an efficient risk management practice to be implemented by banks
and used by banking supervisors worldwide in evaluating performance (Dereje, 2010.)

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 2.2.6Credit risk management techniques
 Oldfield and Santomero (1997) investigated risk management in financial institutions. In
this study, they suggested four steps for active risk management techniques:

 The establishment of standards and reports;

 The imposition of position limits and rules (i.e. contemporary exposures, credit
limits and position concentration);

 The creation of self-investment guidelines and strategies;

Loans that constitute a large proportion of the assets in most banks’ portfolios are
relatively illiquid and exhibit the highest credit risk (Koch and MacDonald, 2000). The
theory of asymmetric information argues that it may be impossible to distinguish good
borrowers from bad borrowers (Auronen, 2003), which may result in adverse selection
and moral hazards problems. Adverse selection and moral hazards have led to substantial
accumulation of non-performing accounts in banks (Bester, 1994; Bofondi and Gobbi,
2003). The very existence of banks is often interpreted in terms of its superior ability to
overcome three basic problems of information asymmetry, namely ex ante, interim and
ex post (Uyemura and Deventer, 1993). The management of credit risk in banking
industry follows the process of risk identification, measurement, assessment, monitoring
and control. It involves identification of potential risk factors, estimate their
consequences, monitor activities exposed to the identified risk factors and put in place
control measures to prevent or reduce the undesirable effects. This process is applied
within the strategic and operational framework of the bank.
Banks must have a process to analyze beneficiaries’ ability to service a facility advanced
to them. In some instances, stringent policies must be put in place to prevent individuals
that involve in fraudulent activities or crimes from accessing a facility. This can be
achieved through a number of ways for example using reliable source of references,
accessing credit bureaus, or becoming familiar with individuals responsible for managing
a company and checking their references and financial conditions.

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 2.3 EMPHERICAL LITRATURE

Abdus (2004) has examined empirically the performance of Bahrain's commercial banks
With respect to credit (loan), liquidity and profitability during the period 1994-2001.
Nine financial ratios (Return on Asset, Return on Equity, Cost to Revenue, Net Loans to
Total Asset, Net Loans to Deposit, Liquid Asset to Deposit, Equity to Asset, Equity to
Loan and Non-performing loans to Gross Loan) were selected for measuring credit,
liquidity and profitability performances. By applying these financial measures, this paper
found that commercial banks' liquidity performance is not at par with the Bahrain
banking industry. Commercial banks are relatively less profitable and less liquid and, are
exposed to risk as compared to banking industry. With regard to asset quality or credit
performance, this paper found no conclusive result.
Non-performing loans to gross loans (NPLGL) indicates that there is no difference in
performance between the commercial banks and the banking industry in Bahrain.

NSIAH (2010) did a study on assessment of credit risk management practice of

commercial bank of Ghana. The purpose of the study to examine credit risk management
policy and procedures of two rural bank of Ghana. The researcher used qualitative
method to analyze the data which were collected from secondary and primary sources
from two rural banks. Commercial banks are relatively less profitable. With regard to
asset quality or credit performance this paper found no conclusive result.

Hagos10) did study on credit management case on Wegagen bank Share Company in
Tigray region. The objective of the study was to evaluate the performance of credit
management in Wegagen bank Tigray region. The researcher was used qualitative
methodology to analysis the data were collected primary and secondary. Its recommend
on the basis of the analysis that the banks should adopt a more active marketing strategy
to expand and create their own market, consider tighter control for their operations with
understanding banking regulations (e.g., Financial Institutions Reform, Recovery, and
Enforcement Act) and adopt the loan policy in a way that they can make a loan decision
with more reliable cash flow analysis.

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The above empirical review of literature emphasizes that all the studies so far conducted
are mainly discussing the loan recovery problems, determinant factors for default of
borrowers in financial institutions in general at Macro-level. The researcher also observed
in the review of literature that there are no studies conducted mainly to identify the
problems related to lack of effective credit risk pricing system with reference to
COMMERCIALBANK OF ETHIOPIA. Thus, the researcher felt it appropriate to take up
the present study entitled “ASSESEMENT OF CREDIT RISK MANAGEMENT- a
CASE STUDY ON COMMERCIAL BANK OF ETHIOPIA” (Balegzihabher Branch) to
assess the credit risk pricing system problems and thereby to recommend courses of
action.

Oretha(2012) did a study on the relationship between credit risk management practice
and financial performance of commercial banks in Liberia. The Research objective is to
gain a better understanding of credit risk management practice and its relationship with
financial performance. The measure of financial performance is the return on asset. The
results of the researcher showed a positive performance of commercial banks in Liberia.

CHAPTER THREE
3. Research design and methodology

3.1 Source of data

The data will collect with the use of both primary and secondary data sources. Primary
data will collect by distributing questionnaires to credit managers and employees of the
data will collect from data records and events like books, articles, research paper,
internet, publications and unpublished paper and bank manual.

3.2 Method of data collection

The researcher will distribute questionnaire and interview to obtain primary data, and use
data records and events like books, reports, and internet and research paper to obtain
secondary data.

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 3.3 Sampling technique and sampling size
The populations of the study are the employees of commercial bank of Ethiopia who are
responsible for credit risk management. Total populations employees of commercial bank
are 50.The researcher will use judgmental sampling method to select respondent from
employees .The sample size of the study 14 respondents which the researcher selected
judgmentally.

3.4 Research approach

In order to assess and evaluate credit risk management system the researcher were use
mixed approach. Qualitative used for analyses the data that gather through interview and
questionnaire. Quantitative approach used for statically techniques and use surveys.

3.5 Research method

The method of data analysis is descriptive in the sense the credit risk management of the
Bank will be percentage and table.

3.6 Method of data analysis

In attempting to assess the credit risk management, the data analysis will be implemented
in descriptive type and tables are used for meaningful interpretation of the data.

3.7 Ethical consideration

This research will conduct only for academicals purpose .The information to be obtained
from the bank used for this purpose only, but not for personal interest and transferring to
other organization. To prepare this proposal the researcher read some books and research
paper that use as a source .Therefore, when taking researcher the other works, by
referencing the name of the person.

CHAPTER FOUR

4. Budget schedule

No Material Unit Unit price Total price

required

21
1 Pen 5 5*5 25

2 Bender 1 1*20 20

3 Paper 150 150*0.5 75

4 For writing in to 25-30 pages 30*8 240

soft copy

5 For printing 25-30 pages 30*1 30

6 For copy 60 pages 60*0.50 30

7 For binding 3 3*10 30

8 ruler 1 1*15 15

9 contingency 200

total 665

Reference
Abdus(2004) performance of Bahrain's commercial banks

Basle committee on banking supervision, principle for management of credit risk, (2004).

Basle committee on banking supervision, principle for the management of credit risk,
Basel September (2000).

Bofondi, M. and Gobbi, G. (2003), Bad Loans and Entry in Local Credit Markets, Bank
of Italy Research Department, Rome
Basel (1999), “Principles for the management of credit risk”, Consultative paper issued
by the Basel Committee on Banking Supervision, Basel.
Basel Committee on Banking and Supervision (2000). Best practices for credit
risk. Basel Committee Publication No. 74, Basel.

22
Basel Committee on Banking and Supervision (2001). Sound practices for the
management of operational risk Basel Committee Publication No. 86, Basel.
Brigham, E. F., & Ehrhardt, M. C. (2002). Financial management theory .
Calomirus.R , and Enggel,c(2004). Adjustment is much slower than you think
unpublished working paper, MIT and Yale University
Derje(2010) credit risk management
Ganesan, v. (2000). Good credit culture to enhance confidence. Journal of financial and
quantitative analysis.vol 25(4) 469-490
Hagos(2010) study on credit management case on wegagen bank
HYPERLINK"http://www.combank,com"http//www.combank,com//(http//en.wikipidia//)

Koch,T.W. and MacDonald,s.s(2000),bank management,the Dryden press)Harcourt

college publishers,Hinsdale,IL)orando,FL

Oldifield G.S. and santomero,A.M.(1997)"Risk management institution",Sloan

Management Review,vol.39 No.1,pp.33-46.
Oretha(2012) credit risk management practices and financial performance of commercial banks
in Liberia
Rose, s.p. (1993) commercial bank of management,2nded, irwin Homewood,IL Boston
Uyemura,D.G. and deventer,D.R(1993),Risk management in banking: theory and Application of
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