ST.

MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES

ASSESSMENT OF CREDIT MANAGEMENT PRACTICES:

THE CASE OF LION INTERNATIONAL BANK S.C

BY
MERIED HAILE

JANUARY 2020
ADDIS ABABA, ETHIOPIA
ASSESSMENT OF CREDIT MANAGEMENT PRACTICES:
THE CASE OF LION INTERNATIONAL BANK S.C

BY
MERIED HAILE

A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY,

SCHOOL OF GRADUATE STUDIES IN
PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE AWARD OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION

JANUARY 2020
ADDIS ABABA, ETHIOPIA
 ST. MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES

ASSESSMENT OF CREDIT MANAGEMENT PRACTICES:

THE CASE OF LION INTERNATIONAL BANK S.C

BY
MERIED HAILE

APPROVED BY BOARD OF EXAMINERS

________________________ __________________
Dean, Graduate Studies Signature & Date

______________________________ _____________________
Advisor Signature & Date

______________________________ ____________________
External Examiner Signature & Date

______________________________ _____________________
Internal Examiner Signature & Date
 DECLARATION

I, the undersigned, declare that this thesis is my original work, prepared under
the guidance of Asst. Professor Tiruneh Legesse. All sources of materials
used for the thesis have been duly acknowledged. I further confirm that the
thesis has not been submitted either in part or in full to any other higher
learning institution for the purpose of earning any degree.

Meried Haile Signature -----------------------

St. Mary’s University, Addis Ababa January, 2020

i
 ENDORSEMENT

This thesis has been submitted to St. Mary's University, School of

Graduate Studies for examination with my approval as a university advisor.

------------------------------------- --------------------------------

Advisor Signature

St. Mary's University, Addis Ababa January, 2020

ii
 Table of Contents

TABLE OF CONTENTS .............................................................................................................. iii

ACKNOWLEDGEMENTS ……………………...………………………………………………Vi

LIST OF ABBREVIATION ........................................................................................................ vii

LIST OF TABLE ......................................................................................................................... viii
ABSTRACT ................................................................................................................................... ix
CHAPTER ONE ............................................................................................................................. 1
INTRODUCTION .......................................................................................................................... 1
1.1 BACKGROUND OF THE STUDY ....................................................................................... 1

1.2 ETHIOPIAN BANKING BUSNESS HISTORY .................................................................... 2

1.3 BACKGROUND OF THE ORGANIZATION ...................................................................... 3

1.4 STATEMENT OF PROBLEM .............................................................................................. 4

1.5 BASIC RESEARCH QUESTION ………………………………………………………..………6

1.6 OBJECTIVES OF THE STUDY ........................................................................................... 6

1.6.1 GENERAL OBJECTIVE OF THE STUDY ………………………………………………..6

1.6.2 SPECIFIC OBJECTIVE OF THE STUDY ………………………………………………….……………..6
1.7 SIGNIFICANCE OF THE STUDY ....................................................................................... 7

1.8 SCOPE OF THE STUDY ...................................................................................................... 7

1.9 LIMITATION OF THE STUDY…….………………………………………………………………………………………….….8

2.0. ORGAZATION OF THE RESEARCH ....................................................................................... 8

CHAPTER TWO ............................................................................................................................ 9

REVIEW OF RELATED LITERATURE .................................................................................... 9
2.1 INTRODUCTION ................................................................................................................. 9

2.2 THORETICAL REVIEW ..................................................................................................... 9

2.2.1 ROLE OF BANKS IN THE ECONOMY …………………………………………………….…9

2.3 CREDIT PROCESS SYSTEM………………………………………………………………………..12
2.3.1 CREDIT INFORMATION ...............................................................................................13
2.3.2 CREDIT ASSESSMENT/EVALUATION ........................................................................14
2.3.3 CREDIT APPROVAL ......................................................................................................19
2.3.4 CREDIT FOLLOWUP .....................................................................................................19
2.4 BANKING BUSINESS RISKS .............................................................................................21

iii
 2.4.1 CREDIT RISK .................................................................................................................21
2.4.2 LIQUIDITY RISK ............................................................................................................22
2.4.3 MARKET RISK ...............................................................................................................22
2.4.4 OPERATIONAL RISK ....................................................................................................22
2.4.5 FOREIGN CURRENCY RISK ………………………………………………..…….…………..………………….23
2.4.6 CAPITAL OR SOLVENCY RISK………………………….………………..…….…………...………..……….23
2.4.7 INTEREST RATE RISK ……………………..…………………….……………..…….…………..…..….………..23
2.4.8 COUNTRY RISK ……………………………………………………….…….………..…….…………..…………………23
2.5 CREDIT RISK MANAGEMENT ………………….…….………………………………………24
2.6 EMPERICAL REVIEW………………………………………………..………………………………………………………25
2.6.1 CREDIT RISK ASSESSEMENT PRACTICE ………………………………..……………………………….……25
2.6.2 COLLATERAL COVERAGE/SECURED LOANS ……………………………….……………………………26
2.6.3 CREDIT FOLLOW-UP AND RECOVERY PACTICE ……………………………………………….…..….26
2.6.4 LOAN CONCENTRATION RISK MANAGEMENT …………………………………………….………….27
2.7 CONCEPTUAL FRAMEWORK OF THE STUDY…..……………………………….……………………..….28
CHAPTER THREE…….……………………………………………………………………………………29
RESEARCH DESIGN AND METHODOLOGY ....................................................................... 29
3.1 INTRODUCTION ................................................................................................................29

3.2 RESEARCH DESIGN AND APPROACHES .......................................................................29

3.3 POPULATION OF THE STUDY AND SAMPLE SIZE ......................................................29

3.3.1 POPULATION OF THE STUDY .........................................................................................29

3.3.2 SAMPLE SIZE .....................................................................................................................31

3.4 SOURCE OF DATA AND DATA COLLECTION TOOLS .................................................31

3.4.1 DATA ANALYSIS METHOD ..............................................................................................31

3.5 ETHICAL CONSIDERATIONS ..........................................................................................32

3.6 VALIDITY AND RELIABILLTY ........................................................................................32

3.6.1 VALIDITY .......................................................................................................................32

3.6.2 RELIABILITY .................................................................................................................32
CHAPTER FOUR …………………………………………………………………………………………..34
DATA PRESENTATION ANALYSIS AND INTERPRETATION ......................................... 34
4.1 INTRODUCTION ................................................................................................................34

4.2 RESULT SURVEY ...............................................................................................................34

iv
 4.3 CREDIT RISK ASSESSEMENT/EVALUTION PRACTICE ……………….………………37
CHAPTER FIVE…………………………………………………………………………………………….46
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ............................................... 46
5.1 INTRODUCTION ................................................................................................................46

5.2 SUMMARY OF FINDINGS .................................................................................................46

5.3 CONCLUSION .....................................................................................................................48

5.4 RECOMMENDATION ........................................................................................................48

5.5 RECOMMENDATION FOR FURTHER STUDIES………………………………..………..50

REFERENCE ………………………………………………………………………………………………………………………………….…1
QUESTIONNAIRS.......................................................................................................................... i
INTERVIEW QUESTIONS…………………………………………………………………………………………….……………………………….vI.

v
 ACKNOWLEDGEMENTS

My sincere thanks goes to the almighty God for giving me the courage,
inspiration and wisdom required for the successful accomplishment of this
thesis.

I wish to express my deepest gratitude to my advisor, Asst. Professor Tiruneh

Legesse for his thoughtful guidance, encouragement and helpful advices
during the whole process of the research development to write-up.

My special and deepest gratitude also goes to my wife Woy.Tsega G.Mariam,

my lovely babies Michael, Musse and Meklit for their patience and love
during my postgraduate studies.

I am also very thankful to Staffs of Lion Intentional Bank S.C for their
cooperation during my studies and for their genuine response during the
survey.

Finally, I would like to express my deepest gratitude to all my friends;

colleagues and relatives for their usual encouragement, advice and support.

vi
 LIST OF ABBREVIATION

BCC : BRANCH CREDIT COMMITTEE

BOD : BOARD OF DIRECTORS
CIC : CREDIT INFORMATION CENTRE
DLL : DISCRETIONARY LENDING LIMIT
EC : ETHIOPIAN CALENDAR
FIS : FINANCIAL INSTITUTIONS
GC : GREGORIAN CALENDAR
NBE: NATIONAL BANK OF ETHIOPIA
NPL: NON-PERFORMING LOAN
LAF : LOAN APPROVAL FORM
L/C : LETTER OF CREDIT
LIB : LION INTERNATIONAL BANK
KYC : KNOW YOUR CUSTOMER
S.C : SHARE COMPANY
SPSS : STATISTICAL PACKAGE FOR SOCIAL SCIENCE

vii
 LIST OF TABLES

Table 3.1. Population Size of the Study………………………………………..……...…..30

Table 3.2.Cronbach’s Alpha Reliability Analysis …………………………….…....…….33

Table: 4.1.Survey Response Rate. ……………………………………..……...………….34

Table: 4.2.Demographic Profile of Respondents ………………………………………...35

Table: 4.3.Credit Assessment/Evaluation practice of the ……..........................................38

Table: 4.4.Credit Management Practice in Securing Loans by Collateral ……….............39

Table: 4.5. Credit Follow-up Practice of the Bank ……………………..…………...........40

Table: 4.6. Credit Management Practice in Case of Concentration Risk...........................42

Table: 4.7.The practice of granting loans on clean basis and at Lower Interest rate ........43

Table: 4.8. Ranking of the credit management practice in case of the selected four risk areas...44

viii
 ABSTRACT

The purpose of the study was to assess the credit management practice of
Lion International S.C. The data were gathered from all staff of the head
office Credit Management Department and twenty branch managers and
customers’ relationship officer found in Addis Ababa only on the credit
management practices of the bank in areas of securing credit facilities
against collateral, credit management analysis/evaluation practice of the
bank, concentration risk management practice of the bank and the practice of
the bank’s credit follow-up and recovery. The questionnaire survey was
undertaken among 65 employees of the bank and all were collected to
assess the perception of credit management practices of the bank in relation
to the above practices. Closed ended questions were used, particularly to
reflect the views of the employees with regard to four practices. Descriptive
research design with 5 levels Likert scale was used to measure variables of
study. Data was analyzed through descriptive statistics, percentage and
frequency using SPSS Version 20.0 software. The result from the survey
shows that majority of the bank staff were explained their concern on weak
collateral coverage of the bank loans, high concentration risk on export loan
out of the total loan volume of the bank, weak credit analysis during approval
and at same time poor follow-up and recovery activities. According to the
survey the bank can reverse the potential risk by providing reasonable
attention for collateral holding , developing moderate loan concentration
between credit products, improving the competency of the credit follow-up
and recovery division for quality loan management and timely follow-up of
bad debts were recommended.

Key words: Credit Management assessment, Loan Concentration risk, and collateral risk

ix
 CHAPTER ONE

INTRODUCTION

This chapter deals with the introductory part of the study, it contains the background of the
study, operational definition of key terms, and statement of the problem, research
questions, objectives, significance, scope and limitation of the study.

1.1 BACKGROUND OF THE STUDY

Economic role of banks in any country is crucial for all business activities. Banks play an
intermediary function, they collect money from those who have excess funds and lend it to
others for investment purpose. Availing credit to borrowers is one of the main contribution
banks to the growth of the economy. Loans and advances are the major components of
bank's assets. It usually contributes the Lions’ share of the banks operating income and
associated with greater risk exposure (Koch and Mac Donald, 2006).

According to Oyatoya, (1983), credit has been recognized as one of the most important
financial services that contribute to the success of a business venture and this success in
turn contributes to the major economic development of a country. However, the existence
of credit facility alone does not necessarily result in supporting economic development
unless otherwise, it is accompanied by the existence of efficient utilization of credit funds.

Even though credit has been recognized as one of the most important financial services it
is subjected to business risks. Theoretically risk is defined as the element of uncertainty or
possibility of loss that prevail in any business transaction in any place, in any mode and at
any time. In the banking business, risk can be broadly categorized as credit risk,
operational risk, market risk etc. Among the risks, credit risk is the most common form of
risks for the banking industry. Globally, it is reported that more than 50% of the total risk
elements in banks and other financial institutions are credit risk alone (Lalon, 2015).

Credit risk is the risk of default or risk of losing or delaying interest and principal
repayments from the loan contract which needs to be managed carefully to achieve the
required level of loan growth and interest income. (Lalon, 2015).

1
1.2 ETHIOPIAN BANKING BUSIBESS HISTORY

The establishment of National Bank of Ethiopia indicates the modern Banking history in
Ethiopia which was backed to the year 1905 when the Bank of Abyssinia was established
(NBE, 2010). Bank of Abyssinia was formed under a fifty years franchise agreement made
with the National Bank of Egypt, which was owned by the British by then. To widen its
reach in the country the Bank had expanded its branches to Dire Dawa, Gore and Dessie. It
had also an agency and a transit office in Gambella and at the port of Djibouti respectively.
After its formal liquidation on August 29, 1931 the Bank of Abyssinia was replaced by the
Bank of Ethiopia. According to NBE (2010) Bank of Ethiopia, was also known as Banque
National Ethiopian, had a function of both a Central Bank and Commercial Bank and was
considered as one of the first indigenous banks in Africa. The Bank of Ethiopia operated
until 1935 and come to an end because of the Italian invasion. During the five years of the
Italian occupation (1936-41), many branches of the Italian Banks such as Bancodi Italia,
Banco Di-Roma, Banco Di-Napoli and Banco Nazianali del lavoro were operational in the
main towns of Ethiopia.

After leaving of the Italians, the State Bank of Ethiopia was established on November 30,
1943 with a capital of one Million Maria Theresa Dollars. Pursuant to the Monetary and
Banking Law of 1963 the State Bank of Ethiopia that had served as both as a central and
as a commercial bank was dissolved and split into the National Bank of Ethiopia and
Commercial Bank of Ethiopia Share Company. Accordingly, the central banking
functions and the commercial banking activities were transferred to the National Bank of
Ethiopia and the Commercial Bank of Ethiopia Share Company respectively.
Moreover, according to (NBE, 2010), following the adoption of the command economy in
1974, all private commercial banks and financial institutions were nationalized on January
1st, 1975 and re-organized as one commercial bank, the Commercial Bank of Ethiopia;
two specialized banks the Agricultural and Industrial Bank (AIB),latter renamed as the
Development Bank of Ethiopia (DBE) and Housing and Savings Bank (HSB) latter
named as the Construction and Business Bank (CBB) currently merged with Commercial
Bank of Ethiopia; and one insurance company, the Ethiopian Insurance Corporation (EIC)

2
were formed. During the era of state socialism (1974-1991), Ethiopian financial
institutions were in charge of execution of the national economic plan. State enterprises
received bank finance in accordance with the plans priorities. Following the change of the
socialist government in 1991 new economic policy directions had adopted. Accordingly,
financial institutions were re-organized to operate towards a market oriented policy
framework. The Proclamation No. 83/1994 had allowed the establishment of private
banks which had marked the beginning of new era in the Ethiopian banking sector
development. Subsequent to the enactment of this proclamation sixteen private banks had
been entered to the market.

1.3 BACKGROUND OF THE ORGANIZATION

In the last twenty years, investment and business activities involving both in the public
and private banking sectors had shown encouraging development in paving the way for
the growth of the banking industry (NBE, 2016).

Lion International Bank Share Company (LIB) is one of the emerging private banks in
Ethiopia.LIB established in accordance with the 1960 Commercial Code of Ethiopia and
National Bank of Ethiopia Licensing and Supervision of Banking Business Proclamation
No. 84/1994 in December 2006. The bank is engaged in providing short, medium and
long term credit facilities, and has been striving to exploit all opportunities towards
achieving its corporate goals. The bank has been playing a significant role in providing
loans and advances to its customers that enhance the investment needed in the country and
as a means of generating income for its shareholders (LIB annual report, 2016/17).

From the various internal documents gathered by the researcher, currently LIB is
operating its banking service throughout with 225 branches and provides a job
opportunity for 2,251 permanent and 325 temporary employees. During the fiscal year
2017/18 the bank has reported annual net profit after tax of Birr 390,766,000 and paid
income tax of Birr 89,566,000 to the tax authority.

3
1.4 STATEMENT OF THE PROBLEM

Banks play a great role in economic growth and development of any nations. Banks have
their own credit policies that guide them in the process of granting credit facilities. Each
credit policies setS the rules and procedures on the credit practices of who can access the
bank’s credit facilities, for what purpose does the borrower want the credit, when
customers needs the fund. In addition, the credit policy is expected to states the
repayment arrangements and necessary collaterals for the credit facility (Mosharrafa,
2013).

For Mosharrafa, credit assessment/evaluation helps the banker to ensure selection of right
type of loan proposals/projects and to select right type of borrower. In order to select the
right borrowers, security should not the only thing to rely up on. Therefore, it is the
responsibility of the bankers to investigate the client from different view point i.e. the
strength and weakness of the client business, profitability, generally the financial flow of
the business so that the client were be able to repay the bank loan as repayment schedule
with profit or not can be assess.

Credit management is a comprehensive process of monitoring of loan facilities, extension

of credit, distinguishing the market segments as well as defined the returns generated. The
policy on credit management contains its own system or mechanisms that guide the
employees wherever they try to start their activity and on the collection of the loan
repayments (Asante, 2015)

The collateral or security that the company possesses also acts as a very big determining
force implying that the greater the financial strength and collateral availability, the greater
the loan granting possibility (Eveline, 2010). Therefore, that is why banks focused more
on collateral. Many banks failed to recognize early warning signals deteriorating asset
quality and missed the opportunities to work with borrowers to bring to an end their
financial deterioration and to protect the bank’s position. This lack of monitoring led to a

4
costly process by senior management to determine the dimension and severity of the
problem loans and resulted in large losses (Lagat, Mugo, Otuya, 2013).

Concerning local study conducted by Alebachew (2015), factors such as poor credit
policy, weak credit analysis, poor credit follow-up, inadequate risk management analysis
and lack of information management system are the causes for weak credit risk
management in Nib International Bank S.C.

Other local research by Habtamu(2015) assessed factors affecting credit management

practice in five big private commercial banks such as Awash International Bank S.C,
Dashen Bank S.C, Bank of Abysinia S.C,Wegagen Bank S.C and United Bank S.C and he
concluded that the major factors affecting the quality of the loans are lack of proper follow
up and weak credit analysis. But the nature and factors affecting credit management in
small private banks like LIB are totally different and needs further research as their
customer and resource base are unlike.

On the other hand, this researcher has observed that even though there are few disparate
studies on credit management practice of the private banks, no study is conducted on the
newly emerged private banks namely Bunna International Bank, Abay Bank, Enat Bank,
Addis International Bank, Debub Global Bank and Lion International Bank which were
joined to the banking industry within the last ten years. These banks have their own
unique challenges in managing credit due to various capacity issues.

These and other factors have motivated the researcher to make an assessment on credit
management practice of Lion International Bank S.C (LIB), which is one of the last
entrants to the banking industry. The main purpose of the research is to deliver the first
initial reference document for those who are interested in carrying out similar studies on
this bank or other similar banks and credit institutions in the industry in general.

5
1.5 BASIC RESEARCH QUESTIONS

In order to achieve the research objectives, the following research questions were
presented:

1. Is the current credit management practice of the bank paid sufficient attention to the
importance of proper credit analysis/evaluation?
2. How is the effort of the credit management practice of the bank to secure its loans by
collateral?
3. Is the current credit follow-up and recovery practice of the bank strong enough to the
expected level to have quality loan?
4. How the current credit management practices of the bank manages the concentration
risk?

1.6 OBJECTIVES OF THE STUDY

1.6.1 GENERAL OBJECTIVE OF THE STUDY

The general objective of the study was to assess the credit management practice of
Lion International Bank S.C with respect to four main credit management practices.

1.6.2 SPECIFIC OBJECIVE OF THE STUDY

1. To evaluate the current credit analysis/evaluation practices of the bank,

2. To evaluate the credit management practice of the bank in securing loans by
collateral,
3. To assess the credit follow-up and recovery practice of the bank in developing quality
loans,
4. To assess the concentration risk of the bank.

6
1.7 SIGNIFICANCE OF THE STUDY

The strength and soundness of the banking system primarily depends upon the health
conditions of its loan and advances. Therefore, ability of the bank to formulate and
implement proper credit policies and procedures that can able to build quality credit and
reduce nonperforming loans is the way to survive within the stiff competition. Contrarily,
failure to create and build up quality loans leads to higher default risk and bankruptcy.

Consequently, the findings of this research is useful for all the emerging private banks
including
LIB who will be able to evaluate its own credit management practices and to
enhancement the bank’s. The research also facilitates the development of suitable credit
management practices and procedures.

The National Bank of Ethiopia can use this study as an input to revise its credit risk
management directives. The study will also benefit to add values to the already existing
body of knowledge thereby will benefit the academicians and researchers. The study will
further provide background information to research organizations and scholars and
identify gaps that will help as a benchmark for researchers who are interested in the area
to extend it further.

1.8 SCOPE OF THE STUDY

The study mainly focused on credit management practice of Lion International Bank S.C.
This study was limited to the assessment of the credit management practice of the bank in
the selected four credit management practice of the bank such as credit request analysis/
evaluation, efforts to secure loans by collateral, credit follow-up and recovery practice of
bank and loan concentration risk. Since 70 percent of the total outstanding loans of the
bank as of June 30, 2019 was accumulated within the following twenty branches found in
Addis Ababa the namely Yeka, Haile G.Selase, Haya-Arat, Gurdshola, CMC, Jakros,
Kazanchis, Senga-Tera, Sarbet, Africa-Union, Bole, Saris, Gotera, Gofa, Arada, Merkato,
Raguel ,T.Haimanot, Stadium and Meskel Flower. In addition, all credit approval and
administration of the bank is headed by the head office credit management department.

7
Hence, the survey was mainly focused on employees’ perception of these branches and
the department.

Despite the importance of other research methods equivalently descriptive method was
used to describe outcomes of this survey.

1.9 LIMITATION OF THE STUDY

Taking into consideration the given time for this research and the associated costs, the
researcher has limited his survey only with the staffs of the head office credit management
department and the twenty branch managers and customer relationship officers of the bank.
Owing to confidentiality issues some critical reports of the bank obtained during the survey
was remaining unused.

2.0. ORGAZATION OF THE RESEARCH

The study presented in five chapters. The first chapter contains background of the study,
statement of the problem, basic research questions and objectives of the study, scope of
the study, and significance of the study. The second chapter deals with previous studies
and literatures relevant to the study and it also includes theoretical and empirical
evidences related to the study. The third chapter discusses about the type and design of the
research paper, analysis of participants of the study, the sources of the data, the data
collection tools or instruments employed, the procedures of data collection and the
methods of data analysis are described. The fourth chapter deals with data analysis and
interpretation. The last chapter presented the summary of findings, conclusions and
possible recommendations.

8
 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 INTRODUCTION

This chapter deals with the related literatures of the study and discusses the history of the
banking industry in Ethiopia, role of banks, bank lending, the role of collateral in credit
management, the importance of managing concentration risk, credit assessment or
evaluation practice in managing credit risk and the function of credit follow-up and
recovery in credit management practice.

2.2 THORETICAL REVIEW

2.2.1 ROLE OF BANKS IN THE ECONOMY

Banking sector makes a meaningful contribution to the economic growth of every

country. Banks’ contribution to the economic growth lies in the role they play in
mobilizing deposits and allocating resources efficiently to the most productive uses. So
making credit available to borrowers is one means by which banks contribute to the
growth of economy. Banks pool resources from the surplus group of the society in the
form of saving for projects that are too large for individual shareholders to undertake
(Bagehot 1963). They are also considered the most important enabler of financial
transactions in any country’s economy and are the principal source of credit (Rose, 2002).
Bank finance is the primary source of debt funding.

Commercial banks extend credit to different types of borrowers for various purposes,
either for personal, business or corporate clients (Saunders & Cornett, 2003). Besides,
banks are also the custodians of nation’s money, which are accepted in the form of
deposits and paid out on the client’s instructions (Harris, 2003).

A bank’s role has expanded considerably and is no longer limited to the taking of deposits
and providing credit. As per Fourie and friends, (1998) Banks perform the following
activities:

9
Money Creators: Commercial banks create money by way of deposit liabilities. In
contrast to liabilities of other businesses, bank liabilities (cheques) are generally accepted
as a means of payment.

Managers of the payment system: This refers to the payment of cheques through the
Automatic Clearing Bureau (ACB). It also facilitates payments of credit and debit cards,
internet and cell phone banking and automatic teller machines.

Creators of indirect financial securities: Commercial banks hold assets that are subject
to specific risks, while issuing claims against them in which these risks are largely
eliminated through diversification.

Information agents: Commercial banks developed sound databases of clients’

information and the information is not publicly available (asymmetric information).The
information is only shared with other banks by way of a bank code or a full general bank
report.

Financial spectrum fillers’: The capital market cannot supply the full range of
instruments required by borrowers. Commercial banks assist in this regard by supplying
specific instruments to fill the gap.

Dealer of foreign currency: Due to the globalization of the world’s economies this has
become a very important function. Commercial banks assist in the conversion of
currencies, transfer of funds and negotiate foreign financing.

Lending enable banks to be as financial intermediaries, banks collect funds from savers in
the form of deposit and then supply it to borrowers as loans. Thus banks accept customer
deposits and use those funds to give loans to other customers or invest in other assets that
will yield a return higher than the amount bank pays to depositor (McCarthy et al., 2010).
It follows that customers’ deposit is the primary source of bank loan and hence, increasing
or guaranteeing deposits directly has a positive effect on lending. Commercial banks
extend credit to different types of borrowers for many diverse purposes, either for
personal, business or corporate clients (Saunders & Cornett, 2003).

According to the NBE report during 2010,the banking sector of Ethiopia provides the
most basic banking products including deposit facilities, loans and advances, fund transfer

10
(local /global) , import/export facilities, and guarantees. Recently, most of the banks are
striving to improve their service delivery through introducing different IT solutions.
Recent trends also indicate that banks are competing in the market on the basis of branch
expansion, advertisements, raising capital bases, improved service delivery, and
investment on IT software and infrastructure. However, these technological innovations
are at their infant stage and the sector is required to do much more to meet its customer
expectations (NBE, 2010).

The Ethiopian banking business is operated in accordance to “Banking Business

Proclamation No. 592/2008” and different directives on banking business operations
issued by the National Bank of Ethiopia.

The recent banking proclamation is the re-establishment of NBE (FDRE, 591/2008). The
proclamation sets out the revised purpose, powers and duties of the central bank.
According to this proclamation, the functions of NBE include:

o License and regulate banks, insurance companies and other financial institutions in
accordance with the relevant laws of Ethiopia,
o Determine on the basis of assessing the received deposit, the amount of assets to
be held by banks. (Reserve requirement),
o Issue directive governing credit transactions of banks and other financial
institutions, and
o Determine the rate of interest.

The current banking business in Ethiopia is governed by the banking business

proclamation (FDRE, 2008) Proclamation No.592/2008.The proclamation sets the
following banking business issues:

o Requirement for obtaining license for banking business in Ethiopia,

o Prohibit foreign nationals or organizations fully or partially open banks or
branch offices, subsidiaries of foreign bank in Ethiopia or acquire the shares of
Ethiopian banks,
o Limitation of the acquisition of shares,
o Appointment of bank directors and officers,

11
 o Maintenance of required capital, legal reserve and adequate liquidity and
reserve balance,
o Limitations on certain transaction (investment),
o Inspection of banks, and
o Revocation of license.

The National Bank of Ethiopia is the central bank of the country which plays the most
influential role in economic and financial development issues and in regulating
commercial banks. The central bank acts as a banker and financial advisor to the
government. It is also the nation’s monetary authority and responsible for promoting
monetary and financial stability in the country. To improve the stability of the financial
system the central bank will act as a banker to the banking and other financial institutions
in the country. Consequently, having the above authority and responsibility the central
bank can influence the lending policy of commercial banks and their debt recovery.

2.3 CREDIT PROCESS SYSTEM

Credit process encompasses every activity involved in lending including product sales,
customer selection and screening, the application and approval process, repayment
monitoring, and delinquency and portfolio management. It is also linked with the
institutional structure pertaining to the credit process. Quality of credit process is one of
the most determinant factors for the efficiency, impact and profitability of the banks. Thus
getting the right credit process and product mix is therefore one of the most demanding as
well as rewarding challenges of every financial institutions (Ferreti, 2007).
The major credit risk management activities are discussed here below in the following
sections that include credit information, credit analysis process, credit approval and credit
monitoring processes.

12
2.3.1 CREDIT INFORMATION

Engagement in financing begins with customer recruitment. An issue of know your

customer, traditionally known as KYC is so vital before proceeding to details. Banks use
various means to obtain such information about the existing or potential customer. Use of
financial statement, credit report from credit bureau, customers’ history if not new is the
potential sources of information (Ross et al., 1999).

According to NBE CRB, 2012 adequate and timely information that contributes to enable
a satisfactory assessment of the creditworthiness of a borrower is crucial for making
prudent lending decision. a credit report is the organized presentation of information
about an individual’s and/or company’s credit record that a credit bureau communicates to
those who request information about the credit history of an individual’s and/or
company’s experiences with credit, leases, non-credit-related bills, collection agency
actions, monetary-related public records, and inquiries about the individual’s credit
history.

The purpose of information sharing is to communicate relationship information from

existing lending relationships to outside lenders (Gehrig and Stenbacka, 2007). Credit
providers use credit information to conduct credit risk analysis of prospective borrowers
in order to mitigate credit risk. As Kallberg and Udell (2003) highlight that information
sharing is useful both at the origination stage and after credit has been extended.
Especially at the origination phase, information sharing reduces the problems of adverse
selection.

Availability of good credit information improves non-performing loan, which leads to

fewer losses and decreases interest rates for good credit risks (Jentzsch 2008). In addition,
Jentzsch further supports that sharing credit information between lenders intensifies
competition and increases access to finance. As Jappelli and Paggano (2005) indicate that
credit information sharing results improved bank’s knowledge of applicant’s character,
avoiding adverse selection and reduce the informational rent that banks could otherwise
extract from their customers. Credit information also acts as a borrower disciplining
device, by cutting insolvent debtors off from credit and eliminates or reduces the

13
borrowers’ incentive to become over-indebted by drawing credit simultaneously from
many banks without any of them realizing it.

In addition, Barth, Lin, Lin and Song (2008) concluded that information exchange will
assist in minimizing lending corruption in banks by reducing information asymmetry
between consumers and lenders, improving the bribery control methods and increase the
bargaining power of lenders. The exchange of consumer credit information disciplines
borrowers to repay loans because borrowers do not want to damage the good report which
can make it difficult for them to get credit.

2.3.2 CREDIT ASSESSMENT/EVALUATION

Credit assessment is the first step in the process of credit management. The assessment
starts with evaluating the customer’s request and capacity to ensure there is a need for
financing the request of the client. Credit assessment is the most important task to ensure
the underlying quality of the credit being granted and it is considered as an essential
element of credit risk management (Cade, 1999).

For other writers like Koch, credit assessment refers to the process of deciding whether or
not to extend credit to a particular customer. Once a customer requests a loan, bank
officers analyze all available information to determine whether the loan meets the bank’s
risk-return objectives. Credit analysis is essentially default risk analysis in which the loan
officers attempts to evaluate a borrower’s ability and willingness to repay the bank’s loan
(Koch, 2003). Accordingly, Koch has identified three district areas of commercial risk
analysis related to the following questions:

o What risks are inherent in the operations of the business?

o What have managers done or failed to do in mitigating those risks?
o How can a lender structure and control its own risks in supplying funds?

The first question forces the credit analyst to generate a list of factors that indicate what
could harm a borrower’s ability to repay. The second recognizes that repayment is largely
a function of decisions made by a borrower. The last question forces the analyst to specify
how risks can be controlled so the bank can structure an acceptable loan agreement.

14
The credit quality of an exposure generally refers to the borrower’s ability and willingness
to meet the commitments of the facility granted. It also includes default probability and
anticipated recovery rate (Saunders & Cornett, 2003). Credit assessment thus involves
assessing the risks involved in financing and thereby anticipating the probability of
default and recovery rate.

The FIVE C’s OF CREDIT

The five C’s are considered the fundamentals of successful lending and have been around
for approximately 50 years. Initially only character, capacity and capital were considered.
However, over the years collateral and conditions were added. These provided an even
more comprehensive view and clearer understanding of the underlying risk and resulting
lending decision (Beckman & Bartels, 1955). According to (Murphey, 2004a), these
principles should be the cornerstone of every lending decision. The five C’s are discussed
as follows:

Character - refers to the borrower’s honesty, integrity, serve of responsibility and

trustworthiness. An analyst must assess the borrower’s integrity and subsequent intent to
repay. If there are any serious doubts, the loan should be rejected.

It also refers to the borrower’s reputation and the borrower’s willingness to settle the debt
obligations. In evaluating character, the borrower’s honesty, integrity and trustworthiness
are assessed. The borrower’s credit history and the commitment of the owners are also
evaluated (Rose, 2000). A company’s reputation, referring specifically to credit, is based
on past performance. A borrower has built up a good reputation or credit record if past
commitments were promptly met (observed behavior) and repaid timely (Rose, 2002;
Koch and McDonald, 2003). Character is considered the most important and yet the most
difficult to assess (Koch and MacDonald, 2003).

The quality of management in the specific business is evaluated by taking reputation,

integrity, qualifications, experience and management ability of various business
disciplines such as finance, marketing and labor relations into consideration
(Nathenson,2004). These factors can be regarded as a risk mitigates if a banker views

15
these positively. Much of its success can in fact be attributed to competent leadership.
Companies with strong and competent management teams tend to survive in an economic
downturn.

Capital - refers to the owner’s level of investment in the business. Banks prefer owners to
take a proportionate share of the risk. Although there are no hard and fast rules, a
debt/equity ratio of 50:50 would be sufficient to mitigate the bank’s risk where funding
(unsecured) is based on the business’s cash flow to service the funding (Harris,
2003).Lenders prefer significant equity (own contribution), as it demonstrates an owner’s
commitment and confidence in the business venture

Capacity –refers to the business’s ability to generate sufficient cash to repay the debt. An
analysis of the applicant’s businesses plan, management accounts and cash flow forecasts
(demonstrating the need and ability to repay the commitments) will give a good indication
of the capacity to repay (Koch and MacDonald, 2003).To get a good understanding of a
company’s capacity evaluating the type of business and the industry in which it operates is
also vital. It plays a significant role since each industry is influenced by various internal
and external factors. The factors that form the basis of this analysis includes: Type of
industry, Market share, Quality of products and life cycle, whether the business is labor or
capital intensive, the current economic conditions, seasonal trends, the bargaining power of
buyers and sellers, competition and legislative changes (Koch and MacDonald, 2003;
Nathenson, 2004). These factors lead the banker to form a view of the specific company
and industry. The banker would regard this as a potential risk mitigate if he/she is
confident about the company and industry and prospects for both appear to be positive.

The following financial ratio analyses are very critical in assessing business’ position
(Koch and MacDonald, 2003):

o Liquidity ratios - reflect the company’s ability to meet its short-term obligations.
The current ratio is calculated by dividing the current assets by the current
liabilities.
o Activity ratios- indicate whether assets are efficiently used to generate sales.
o Leverage ratios- indicate the company’s financial mix between equity and debt
and potential volatility of earnings. High volatility of earnings increases the

16
 probability that the borrower will be unable to meet the interest and capital
repayments.
o Profitability ratios- supply information about the company’s sales and earnings
performance.

Condition–refers to the economic environment or industry specific supply, production, and

distribution factors influencing a firms operation. Repayment sources of cash often vary with
the business cycle or consumers demand.

Conditions are external circumstances that could affect the borrower’s ability to repay the
amount financed. Lenders consider the overall economic and industry trends, regulatory,
legal and liability issues before a decision is made. Once finance is approved, it is normally
subject to terms, covenants and conditions, which are specifically related to the compliance
of the approved facility (Leply, 2003).

The primary role of covenant is to serve as an early warning system. Covenants can either be
negative or positive (Nathenson, 2004).

Negative covenants stipulate financial limitations and prohibited events (Rose, 2000; Koch
and MacDonald, 2003). Some examples of negative covenants are:

o Cash dividends cannot exceed 50% of the net profit after tax (financial limitation).
o No additional debt may be obtained without the bank’s prior approval (prohibited
event).

Positive or affirmative covenants stipulate the provisions the borrower must adhere to
(Rose, 2000; Koch and MacDonald, 2003). Some examples of positive covenants are:

o Audited financial statements must be provided within 90 days of the company’s

financial year end.
o The borrower must maintain the following financial ratios: Interest cover ratio of
4:1(defined as earnings before interest and tax divided by interest paid), Gearing
ratio of 2:1 (defined as total liabilities divided by owners equity).

Collateral – collateral is the lenders’ secondary source of repayment or security in the

case of default. Having an asset that the bank can seize and liquidate when a borrower

17
defaults reduces loss, but it does not justify lending proceeds when the credit decision is
originally made.

It is something valuable which is pledged to the bank by the borrower to support the
borrower’s intention to repay the money advanced. Security is taken to mitigate the
bank’s risk in the event of default and is considered a secondary source of repayment
(Koch and MacDonald, 2003).

Similar to the above idea, Rose and Hudgins, (2005) define secured lending in banks as
the business where the secured loans have a pledge of some of the borrower’s property
(such as home or vehicles) behind them as collateral that may have to be sold if the
borrower defaults and has no other way to repay the lender

De Lucia and Peters (1998), identified the following three reasons why security is
required by the banking industry:

o to ensure the full commitment of the borrower to its operations,

o to provide protection if the borrower deviate from the planned course of action out
lined at the time credit is extended, and
o to provide insurance if the borrower default.

The value of an asset is based on the estimated re-sale value of the assets at the time of
disposing of it (McManus, 2000). Each property is valued by the bank to determine the
property’s market value for security purposes (Rose, 2000).

In addition, to the physical collateral borrowers can provide a surety ship/ third party
collateral for their debt. When the borrower is not in a position to repay the debt, the bank
will then call on the surety for repayment (Koch & MacDonald, 2003)

It is common practice for the banks to take the surety ships of the shareholders/directors
when funds are advanced to a company (Rose, 2000; Vance, 2004).

18
2.3.3 CREDIT APPROVAL

Credit approval is the careful balance of minimizing risk and maximizing profitability
while maintaining in a competitive and complex global market place. Credit approval is
the process of deciding whether or not to extend credit to a particular customer. It
involves two major steps: gathering relevant information and determining credit
worthiness (Ross, Westerfield and Jaffe, 1999).

Once the necessary credit information has been gathered, a firm faces the hard choice of
either granting or refusing credit request. As per Ross, Westerfield and Jaffe, (1999)
many financial managers use the "five C's of Credit" as their guide to identify and
evaluate the credit risk resulting from a possible exposure to sanction the credit.

2.3.4 CREDIT FOLLOWUP

Credit approval is expected to be done on sound credit risk analysis and assessment of the
credit worthiness of the borrowers. However, loan granted on the basis of sound analysis
sometimes go bad when the borrowers failed to meet as per the terms and conditions of
the loan contract. It is for this reason that proper credit follow up and monitoring is
essential throughout the life of the loan. As per Volume No.3, credit monitoring or
Follow-up deals with the following vital aspects:

o Detecting deviations from terms of decision,

o Ensuring compliance with terms and conditions,
o Monitoring end use of approved funds,
o Monitoring performance to check continued viability of operations,
o Making periodic assessment of the health of the loans and advances using the key
performance indicators that might include profitability, activity level and ensure
that the assets created are effectively utilized for productive purposes,
o Ensuring recovery of the installments of the principal and interest in case of term
loan as per the scheduled repayment program,
o Identify early warning signals, if any, and initiate remedial measures thereby
averting from possible default.

19
Mostly there are three types of loan follow up systems. These are: Physical follow up,
Financial Follow up and Legal Follow up.

Physical Follow-up
Physical follow-up helps to ensure existence and operation of the business, status of
collateral properties, quality of goods, availability of raw materials, labor situation,
marketing difficulties observed ,undue turnover of key operating personnel, change in
management set up among others and environmental impact,

Financial Follow- up

Financial follow up is required to verify whether the assumptions on which lending

decisions was taken continues to hold good both in regard to borrowers’ operation,
correctness of declared financial data, conformity of financial data with other records (
such as taxes ,register books), and whether the end use is according to the purpose for
which the loan was given.

Legal Follow-up

The purpose of legal follow up is to ensure the availability legal remedy of the Bank is
kept alive at any times. It consists of obtaining proper documentation and keeping them
alive, registration of mortgage contracts, proper follow up of insurance policies.

The specific issues pertaining to legal follow up include: ascertaining whether contracts are
properly executed by appropriate persons and documents are complete in all aspects,
obtaining revival letters in time (revival letters refer to renewal letter for registration of
security contracts that have passed the statutory period as laid down by the law), ensuring
loan/mortgage contracts are updated timely and examining the regulatory directives, laws,
third party claims among others.

20
2.4 BANKING BUSINESS RISKS

Shareholders’ value maximization requires a firm to engage in risk management practices

only if doing so enhances the value of the firm and, by implication, its value to
shareholders (Ali, 2006). A volatile economy and recent credit crisis show the importance
of banks to increase attention on how risks can be measured and kept under control. Bessis
(2002:11) defines banking risks as “adverse impacts on profitability of several distinct
sources of uncertainty”.

Some of the risks associated with financial institutions are presented as follows: credit,
liquidity, market, operational, currency, solvency, and interest rate, country risks and
others.

2.4.1 CREDIT RISK

According to Valsamakis et al (2005), credit risk is the risk that a financial contract will
not be performed according to the agreement. It is the risk that the counter party to an
asset will default. In other words it is the risk to earnings or capital due to borrowers’ late
and nonpayment of loan obligations. Credit risk encompasses both the loss of income
resulting from the sector inability to collect anticipated interest earnings as well as the loss
of principal resulting from loan defaults. Credit risk arises because of the possibility that
the expected cash flows from advances and securities held, might not be paid in full. For
Cade (1999), credit risk is considered the most dangerous of the risks banks face.

Credit risk includes both transaction risk and portfolio risk. Transaction risk refers to the
risk within individual loans; transaction risk is mitigated through borrower screening
techniques, underwriting criteria and quality procedures for loan disbursement,
monitoring, and collection. Portfolio risk refers to the risk inherent in the composition of
the overall loan portfolio. Policies on diversification (avoiding concentration in a
particular sector or area), maximum loan size, types of loans, and loan structures lessen
portfolio risk.

21
2.4.2 LIQUIDITY RISK

Liquidity risk is the possibility of negative effects on the interests of owners, customers
and other stakeholders of the financial institution resulting from the inability to meet
current cash obligations in a timely and cost-efficient manner. Liquidity risk occurs when
there is a sudden surge in liability withdrawals resulting in a bank to liquidate assets to
meet the demand (Bessis,2002). It usually arises from management’s inability to
adequately anticipate and plan for changes in funding sources and cash needs. According
to Rose and Hudgins (2005) banks and other financial institutions are concerned about the
danger of not having enough cash to meet payment or clearing obligations in a timely and
cost effective manner. Efficient liquidity management requires maintaining sufficient cash
reserves on hand (to meet client withdrawals, disburse loans and fund unexpected cash
shortages) while also investing as many funds as possible to maximize earnings.

2.4.3 MARKET RISK

Market risk is the risk incurred in the trading of assets and liabilities when interest rates,
exchange rates and other asset prices change (Saunders and Cornett, 2003). It is the
current and potential risk to earnings and shareholders’ equity resulting from adverse
movements in market prices. It arises from interest rate, equity and foreign exchange risks
(Koch and Macdonald, 2003). According to Bessis (2002), due to higher competition in
the banking market, the interest income of banks is declining and banks are concentrating
more on non-interest income in order to mitigate this risk.

2.4.4 OPERATIONAL RISK

It is the risk of loss resulting from inadequate internal processes, people and systems or
from external events (Koch and Macdonald, 2003). Operational risk is the possible risk
that existing in technology or support systems will fail or malfunction. It also includes
human errors, fraud and failure to compliance with an institutional procedures and
policies (Bessis, 2002).

22
2.4.5 FOREIGN CURRENCY RISK

Concerns the possible impact in shortage of foreign currency and fluctuations in exchange
rates may have on the foreign exchange holdings or the commitments payable in foreign
currencies by business organizations (Valsamakis, et al., 2005). It is the possible that,
shortage of foreign currency and exchange rate fluctuations can adversely affect the value
of a bank’s assets and liabilities held in foreign currencies (Bessis, 2002).

2.4.6 CAPITAL OR SOLVENCY RISK

It is the risk that a bank may become insolvent and fail (Koch and Macdonald, 2003).
This risk isn’t considered a separate risk because all of the risks a bank faces, in one form
or another, affect a bank’s capital.

2.4.7 INTEREST RATE RISK

A bank is exposed to interest rate risk when the maturities of the bank’s assets and
liabilities are mismatched (Saunders & Cornett, 2003). Interest rate risk arises from the
possibility of a change in the value of assets and liabilities in response to changes in
market interest rates. If interest rates rise and a mismatch occur in maturities by holding
longer-term assets than liabilities, the market value of the assets will decline by a larger
amount than the liabilities. Also known as asset and liability management risk, interest
rate risk is a critical treasury function, in which financial institutions match

the maturity schedules and risk profiles of their funding sources (liabilities) to the terms of
the loans they are funding (assets). Bessis,(2002) states that interest rate risk could result
in economic losses and insolvency.

2.4.8 COUNTRY RISK

It is associated with the risk that foreign borrowers cannot repay the debt due to adverse
political and economical conditions or interference by the foreign government (Saunders
and Cornett, 2003).Besides the aforementioned risks Rose and Hudgins (2005) state that

23
banks are also exposed to: Compliance risk, Reputation risk, Sovereign risk, Strategic
risk, and Legal and Regulatory risks.

Financial institution managers (and regulators) review these risks in light of:

o the institution’s potential exposure to loss,

o the quality of internal risk management and information systems, and
o the adequacy of capital and cash to absorb both identified and unidentified potential
losses.

In other words, management determines whether the risk can be adequately measured and
managed, considers the size of the potential loss, and assesses the institution’s ability to
withstand such a loss.

2.5 CREDIT RISK MANAGEMENT

Loan is a major asset and source of income for banks and risky area of the industry.
Moreover, its contribution to the growth of any country is very clear. Bank credit is the
primary source of debt financing available for most customers in the personal, business or
corporate market. The underlying need for credit varies across these markets. Banks
generally also want to increase the base of their income and use credit extension as an
opportunity to cross sell other fee generating services when a customer applies for credit
facilities (Koch and MacDonald, 2003).

Successful financial institutions must meet the desperate needs of depositors and
borrowers. Depositors look for higher interest rates, short terms and no risk, while
borrowers seek low interest rates and long terms. Financial institutions are therefore, in
the risk intermediation business. To be successful, financial institutions, banks in
particular, must properly underwrite risk, manage and monitor the risk assumed
(Barrickman, 1990).

Credit risk can be defined as the potential for a borrower or counter party to fail to meet
their obligations in accordance with the terms of an obligation’s loan agreement, contract
or indenture (Sobehart, Keenan &Steyn, 2003).Credit risk is considered the oldest form of

24
risk in the financial markets. Caouette, Altman &Narayanan (1998: 1) state that “credit
risk is as old as lending itself”, dating back as far as1800 B.C. The first banks, which
started in Florence seven hundred years ago, faced very similar challenges that banks face
today. Although managing credit risk is their core competency, many banks failed due to
over-extension of credit (Caouette et al, 1998).

Credit risk is the most prominent risk assumed by banks due to various factors that
influence a borrower’s ability to repay the credit facility. The borrower’s ability to repay
is closely linked to the general economic conditions of a country. In favorable economic
conditions the ability to repay increases, which could be due to a favorable interest rate
environment, low inflation, increased income levels or a combination of these factors. The
opposite is however true in poor economic conditions. The borrower’s ability to repay is
adversely effected under these conditions due to a reduction in disposable income (Koch
and MacDonald, 2003). The increasing variety in the types of counterparties (from
individuals to sovereign governments) and the ever expanding variety in the forms of
obligations (from auto loans to complex derivatives transactions) has meant that credit
risk management has jumped to the forefront of risk management activities carried out by
firms in the financial services industry(Basel Committee,1999).

2.6 EMPERICAL REVIEW OF THE SPECIFIC CREDIT MANAGEMNT

PRACTICES

2.6.1 CREDIT RISK ASSESSEMENT PRACTICE

A bank, in considering whether to lend or not, takes into account the quality of a borrower
which is reflected in, inter alia, its past and projected profit performance, the strength of its
balance sheet (for example, capital and liquidity) the nature of and market for its product,
economic and political conditions in the country in which it is based, the quality and
stability of its management and its general reputation and standing

Risk, and the ways, in which it can be identified, quantified and minimized, is key
concerns for a bank’s management and its auditors when they are considering the need to
provide for bad and doubtful loans. No loan is entirely without risk. Every loan, no matter

25
how well it is secured, and no matter who is the borrower, has the potential to generate loss
for the lender. It is the degree of risk to which a loan is susceptible and the probability of
loss that vary; these should normally be reflected in the interest margin and other terms set
at the inception of the loan (Brown, 1998).

It is important for the bank to know the purpose of the loan, to assess its validity and to
determine how the funds required for the payment of interest and the repayment of capital
will be regenerated. The borrower’s ability to repay a loan is of paramount importance.
Ideally, the loan will be self- financing in that it will be repaid from the cash flow that the
borrower is able to generate from employing the proceeds of the loan.

2.6.2 COLLATERAL COVERAGE /SECURED LOAN

According to Boot and Thakor (1994), granting secured loans or loans backed by
borrowers’ assets /collaterals has been suggested in the literature as a solution to adverse
selection and moral hazard problems arising out of information asymmetry. Salas and
Saurina (2002) found loans without collateral to be riskier than mortgages for Spanish
savings banks during 1985-1997.

A bank will often require security for a loan in the form of a guarantee or mortgage, in
which case it will be concerned about the value and title of that security. The decision to
grant loan, however, should be based on the prospects and solvency of the borrower and a
careful analysis of how the funds to repay the loan will be generated.

2.6.2 CREDIT FOLLOW-UP AND RECOVERY PRACTICE

Regular monitoring of loan quality, possibly with an early warning system capable of
alerting regulatory authorities of potential bank stress, is essential to ensure a sound
financial system and prevent systemic crises (Agresti et al.2008)

There is a tendency by borrowers to give better attention to their loans when they perceive
they got better attention. Some of the loans defaults ascribe to lower level of attention
given to borrowers. It is advised that banks keep up with their loans timely.

Banks rarely lose money solely because the initial decision to lend was wrong. Even where
there are greater risks that the banks recognize, they only cause a loss after giving a
warning sign (Machiraju). More banks lose money because they do not monitor their

26
borrower’s property, and fail to recognize warning signs early enough. When banks fail to
give due attention to the borrowers and what they are doing with the money, then they will
fail to see the risk of loss. The objective of supervising a loan is to verify whether the basis
on which the lending decision was taken continues to hold good and to ascertain the loan
funds are being properly utilized for the purpose they were granted. In order to meet these
objectives banks need to see whether the character of the borrower, its capacity to repay
the loan, capital contribution, prevailing market conditions and the value of the collateral
that was taken during loan approval time continues to remain the same (George G, 2004).

As has been mention a bank can use different ways to monitor the borrower. Follow up the
financial stability of a borrower can be done by periodically scrutinizing the operations of
the accounts, examining the stock statements and ascertaining the value of security.
Visiting the borrower periodically to have understanding of the progress of the borrower’s
business activity and thereby give advice as necessary and it is also among the common
methods of loan follow up.

Constant monitoring increases the chance that the company will respond to a bank’s
concern and provide information more willingly. A bank which always closely follows a
company’s standing can often point out danger or opportunities to the company, as well as
quick agreement to request for credit.

From the regulatory point of view, Ethiopian banks are required to make continuous
review of their loan and submit reports to the central bank. This function of banks has a
legal as well as contractual base. But the detail as to the frequency of visiting the
borrower’s premises, verifying the use of the loan and other related circumstances is left to
the discretion of individual banks.

The legal base for banks to do the review is provided under Article 5 of Directive
No.SBB/43/2008.

2.6.3 LOAN CONCENTRATION RISK MANAGEMENT PRACTICE

Loan concentration is the extent of the total loan distribution to each sector of the economy
in a proportional way to minimize the risk involved in each sector of the economy. In order

27
to avoid loan default loans of a bank has to be balanced distribution based on the economic
activity of the country. When loans are concentrated on certain sector of the economy and
among few customers any economic fluctuation in the sector or on such customers will
seriously affect the loans of the bank.

2.7 CONCEPTUAL FRAMEWORK OF THE STUDY

From the literature review, discussed above, the researcher has constructed the following
conceptual framework to summarize the main focus points of the study in the following
framework.

Source: Own survey

Credit
Analysis / Collateral
Evaluation Coverage

Credit
Management
System

Credit Loan
Follow-up Concentration
and Recovery

28
 CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 INTRODUCTION

In this chapter the researcher explained the research design, approach, source of data and
data collection tools, sample size and sampling techniques, instrument, methods and
procedures of data analysis.

3.2 RESEARCH DESIGN AND APPROACHES

In assessing the credit management practices of Lion International Bank a descriptive

research design was used. Descriptive research illustrate the situation or phenomena to
provide answers to the questions of who, what, when, where and how associated with a
particular research problem, and used to obtain information concerning the status of the
phenomena (Shajahan, 2004).

3.3 POPULATION OF THE STUDY AND SAMPLE SIZE

In most cases it is impractical for researchers to collect data from the entire population that
is why it is necessary to take sample through appropriate sampling techniques. A good
sampling design is expected to represent the entire population, which also results in small
sampling error, viable in the context of available fund and result of sample study can be
applied to the total population (Kothari, 1985).

3.3.1 POPULATION OF THE STUDY

The target population considered in this study was staff members of the head office Credit
Management Department as a whole and branch managers as well as Customer Service
Officers of the main 20 branches found in Addis Ababa and three executive management
members of the bank who directly participated in the credit approval process were
assessed by structured questionnaire and unstructured interviews respectively. Since, all
loans of the bank are processed and approved at head office except Tigrai Region requests

29
which were approved at Mekelle Regional Office the selection of the entire officers of the
Credit Management Department would be helpful to collect sufficient information
concerning credit management practice of the bank. On the other hand managers of the
main 20 branches and the customer relationship officers of this branch were selected
based on the outstanding loan balance of June 30, 2019. The main twenty branches of the
bank namely Yeka, Haile G.Selase, Haya-Arat, Gurdshola, CMC, Jakros, Kazanchis,
Senga-Tera, Africa-Union, Sarbet, Bole, Saris, Gotera, Gofa, Arada, Merkato, Raguel,
Tekle-Haimanot, Stadium and Meskel-Flower were accounted 70% of the total
outstanding loans of the bank in the stated period. Hence, assessing 70% of the loans of
the bank could give a true picture of the total loans of the bank. In addition employees
who are working in these branches and at credit department have better understanding and
information about credit management practice of the bank. The information obtained from
the executive management member of the bank was also equally important to understand
the perception of the management members concerning the credit management practice of
the bank in general and the selected four credit management practices in specific and
remedies of the problem.

The above target population study conducted by questionnaire has summarized in the
following table.
Table 3.1 Population Size of the Study

Respondents Population Size

Division Managers 2

Customer Relationship Managers 5

Customer Relationship Officers 22

Credit Analysis officers 8

Credit Follow-up and recovery Officers, 8

Branch Managers 20

Total Population 65

30
Accordingly 65 employees of the bank were considered in the study and data was collected
from the total population of 65 employees who have direct day to day credit management
practice in the bank using census method.

3.3.2 SAMPLE SIZE

Since the population size of the study was manageable in size and representative, data was
collected from the total population of 65 credit processing and administering participant
employees using census method.

3.4 SOURCE OF DATA AND DATA COLLECTION TOOLS

For the purpose of this study, both primary and secondary data was collected. Accordingly,
the primary data were collected using open ended interview from three executive
management members of the bank and close ended questionnaire were used to collect the
desired data from the rest 65 target populations. Secondary data were collected from LIB
website, the bank’s credit policy and procedures and annual reports, published and
unpublished information, books and journals from library and internet. The questionnaire
was designed to collect data from credit processing practitioners of the bank to collect
practical information from employees without compromising their employment security
due to their participation in this research.

3.4.1 DATA ANALYISIS METHOD

Data from questionnaires were analyzed through descriptive statistics using SPSS software
version 20.0 (Statistical Package for Social Science). The descriptive statistics was
presented using tables in the form of percentage, mean and standard deviation.

31
3.5 ETHICAL CONSIDERATIONS

Confidentiality and privacy are the corner stone in the field of research in order to get
relevant and appropriate data. The researcher clearly assured the purpose of the study and
confidentiality of the information. Respondents were assured that any information
gathered through data collection instruments was used only for academic purpose. The data
and documents were secured during the research and kept safely. Back up of the research
inputs and outputs were archived. Moreover, data collected from the respondents was
based on their free consent. On the other hand, all sources and materials consulted have
been duly acknowledged.

3.6 VALIDITY AND RELIABILLTY

3.6.1 VALIDITY

The validity of research instrument can be considered how accurate the instrument
measures and what are supposed to measure Joubert and Ehrlich (2005). The face validity
of the instrument was assessed during pretest of the questionnaire on 10 employees of the
bank who are not part of the survey and the result of the pretest was found promising.

3.6.2 RELIABILTY

The reliability of instrument refers to a precision of the test even if the test is done again
and again (Joubert and Ehrlich 2005). The instruments of the study were adopted from
previous work and used from Tigist Assefa MBA Thesis with some modification.

The data collection tool was pre-tested among non-participants of the study on 10
employees selected from the bank to see whether the questions are well elaborated,
correctly interpreted, if there are any unclear enquiries.

Based on the feedback from participants some modification was made to the questionnaire.
The research instrument was also tested by Cronbach’s alpha and the value was 0.819
which indicates as “good” since more than 70% for a reliability coefficient.

32
Table 3.2: Cronbach’s Alpha Reliability Analysis
Reliability Statistics

Selected Credit management practices Cronbach's Alpha No of Items

Credit Analysis/evaluation practice .821 7

Collateral Coverage practice
.885 3
Follow-up and recovery practice
.864 13

Concentration risk .882 3

Ranking of risks .821 4

.805 30
Own survey, 2019

33
 CHAPTER FOUR

DATA PRESENTATION ANALYSIS AND INTERPRETATION

4.1 INTRODUCTION

This chapter comprises the presentation, analysis and discussion of the findings in view of
the research questions raised in the first chapter of this study. Primary and secondary
sources of data were used to look on the findings. The data were summarized and analyzed
using SPSS version 20 and presented using, tables, frequencies, percentages, statistically
described using mean and standard deviation. Moreover, additional data were collected
from three top management members of the bank using interview and from 65 employees
of the bank comprises of Credit area Division Managers and officers at the credit
department and branch managers of the main 20 branches found in Addis Ababa were
considered as target population.

4.2 RESULT SURVEY

The questionnaires were distributed to 65 employees and all of them were completed and
collected. As the result, the response rate was 100 percent.

Table 4.1: Survey Response Rate.

S.No. Item Respondent
1 Population Size 65
2 Completed and returned questionnaires 65
3 Response rate 100%

Source: Own Survey 2019

34
Table 4.2: Demographic Profile of Respondents

Percent
No. Description Type Frequency

1 Gender Male 38 58
Female 27 42
Total 65
100
2 Age 21-30 years 28
43
31-40 years 32
49
41-50 years 5
8
above 50 years 0 0

Total 65 100.0
3 Educational Qualification Diploma 4 6
First Degree 37 57
Masters Degree 24 37
Total 65 100
4 Job positition Customer Relationship
22
Officer 34
in the bank
Credit Follow-up and
8
Recovery Officer 12
Credit Analysis Officer 8
12
Customer Relationship
5
Manager 8
Branch Manager 20
31
Division Manager 2
3
Total 65 100
5 Banking Work Experience 1 to 2 years 0 0
3 to 5 years 25 39
6 to 10 years 19 29
Above 10 years 21 32
Total 65 100.0
Source: Own Survey 2019

35
In respect to the respondents’ gender composition the respondents 58 percent of the
respondents were male and the remaining 42 percent were female. From the research we
can understand that the gender composition of the employees in credit management of the
bank is relatively balanced.

The dominant age margin of the employees participated in the credit management process
of the bank were 31-40 years old i.e.49 percent followed by 43 percent in age group 21-30
years old and the remaining 8 percent of the respondents were found in the age gap of 41-
50 years old. This is a good implication of the work force of the credit related activity of
the bank has been performing with moderate experienced employees

The study shows that 57 percent of the employees participated in the credit management
process of the bank were BA degree holders and 37 percent were master’s degree holders
but only 6 percent were diploma holders. In general, table 4.2 clearly shows that
educational qualification the employees working in the credit processing activity had
promising qualification to perform their job.

From the total respondents of the research 34 percent were customer’s relationship officers
who were assigned at the 20 target branches and at the head office Credit Management
Department. The next dominant figure of the participants were Branch Managers who had
31 percent share followed by 12 percent each credit follow- up and credit analysis officers.
But the Customers’ Relationship Managers were 8 percent of the respondents and only 3
percent of the respondents were Division Manager in position. These clearly indicated that
the respondents of the questionnaire had first hand information and direct involvement in
the credit management practice of the bank that can greatly contribute to the data quality of
the survey.

The work experience of the employees who had participated in the study indicated that 39
percent of the employees had only 3 to 5 years experience and the 32 percent of the
employees had above ten years work experience but 29 percent of the respondents had 6
to 10 years experience. The fact that majority of the respondents had above six years
experience in banking sector and credit operations that would help to capture a good
quality of data.

36
4.3 CREDIT RISK ASSESSEMENT/EVALUTION PRACTICE OF THE BANK

Table 4.3 shows the perception of the respondents on credit assessment practice of the
bank .Accordingly, 47.7 percent of the respondents strongly agree and 24.6 percent of the
respondents agreed that the bank was lenient / lax to customers need during credit
approval. On the other hand 47.7 percent of the respondents disagree for statement that the
bank makes maximum effort to secure its loans by collateral. In the case of know your
customer (KYC) policy 46.2 percent of the respondents agree and 32.3 percent strongly
agree that the bank had used KYC as main criteria of quality borrowers. With regard to
loan concentration 56.9 percent and 32.3% percent of the respondents’ agree and strongly
agree respectively on existence of loan concentration risk on certain products of the bank.
Similarly, 41.5 percent of the respondents were disagreed to the banks’ efforts to avoid
loan concentration risk. With regard to the efforts of the bank to have quality credit
analysis, 47.7 percent of the respondents disagreed to statement. Moreover, the response of
the survey participants concerning the importance of poor risk assessment as stipulated in
the table 4.3 also shows 47.7 percent agreement,20 percent neutral and another 20 percent
disagree on the statement that the poor risk assessment of LIB has reduced the quality the
loans.

37
 Table 4.3: Credit Assessment/Evaluation practice

N Statement Strongly Strongly Standard

Agree Neutral Disagree deviation
o agree Disagree Mean
(2) (3) (4) (SD)
(1) (5)
% % %
% %

LIB is Lenient / lax to customers need 47.7 24.6 10.8 10.8 6.2 2.03 1.262
1 during approval
The bank makes maximum efforts to 23.1 20.0 3.1 47.7 6.2 2.94 1.368
secure loan by building and other type of
2 collateral.
The bank mainly uses know your customer 32.3 46.2 16.9 4.6 4.6 1.94 0.827
3 (KYC) as a policy base for credit analysis.
Loans of the bank are highly concentrated 29.2 56.9 4.6 9.2 9.2 1.94 0.846
4 on few credit products.
The bank makes necessary effort to avoid 7.7 18.5 20.0 41.5 12.3 3.32 1.147
5 loan concentration risk on certain products
The current credit management practice of 20.0 15.4 13.8 47.7 3.1 2.34 1.065
the bank paid sufficient attention to the
importance of proper Credit analysis or
6 evaluation.
The poor risk assessment of LIB will 10.8 47.7 20.0 20.0 1.5 2.54 0.985
7 reduce the quality of its loan.

Source: Own Survey 2019

From the reply given by the respondents, it is easy to understand that bank is too flexible to
in its response to the requests of the customers. Naturally customers always demand to get
the maximum loan amount at any time. As a result, instead of basing on tangible merit of
the borrowers the lenient/lax credit management practice of LIB, would lead to the
possibility of high adverse selection and lower quality loan and advance.
The lower effort of the bank to secure its loans and advances by collateral would adversely
affect the interest of the bank as bank has little or no collateral to recover its bad debt loan
when customers fail to perform their obligation as per the contract.
As indicated above the bank has been granting loans based on KYC policy recruitment. On
contrary Ethiopia as a nation do not have as such strong national ID and neat personal

38
 record that can provide sufficient information about borrowers. As a result, the likely hood
adverse selection is significant and possibility of bad debt is also higher.
On the other hand, the loans of the bank were highly concentrated on certain products
consequently the success and failure of the bank is subjected to the fate of such sector of
the economy and the loan type. Accordingly, the possibility of lower quality loan and total
collapse of the bank would be clear.
In general, the outcome of the study from the perception of the employees indicates that
poor credit risk assessment, poor KYC application and higher loan concentration cause
lower quality of loans.

Table 4.4: Credit Management Practice in Securing Loans by Collateral

N Statements Strongly Strongly Standard

Agree Neutral Disagree deviation
o agree Disagree Mean
(2) (3) (4) (SD)
(1) (5)
% % %
% %

Loans backed by collateral performs 40.0 43.1 9.2 7.7 0.00 1.85 0.888
8 well
Collateralizing loans help to protect loan 52.3 38.5 1.5 6.2 1.5 1.66 0.906
9 default
Most of the time non collateralized/clean 30.8 23.1 21.5 16.9 7.7 2.48 1.30
10 loans are defaulted
Source: Own Survey 2019

As presented in the table 4.4, granting loan against collateral is believed to ensure better
loan performance by 43.1 percent and 40 percent agreement and strong agreement of the
respondents respectively. Similarly, 52.3 and 38.5 percent of the respondents strongly
agreed and agreed respectively that collateral would help to protect loan default. On the
other hand, 30.8 percent and 23.1 percent of the respondent strongly agree and agree
respectively believed that most of the time non collateralized/clean loans are defaulted.

This employees perception survey shows borrowers perform better in their repayment
record when they offered collateral that means collateral also serves as a limit to the loan
appetite of the customers when banks require proportional collateral for the amount of loan
the granted. On contrary if banks are less dependent on collateral for the amount of loan

39
 they granted borrowers would create great pressures on banks to take huge amount of loan
as much as possible but in most cases less effort is made to repay as per the contract.

In conclusion, the implication of the above table is a clear evidence of the existence of
poor credit management practice as a result of its lower attention to the importance of
securing its loan against collateral.

Table 4.5: Credit Follow-up Practice of the Bank

No Statements Strongly Strongly Standard

Agree Neutral Disagree deviation
agree Disagree Mean
(2) (3) (4) (SD)
(1) (5)
% % %
% %

LIB is strictly active enough in credit 18.5 16.9 18.5 41.5 4.6 2.97 0.537
11 follow-up and monitoring activities.
LIB pays lesser attention to the early 16.9 41.5 20.0 20.0 1.5 2.48 0.647
12 warning signals in credit management.

The follow-up and recovery Division of 6.2 32.3 24.6 23.1 13.8 3.06 0.564
LIB is fully authorized and accountable
13 in managing credit follow-up.

The follow-up and recovery Division of 6.2 26.2 30.8 26.2 10.8 3.09 0.654
LIB is equipped with the necessary
trained and experienced manpower in
14 managing credit follow-up.
LIB’s practice is too flexible in 20.0 53.8 18.5 7.7 0.00 2.14 0.827
rescheduling and restructuring credit
15 facilities.

LIB is active in timely searching for 3.1 21.5 33.8 36.9 4.6 3.18 0.934
16 attachable properties to reduce bad loans

LIB is aggressive in timely foreclosure of 1.5 18.5 24.6 44.6 10.8 3.45
17 held collaterals to recover it bad loans, 0.969

The bank follows excessively rigid 4.6 23.1 43.1 29.2 0.00 2.97 0.847
procedure in disposing held and acquired
18 properties

LIB tries to reduce the volume of bad 13.8 35.4 21.5 27.7 1.5 2.68 0.732
debts through injecting more loans
19 (disbursement)

Good credit follow-up and monitoring 27.7 60.0 1.5 9.2 1.5 1.97 0.901
20 can reduce the occurrence of bad loans.
Higher budget and sufficient manpower 21.5 50.8 10.8 13.8 3.1 3.1 0.550
at Credit Follow and Recovery Division
21 of the bank can lower the bad debts.

Source: Own Survey 2019

40
Table 4.5 indicates the target populations’ perception on credit follow-up practice of the
bank. Accordingly, 41.5 percent of the respondents disagree to the statement “LIB is
strictly active enough in follow-up and monitoring activities”. In addition, 41.5% of the
respondents believed that LIB pays lesser attention to the early warning signals in its credit
follow-up management. On contrary, 53.8 percent of the respondents agreed to the
statement that the bank is too flexible in rescheduling and restructuring credit facilities.
From the respondents’ perception point of view we can understand that the bank’s practice
of credit follow-up is too weak to protect the bank from unnecessary loss.

Table also shows majority of the respondents with 36.9 percent disagree with statement
that “LIB is active in timely searching for attachable properties to reduce bad loans”.
Moreover, 33.8 percent of the respondents were also neutral in their response to the above
statement.

Besides, the weakness of the bank in timely searching for attachable properties to avoid
credit risk is witnessed by 36.9 percent of the respondents disagreement to the statement
that “LIB is active in timely searching for attachable properties to reduce bad loans” with
same token the next large number of respondents with 33.8 percent were neutral to the
above statement.

Regarding the other practice of bank’s credit management 35.4 percent of the respondents
agree that the bank had injected additional loan to reduce bad loans during peak seasons.
However, 27.7 percent of the respondents disagree with the idea of additional fund
injection to reduce NPL and only1.5 percent of the respondents had strongly disagreed
with idea. The perception survey indicated that 60 percent of the respondents agree that the
good credit follow up and monitoring can reduce the occurrence of bad loans. On the other
hand about 50.8 percent of the respondents agree that higher budget and sufficient
manpower at Credit Follow and Recovery Division can lower the bad loan.

The bank had been practicing too flexible procedure in rescheduling and restructuring for
simple requests of borrowers would lead to reduction of borrowers commitment to respect
the initial repayment contract. The delays in repayment gradually lead to higher
accumulated non-performing loan.

41
 The implication of the above discussion can be used to conclude the credit recovery and
follow-up performance and practice has direct association to the quality of loan
performance. From the respondents perception point view the bank had been failed to
provide sufficient attention to the early warning signals in its credit management and to
equip the recovery and follow division of the with the necessary manpower; budget and
authority. In addition, 44.6 percent of the respondents agreed that the bank’s practice was
less aggressive in timely foreclosure of held collaterals to recover its loans. In general the
credit management practice of the bank had failed to provide sufficient credit follow-up
and related activities. Consequently, the risk of higher level of uncollected loan would be
obviously very sky-scraping.

Since, loan follow is one of the very important credit tasks to watch after the funds of the
bank as what extent the customer has utilized the fund to the intended purpose, to what
extent the business of the customer has changed after getting the loan.

When banks failed to take corrective action based on the early warning signals the bad
loans volume will increase over time.

Table 4.6: Credit Management Practice in Case of Concentration Risk

N Statements Export Import Standard

Export Domesti Building
pre- Trade deviation
Term c trade term loan Mean
o shipment
(2) loan (3) (4)
(SD)
(1) (5)
% % % %
%

Which credit product is currently the 80.0 10.8 3.1 1.5 4.6 1.40 0.981
dominant credit facility of the Bank?
22 Tick where appropriate.
Which credit product is currently the 86.2 1.5 3.1 3.1 6.2 1.42 0.942
most vulnerable for concentration
23 risk? Tick where appropriate.

Source: Own Survey 2019

Besides the above questions respondents were asked to provide their perception on loan
concentration risk of the bank as stipulated in Table 4.6.Accordingly, 80 percent of the

42
 respondents agreed that export pre-shipment credit facility was the dominant facility out of
the given five main credit products of the bank. In addition, only 10 percent of the
respondent agreed that import trade loans are the next dominant credit facilities of the
bank. Similarly, respondents were asked to select the most vulnerable credit product for
concentration risk out of the top credit products of the bank. As a result, 86.2 percents of
the respondents vote for export pre-shipment facilities as the most vulnerable products of
the bank.

The above table has clearly indicated the weakness of the bank in managing concentration
risk on export pre-shipments credit facilities instead of having balanced composition of
credit basket. Moreover, the concentrated type of bank loan was usually granted on clean
basis. Hence, the possibility of high and unrecovered bad debt is noticeable in near future
unless some other strategic shift is adopted. The implication of high concentration risk is a
clear indication of the bank’s high possibility of bad debt when the concentrated sector of
the economy faces some kind of economic crisis.

Table 4.7: The practice of granting loans on Clean Basis and at Lower Interest rate

Statements Strongly Strongly Standard

Agree Neutral Disagree deviation
agree Disagree Mean
(2) (3) (4) (SD)
(1) (5)
% % %
% %

Loans with higher concentration 47.7 32.3 4.6 15.4 0.00 1.88 0.682

risk possibilities are loans granted

24 on clean basis.
Loans with higher concentration 36.9 46.2 12.3 4.6 0.00 1.85 0.815
risk are loans granted in order to
25 encourage export trade.
Loans with higher concentration 27.7 33.8 10.8 18.5 9.2 2.48

risk possibilities are loans granted 0.734

26 at lower interest rate.

Source: Own Survey 2019

43
 With respect to the practice of granting loans on clean basis as presented in table 4.7 above
47.7 percent of the respondents strongly agreed and 32.3 percent agreed that loans with
higher possibility of risk are the loans granted on clean basis. Similarly, 36.9 percent of the
respondents strongly agreed and 46.2 percent of the participants agreed that most of the
loans with higher possibility of concentration risk were granted to encourage export trade.
In addition, 27.7 percent of the respondents strongly agreed and 33.8 percent agreed with
the statement said “Loans with higher concentration risk possibilities are loans granted at
lower interest rate.”
From the above responses of the staff members, the possibility of concentration risk was
higher for the loans granted on clean basis than loans granted against any kind of collateral.
These loans are usually granted to encourage export business which is the most vulnerable
area of credit facilities due to lack of collateral and volatile nature of the Ethiopian export
trade. Besides, these loans were mostly granted at lower interest rate usually at 11 percent
per annum to encourage exporters. Consequently, the export loans of the bank are the most
concentrated risky credit area of the bank unless the bank makes dynamic strategic shift on
its collateral and interest rate policy.

4.8: Ranking of the credit management practice in case of the selected four risk areas

Risk areas in credit Mgt practice 1st 2nd 3rd 4th

27 Poor credit analysis/ evaluation 20.0 9.2 15.4 55.4

Weak Collateral Coverage 40.6 27.7 19.4 12.3

28
Poor Credit Follow-up and recovery 4.6 27.7 46.2 21.5
29 practice
30 High Loan Concentration 34.8 35.4 19.0 10.8

Source: Own Survey 2019

On the last part of the questionnaire, respondents were asked to rank the credit
management practice of the bank in case of the selected four risk areas that could reduce
the quality of the bank loans in of their risk level (from one to four).The ranking result in
this regard indicated that 40.6 percent and 35.4 percent of the respondents ranked insecure

44
collateral and high loan concentration as the first and the second risk areas of the bank that
can seriously reduce the quality of the loan. Whereas, 46.2 percent of the respondents
ranked follow-up and recovery activities as the third risk area in reduction of quality of the
loans and lastly respondents ranked poor credit analysis/evaluation as the fourth risk can
reduce the quality of the loan.

The implication of the above responses of the credit processing staffs of the bank indicated
that the loans granted on clean basis and the high export credit facility loan concentration
were the primary dangers of the bank in reduction of the quality of the loan and that can
bring total collapse of the bank unless radical consideration is given against these two risk
areas. On the other hand, poor credit follow-up and recovery activities and poor risk
assessment/evaluation were the expected risk areas of the bank that causes for poor quality
loans ranked as third and fourth respectively, that needs serious attention by the
management of the bank to improve the quality of the loan.
.

45
 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 INTRODUCTION

The forth chapter presented the research results, analysis and interpretation of the data,
while this chapter is dedicated for the summary, conclusions and recommendation of the
research.

5.2 SUMMARY OF FINDINGS

The study conducted survey of employees’ perception that had daily participation in the
credit management practice of the bank using self-administered questionnaires and
structured survey of documents and unstructured interview for three executive
management members of the bank. The survey had a response rate of one hundred percent.
Twenty major branches of the bank were selected for the survey based on June 30, 2019
total outstanding loan balance of the bank. From the total respondents 32 percent of the
employees had ten years and above banking experience but 39 percents had three to five
years work experience. Moreover, 29 percent of the respondents had 6 to 10 years banking
experience.

The survey indicated that 47.7 percent of respondents disagree to the statement that the
bank makes maximum efforts to secure loan by building and other type of collateral. In
addition, the respondents had ranked first, weak collateral coverage as the primary risk
area in credit management of the bank.

The second major finding the of the survey was reported to be, the bank’s weak credit
management practice in reduction of the current high loan concentration in export loans
Currently the export credit facilities of the bank have reached about 39 percent of the total
loan. Moreover, these facilities were mostly granted on clean basis in the form of export
pre-shipment. Considering the nature of Ethiopian export commodities which are

46
incompetent in the global market in quality, quantity and price, its vulnerability risk is
very high. The support of the Ethiopian government to this sector is also weak and
inconsistent. It is common only few exporters were able to continue in the export business
with big challenges. As a result, heavily financing the export sector instead of balanced
financing in each sector of the economy will lead to huge challenges to the bank.

The third finding of the survey as a source of credit risk was poor credit follow up and
recovery practice. Accordingly, 27 percent and 60 percent of the respondents strongly agree and
agree respectively that poor follow-up and recovery practice were the main risk areas of the bank.
In addition, poor credit follow-up and recovery activity of the bank was ranked by the
respondents as the third factor for the occurrence poor quality loan. The Existence of
serious and consistent credit follow-up practice would help to the bank and borrowers to
trace the problem in loan repayment and to take timely action to recover bad debt for the
banks and to avoid business loss for the borrowers.

According to, the survey, the last identified risk area out of the four was poor credit
analysis/evaluation evidenced by 60 percent agreement and 27 percent strong agreement of
the 65 respondents.

Genuine credit risk assessment/evaluation practice would help banks to identify the
economic and political environment of the country, behavior and track record of the
borrowers, nature of the collateral offered and other factors affecting quality of the loan.
Good credit assessment would definitely lead to genuine credit decision and reduce
adverse selection of borrowers at same time the possibility of having quality loan will be
higher.

47
5.3 CONCULUTION

The main objective of this research was to assess the credit management practice of Lion
International Bank S.C. To achieve this objective, the researcher used mixed research
approach. More specifically, the researcher used survey on major branches found in Addis
Ababa targeting on the main credit facility poles of the bank purposely to assess the credit
management practice of the bank. Employees of the bank who had day today participation
in the credit approval and collection process were assessed using structured survey
questionnaire and unstructured interview of the executive management members of bank
and various bank reports. Based on the respondents view, it was evident that the most
likely credit management practices that seriously affect the quality of loan were concluded
as follows:

The study indicated that weak effort to secured credit facilities against collaterals in
managing credit of the bank was the main reason for poor quality loan growth. Failure to
develop balanced credit portfolio among different sectors of the economy would lead to
poor quality loans where the economy of the concentrated loan goes wrong. The third
problem indentified as credit management practice of the bank was found to be poor credit
follow-up and recovery practice. Credit Follow-up plays essential role to ensure loan
collections and failure to make proper follow-up after disbursement of the loan was found
to be one the reason for low quality loan. The fourth identified credit management
practice of the bank as source of poor quality loan was weak credit analysis/evaluation
during processing of the credit requests.

The in-depth interview with senior executives of the bank indicated that the major factors
causing occurrences of non-performing loans includes: lack of sufficient collateral
coverage by borrowers, unhealthy competition among banks ,poor credit culture, huge
pressure of share holders to have maximum annual dividend on their investment, scarcity
of foreign currency, weakness in conducting know your customer (KYC) principle before
lending, the bank’s aggressive lending to maximize profit, and inadequacy of the
supervisory authority policies.

48
Generally, in respect of the factors that could affect the credit management practice of the
bank , the structured questions in the questionnaire and unstructured in-depth interviews
had identified the following credit management practices as the main problems for low
quality loans and advances such as weak effort to secure loans against strong collateral,
failure to build balanced loan portfolio, providing lower attention to the roles of the credit
follow-up and recovery activities of the bank, undermining the contribution of wise credit
risk analysis/evaluation, unhealthy competitor banks credit culture, huge pressure of share
holders to have maximum annual dividend on their investment, scarcity of foreign
currency and others ascribe to the poor credit practice of the bank.

5.4 RECOMMENDATION

Based on the summary findings and conclusions, the following recommendations are
suggested:

o As loans would contribute to the development of an economy and its default leads
to occurrence of huge loss on banks and a country; deliberate effort shall be exerted
to build quality loan in order to protect the interest of the public in general and
depositors and share holders in particular;

o The bank should create a strong and efficient credit administration, monitoring, and
controlling practice that regularly reviews loan files and business of the borrowers,
to ensure whether approved loans are utilized for the requested purpose, and early
loan workout and rescheduling mechanisms should exhaustively implemented to
increase the quality of the loans and to minimize the overall credit risks of the
Bank;

o The management of banks hall focus on healthy, long term and sustainable growth
instead of short run and vigorous results;

49
 o The bank has to made systematic strategic shift to reduce the concentration risk
associated with the export loan by equitable distribution of its credit products
among the different sectors of the economy;

o Even though using know your customer (KYC) principle or policy is important it
has to be used with sufficient certainty instead of over simplifying;

o As evidenced by the survey, the bank’s effort to secure its loans by collateral was
very limited but it would reduce the possibility of recollecting the loan. As result,
the bank has to discourage clean loans to reduce the possibility of poor loans;

o The bank has to give due emphasis for development and competency of the Credit
Follow-up and Recovery Division of the bank to discharge its responsibility of
serious credit follow-up and recovery activity.

5.5 RECOMMENDATION FOR FURTHER STUDIES

The focus of this study was Assessing Credit Management Practice of Lion International
Bank S.C. and it is therefore, recommended that a similar study can be conducted on other
groups of private commercial banks of Ethiopia as there might have some other unique
determinants of quality loans.

50
 REFERENCES

Alebachew Neguse.(2015). Assessment of Credit Management Practice: The Case of Nib

International Bank S.C MA Thesis , St.Mary University

Agresti, A.M., P. Baudino & P. Poloni. 2008. The ECB and IMF indicators for the Macro
prudential analysis of the banking sector: a comparison of the two approaches. ECB
Occasional Paper no. 99.

Asante Yaw Adu(20150 Assessing Credit Management Practices in Savings & Loans
Companies: A Case Study of First Allied Savings & Loans Ltd, Ksi
Ali Fatemi & Iraj, Fooladi.(2006). Credit Risk Management: a Survey of Practices.
Managerial Finance 32(3): 227-233
Asrat Getachew.(2013). The Reporter English Edition. "Project with no Takers". ,2013.
Addis Ababa.
Bagehot, Walter.(1963).Banking Theory and Practice, Lombard Street, Homewood; IL:
Richard D. Irwin. Reprint of the1873 edition.
Barth, J., Lin, C., Lin, P. & Song, F.(2008). Corruption in Bank Lending to Firms: Cross
Country micro evidence on the beneficial role of competition and information sharing.
Journal of Financial Economics, 91: 361-388.
Barrickman, J.R.(1990). Successful Commercial Lending from the Ground up to Bottom
Line,7(2): 12-14.
Basel Committee.(2001). Sound Practices for the Management and Supervision of
Operational Risk. Basel Committee on Banking Supervision.
Basel Committee.(1999).Principles for the Management of Credit Risk. Consultative Paper
Prepared by the Basel Committee on Banking Supervision.
Beckman, TN & Bartels R.(1955). Credits and Collections in Theory and Practice. 6th
edition. New York: McGraw-Hill.
Bessis J.(2002). Risk Management in Banking.(2nd Edition). London: John Wiley & Sons
Ltd
Boot, A.W.A., and A.V. Thakor. 1994. Moral hazard and secured lending in an infinitely
repeated credit market game. International Economic Review 35:899–920.

Brown brigde, Martin. 1998. The Causes of financial distress in local banks in Africa and
implication for prudential policy, UNCTAD/OSG/DP/132.

Cade, E.(1999). Managing Banking Risks. Chicago: Glenlake Publishing Company, Ltd

1
Caouette, JB, Altman EI & Narayanan P.(1998).Managing Credit Risk: The Next Great
Financial Challenge. New York: John Wiley & Sons, Inc
De Lucia, R. & Peters, J.(1998). Commercial Bank Management.(4th Edition). Sydney,
Country: LBC Information Services.
Demirgüç-Kunt, A. & E. Detragiache.(1998). The Determinants of Banking Crises:
Evidence from Developed and Developing Countries. IMF Staff papers, Vol.45,No. 1.
Ekanayake, E.M and Azeez A.A.(2015). Determinants of Non-Performing Loans in Licensed
Commercial Banks: Evidence from Sri Lanka, Sri Lanka Asian Economic and
Financial Review, 5 (6), pp. 868-882.
Eveline Ngwa (2010) Credit Risk Management In Banks as Participants In Financial
markets, a qualitative study
FDRE, The House of Peoples’ Representatives. (2008).Proclamation No. 591/2008, 'The
National Bank of Ethiopia Establishment', Addis Ababa.
FDRE, The House of Peoples’ Representatives. (2008).Proclamation No. 592/2008, 'Banking
Business in Ethiopia' Addis Ababa.
Ferreti, F.(2007).Consumer Credit Information Systems: a critical review of the literature.
Too little attention paid by lawyers? European Journal of Law and Economics, 23(1):
71-88.
Fofack, Hippolyte (2005). Non-performing loans in sub-Saharan Africa: Causal Analysis and
Macroeconomic Implications. World Bank Policy Research Working Paper No. 3769,
Fourie LJ, Falkena HB & Kok WJ.(1998). The South African Financial System, 2nd edition.
Johannesburg: Thomson Publishing.
George G.Kaufman.(2004).Macroeconomic Stability, Bank Soundness, and Design
Optimum Regulatory Structures, Multinational Finance Journal, 1/30/04.
Gary, R (2000). The Fundamental Means of Customers’ Attraction and Retention Strategies.
New Castle: Great Britain.
Gehrig, T. and Stenbacka, R. (2007). Information Sharing and Lending Market Competition
with Switching Costs and Poaching, European Economic Review, 51: 77-99
Habtamu Gemechu ,(2015).Assessment of Factors affects Non-Performing Loans. The case
of Ethiopian Private Banks. Addis Ababa University
Harris, P.(2003). A Banker’s view of BEE. Briefing to Business Map Foundation members,
Johannesburg, July 25, 2003.http://www.businessmap.co.za accessed on 2019/03/29
International Monetary Fund.(2009).Initial lessons of the Crisis. IMF Staff Paper 09/37.
Washington, DC
Jappelli, T. and Pagano, M.(2005). Role and Effects of Information Credit Sharing.
Cambridge: The MIT Press. Available from: http://www.csef.it/WP/wp136.pdf
[Accessed May 2019]

2
Jentzsch, N.(2008). An Economic Analysis of China’s Credit Information Monopoly, China
Economic Review, 19: 537-550.
Kallberg, J. & Udell, G.(2003).The Value of Private Sector Business Credit Information
sharing: the US case, Journal of Banking and Finance, 27: 449-469.
Kaufman, George G.(2004). Macroeconomic stability, Bank Soundness, and Design
Optimum Regulatory Structures, Multinational Finance Journal.
Koch T.W & Scott MacDonald S.(2003).Bank Management,(5th edition). Ohio: South
Western Thompson Learning.
Koch, T.W. and Scott Mac Donald S.(2006).Management of Banking, (6th edition), U.S.A:
Thomson - South Western.
Kothari C.R.(1985). Research Methodology, Methods and Techniques. New Delhi: Wiley
Estern limited.Lalon,R.M.(2015). Credit Risk Management (CRM) Practices in Commercial
Banks of Bangladesh: “A Study on Basic Bank Ltd.”. International Journal of
Economics, Finance and Management Sciences, 3, 2, 78-90.
Leply WH.( 2003). Bankers, Betas… and the Cs of Credit. The RMA Journal, 86(4): 62-65
Lion International Bank S.C. (2014). Annual Report 2013/14. Addis Ababa
Lion International Bank S.C. (2015). Annual Report 2014/15. Addis Ababa
Lion International Bank S.C. (2016). Annual Report 2015/16. Addis Ababa
Lion International Bank S.C. (2017). Annual Report 2016/17. Addis Ababa
Lion International Bank S.C. (2018). Annual Report 2017/18. Addis Ababa
Lion International Bank S.C. (2017). Credit Analysis Procedure. Volume No.3. Addis Ababa

McCarthy M.G; Schneider, D.K. and Tibb, S.L.(2010). Investments and loans reported by
the 10 largest U.S banks, Journal of Bank Accounting and Finance Dec 2009- Jan
2010: P19-24.

McManus S. (2000). A Guide to Credit Management in South Africa. Durban: Butterworths

Murphey LB.(2004a).Focusing on the Fundamentals (Again).The RMA Journal,86(8):18-19

Nathenson JL.(2004).A Primer on Deals for Middle-Market Bankers. The RMA

Journal,86(8): 46-54

National Bank of Ethiopia.(1994),The Licensing and Supervision of Banking Business,

Proclamation No. 84/1994. Addis Ababa.

National Bank of Ethiopia.(2008). Asset Classification and Provisioning Directive No.

SBB/43/2008. Addis Ababa.

3
National Bank of Ethiopia.(2010). Annual Report, Addis Ababa

National Bank of Ethiopia. (2012).Directives for the Establishment and Operation of Credit
Reference Bureau, Directives No. CRB/01/2012.

National Bank of Ethiopia, (2015).Improving The Industry with Special Focus on

Investment: Business Planning and Monitoring Affair Department, Alpha printer,
Addis Ababa

National Bank of Ethiopia.(2016). Annual Report Addis Ababa

Onchomba O.F.(2014). The Relationship between Macroeconomic Factors and Non-

Performing Loans in Mortgage firms in Kenya. School of Business: University of
Nairobi

Oyatoya, W.(1983). Constraints to Agricultural Loan Repayment. 1st ed. Nigiria: Chartered
Institute of Banks.

Rana-Al-Mosharrafa (2013) Credit Assessment Practice of a Commercial Bank in

Bangladesh, International Journal of Economics,Finance and Management Sciences.

Rose, PS.(2003).Commercial Bank Management (5th Edition). New York: McGraw

Hill/Irwin

Rossi, S. P. S., Schwaiger, M., & Winkler, G. (2005). Managerial Behavior andC / Profit
Efficiency in the Banking sectors of Central and Eastern European countries, (March).

Ross,Westerfield and Jaffe.(1999).Corporate Finance(5th Edition). Irwin/McGraw-Hill.

Tekeste Gebrekidan, (2016).The Assessment of Credit Management Performance in

Emerging Private Commercial Banks in Ethiopia: The Case of Berhan International
Bank S.C MA Thesis , St.Mary University

Salas, V., &Saurina, J. (2002). Credit risk in two institutional regimes : Spanish commercial
and savings banks. Journal of Financial Services Research, 22(3), 203–22

Saunders, A. & Cornett, MM. (2003).Financial Institution Management (4th edition). New
York:McGraw-Hill/Irwi.

Shajahan, S. (2004). Research Methods of Management (2nd ed.) Nigiria: Chartered Institute
of Banker

Shofiqul Islam, Mohammed, Nikhil Shil&Mannan Abdul.(2011). Non-Performing Loans: Its

Causes, Consequence and Some Learning, American International University,
Bangladesh, East West University, Stamford University.

4
Sobehart JR, Keenan SC & Stein R.(2003).Complexities and Validation of Default Risk
Models. (In Frontiers in Credit Risk: Concepts and techniques for applied credit risk
measurement.) Singapore: Wiley

Tigist Asefa, (2017). An Assessment of Non-Performing Loan of Commercial Banks of

Ethiopia.MA Thesis.St.Mary University.Addis Ababa.

Valsamakis, A.C., Vivian, R.W. & Du Toit, G.S.(2005). Risk Management: Managing
Enterprise Risks.(3rd Edition). South Africa: Heinemann Publishers

Vance TD.(2004). From Me to You, Reflections on a Career in Lending. The RMA Journal,
87(4): 30-37

5
 QUESTIONNAIRE
St. Mary’s University
School of Graduate Studies
Dear employees of Lion International Bank S.C.

I’m a student of St. Mary’s University undertaking a master of Business Administration,

and I’m conducting my postgraduate thesis on “Assessment of Credit Management
Practice of Lion International Bank S.C.” As partial fulfillment of the requirement of
degree of masters, I would appreciate your favorable considerations for the enclosed
questionnaire the research endeavor. Your response to this Questionnaire will serve as a
source of information for the thesis purpose only. Any response you provide here is strictly
held confidential and will be used exclusively for the research purpose only. Your honest
and professional response is vital for the research outcome to be reliable and for successful
timely completion of the study. .

Thank you in advance for your cooperation and timely response.

Part I: Back ground information about respondents

Instruction: - Please circle the appropriate response from the options provided.
A. Sex: 1. Male 2. Female
B. Age: 1. 21-30 years 2. 31-40 years 3. 41-50 years 4. Above 50 years
C. Your latest qualification?
1. Diploma 2. First Degree 3. Masters Degree 4. Doctorate Degree
D. Your current position in the bank?
1. Customer Relationship officer 2. Credit Follow-up Officer
3. Credit Analysis Officer 4. Customer Relationship Manager
5. Branch Manager 6. Division Manager
E. Your work experience in the banking industry?

1. 1 to 2 years 2. 3 to 5 years 3. 6 to 10 years 4. Above 10 years

Part II: - Study questions on Credit Management Practice of Lion International

Bank S.C

i
 Please put (√) mark inside the box that indicate your level of agreement for each statement.

Least Considered Most Considered

1. Strongly Agree (SA) 2. Agree (A) 3. Neutral (N) 4.Disagree (DA) 5.Strongly Disagree Agree
(SA)

o Please indicate your degree of agreement or disagreement to the statements

pertaining to the practice of credit request analysis/evaluation process

Statements Strongly Strongly

Agree Neutral Disagree
agree Disagree
(2) (3) (4)
(1) (5)
LIB is Lenient / lax to customers need during
1 approval

The bank makes maximum efforts to

secure loan by building and other type of
2 collateral.
The bank mainly uses know your
customer (KYC) as a policy base for
3 credit analysis.
Loans of the bank are highly concentrated
4 on few credit products.
The bank makes necessary effort to avoid
5 loan concentration on certain products
The current credit management practice of the
bank paid sufficient attention to the importance of
6 proper Credit analysis or evaluation.

7 The poor risk assessment of LIB will

reduce the quality of its loan.

ii
 o Please indicate your degree of agreement or disagreement to the statements
pertaining collateral and the occurrence of NPL.

Statements Strongly Agree Neutral Disagree Strongly

agree Disagree
(2) (3) (4)
(1) (5)

8 Loans backed by collateral performs well

Collateralizing loans help to protect loan

9 default
Most of the time non collateralized/clean
10 loans are defaulted

o Please indicate your degree of agreement or disagreement to the statements

pertaining to Credit follow-up and the occurrence of NPL

Statements Strongly Strongly

Agree Neutral Disagree
agree Disagree
(2) (3) (4)
(1) (5)

LIB is strictly active enough in credit

11 follow-up and monitoring activities.
LIB pays lesser attention to the early
12 warning signals in NPL management.
The follow-up and recovery Division of LIB
is fully authorized and accountable in
13 managing credit follow-up.
The follow-up and recovery Division of LIB
is equipped with the necessary trained and
14 experienced manpower in managing NPL
LIB’s practice is too flexible in rescheduling
15 and restructuring credit facilities.
LIB is active in timely searching for
attachable properties to reduce NPL
16
LIB is aggressive in timely foreclosure of
17 held collaterals to recover its bad loans,

18 The bank follows excessively rigid

iii
 procedure in disposing held and acquired
properties
LIB tries to reduce bad debt volume
through injecting more loans
19 (disbursement)
Good loan follow up and monitoring can
reduce the occurrence of bad loans at
20 LIB.
Higher budget and sufficient manpower at
Credit Follow and Recovery Division of the
21 bank can lower the bad debts.

22. Which credit product is currently the dominant credit facility of the Bank? Tick where
appropriate.
(1) Export pre-shipment facilities ----------------------------------------------
(2) Import Trade loans and advances ------------------------------------------
(3) Export term loans and OD facility limits ----------------------------------

(4) Domestic Trade and Service loans and advances -------------------------

(5) Building and construction loans and advances----------------------------
23. Which credit product is currently the most vulnerable for concentration risk? Tick
where appropriate.

(1) Export pre-shipment facilities -----------------------------------------------

(2) Import Trade loans and advances -------------------------------------------
(3) Export term loans and OD facility limits ---------------------------------
(4) Domestic Trade and Service loans and advances -------------------------
(5) Building and Construction loans and advances----------------------------

iv
 o Please indicate your degree of agreement or disagreement to the statements pertaining
to loans concentration risk in association with collateral, purpose of the loan and their
interest rate.

Statements Strongly Agree Neutral Disagree Strongly

agree Disagree
(2) (3) (4)
(1) (5)

Loans with higher concentration risk

possibilities are loans granted on clean
24 basis.
Loans with higher concentration risk are
loans granted in order to encourage
25 export trade.
Loans with higher concentration risk
possibilities are loans granted at lower
26 interest rate.

o Please rank the factors that cause occurrence of Non-performing loans of LIB as
per their importance in contributing to the occurrence of NPLs from 1-6.

Statements 1st 2nd 3rd 4th

27 Analysis or risk assessment

28 Collateral Coverage

29 Follow-up and Recovery activities

30 Loan Concentration

31. If you have further comments on Credit Management Practices of Lion International
Bank S.C. Please use the space given below:

_____________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

v
 INTERVIEW QUESTIONS
St. MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES

INTERVIEW QUESTIONS

The following are the main interview questions presented to the top management members

of the bank.

1. How do you evaluate the quality of the bank’s credit analysis during approval of

the facilities?

2. Do you think that availability of collateral has direct relations in reduction of NPL?

3. What credit follow-up and recovery techniques are applied by your bank to

maintain the NPL volume at the required level?

4. Do you think that some credit products of the bank are highly vulnerable to be

Non-Performing Loan ?

vi