GREAT LAND COLLEGE
DEPARTMENT OF DEVELOPMENT MANAGEMENT
ASSESS CREDIT MANAGEMENT POLICY AND PRACTICE SINKE
BANK S.C BEDELE BRANCH
BY:
Birku Habte Kinde
ID Number GLC/1857/14
INSTRUCTOR:
DESALEGN MOSISA (PhD Candidate)
JULY, 2022
NAKAMTE, ETHIOPIA
TABLE OF CONTENTS
Contents
TABLE OF CONTENTS 1
LIST OF TABLES 2
CHAPTER ONE 2
INTRODUCTION 2
1.1. Background of the Study 2
1.2. Statement of the Problem 3
1.3. Research Questions 4
1.4. Objective of the Study 4
1.4.1. General Objective 4
1.4.2. Specific Objectives 4
1.5. Significance of the Study 5
1.6. Scope of the Study 5
1.7. Limitation of the Study 5
CHAPTER TWO 6
LITERATURE REVIEW 6
2.1. Introduction 6
2.2 Credit Risk 6
2.3 Credit Risk Management 6
2.4 What is Non-Performing Loan? 7
2.5 Loans and Advance 7
2.6 Credit Manager’s Basic Function Error! Bookmark not defined.
2.7. Credit Analysis Error! Bookmark not defined.
2.8. The credit process Error! Bookmark not defined.
2.9 Classification of credit (loan) Error! Bookmark not defined.
2.9.1 Time classification Error! Bookmark not defined.
2.9.1.1 Short-term loans.............................................................................................Error! Bookmark not defined.
2.9.2Security Classification Error! Bookmark not defined.
2.9.3 Lender Classification Error! Bookmark not defined.
2.9.4 Borrower classification Error! Bookmark not defined.
CHAPTER THREE 8
1
Research Methodology 8
3.1. Background of the Organization 8
3.2. Research Type and Design 8
3.3. Sample Size and Sampling Techniques 8
3.4.1. Sample Size 8
3.4.2. Sample Techniques 9
3.5. Methods and Instruments of Data Collection9
3.6. Method Data Analysis 9
3.7. Ethical Considerations 9
4. Time Schedule and Budget Breakdown 10
REFERENCES Error! Bookmark not defined.
APPENDIX Error! Bookmark not defined.
LIST OF TABLES
Table 4.1 Time Schedules 10
Table 4.2 Budget needed 11
CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
The financial sector and institutions were nationalized and consolidated into specialized banks during the
previous revolution period. During that time, the country's economic system was socialist. As a result, all
banks, including Ethiopia's National Bank, were thought to act as governments, favoring and promoting the
development and sustainability of the social sectors (cooperatives). In today's competitive environment, any
company's ability to survive is closely related to its profit-maximizing and cost-cutting strategy. In any
company, the effective and efficient use of resources in general, and finance in particular, is critical for
improving productivity, as well as for the country's economic growth and development. The effect of good
loans and advances processes has contributed significantly to the growth of bank loans and has had an impact
on the economy as a whole. Micro-finance institutions provide suitable financial and other services using
2
innovative methodologies and systems at low cost to meet the needs of low income sections of the population
and act as intermediaries in a genuine sense (Wolday, 2000)..
Banks are primarily concerned with accepting deposits in order to lend or invest them. In any country's
economy, there will be individuals and institutions with excess funds that they do not require for immediate
use and who wish to deposit these funds in an institution for both security and to earn interest. This
institution would then lend the money to the final borrowers at a higher interest rate than it pays its
depositors. (A.A. Leouleseged Teferi, 2002). Credit comes from the Latin word "creditum," which means
"believers" or "trust." A promise by one party to pay another for money borrowed or goods or services
received is referred to as "credit" in economics. (ML JhiNGan, New Delhi, 2002). Another definition of
credit is that it comes from the Latin word "credo," which means "I believe." Credit is based on trust in the
individual as well as the security being supplied. Credit is purchasing power that is not earned from income
but is provided by financial institutions as a counterbalance to idle deposits or as a net increase to the overall
amount of purchasing power.
In truth, no economy can run without credit; today, credit instruments are used to settle all economic
transactions. It is the lifeblood of today's commercial and business systems (Cole, G.D.H., 2000). Oromia
Credit and Saving Share Company (OCSSC), which was established in 1997, is one of the 21 licensed MFIs
in the country with 70 branches and 50,815 clienteles and loan outstanding of about 43.4 million
(OCSSCOAR, 2002). The company operates in 190 districts in Oromia and About 99% of the clientele of the
company are from rural areas. Sinke Bank S.C. is developed from Oromia Credit and Saving S.C, with
seven billion birr capital in 2021 and starts playing a vital part in the regional economy and social life. For
more than a decade, lending has been the bank's principal activity, in which it provides substantial sums of
money to borrowers. It is also true that bank loans, as profitable as they are, are also risky. Changes in
economic policies and the economy in general affect bank loans, which fluctuate and are influenced by them.
It is critical for Oromia Credit and Saving S.C to develop and maintain loan policies in order to reduce the
risk connected with them. The focus of this study is on credit management policy and practice to reduce
credit risk, and contribute to the growth of the country's economy.
1.2. Statement of the Problem
Bank credit is money granted by banks to eligible clients to assist the execution of legally formed profitable
business or investment activities with economic significance, with an agreement to repay the principal plus
interest within the loan contract time. The major objective of the OCSSC is improving the living conditions
of rural households through mobilization of saving and provision of credit. Hence, it is expected that the
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income of clientele households would increase. Some anecdotal observations on the ground, however, show
that there are mixed influences of credit provisions on the incremental income of the clienteles. USAID
(1995) revealed that financial schemes of institutions that do not follow sound, sustainable financial
principles and facilitate real economic growth might cause more harm than good. A similar study by Pischke
et al. (1966) recommended that NGOs offering credit and other financial services should be subjected to
national standards and adoption of appropriate standards.
Limited access by rural farm households to financial services is widely recognized in Ethiopia. According to
the Microsoft Project Document of UNDP (1999), the economically active but poor in Ethiopia who can
potentially access financial services are about 6 million out of which about 8.3% have gained access to the
licensed microfinance institutions. Scaling up of the financial services provided by microfinance institutions
requires identification of supportive features that are acceptable to the clienteles. Accordingly, it is
imperative to analyze the influences of microfinance parameters and other factors affecting the household
income in order to provide empirical evidences on the extent of influence of microfinance services. The
major question to be answered is whether variables associated with microfinance service significantly
contribute to incremental household income or not.
This study is, therefore, designed with the objectives of analyzing the influence of micro-finance services on
the incremental income of the target households and identify instruments of microfinance services such as
loan size, loan scheduling, utilization, etc. that would affect the performance of microfinance services.
1.3. Research Questions
This study looked into Sinke Bank's credit approval process and credit management to see if:
1. Does the bank follow appropriate credit policies and procedures?
2. What are the most common reasons for nonperforming loans?
3. What are the procedures for borrowers who are behind on their payments?
4. What effort is accepted by credit department after disbursement of loan made?
1.4. Objective of the Study
1.4.1. General Objective
The general objective of this study is to assess credit management policy and practice Sinke bank S.C Bedele
Branch.
1.4.2. Specific Objectives
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1. To review the techniques that the bank has used in the past to reduce the quantity of nonperforming
loans.
2. To identify the difficulties associated with the non-performing loans (NPLS) in Dashen Bank.
3. To assess the problems related with the bank's implementing policy manual.
4. Examining the importance of credit follow-up and analyzing follow-up methods in order to ensure
timely loan repayment.
1.5. Significance of the Study
The proposed research, according to the student researcher, will help
To reduce the reasons and difficulties linked with non-performing loans.
It also serves as a preliminary study for individuals with a greater interest in this field. As a result, the
research assisted in making the necessary adjustments in accordance with the study's
recommendations.
Will expand and refresh the reader's knowledge of Sinke Bank's loan and advance procedure, as well
as how the process they design is utilized as a measure of their success.
Would provide officers and analysts with a better understanding of what is expected of them.
Aid officers and analysts in understanding what is expected of them as professionals in managing the
loan and advance process, which is a critical aspect of the bank's operations.
Provide a foundation for planning and effective use, as well as an understanding of the bank's loan
and advance, as well as their legal ramifications.
The concerned government entity would be able to observe the bank's loan and advance, as well as
the legal ramifications.
1.6. Scope of the Study
Sinke Bank S.C.'s banking operations are spread around the country. Credit management at the corporate
level and at the branch level is same. As a result, the research is focused on the corporate headquarters.
1.7. Limitation of the Study
During the preparation of this research study, the students investigated the personal files of individual
borrowers, which they were unable to do. It may be difficult to assess information as needed because banks
are profit-driven organizations with most information kept hidden. As a result, the information gathered is
restricted to bank employees.
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CHAPTER TWO
LITERATURE REVIEW
2.1. Introduction
The banking industry's main functions include mobilizing deposits and channeling them into the economy in
the form of loans. The latter is the basic activity of commercial banks, as well as their principal source of
revenue. It is self-evident that loans and advances carry a certain amount of risk. The paradox is that, despite
the danger, commercial banks must continue to lend. The ultimate logic is to figure out how to reduce the
risk of lending (Hiwot/Mengistu G, 2007).
2.2 Credit Risk
Banks act as middlemen in the financial system. Bankers take money from depositors who expect to be paid
back and lend it to borrowers who do not always pay it back. Credit risk is the risk of intermediating between
depositors and borrowers. Credit risk, when managed effectively, is the single largest source of bank profits.
The most common reason of bank failure is insufficient credit risk management. Haslam, Gregory L., 2007.
The prospect of loss or injury, as well as the degree or probability of such loss, is referred to as risk. The risk
that debts will not be repaid on time and in full as expected or contracted, resulting in a financial loss or
nonperforming loans, is known as credit risk.
2.3 Credit Risk Management
All businesses are in the business of putting money into undertakings that are unclear in terms of yielding
profits but leave them just as well off at the end as they were at the start. Financial firms, government
agencies, and other organizations are among them. They all have objectives and set aside funds to achieve
them. Because all organizations encounter uncertainty in accomplishing their objectives, they are all exposed
to risks that are unique to them. Credit must be efficiently managed because it is the primary source of
income, and timely repayment relieves banks of the burden of meeting depositor demand. If loans are not
repaid on time, the lending bank faces certain risks, and the loans will change their nature and become non-
performing loans, which means they have been underpaid for three repayment periods in a row.
The process through which an organization optimizes how it accepts risks is known as risk management. All
organizations amass resources and invest them in activities with a high degree of uncertainty about their
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future outcomes. Credit must be efficiently managed because it is the primary source of income, and timely
repayment relieves banks of the burden of meeting depositor demand.
Loan accounts account for half or more of most banks' total assets and half to two-thirds of their revenue.
Furthermore, when a bank runs into major financial difficulties, its troubles are frequently caused by loans
that have become uncollectible as a result of mismanagement, unlawful loan manipulation, or unwise lending
policies or unexpected economic downturn (LazzarePotier’s Neil Murphy, 2002).
2.4 What is Non-Performing Loan?
Non-performing loans are defined as loans or advances whose credit quality has deteriorated to the point
where full collection of principal and/or interest in accordance with the contractual terms of the loan or
advance is in doubt. (According to NBE's directive No.SBB/32/2002) explain non-performing loans as loans
or advances whose credit quality has deteriorated to the point where full collection of principal and/or
interest in accordance with the contractual terms of the loan or advance is in question.
2.5 Loans and Advance
Loan is defined as a lender allowing temporary use of a quantity of money to a borrower who must repay the
money borrowed over a set period of time, in addition to the interest on the loan or debt incurred
(SBB/43/2008). The lender gives the borrower a deadline to refund the money, but if the borrower fails to
repay the money on time, the lender levies a late fee to those who do not return the money on time.
Advance -are credit facilities in the form of written promises and should not necessarily be given on physical
money like loans. (SBB/43/2008)
Loans and advances are financial assets resulting from direct lending or unanticipated advances (for example,
advances on L/C and overdraws). On performing loans, it includes accumulated interest. Commitments of
any kind (unused O/D limit, un-disbursed loans, and dependent assets) are excluded (Credit policy and
process manual, Dashen Bank, 2013).
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CHAPTER THREE
Research Methodology
3.1. Background of the Organization
This chapter deals with materials and method applied during the study. Accordingly it starts with framing the
research design, followed by sample size and sampling techniques. Data collection instruments and method
of data analysis core activities undertaken in this chapter.
3.2. Research Type and Design
The research design is the blueprint for data collection, measurement, and analysis. Both primary and
secondary data sources are used in this study. The researchers are using a questionnaire and performing
direct personal interviews with bank executives to acquire information from primary sources. Sinke Bank's
credit risk management methods are evaluated using a descriptive research design.
3.3. Sample Size and Sampling Techniques
The bank employs 68 credit-related employees and has 2,235 borrowers spread over 10 branches. Only the
credit appraisal department, credit analysts, credit information and portfolio management division, customer
relationship managers (CRM) department, risk management department, and eighteen branches with a
significant loan disbursed amount from the total loan disbursed by the bank are included in this study.
3.4.1. Sample Size
There are a total of 68 employees in Sinke bank, and 2235 borrowers from the ten branches
Yamane (1967:886) cited in Israel (1992) which is revised on April 2009 and again reviewed on June 2012
provides a simplified formula to calculate sample sizes.
Where:- n = the sample size
N = the population size
e = the level of precision (Sampling error)
Assumptions
A 95% confidence level, and e = ±5%
8
n=
n = n=340
3.4.2. Sample Techniques
Non probability sampling was employed to choose relevant respondents, specifically purposive or
judgmental sample for credit and risk management employees and convenience sampling for bank borrowers.
Purposive or judgmental sampling is an approach in which specific situations, people, or events are
intentionally chosen to offer important information.
3.5. Methods and Instruments of Data Collection
Both questionnaire and interview are given as tools of this study. The data are collected through
questionnaire and interview method to generate primary data of the study. So, structured questionnaire and
structured interview are used as a tool of data collection process of the study. A 5 - point like scale
questionnaire will be distributed and collected by the researcher. This helps to assure response, which are
kept confidential by the researcher. But if it is distributed by the researcher and collected by another person
the respondents will get confused and it is difficult to get real information. So, to protect this confusion the
questionnaires are distributed and collected by the researcher himself.
3.6. Method Data Analysis
After gathering the information needed for the study, charts and tables are utilized to illustrate the
information, and statistical numbers such as percentages are employed for data presentation and analysis.
More qualitative techniques of analysis are used in addition to quantitative methods of analysis to analyze
Sinke Bank's credit risk management policies. Data will be acquired through semi structured questionnaires,
interviews, and secondary sources. To make the analysis easier to understand and communicate to the
readers, percentages are produced for this data.
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3.7. Ethical Considerations
The researcher conducts the study by taking all ethical standards of a research in to consideration. First,
respondents of the study are briefed about the purpose of the study and are asked for their informed consent
to be involved in the study. The issue of confidentiality will be also assured to them and will implement
accordingly. The names of the respondents are not being asked to make them comfortable and to make their
information secret.
4. Time Schedule and Budget Breakdown
Table 4.1 Time Schedules
S/No Activities Jan Feb Marc Apr Ma June
1 Title Approval
Proposal Development
Proposal defense
Data Collection
Data Analysis and
interpretation
Report writing
Research Defense
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Table 4.2 Budget needed
S no Budget Line Items Cost in Cash
Proposal Development
1 Materials 1,500
2 Printing 500
3 Photocopying 500
Data Collection(Fieldwork)
4 Materials 1,500
5 Printing 500
6 Data Analysis 1000
8 Report Writing 1500
9 Binding and Dissemination 1000
Total Cost 8000
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REFERENCES
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233-236
APPENDIX
GREAT LAND COLLEGE
DEVELOPMENT MANAGEMENT PROGRAM
Dear respondent
First of all, thank you for participating in this Study
The success of this survey depends on your participation and frank responses. Hence, your assistance in
answering the questionnaire is highly appreciated. Please be assured that your responses will be kept strictly
confidential. Individual participants will not be identified in the analysis as only aggregated results will be
analyzed and presented.
Part I. Background information: please mark a “√” on the box that fits you.
1. Gender: - A. Male B. Female
2. Age of respondents: - A. 14-18 B. 18-32 C.30 and above
3. Educational qualification: - A. High school B .certificate C. Diploma □ D. BA/BSC□ E. Master’s
and above □
4. Work experience≤5years 5-10years 11-15years Above 16years
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Details on manuals:
S.No Statement Yes No
1. The bank’s credit policy and procedure is it flexible based on conditions
2. The bank uses internal credit rating system for all credit facilities
3. The bank’s credit risk management guideline or policy easily understandable
4. The guidelines support the goals and objectives of credit risk
management
Credit creation and Procedure
S.No Statement
Stron gly
Strongly
Agree
Agree
5. The banks have excellent credit analysis and procedures followed by
the bank in extending credit
6. The branch lending limit has sufficient as your branch grade level to
serve the borrowers
Follow – up collection
7. The credit collection technique used by your bank is effective
8. Lack of follow – up
9. Lack of training
10. Inadequate information about customer credit worthiness
11. Loan diversion
15
12. Lack of market for clients‟ product
13. Unfavorable environment conditions
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APPENDIX
GREAT LAND COLLEGE
DEVELOPMENT MANAGEMENT PROGRAM
Dear respondent
First of all, thank you for participating in this Study
The success of this survey depends on your participation and frank responses. Hence, your assistance
in answering the questionnaire is highly appreciated. Please be assured that your responses will be
kept strictly confidential. Individual participants will not be identified in the analysis as only
aggregated results will be analyzed and presented.
Part I. Background information: please mark a “√” on the box that fits you.
1. Gender: - A. Male B. Female
2. Age of respondents: - A. 14-18 B. 18-32 C.30 and above
3. Educational qualification: - A. High school B .certificate C. Diploma □ D. BA/BSC□ E.
Master’s and above □
4. Work experience≤5years 5-10years 11-15years Above 16years
Interview questions
1. What are the credits services that Sinke Bank S.C. if offering?
2. In your opinion, what type of risk exists in those services?
3. How if the credit risk situation that your bank is dealing with? How many types of credit
risk? In your opinion, which one is the most serious?
4. Could you please kindly tell in detail about the bank’s internal credit rating system? In
your opinion, is it helpful to Sinke Bank S.C. credit management?
5. How does the level of training contribute to credit management?
17
