

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GLOBAL BRIDGE COLLEGE
FACULTY OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESSEMENT OF CREDIT RISK MANAGEMENT PRACTICE (IN THE

CASE OF DASHEN BANK WOLAITA SODDO BRANCH)

A RESEARCH PROPOSAL PAPER SUBMITED TO DEPARTMENT OF

ACCOUNTING AND FINANCE IN THE BACHELOR OF ARTS DEGREE IN
ACCOUNTING AND FINANCE
PREPARED BY:-
BETELIHEM PAWLOS

ADVISOR: [Link] M (MSc)

July, 2023

Wolaita Sodo, ETHsIOPIA

 ACKNOWLEDGEMENT

First and foremost, I would like to give my thanks the Almighty of God for giving me the
aptitude, determination, and endurance throughout my daily live. Without his support nothing
can be accomplished. And I would like to express my gratitude and appreciation to my
advisor Mesele (MSc), whose dedication and support have made possible to the completion
of the activities of the study, I would like to say thanks to employees, credit manager and
manager of Dashen Bank in Wolaita Sodo Branch for providing the relevant data.

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 Abstract

This study would be conducted on the assessment of credit risk management practice in
Dashen bank at Wolaita Sodo branch. This research would be conducted with a qualitative
and quantitative research approach by employing descriptive research design and these
research target group is employees who directly involved in credit risk management and
administration. The researcher used primary and secondary data source. Unstructured
interviews and closed questionnaires were used to collect primary data, secondary data from
books, Google, and other publishers. The researcher used purposive sampling technique
under non-probability sampling to collect data from employee of the bank and use the
descriptive data analysis method. The researcher used table for presentation and
interpretation of the data. The study summarizes that the bank uses different credit risk
management tools, techniques and assessment procedures to manage their credit risk, the
credit risk management and that they all have one main objective, i.e. to reduce the amount of
loan default, which is a principal cause of bank failure. The recommendation of the credit
risk management department is at infant stage in terms of the implementation of the policies
and guidelines of the credit management, the bank should provide training for the employee’s
repeatedly to enhance their capacity and reviewing the adequacy of credit department across
the entire organization.

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 Table of Contents
ACKNOWLEDGEMENT ................................................................................................................... 2
Abstract ....................................................................................................................................... 3
List of table .................................................................................................................................. 6
CHAPTER ONE .............................................................................................................................. 7
1. INTRODUCTION ........................................................................................................................ 7
1.1. BACKGROUND OF THE STUDY ............................................................................................. 7
1.2 statement of the problem.................................................................................................... 8
1.3 Research Question .............................................................................................................. 9
1.4 Objective of the study.......................................................................................................... 9
1.4.1 General objectives ........................................................................................................ 9
1.4.2 Specific objectives......................................................................................................... 9
1.5 Significance of the study ...................................................................................................... 9
1.6. Scope of the study ............................................................................................................ 10
1.9. Organization of the paper ................................................................................................. 10
2. REVIEW LITERATURE ............................................................................................................... 11
2.0 Introduction ...................................................................................................................... 11
2.1. Theoretical Literature Review ........................................................................................... 11
2.2 Definition and Concept of Credit, Management, and Risk Management ................................ 11
2.3 Sources of credit risk ......................................................................................................... 12
2.4. General Principles of Sound Credit Risk Management in Banking......................................... 13
2.4.1 Establishing an Appropriate Credit Risk Environment .................................................... 13
2.4.2 Operating under a Sound Credit Granting Process......................................................... 14
2.4.3 Maintaining an Appropriate Credit Administration, Measurement and Monitoring Process
.......................................................................................................................................... 15
2.4.4 Ensuring Adequate Controls over Credit Risk ................................................................ 16
2.5 Analysis of the creditworthiness of bank loan applicants ..................................................... 17
2.5.1 Pre-requisites of creditworthiness................................................................................ 17
2.5.2 Accounting information and creditworthiness analysis .................................................. 17
2.6 Credit Risk Management in Banks ...................................................................................... 18
2.6.1 Obstacles to credit Risk Management........................................................................... 18
2.6.2. Deficiency in Credit Risk Management......................................................................... 19
2.7 Credit Risk Management Policy .......................................................................................... 19
2.8 Credit Risk Management Practices...................................................................................... 20

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 2.9. Credit Risk Management Strategies ................................................................................... 20
2.10 Credit Risk Management process...................................................................................... 20
2.11 Tools of Risk Management ............................................................................................... 21
2.11.1 Risk control tools....................................................................................................... 21
2.11 .2 Risk financing tools ................................................................................................... 23
2.12 Empirical Literature Review........................................................................................... 24
CHAPTER THREE ......................................................................................................................... 26
RESEARCH METHODOLOGY ......................................................................................................... 26
3.1 Introduction ...................................................................................................................... 26
3.2. Research Approach .......................................................................................................... 26
3.3 Research Design ............................................................................................................... 26
3.4. Target group .................................................................................................................... 26
3.5 Source of data ................................................................................................................... 26
3.6 Method of data collection................................................................................................... 27
3.7 Sampling techniques and sample size .................................................................................. 28
3.8 Method of data analysis ..................................................................................................... 28
CHAPTER FOUR ...................................................................................................................... 29
DATA PRESENTATION AND ANALYSIS........................................................................................... 29
4.1. Data presentation and analysis based on the questionnaires .............................................. 29
4.2. Data presentation of interview result ................................................................................ 38
4.2.1 The nature of credit risk management in the bank....................................................... 38
4.2.2. Credit culture of the bank ........................................................................................... 39
4.2.3 Advantage of risk management in the bank .................................................................. 40
4.2.4 Risk preventive technique and control procedures ........................................................ 41
4.2.5 Methods of improving risk management activities ........................................................ 42
4.2.6 Major challenges in implementation of effective credit risk management practice in the
bank ................................................................................................................................... 42
CHAPTER FIVE ............................................................................................................................ 44
5. SUMMARY OF FINDINGS, OR CONCLUSION AND RECOMMENDATION........................................ 44
5.1 Introduction ................................................................................................................ 44
5.2 Summary of findings or conclusions .............................................................................. 44
5.3 Recommendation ........................................................................................................ 45
Reference .................................................................................................................................. 47
APPENDIX .................................................................................................................................. 49

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 List of table
Contents page

Table 4.1: Backgrounds of the respondents ........................................................................................ 29

Table 4.2: is there an awareness of risk management by the staff in the bank ........................................ 31
Table 4.3: points covered within the guidelines and policies of the bank............................................... 33
Table 4.4: Does the guidelines and policies support the goals and objectives of the bank ....................... 34
Table 4.5: Does the bank analyze the credit worthiness of the borrower‟s before approving the loan. ..... 36
Table 4.6: How the bank qualifies the credit worthiness of the borrower‟s before approving loan? ......... 36

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 CHAPTER ONE

1. INTRODUCTION
1.1. BACKGROUND OF THE STUDY

Bank is financial institutions that accept deposit and make loans. After the great depression,
the US congress required bank only engage in banking activities, whereas investment banks
were limited to capital market activities. Banks in Ethiopia extend credit (loan) to different
types of borrower for many different purposes. For most customers, bank credit is the
primary source of available debt financing and for banks; good loans are the most profitable
assets. (Frederics Mishkin, 2004, pp 8 - 9)

Adequately managing credit risk in financial institutions (FIs) is critical for the survival and
growth of the FIs. In the case of banks, the issue of credit risk is even greater concern because
of the higher level of perceived risk resulting from some of the characteristics of client and
business condition that they find themselves in. In recent times, banks‟ risk management has
come under increasing analysis in both academia and practice. Banks have attempted to sell
sophisticated credit risk management systems that can account for borrower risk and perhaps
more importantly, the risk reducing benefits of diversification across borrowers in a large
portfolio.

Credit risk occurs when debtor/borrower fails to fulfill his obligations to pay back the loans to
the principal/lender. In banking business, it happens when “payments can either be delayed or
not made at all, which can cause cash flow problems and affect a banks, liquidity” (Greuning
and Bratonovic 2003, pp161). Hence credit risk management in the bank basically involves
its practices to manage/minimize the risk exposure and occurrence.

In order to reduce the rate of default, banks all obliged to establish own credit risk
management strategy. Credit risk management in a financial institution starts with the
establishment of sound lending principles and an efficient framework for managing the risk
policies, industry specific standards and guide lines, together with risk concentration limits
are designed under the supervision of risk management committee. „„The goal of credit risk
management is to maximize a bank‟s risk-adjusted rate of return by maintaining credit risk
exposure within acceptable parameters‟ (Bassel I,2000). Hence, the purpose of this study is to

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assess credit risk management problems of Dashen Bank, Wolaita Soddo Branch in light of
the practices of modern credit risk management in financial institutions.

1.2 statement of the problem

Credit risk is the risk of loss due to a debtor‟s nonpayment of loans or other line of credit.
Credit risk is defined as the potential that a bank and borrower or counterparty would fail to
meet its obligations in accordance with agreed terms. Default occurs if the debtor is unable to
meet its legal obligation according to the debt contract. The examples of default event include
the bond default, the corporate bankruptcy, the credit card charge-off, and the mortgage
foreclosure. Other forms of credit risk include the repayment delinquency in retail loans, the
loss severity up on the default event, as well as the unexpected change of credit rating (Aijun,
2009). The objective of credit risk management is to minimize the risk and maximize bank‟s
risk adjusted rate of return by assuming and maintaining credit exposure within the
acceptable parameters. The risk must be assessed to derive a sound investment decision and
decision should be made by balancing the risks and returns. The role of credit risk
management is assessing the risk, conducts monitoring and reviews of the performance of the
bank. (Machiraju, 2008)

Poor credit risk management results in, impeding (reducing) banking system profitability and
stability in many places, and bank failures. For example, Udunze (2013) reports that as a
result of investigations regarding poor corporate governance and poor credit risk
management, the chief of executive officer of Eco bank transnational agreed to
forgoUS$1.14milion bonus to earn for the 2012 financial year as part of efforts to rebuild
public confidence in the bank against the back drop of accusations of maladministration,
fraud, and technical incompetence in the bank in Nigeria. To give emphasis for the credit risk
management practice, still now some studies has already been made to the literature on credit
risk management in Ethiopian banks, such as that of Girma Mekasha (2011) and Tibebu
Tefera (2011). But, still there are gaps related with the credit risk management practice in
banks. Here, The study would try to assess these gaps by employing primary data sources,
which may help me to investigate data directly from the practitioners and experts.

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1.3 Research Question
This study would try to answer the following basic questions.

1. How credit risk management is practiced in Dashen Bank, Wolaita Soddo Branch?
2. What are the major challenges that affects credit risk management practice in
Dashen Bank, Wolaita Soddo Branch?
3. What are the effective credit risk management practice in Dashen Bank, Wolaita
Soddo Branch?

1.4 Objective of the study

1.4.1 General objectives

The main objective of the study is to assess the credit risk management practice in Dashen
Bank, Wolaita Soddo Branch.

1.4.2 Specific objectives

The specific objectives of this study are:

1. To investigate about how Dashen Bank practice in credit risk management.

2. To identify the challenges that affect credit risk management practice.
3. To identify credit risk management practice are effective for bank, especially in
Dashen Bank, Wolaita Soddo branch.

1.5 Significance of the study

The study would result in a clear understanding of the credit risk management for Dashen
Bank, Wolaita Soddo Branch how to manage and assess the risk faced by the bank. And also
the study on credit risk management will contribute to existing knowledge and literature on
the subject under investigation. Moreover, the study would also serve as a reference material
to other researchers. In fact, it is hoped that the study would have paramount importance in
providing information related to problems associated with credit risk management so that
remedial action, especially in the area of providing information for enhancing policies and
procedures on credit risk management at the banks. Moreover, it would also give an insight to
management in how to systematically approach risks associated with credit management.

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1.6. Scope of the study
The scope of the study would be based only to assess credit risk management practice of
Dashen Bank, Wolaita Soddo Branch. The bank activities of Dashen Bank are one of the
greatest private banks. The magnitude of risk managements is mainly in number however; the
study would encompass credit risk management.

1.9. Organization of the paper

This paper is organized in to five chapters. The first chapter focuses on background of the
study, statement of the problem, objective of the study, research question, significance of the
study, scope of the study, organization of the paper, chapter two focus on different literatures
written on issues related to risk management practices. The third chapter shows methodology
of the research and chapter four states the data presentation and analysis. The fifth chapter
contains conclusions findings and recommendation.

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 CHAPTER TWO

2. REVIEW LITERATURE
2.0 Introduction
The chapter reviews the theoretical studies with the aim of accomplishing the different
hypotheses of credit risk procedures. This will be followed by the empirical review of
literature. The theoretical literature highlights the various theories of credit risk management.
The theoretical review throws more light on the definition of credit risk management, what is
credit, sources of credit risk, evolution of credit risk management and credit risk management
practices. Again there are other theoretical dimensions like credit risk management
programme, credit risk measurement and the effect of non-performing loans on the
performance of a bank. The final part of this chapter examined some relevant empirical
reviews on the different credit hazard administration, the credit procedure and loan advances
and its impacts on the performance of banks execution.

2.1. Theoretical Literature Review

The theory that the researcher used is bank credit risk management theory. It was developed
by David [Link] University of California and it was used to study why risk management is
need and outlines some of the theoretical under pinning of contemporary bank risk
management, with an emphasis on credit risk.

The theoretical literature highlights the various theories of credit risk management. The
theoretical review throws more light on the definition of credit risk management, what is
credit, sources of credit risk, evolution of credit risk management and credit risk management
practices. Again there are other theoretical dimensions like credit risk management
programme, credit risk measurement and the effect of non-performing loans on the
performance of a bank.

2.2 Definition and Concept of Credit, Management, and Risk Management

Credit is the trust which allows one party to provide resources to another party where that
second party does not reimburse the first party immediately, but instead arranges either to
repay or return those resources at a later date (Sullivan et al., 2003). The resources provided
may either be financial, or they may consist of goods or services. Credit encompasses any
form of deferred payment which is extended by a creditor to a debtor. The purpose and the
nature of credit have been categorized into short term, medium term and long term loans.
Short term loans are advances extended with a repayment period of not more than five years.
Medium term loans have a repayment period that ranges from five to ten years. Long term
loans have a repayment period of more than ten years. Most of the credits accessed in Ghana
is either the short or the medium term credit facility. Evidence from earlier studies show that

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credit dangers are the most astounding enrolled type of danger the management of an account
industry have encountered, regarding misfortunes and credit defaults (Bluhm [Link]. 2003).

Management is the simplest understand definition can be defined as the act of planning,
directing, controlling, monitoring and testing for designed results to be obtained. Risk on the
other hand defined as uncertainty concerning the occurrence of loss (E. Radja 2011). When
companies indulge in business, it is obvious that they would be exposed to one type of risk or
another which in most cases in uncertainty although at times it can be certain that it would
occur. Banks are one of such business whose risk is very sure because they do not function in
isolation given the dynamic environment in which they operate.

Risk management is” a systematic process for the identification and evaluation of pare loss
exposures faced by an organization or individual and for the selection and implementation of
the most appropriate technique, for treating such exposures” (E. Radja, 2011). Credit risk can
be defined as the potential that a contractual party would fail to meet its obligations in
accordance with agreed terms. Credit risk is the largest element of risk in the books of most
banks and, if not managed in a proper way, can weaken individual banks or even cause many
episodes (divisions) of financial instability by impacting the whole banking system. Thus to
the banking sector, credit risk is definitely an inherent and crucial part as by Jackson and
Perraudin (1999). Credit risk management on the other hand defined as the process of
controlling the potential consequence of credit risk.

2.3 Sources of credit risk

The main source of credit risk includes, limited institutional capacity, economic and market
fluctuation, inappropriate credit policies, volatile interest rates, poor management,
inappropriate laws, ineffective control process, poor loan underwriting, poor lending practice,
government interference, absence of real financial statement from the customer, customer
awareness problem, and inadequate supervision by the central bank (Kithinji,2010). He
identified poor project supervision, evaluation and management, untimely loan disbursement,
division of funds, and dishonesty of loan beneficiaries as a case of loan default which
ultimately leads to credit risk. To reduce the probability of credit risk, financial institutions
should take-part in different situations that may enables them to overcome the occurrence of
un-expected default. So as to attain these objectives institutions should create a trustworthy
information to both the staffs and borrower‟s, develop the habit of good understanding
(relationship) between the high level executives‟ and those who are operates through the

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organization, follow-up regularly the performance of the debtor‟s, recover loans which are
due.

2.4. General Principles of Sound Credit Risk Management in Banking

Reviewing the general principles of credit risk management can provide a clearer picture on
how banks carry out their credit risk management, despite of the specific approaches that may
differ among banks.
Some of the principles of sound practices of bank credit risk management as outlined in the
Basel committee publications ([Link] 2008) cover the following four areas:

2.4.1 Establishing an Appropriate Credit Risk Environment

To establish an appropriate credit risk environment mainly depends on a clear identification
of credit risk and the development of a comprehensive credit risk strategy as well as policies.
To banks, the identification of existing and potential credit risk inherent in the products they
offer and the activities they engage in is a basis for an effective credit risk management,
which requires a careful understanding of both the credit risk characteristics and their credit-
granting activities. Besides, the design of objective credit risk strategies and policies that
guide all credit-granting activities is also the cornerstone in bank credit risk management
process.
It is stated that a credit risk strategy should clarify the types of credit the bank is willing to
grant and its target markets as well as the required characteristics of its credit portfolio.
According to Saunders (2006), these strategies should reflect the bank‟s tolerance for risk and
the level of profitability the bank expects to achieve for incurring various credit risks. Again,
Boateng‟s (2004) study shows that the credit risk strategy of a bank should give recognition
to the goals of credit quality, earnings and growth. Every bank, regardless of size, is in
business to be profitable and, consequently, must determine the acceptable risk-return trade-
off for its activities, factoring in the cost of capital. Richard S. (2010)

While credit policies express the bank‟s credit risk management philosophy as well as the
parameters within which credit risk is to be controlled, covering topics such as portfolio mix,
price terms, rules on asset classification, etc.

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According to Boating (2004), a cornerstone of safe and sound banking is the design and
implementation of written policies and procedures related to identifying, measuring, monitoring
and controlling credit risk. Such policies should be clearly defined, consistent with prudent
banking practices and relevant regulatory requirements, and adequate for the nature of the bank
and that the credit risk strategies and policies should be effectively communicated throughout the
organization. All relevant personnel should clearly understand the bank‟s approach to granting
and managing credit and should be held accountable for complying with established policies and
procedures.
Moreover, establishing an appropriate credit environment also indicates the establishment of a
good credit culture inside the bank, which is the implicit understanding among personnel about
the lending environment and behavior that are acceptable to the bank.

2.4.2 Operating under a Sound Credit Granting Process

The Basel Committee (2000) asserts that in order to maintain a sound credit portfolio, a bank
must have an established formal transaction evaluation and approval process for
granting of credits. Approvals should be made in accordance with the bank‟s written guidelines
and granted by the appropriate level of management. There should be a clear audit trail
documenting that the approval process was complied with and identifying the individual(s)
and/or committee(s) providing input as well as making the credit decision (Boating, 2004).
A sound credit granting process requires the establishment of well-defined credit granting criteria
as well as credit exposure limits in order to assess the creditworthiness of the obligors and to
screen out the preferred ones. In this regard Thomas (2002) asserts that banks have traditionally
focused on the principles of five Cs to estimate borrowers‟ creditworthiness. These five C‟s are:
i. Character. This refers to the borrower‟s personal characteristics such as honesty, willingness
and commitment to pay debt. Borrowers who demonstrate high level of integrity and
commitment to repay their debts are considered favorable for credit.
ii. Capacity. This also refers to borrowers‟ ability to contain and service debt judging from the
success or otherwise of the venture into which the credit facility is employed. Borrowers who
exhibit successful business performance over a reasonable past period are also considered
favorable for credit facility.

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iii. Capital. This refers to the financial condition of the borrower. Where the borrower has a
reasonable amount of financial assets in excess of his financial liabilities, such a borrower is
considered favorable for credit facility.
iv. Collateral. These are assets, normally movable or unmovable property, pledged against the
performance of an obligation. Examples of collateral are buildings, inventory and account
receivables. Borrowers with a lot more assets to pledge as collateral are considered favorable for
credit facility.
v. Condition. This refers to the economic situation or condition prevailing at the time of the loan
application. In periods of recession borrowers find it quite difficult to obtain credit facility.
Banks must develop a corps of credit risk officers who have the experience, knowledge and
background to exercise prudent judgment in assessing, approving and managing credit risks.

A bank‟s credit-granting and approval process should establish accountability for decisions taken
and designate who has the absolute authority to approve credits or changes in credit terms.

2.4.3 Maintaining an Appropriate Credit Administration, Measurement and

Monitoring Process
Credit administration is a critical element in maintaining the safety and soundness of a bank.
Once a credit is granted, it is the responsibility of the bank to ensure that credit is properly
maintained. This includes keeping the credit file up to date, obtaining current financial
information, sending out notices and preparing various documents such as loan agreements, and
follow-up and inspection reports.
Credit administration, as emphasized by Wesley (1993), can play a vital role in the success of a
bank, since it is influential in building and maintaining a safe credit environment and usually
saves the institution from lending problems. Therefore, banks should never neglect the
effectiveness of their credit administration operations. Then talking about credit risk
measurement in banks, it is required that banks should adopt effective methodologies for
assessing the credit risk inherent both in the exposures to individual borrowers and credit
portfolios The last focus in this area of principles is related to credit risk monitoring, which is
definitely a must in banks‟ risk management procedure.

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A proper credit monitoring system will provide the basis for taking prompt corrective actions
when warning signs point to deterioration in the financial health of the borrower.

2.4.4 Ensuring Adequate Controls over Credit Risk

In order to ensure adequate controls over credit, there must be credit limits set for each officer
whose duties have something to do with credit granting. Material transactions with related parties
should be subject to the approval of the board of directors (excluding board members with
conflicts of interest), and in certain circumstances (e.g. a large loan to a major shareholder)
reported to the banking supervisory authorities.
The means for guaranteeing adequate controls over credit risk in banks lay in the establishment
of different kinds of credit reviews. Regular credit reviews can verify the accordance between
granted credits and the credit policies, and an independent judgment can be provided on the asset
qualities.

As types of credit, facilities of one banks can be broadly classified in to two groups‟ funded and
non-funded credit. Any type of credit facility which involved direct flow of banks fund on
account of borrowers is treated as funded credit facility.

Funded credit facility may be classified in to four major types :- loans, cash credit, overdraft and
bill discounted and purchase. A type of credit facility where there is no involvement of direct out
of banks find on account of borrower termed as non-funded credit facility. Non funded credit
facilities may turn in to funded facilities at times. As such, liabilities against those types of credit
facilities are termed as contingent liabilities.

The major no funded credit facilities are letter of credit bid bond, performance bond, advance
payment guarantee and foreign counter guarantee.

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2.5 Analysis of the creditworthiness of bank loan applicants
The notion „creditworthiness‟ can be defined as a presumed ability to meet agreed deadlines
related to repaying the credit and interest accrued without affecting the vitality of the borrower,
that means the repayment process should be based on the income received in the process of the
borrower‟s usual activity, without affecting adversely his financial situation, his financial results
as well as other business entities. (stoyanov,2008)

2.5.1 Pre-requisites of creditworthiness

According to stoyanov, the prerequisites of credit worthiness are divided in to personal and
financial prerequisites.

Personal prerequisites: the will to work and demonstrate enterprise along with courage in
decision making and ability to respond quickly and adequately to the changing environment. To
the personal creditworthiness, prerequisites belong: the ability to make an estimate when
comparing incomes and expenditure for the corresponding business activity for higher
achievements and to implement effective management.

Financial pre-requisites: it is the data about the financial and economic situation of the loan
applicant. These includes forecast about expected development of the industry and the role that
the enterprise plays in it, a study whether the loan can be repaid in accordance with the terms and
using revenue from the activity of the business entity.

2.5.2 Accounting information and creditworthiness analysis

From the presented data of creditworthiness analysis of bank loan applicants, the accounting
information has highest relative share in the total value of this information. The minimal required
number of accounting reports presented by the loan applicants is as follows:

Accounting balance sheet

Profit and loss account
Statement of liability on previous credits and their servicing
Statement of changes in equity, and Statement of cash flows

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2.6 Credit Risk Management in Banks
Although the effects of all risks type cause negative consequences to the bank, credit risk has
been identified as the key risk associated with negative consequences, in terms of its influences
on the bank performance (Sinkey, 1996). This means if credit risk is not well managed it can
lead to failure. Thus for any bank to succeed its credit risk management, it must be handled with
a lot of effective follow up activities.

A clear reason why a correct management of credit risks is very important that before a banking
gives out a loan, it should try are as much as possible to have a reliable view of the borrower.

The bank has to assess the credit risk worthiness of the borrower even after the loan is granted in
terms. Monitoring is required until when the borrowers has finished repaying the loan. This
monitoring is very important because with the uncertainty in the future any potential event that
can cause a borrower to default payment can be fast identified or a mechanism can be part in
place on time to reduce the frequency of loss should it occur. Early identification of borrowers at
risk is good because it enables services adequately staff collections departments, determine the
most effective type of customer we reached and initiate repayment plans before borrowers
situation worsens to the point which for closure is unavoidable. (Cocardi, 2009)

2.6.1 Obstacles to credit Risk Management

According Machiraju (2002), the task of management of credit risk is rendered difficulty in
developing markets by government controls, political pressures, delays in production schedule
and frequent instability in production schedule and frequent instability in a business environment
undermine the financial information is unreliable and the legal frame work does not support debt
recovery. The difficult external context is re informed by internal weakness of banks further
undermine the asset quality.

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 2.6.2. Deficiency in Credit Risk Management
The common deficiencies observed in credit risk management according to Machiraju (2008) in
Banks are

- Absence of written policies

- Absence of portfolio concentration
- Inadequate financial analysis of borrowers
- Credit rationing contributing to determination of loan quality
- Excessive reliance on collateral
- Inadequate checks and balance in the credit process
- Absence of loan supervision
- Failure to control and Audit the credit process effectively.

2.7 Credit Risk Management Policy

Banks like any other firm have formal laid down policies and principles that have been put in
places by the board of directors on how to manage credits and this have to be supervisors or
managers on how to take action. Manass and Zietflow 2005 specifies that credit policy has three
major components. The primary component is credit sanders which is the profile of minimally
acceptable credit period stipulating how long from the invoice the customer has to pay and the
cash discount to ( if any).the second, is credit limit that the dollar amount that cumulative credit
is extended and the last is collection procedures and these are detailed statement regarding when
and how the company would carry out collection of past due accounts, Despite the rules it does
not mean that credit policies are stereotyped. “A good lending policy is not very restrictive, but
allows for the presentation of loans to the board that officers believe are worthy of consideration
but which do not fall within the parameters of written guide lines”. Since the future is uncertain
flexibility must be allowed for easy adaption to changing condition (may be internal or
environmental). For the risk management policies and philosophies have to be used in order to
control the credit risk. (Geruring and Bratanvic, 2003)

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2.8 Credit Risk Management Practices
Banks have different credit risk management policies or philosophies same do the risk
management practices differ from the financial institution to another despite the fact that they
can open to the same risk. The policies and philosophies each and every bank has their individual
level of risk that they can decide to let go based on how it is out lined in their risk management
policy. To exit from firms in the same industry but the implementation in practices differs
practices is not consistent with theory in most cases because of data limitation for most
industries, it difficult to describe which firms manage more risk than others or whether firms
language in dynamic risk management strategies and more importantly it cannot be reliably
tested whether firms language in dynamic risk management strategies and more importantly
it cannot be reliability tested whether a firms management practices conform with existing of
theories. (Tufano, 1996)

2.9. Credit Risk Management Strategies

E. Michael (1996) defines a strategy as a plan (Method) for achieving something. A strategy
thus, simply means a way to go about activity. This thus goes that as a bank has different credit
risk policies (philosophies and different practices, their strategy to attain their deferred goals in
the same way differ. A strategy position means performing different activities from rivals or
performing different activities from rivals or perform its rivals only if it can establish a
difference that it can preserve by effective strategy (porter, 1996). When banks carry out its
operational activities which are the same activities carried out by other banks, they should try to
make differences from their rivals by not only typing to be more efficient but also try to make a
difference. For example, maintaining an appropriate credit administration, monitoring process,
ensuring adequate control over credit, but these practices in conjunction with sound practice
related to the assessment of asset quality adequacy of provision and reserves and the disclosure
of credit risk.

2.10 Credit Risk Management process

The same way that bank has different credit culture (the policies, practices, and philosophy and
management style). They also have different credit risk management process. It is a set of out
lined activities aimed at managing credit risk.

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The activity is just like the one‟s out line for the risk management process and would convert the
range from credit granting to credit collection. They are risk identification, measurement,
assessment control and monitor. The first step is to identify the risk involved in the credit
process. After identification, the risk is measured by evaluating the consequences if it is not well
managed. After the evaluation phase, the risk is then assessed to know the impact, the likelihood
of occurrence, and possibility for it to be controlled. The control and monitoring phase then
comes in. These phases are not distinct like the other three phases. In the control phase, measure
which can be used to avoid, reduce, prevent, or eliminate the risk are put in phase. The
monitoring phase is used to make a constant check so that all process or activity which have been
put in place for the risk management process are well implemented for desired result to be gotten
and in case of any distortion, corrections are then made. All this is done because credit risk is a
very important and delicate risk that banks face and needs to be managed with great care
(precaution) because its consequences are always every detrimental to the bank. Despite the
changes in the financial services sector, credit risk remains the major single cause of banks
failure. (Greuning of Bratanovic, 2003)

2.11 Tools of Risk Management

Risk is handled in several ways most authors give the following risk handling tools. These are
avoidance, loss prevention and reduction, separation, diversification /combination, non-insurance
transfer, retention and insurance. Those tools are classification to two (1) Risk Control and, (2)
Risk finance tools.

2.11.1 Risk control tools

Avoidance: Avoidance of risk exists when the individual or the organization free itself from the
exposure through abandonment of refusal to accept the risk, an individual can avoid third person
disability by not owing a care product, liability can be avoided by dropping the product. Leasing
avoids the risk organizing from property ownership.

Advantage: the chance of loss is reduced to zero it the loss exposure is abandoned; the
possibility of loss is either eliminated or reduced because the activity of product that could
produce a loss has been abandoned (avoided).

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Disadvantage: - it may not be possible to avoid all loss example the company cannot avoid the
premature death of a key executive.

Avoidance is that it may not be practical to avoid the exposure for example a point factory can
avoid loss arising from the production of point however, without any production the firm would
not be business. Avoidance is a useful common approach to handle the risk. By avoiding a
losses or uncertainties that exposure may generate.

Loss prevention and reduction measurement: This measure refers to the safety taken by the
firm to prevent the occurrence of the loss or reduce its severity. Loss reduction measurements try
to minimize the severity of the loss once the partial happened. Example automobile accidents can
be prevented or reduced by having good road, better light and sound affect regulations and
control fast first aid service and control. The libel loss prevention and loss reduction measures
must be considered the risk manager considers the application of any risk financing instrument.

Separation; Separation of the firm exposure to loss instead of concentrating them at one location
where they might be involved in some loss. For example, instead of placing its entire inventory
in one wear have, the firm may prefer to separate this exposure by placing equal parts of the
inventory in ten widely separated warehouses.

Combination or Diversification: Combination is a basic principle of insurance that follows the

low of large numbers. It can reduce risk by making loses more predictable with a higher degree
of accuracy. The difference is that unlike separation, which spreads a specified number of
exposure unit under the control of the firm. In case of firm‟s combination results in the pooling
of resources of two or more forms.

Diversification most speculative risk in the business can deal with diversification. A business
firm diversifies their product, i.e a decline in profit of one business could be compensated by
profits from others.

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Non-insurance transfer- this may be accomplished on two ways: -

Transfer of the activity or property: The property or activity responsible for the risk may be
transferred to some another person or group of person. This type of transfer is closely related to
avoidance through risk control measure because is eliminates a potential loss that may strike the
firm must pass in to someone else.

Transfer of the probable loss: The risk but not the property or activity, may be transferred leasing
rather than buying. Consignment shipment rather that purchasing. If the goods remain unsold or
expired, they would be returned to the consignor.

2.11 .2 Risk financing tools

Retention: this is the earliest method of handling risk. The firm consciously or unconsciously,
decides to assume the risk. The loss is to be burned by the person or firm, and specific
measurements should be taken to retain the loss it the loss is less is severity. The firm decides to
retain the risk for a number of reasons. It is probably impossible to transfer the risk as in the case
of gambling besides the attitude of the individual of the firm towards risk. The value of goods to
be insured compared to insurance cost is another factor that may force businesses to assume risk,
cost benefit analysis. Retention can be effectively used in a risk management program when
contain conditions exit.

-1st no other methods of treatment are available: Insurers may be un-willing to write a certain
type of coverage.

-Non- insurance transfer may not be available.

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2.12 Empirical Literature Review
Kwaku D.(2015) studied assessing credit risk management practices in the banking industry of
Ghana: process and challenge and obtained the following findings. some of the key findings
from the study revealed that the bank has documented policy guidelines on credit risk
management with a senior manager having oversight responsibility for implementation.
However, the study showed that there were some implementation challenges of the credit risk
policies which have resulted low quality of loan portfolio of the bank. It is being submitted that
bank's risk policy should be reviewed frequently.

Chen J. and Shuping H(2012) conducted research on the credit management of commercial
banks of Lianyungang city for the small scale and medium enterprise (SMEs).Investigators have
found out that the risk management plan and operation method that really suit for credit demand
for the SMEs is still not mature and it caused that the bad debts and dead loan were overstocked
in Lianyungang commercial bank, thus it seriously impact on the capital operation of commercial
banks, and it has caused some adverse impact to the development of local economy .There for it
is necessary for commercial banks in Lianyungang city to supervise and manage the whole
process of credit of the small and medium-sized enterprise.

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

Hagos M. (2010) has investigated credit management on wogagen banks. The main objective of
the study is to evaluate the performance of credit management of Wegagen bank in Tigray
Region as compared to National bank's requirements in comparison with its credit policy and

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procedures. The following findings were the result of the investigation: the issues impeding loan
growth and rising loan clients complaint on the bank regarding the valuing of properties offered
for collateral, lengthy of loan processing, amount of loan processed and approved, loan period,
and discretionary limit affecting the performance of credit management.

The existing literature indicates that several studies were carried out about credit risk
management on commercial banks abroad and Ethiopia. However due to diversified and
intensified investments in the country during last 10 and or above years there is an increase of
loan demands among investors from commercial banks in the country. In addition to this, high
demands for loan commercial banks are highly busy in launching branches across the country.
These situations have created an environment in which commercial banks to encounter risk in
credit management. Loans are becoming large and at the same time, bad loans have increased
substantially during the past few years. There for, this study investigates this newly emerging the
challenge in credit risk management process in commercial banks.

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 CHAPTER THREE

3. RESEARCH METHODOLOGY
3.1 Introduction
This chapter covers description of study area, research design, research approach, type of data
that will be gathered, study population, sample size and sampling techniques, data collection
procedures, data analysis, ethical consideration, and validity and reliability of the study.

3.2. Research Approach

This study will use both quantitative and qualitative research approaches to test the effect of
performance appraisal on employee satisfaction. Quantitative research approach involves the
generation of data in quantitative form which can be subjected to rigorous quantitative analysis
in a formal and rigid fashion. The objective of quantitative research is to develop and employ
mathematical models, theories and hypotheses pertaining to natural phenomena. It usually starts
a general statement proposing a general relationship between variables. Quantitative researchers
favor methods such as surveys and experiments, and will attempt to test hypotheses or statements
with a view to infer from the particular to the general (Bhattacherjee, 2012).

3.3 Research Design

This study would be conducted with a qualitative and quantitative research approach by
employing descriptive research design because it involves a systematic collection and
presentation of data and describe (justify) the current nature of credit risk management practice
in Dashen Bank Wolaita Sodo Branch.

3.4. Target group

The target groups of this study are employees who are directly involved in credit risk
management and administration. This means senior bank professionals, department heads,
branch manager, assistance branch managers, loan section heads, loan/credit analysis officers.

3.5 Source of data

In order to get efficient and relevant information about the study, the researcher used primary
and secondary data source. Primary data would be collected from respondents through
questionnaires and personal interviews.

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3.6 Method of data collection
For the purpose of this study, The researcher would use primary and secondary data source.
Unstructured interviews and closed questionnaires would be used to collect primary data.
Unstructured interview would prepare and administered to staff‟s working in loan area and
district managers and assistant district manager of the bank. The secondary data collected from
books, annual report magazines, websites and literatures which are relevant to the study.

Primary data was collecting through questionnaires which include both open ended and close
ended question for the research targeted areas. The interview question was design to gather data
through close end questionnaires. The secondary data include information are obtained from
different reports, bulletins, websites and literatures which are relevant to the theme of the study.

This helps to address the research questions more specifically or to concentrate more on the topic
itself. Interview would be undertaken by the researcher in order to effectively gather pertinent
information to the study. The researcher also used secondary data from books, google, and from
different publishers.

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3.7 Sampling techniques and sample size
Purposive sampling would be used under the non-probability sampling to collect data from the
employee of the bank in line of the research question. The rationale behind employing this
purposive sample type is to identify the employee that have specialized knowledge of credit risk
management and to share their understandings about the study.

The Researcher used purposively 20 respondents, which represent the total population,
employees directly involved in credit risk management and administration, and branch manager,
credit analysts‟ customer service officers.

3.8 Method of data analysis

The relevant information that would be collected from primary and secondary source of data
shall depend on the basis of descriptive analysis method. Because, descriptive analysis uses
transformation of raw data in to a form that would be easy to understand to the reader.
Descriptive is largely the study of the distribution of one variable form. In line with descriptive
data analysis the study would be use tabulation and percentage analysis.

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 CHAPTER FOUR

4. DATA PRESENTATION AND ANALYSIS

4.1. Data presentation and analysis based on the questionnaires

Table 4.1 Backgrounds of the respondents

Number Questions Variables Frequency total percentage Total

1 Gender Male 18 90
Female 2 20 10 100
2 Age 18-30 12 60
31-40 6 30
41-50 0 20 0 100
Above 50 2 10

3 Marital status Married 8 40

Unmarried 12 20 60 100
Certificate 0 0
4 Educational Diploma 0 0
status Bachelor‟s 13 65
degree 20 100

Masters and 7 35
above
Source: questionnaire data, 2023

Table 4.1 illustrates,

The gender of the respondents. Data gathered indicates that there were more male respondents
90%, compared to the female counterparts 10%. The ages of the respondents. Data gathered from
the respondents indicates that majority of the respondents are between the ages of 18– 30 years.
Twelve respondents representing 60% represented this. Six respondents representing 30% were
also between the ages of 31 – 40 years. Whereas, there is no respondents who founds in the age
of41-50. In addition, two respondents representing 10%, were under the ages of above 50 in the

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bank. Therefore, this indicates that most of the employees of the bank are youths. And it may
help the bank to be utilized efficiently.

The marriage status of respondents. As the above table represents, most of the respondents that
represent 60% of the total population are unmarried. Eight respondents who represent 40% of the
total respondents are married.

The educational level of respondents. Based on the data gathered from the respondents, majority
of the respondents holds a Bachelor‟s Degree; this was represented by 65%. 35% of the
respondents also holds a Masters‟ and above. Therefore, it implied that the bank have an
educated manpower in order to undertake its operation. That means since all the respondents are
educated with majority of them holds Bachelor‟s Degree, they can perform their duty properly
and it could have resulted in the banks good performance in terms of its profitability and
creditability.

Respondents year of experience with in the bank

Researcher asked this question because they wanted to know how the respondents are
experienced in terms of banking sector. Based on the data gathered from the respondents,
majority of the respondents had worked within the bank for more than three and five years; this
was represented by 90%. 5% of the respondents have also worked with the bank between 1-2
years. Moreover, 5% of respondents have less than 1-year experience within the bank. Good
experience of the employees of an organization helps the organization in terms of achieving its
goals and objectives. That means, when employees are experienced in their jobs, they can
develop their career and it enables them to carry out their duty properly. Generally, the above
data revealed that respondents are moderately familiar with the banking operation.

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Table 4.2: is there an awareness of risk management by the staff in the bank

Variables Frequency Percentage

Yes 16 80

No 4 20

Total 20 100

Source: questionnaire data, 2023

As the above table postulates, 16 respondents who represents 80% of the total respondents said
that there is an awareness of risk management by the staff in the bank. Whereas, 4 respondents
who represent 20% of the total respondents replied there is no awareness of risk management by
the staffs of the bank. Therefore, the above data shows that there is an awareness of risk
management by the staffs of the bank. And the existence of awareness of credit risk management
leads the bank to be effectively executed and be able to attain its objectives.

Outcomes of effectiv e credit risk management at bank s

Data gathered from the respondents indicated that, effective credit risk management results in
reduction of financial loss of the banking sector. This was represented by 80% of the
respondents. 60% also said that effective credit risk management improves the competitiveness
of the banking sector. Furthermore, 50% of the respondents also added that effective credit risk
management improves the decision-making ability of the banking sectors. Again, 60%of the
respondent also added that effective credit risk management improves their source allocation of
the banking sector. Generally, as the data which stipulated in the above figure shows, effective
credit risk management plays a major role through the reduction of financial losses of the
banking sector.

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factors that increase credit risk in bank s

From the Questionnaire, some respondents (80%) of the total respondents replied that economic
and market fluctuation is the main factor that increases the credit risk in the bank. (55%) of the
respondents are replied that absence of real financial statement from the customer is the main
reason for the increase of credit risk. In addition, (55%) of the respondents replied that customer
awareness problem is the main factor that increases credit risk. According to Kihitinj, there are
different sources of credit risk such as, economic and market fluctuation, absence of real
financial statement from the customers, and customer awareness. Economic and market
fluctuation can intensify credit risks by decreasing the payment powers of the borrowers, this
means non reliable economic and market situation results in the difficulties of the borrower‟s
business to be operated in the normal course of business operation. And there by it increases the
probability of default. Absence real financial statement from customer‟s increases credit risk
through hindering of the bankers from the identification of the payment ability of the customers.
Based on the respondents‟ information researcher understood that the bank faces credit risk
which is resulted from economic and market fluctuations.

In addition, respondents identify major factors that increase credit risk of the bank. The factors
that challenge to manage their credit risks includes: lack of technology to manage the portfolio
data, implementation of policies at the grass root level, miss interpretation of policies, lack of
adequate information about the exact feature of customers especially individual borrowers,
effects of changing in government policy, inadequate human capacity, poorly organized
industries to evaluate their worthiness, problem of collateral registration, low level of awareness
towards credit risk management, unable to get full information about customer from external
sources, use of traditional or simple measurement tools, and absence of relevant information on
time. The reason behind is that poor management can lead to a total disaster in the bank

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Table 4.3: points covered within the guidelines and policies of the bank

Variables Frequency Percentage

Setting the minimal acceptable credit 13 65
period
Setting the dollar amount that the 8 40
cumulative credit is extended
Setting collecting procedure 17 85
Screening and monitoring 11 55
Collateral requirement 17 85
Strengthen internal control system 14 70
Segregation of duty and responsibility 9 45
Control the deposit amount of the 1 5
borrowers
Source: questionnaire data, 2023

AS the above table illustrates, the guidelines and policies of the bank covers different points. As
the data gathered shows 13 respondents that represents (65 %) of the total respondents replied
that the guidelines and policies of the bank includes setting of the minimal acceptable credit
period in which the loan is to be due. In addition, 8 respondents that represents (40%) of the total
respondents replied that the guidelines and policies of the bank incorporates setting of the dollar
amount that the cumulative credit is to be ex tended. And also, 17 respondents that represents
(85%) of the total respondents replied that the guidelines and policies of the bank includes
setting collecting procedures about how to recover the loan on its due date. And 11 respondents
that represents (55%) of the total respondents answered that the guidelines and policies of the
bank includes screening and monitoring of the loan until it becomes due. In addition, 17
respondents that represents (85%) of the total respondents replied that the guidelines and policies
of the bank incorporates c collateral requirements that enables the loan to be reliable and thereby
to minimize credit defaults. And 14 respondents that represents (70%) of the total respondents
replied that the guidelines and policies of the bank covers strengthens of the internal control

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systems. In addition to this, 9 respondents that represents (45%) of the total respondents replied
that the guidelines and policies of the bank covers the segregation of duties and responsibilities
of the employees‟. Moreover,1respondents who represents (5%) of the total respondents replied
that the guidelines and policies of the bank incorporates control over the deposit amounts of the
borrower‟s.

Since banking sectors are the most sensitive financial institutions to be influenced by different
factors such as, economic and environmental factors, it is essential to set guidelines and policies
under which these factors can be minimized. As the data collected implied, the guidelines and
policies of the bank covers setting of collecting procedures and collateral requirements before the
bank extends loan to the customer‟s.

Table 4.4: Does the guidelines and policies support the goals and objectives of the bank

Response Frequency Percentage

Yes 20 100
No 0 0
Total 20 100
Source: questionnaire data, 2023

Respondents were asked to indicate whether the available credit risk management guidelines and
policies supports the objectives and goals of the bank. Data gathered from the respondents shows
that the guidelines and policies supports the objectives and goals of the bank. 20 respondents
representing 100% of the total respondents stated that the objectives and goals of there are
supported by the guidelines and policies of credit risk management. Majority of the respondents
believe that the guideline supports the goals and objectives of the bank.

Does the bank offer training for employees on Credit Risk Management?

The respondents were asked yes or no question about whether the bank offers training on credit
risk management for employees. The result shows that (80%) of the total respondents who

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represents 16 respondents had confirmed the bank offers training to them. Whereas,20% of the
total respondents who represents 4 respondents replied that the bank does not offers training on
credit risk management. From the above figure, researcher perceived that the bank offers training
on credit risk management.
Risk management becomes a part of good business practice and should include training staffs
appropriately. The main reason for an education and training program is to ensure that the
members are comfortable with the system and increase the experience and knowledge level of
the member.
How often does the bank provide credit risk management training courses?

Respondents were asked about the frequency of credit risk management training in their
organizations. The results show that most of the respondents that represents (30%) of the total
respondents had replied that a credit risk management training once per year. About (25%) of the
respondents had replied that credit risk management training course offers more than twice per
year and also, respondents represent (20%) of the total respondents replayed that credit risk
management training is never offered in the bank. The remaining (10%) of respondents are not
give response.
Since the purpose of training is to improve knowledge, skill and attitudes to job satisfaction, it is
better to know how frequent the organizations provide training for employees.
Due to the variations of the above response, it is difficult to say the bank provides training once,
twice, a year or not. The only thing which I can present is expressing of my opinion about the
variations of this variation. As I have seen from the above data, the variations of respondent‟s
response is may be related with the banks trend of providing training to the employees through
separating them by their position. And respondents who replied that the bank never provide
training, are those who join the bank recently and have not get training on the credit
management.

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Table 4.5: Does the bank analyze the credit worthiness of the borrower’s before approving the
loan.

Variables Frequency Percentage

Yes 20 100

No 0 0
Total 20 100

Source: questionnaire data, 2023

As the above table illustrates, 20 respondents that represents (100%) of the total respondents had
replied that the bank analyses the credit worthiness of the borrower‟s before approving the loan.
Therefore, it can be seen that the bank analyses the credit worthiness of the borrower‟s before
approving the loan.

Table 4.6: How the bank qualifies the credit worthiness of the borrower’s before approving
loan?

Response Frequency Percentage

By analyzing its income statement 14 70

report
By analyzing its balance sheet report 17 85

By analyzing its owner’s equity report 12 60

By analyzing its cash flow statement 13 65

report
By analyzing collateral case 1 5

Source: questionnaire data, 2023

As the above table stipulates, 14 respondents who represents (70%) of the total respondents
replied that the bank qualifies the credit worthiness of the borrower‟s by analyzing their income

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statement reports of the current period. And also, 17 respondents who represents (85%) of the
total respondents replied that the bank qualifies the credit worthiness of the borrower‟s by
analyzing their balance sheet reports of the current period. In addition to this, 12 respondents that
represents (60%) of the total respondents replied that the bank qualifies the credit worthiness of
the borrower‟s by analyzing their owner‟s equity reports of the current period. Moreover, 13
respondents that represents (65%) of the total respondents replied that the bank qualifies the
credit worthiness of the borrower‟s by analyzing their cash flow statements of the current period.
And 1 respondent who represents (5%) of the total respondents replied that the bank qualifies the
credit worthiness of the borrower‟s by analyzing the collateral requirements that the borrower‟s
provided.

The data indicated that the bank mostly qualifies the credit worthiness of borrower‟s by
analyzing the balance sheet report and income report statement. This qualification helps to
minimize the credit risk of the bank. Because these reports measure the borrower‟s position and
performance.

The bank s activ ity to reduce credit risk

the researcher would like to know how the bank exercises in order to reduce credit risk. The
results showed that (80%) of the total respondents replied that in order to reduce credit risk the
bank creates clear and trustworthy information in the sector. And (35%) of the respondents
replied that in order to reduce credit risk the bank develops understanding between management
tea m and employees. In addition, (75%) of the respondents replied that in order to reduce credit
risk the bank frequently follow- ups stakeholder‟s performance.

As the data indicated, in order to reduce credit risk, the bank exercises in different ways. But,
from the responses of the respondents, in order to reduces credit risk, the bank creates clear and
trust worthy information in the sector and frequently follow- ups debtor‟s performance.
Measurements tak en by the bank to control credit risk

After the data regarding this question was gathered, (70%)of the respondents are replayed that
discuses through continuous negation, and by creating relation with the customer is one of the

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main measurement taken by the bank and (45%)of respondents are replayed that the bank takes
measurement through rescheduling of the loan to the customers. In addition, (15%) of the
respondents replied that the bank takes a force closure measurement to customers those who are
not complied with the terms of the loan. From the above data, researcher conceived that the bank
takes different measurements on customers that are not complying with the general terms of the
loan.

4.2. Data presentation of interview result

This part of the paper focus on analysis of the data which are collected from primary sources i.e.
interviewing the credit management department of the bank.

4.2.1 The nature of credit risk management in the bank

As the credit manager deploys, the bank applies credit risk management by carrying out its
activity per the dictates of regulatory requirements of National Bank of Ethiopia directives and
information requirement of the bank for making a quality informed decision.
Since credit (loan) is the main source of risk in the banking sectors, the bank endeavors to
manage this risk through the involvement of the essential manners of how to approve credit and
how to control or follow –up the loan until it becomes due.
As the manager informed us, in order to manage credit risk, the bank tries to properly analyze the
credit worthiness of the applicants. And this analysis is applied through:
Credit Rating
Credit rating is the assessment of the creditworthiness of a borrower in general terms or with
respect to a particular debt or financial obligation. It can be assigned to any entity that seeks to
borrow money-an individual, corporation, state or provincial authority. A loan is essentially a
promise, and the credit rating determines the likelihood that the borrower will pay back a loan
within the confines of the loan agreement without defaulting.
The manager replied that a high credit rating indicates a high possibility of paying back the loan
in its entirety without any issues; whereas a poor credit rating suggests that the borrower has had
the difficulty of paying back loans in the past, and might follow the same pattern in the future.
Credit rating involves by assigning letter grades to indicate ratings. And there by giving value to

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these grades, for instance, standard and poor‟s. For example, has a credit rating scale ranging
from „A‟ up to „D‟. A credit rating scale that shows A, B and C indicates a standard or there is a
high possibility of paying back the loan and a credit rating scale that shows D indicates the
possibility of default.

Credit evaluation process

When a new credit application arrives, any decision of the bank will be focused on the business,
financial and structural risks, if applicable, and will keep the following key credit considerations
in mind.
Firms’ competitive environment (positioning among peer groups, innovation, brand image,
relative cost position).
Industry risks; namely technology, regulatory requirement, barriers to entry for competitors,
and possible substitutes.
Capital structure; this would include, depending on the purpose of the credit analysis, the level
of capital expenditure requirement, any off- balance sheet liabilities, accounting and tax issues,
debt leverage, and repayment structure of debt.
Financial flexibility; this includes elements such as financial needs, plans and alternatives,
ability to tap capital markets, and current and future debt capacity.
Empowering of the staffs
In order to manage the credit risk, the bank tries to improve the awareness of the staffs by
delivering continuous training, meetings, and by reporting the credit risks that are occurred in the
past. To extend the awareness to staffs the bank exercises to prepare brochure and distributes to
the staff.

4.2.2. Credit culture of the bank

According to interviewed manager, the bank follows cash flow rather than collateral and deep
analyses and approval of customer financial statement, it is confirmed that they are aware of the
two documents forming the bank‟s credit culture and keep the copies in their computer for

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reference whenever they need. However, it is unrealistic to force them to remember all pages of
the two documents so primarily they remember internally the basic points directly related to their
daily duties. For example, obligations of the customer relationship section or credit assessment
section where they belong to; the portfolio criteria because they have to make the portfolio
themselves; the specific customer treatment based on their credit grades; post-approval monitor
and certainty, reporting rules – who they have to report to.

Lending Procedures

In the investigated transaction office, there are three employees: two relationship managers and
one credit assessment officer. Some people place more emphasis on the duties of the credit
assessment officer or the credit approval in evaluating credit risk management performance but
in practice relationship managers carry equally heavy responsibility. Relationship managers are
not involved in the assessment but the data they collect are of supreme importance because they
form the basis for an accurate client evaluation. The information collected is presented in
standard templates that the bank develops for different type of customers (interview, credit
officer).

According to the manager that was interviewed, the documents that the borrowers must provide
the bank really vary depending on: (i) personal or corporate customer, (ii) new or existing/old
client, (iii) the nature of the business. The lending procedures concern about the former two and
the latter was added by one interviewee. An example of the business natures influence on
documents is if the borrower is an import/export firm, the export/import license must be
presented.

4.2.3 Advantage of risk management in the bank

Any organization should follow and implement prudent risk management in order to be
successful in all sound activities of the organization. Dashen Bank is one of the leading banks in
Ethiopia which serves the economy of the country by giving banking service with in the country.

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The bank must implement risk management technique. From risk management practice the bank
could get the following advantages.

 It is a process which provides assurance that

- Objective are likely to be achieved
- Damaging things will not happen or are less likely to happen
 It is not a process of avoiding risk. i.e. if the bank aims to avoid risks completely
there may be occurrence of out of the business activity but it is risk minimization.
 Its aim is not to eliminate risk, rather to manage risks involved in all universal
actives to maximize opportunities and minimize adverse effects.
 Reduction of exposure to deteriorating credits
 Improvement of the risk adjusted return of a retained credit portfolio
Moreover, its potential benefits are: -

- Supporting strategic and business planning

- Supporting effective use of resources

- Promoting countries improvement

From this researcher‟ understood that, if the bank implements the risk management
techniques properly, it can be effective and serve its customer successfully.

4.2.4 Risk preventive technique and control procedures

Here the researcher used interview to identify the risk preventive techniques and control
procedures that the bank uses and the manager suggests his response as follows. Among these
the following preventive techniques and control procedures are:

 Training employees on the cause and prevention of risks.

 Having good understanding on transactional risk or others
 Identify the character of the customer.
 Check all the necessary documents and required thing.
 Give appropriate training and create good relation with staff
 Confirmation by signature, approval of amount and ID card.

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  Counting cash properly when receiving from the chief clients
 Risk avoidance
 Risk transference
 Risk retention and
 Insurance

4.2.5 Methods of improving risk management activities

As per the responses of the manager, the bank implements many activities to improve credit risk
management, these are: -

 Risk aware culture through training forum brochure etc.

 Strengthen risk based internal control system
 Developing and distributing policies and procedures.
 The bank aware everyone in the bank at all places like managerial position
operational, security board level. i.e. by supporting action plans, policy producers.

4.2.6 Major challenges in implementation of effective credit risk management practice

in the bank
As the manager told us, the major challenges in effective implementation credit
risk management practice is grouped in to two major classes: internal and external
challenges.

Internal challenges: these are factors which are found in the bank. These includes,
 high cost of information technology
 lack of technical knowledge

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  lack of training with in the bank about credit risk management
 difficult to understand the policy and procedure
 information gap
External challenges: are factors which are found in the environments of the bank. These
includes,
 government policy
 back ground of the society
 level of economy
 global economic crisis
Generally, as the credit manager said, due to the above challenges and problems related with the
implementation of the policies and guidelines of the credit management, the practices of credit
risk management is still at its infant stage.

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 CHAPTER FIVE

5. SUMMARY OF FINDINGS, OR CONCLUSION AND RECOMMENDATION

5.1 Introduction
The study of the data collected and the examination of the outcome revealed certain significant
concerns. The focus of this section was to highlight the major findings that were discovered at
the analysis section. These findings were outlined in direct response to the objectives of the
study, which sought, among other things, to analyze bank credit risk management and its impacts
on the banks performance.

5.2 Summary of findings or conclusions

Credit Risk management tries to decrease the negative outcomes of uncertainty, and this
could be done in different approaches. There is traditional risk management, which
handles risk in separate classes. Having analyzed the data in the preceding section, here I
present some summarizations or conclusions.
The survey indicated that the bank has a better skilled manpower in order to undertake
its operation that means, all the respondents are well educated with majority of them are
Bachelor‟s Degree and it may enable them to manage credit risk within the bank.
There are factors that increase the credit risks of the bank, such as, economic and market
fluctuation, and absence of real financial statement from the customer. The analysis
indicates that the credit risk of the bank emanates from the fluctuations of the economic
and the market situations.

The survey illustrated that the bank has well organized credit policy and guidelines that
states duty and responsibility of all department with clearly stated eligibility criteria
expected from borrower for all type of credit product facilitated by the bank. Among
these policies and guidelines setting the minimal acceptable credit period, setting
collecting procedures, and collateral requirement and evaluations are the points which

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 are covered under these policies and guidelines. And these policies and guidelines
support the goals and objectives of the bank.

As the data gathered from the respondents conveyed, the bank provides training to the
employee‟s on the credit risk management.

The bank analyzes the creditworthiness of the borrower‟s especially through the analysis
of the current balance sheet of the borrower‟s.

The study also shows; the bank takes different measures to customers those who are not
complying with the terms of the loan. Researcher concluded that before proceed to legal
action and force closure, the bank firstly discusses with the customer and tries to
negotiate them on the terms that are expressed in the agreement.

The study summarizes that the bank uses different credit risk management tools,
techniques and assessment procedures to manage their credit risk, the credit risk
management and that they all have one main objective, i.e. to reduce the amount of loan
default, which is a principal cause of bank failure.

5.3 Recommendation
Based on the findings researcher would recommend the bank as follows.
 The bank has a good manpower to facilitate the activities of credit risk management
process that ranges from credit granting to credit collection. Here I recommend that
before the risk can be managed, the risk must be identified. Once the risk is identified,
measures are taken to measure its intensity or evaluate the outcome of the risk, an
assessment of consequence in being done, control measures are then put in to place to
avoid/reduce, after that good monitoring is being done to see whether the expected
outcomes are desired.
 Since the credit risk management department is at infant stage in terms of the
implementsation of the policies and guidelines of the credit management, the bank should
provide training for the employee‟s repeatedly to enhance their capacity and reviewing
the adequacy of credit department across the entire organization.

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  Bank practitioners should put it in mind that credit risk management is not to be
introduced or stopped at a particular stage of the banking activity but, should be a
continuous process. The Researcher believed that a timely and continuous credit
management-monitoring and controlling will lead to greater success since, the risk which
leads financial institution into failure is associated with credit and the counter parties
default.
 Participation in portfolio planning and management
 Working with Business Groups and individual in creating credit risk awareness within the
bank‟s risk taking capacity.
 Follow up the implementation of credit policies and standards that conform to regulatory
requirements and the bank‟s overall objectives and improve the miss implementation of
credit risk management policies or guidelines. Cope up to the changes of credit risk
management policies with the regulatory body or organ.
 As the finding (survey) implied the bank takes different measures on customers who do
not comply with the terms of the loan that ranges from discussion with the customer to
force closure. Rather than taking force closures, the researcher recommends the bank to
solve problems based on the following assumptions.

 If the customer has willingness to pay the outstanding loan but he/she failed to pay by
a reasonable problem such as market fluctuations, the bank should reschedule or
refinance the loan.

 If the customer fails to pay the loan on the date of the term which is expressed in the
agreement of the loan, after analyses the cases the bank should give a grace period- a
time period which is provided to extend the recovery dates of the loan and which is
stipulated for a fixed future time period. And it is settled with no interest payment if
the customer repays the loan within this period, and if not he/she is obliged to pay
interest.
 But, if the customers totally failed to comply, I recommended the bank to take a legal
action.

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 Reference


Basel Committee,(1999),Principles for the management of credit risk, Basel Committee on

Banking Supervision, July.
Basel Committee,(2000),Best Practice for Credit Risk Disclosure, Basel Committee on Banking
supervision, September.
Boating, G.,(2004), Credit Risk Management in Banks.

David [Link], (1997), Bank Credit Risk Management Theory, University of California.A

Fredric S. Mishikin,(2004), The Economics of Money, banking, and financial markets.

7th [Link] University. Pearson Addisson Wesley press.

George. E. Radja,(2011), principle of risk and insurance 11 th , edition,Neyork.

Greuning, H.V., and Bratanovic S.,(2003) “Analyzing and Managing Banking Risk: A
framework for assessing corporate governance and financial risk ; the World Bank
Washington DC.

GirmaMekasha,(2011), Credit Risk Management and its Impact on Ethiopian Commercial

Banks, Un-published Master‟s Thesis, Addis Ababa University

[Link],(2008), Modern Commercial Bank 2 nd edition.

Jackson, P. and Perradin, W.(1999) The nature of credit risk: The effect of Maturity, types of
obligor and country of domicile, financial stability review, November.

Kithinji, A.M.,(2010), Credit Risk Management and Profitability of Commercial Bank in Kenya,
School of Business, University of Nirobi.
Lapteva, M.N., (2009), Credit Risk Management in Banks.

Maness and Zeiflow,(2005), Short term financial Management 3 rd edition.

Michael E. Porter,(1996),“What is Strategy?”,Harvard Business Review, November-

December:61 -78.

Peter Tufano,(1996), Who Manage the Risk? An Empirical Examination of Risk Management
Practice in the Gold Mining industry”.

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Richard, S., (2010), Assessment of Credit Risk Management Practices of Kokum Rural Bank
Limited, Unpublished Master‟s Thesis, University of Cape Cost.

Saunders,A.,(2006) Financial Institution Management; A Risk Management Appraoch,.London:

Mcgraw Hill.

Sinky,(1996), Commercial Bank Financial Management.

Stoyanov, St., (2008),Credit Risk Analysis and Information Supply.

Thomas, L.,(2002), Survey of Credit and Behavioral Scoring; Forecasting financial risk of
lending to consumers,University of Edinburgh,Edinburgh.

Tibebu Tefera,(20011), Credit Risk Management and Profitability of Commercial Bank in

Ethiopia, Unpublished Master‟s Thesis, Addis Ababa University.

Udunze B.,(2013), Ecobank‟s CEO forgoes$1.14m bonus: daily sun. vol.10,pp.55

Weasly, D.H.,(1993), Credit Risk Management: Lesson for Success Journal of Commercial
Lending.

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 APPENDIX
GLOBAL BRIDGE COLLEGE

COLLEGE OF BUSINESS AND ECONOMIES

DEPARTMENT OF ACCOUNTING AND FINANCE

RESEARCH QUESTIONNAIRES

Dear respondents; The purpose of this questionnaire is to seek information in Assessment of

credit risk management practice in Dashen bank at Wolaita soddo Branch. Therefore, you are
kindly requested to fill all questions properly and honestly with due care because correctness of
the answer will have a significant importance for the outcome of the research. The information
obtained from this questionnaire is used for only academic purpose.

The researcher would like to thank you in advance for your support to the study.

Instructions

1. No need of writing your name;

2. Mark your answer by putting check mark (() for closed-ended questions in the box provided.

Part I. Respondents’ personal profiles

1. Sex male female

2. Age
18 - 30 31 - 40
41 - 50 above 50

3. Status: Married Unmarried

4. Education status:
Certificate First degree
Diploma Master and above
4. Job title ___________________________

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6. Years of experience within the bank.
Less than 1 year 1-2 years
2 - 5 years above5 years

Part II: Read the following statements and decide your agreement

7. IS there an awareness of risk management by the staff of the bank?

Yes No

8. What do you think about the outcomes of effective credit risk management at banks?
(You can use more than one answer)
Reduce financial loss.
Improve the competitiveness of the bank.
Improve decision making.
Improve resource allocation.
Other (please specify) ______________________________________

9. What are the factors that increase credit risk in banks?

Economic and market fluctuation
Absence of real financial statement from the customer
Customer awareness problem
Other (please specify) ______________________________________

10. Points covered with in the guide line and policies of the bank.
Setting the minimal acceptable credit period
Setting the dollar amount that the cumulative credit is extend
Setting collecting procedure
Screening and monitor
Collateral requirement
Strengthen internal control system
Segregation of duty and responsibilities
Others (please specify) ------------------------------
11. Does these guidelines support the goals and objectives of the bank?
Yes No

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12. Does the bank offer training for employees on Credit Risk Management?
Yes No

13. If your response to question no. 12 is yes, how often the bank provide credit risk management training course?
Never Twice per year
Once a year More than twice per year
14. Does the bank analyze borrower‟s credit worthiness before approving the loan effectively?
Yes No
15. If your answer for question no.14 is yes, how the bank qualify its (the borrowers) credit worthiness? (You can
choose more than one answer)
By analyze its income statement report
By analyze its Balance sheet report
By analyze its owner‟s equity report
By analyze its Cash flow statement report
Other (please specify)

16. How does your Bank exercises to reduce credit risk?

(You can choose more than one answer)
Creating clear and trustworthy information
Developing understanding between management team and employee
Frequent follow up of debtor‟s performance
Other (please specify) ____________________________________

1.7 What are the measures the bank takes to customers that failed to comply with terms of loan?
Discus with the customer rescheduling the loan
Force closure legal action
Other (please specify) _______________________

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 Interview questions to senior managers
1. How does your bank apply credit risk management?
2. From your point of view, how does credit risk management contribute to the success of the bank?
3. In order to minimize the probability of credit risk, what preventive techniques and control proced ures of the
risk management process the bank use?
4. What types of methods are most available to improve credit risk management practice in the bank?
5. What are the major challenges of effective credit risk management practice in the bank.

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