ABSTRACT
The aim of this research is to assess the credit risk and management system of microfinance
institutions, with a particular focus on Addis Credit and Saving Institution (ACSI) in Addis Ababa,
Ethiopia. The objective is to evaluate the effectiveness of
ACSI's credit risk management practices and their
impact on the institution's overall performanc.e. Micro finance
institution are a credit provider and they made financial service available to low income clients. This
research will examine the credit risk management and
the collection policy of micro finance institution and this study
will also examine what kinds of mechanisms are used by micro finance institution to handle
credit risk. Credit risk in micro finance institution is known to have adverse impact on profitability
The
and growth of the institution. The researcher observe that there is a high default.
general objective of this research is the assessment of credit risk
management practice of Addis credit and saving institution and its effect on loan
The institution is selected purposely with regard to its
performance.
capacity and service year. This research will examine the characters of credit risks
that are most commonly faced by micro finance institution. The research employs a mixed-
methods approach, combining quantitative data analysis with qualitative interviews to provide
Key areas of
a comprehensive understanding of ACSI's credit risk management practices.
investigation include the identification and measurement of
credit risk, the effectiveness of existing risk management
strategies, and the institution's overall risk management
framework. The data will collected through questionnaire. And
also the primary and secondary source of data will be used for
the study. The main primary source of data will collected by interviewing credit and risk
management staff. In general this study will focuses on the credit risk management practice of
micro finance institution.
Problem statment
Microfinance institutions (MFIs) play a critical role in providing financial services to underserved
communities, particularly in developing countries like Ethiopia. Micro finance
institution faces significant challenges in managing credit
risk. Despite their importance in promoting financial inclusion and economic development ,
these institutions often struggle with high default rates, inadequate
risk assessment procedures, and inefficient credit management
[Link] primary problem is the lack of a robust and effective credit risk management
system within Addis Credit and Saving Institution. This deficiency leads to increased default rates,
which not only threaten the financial stability of the institution but also limit its ability to extend
credit to more beneficiaries. In Micro finance institution The existing methodologies for assessing
the creditworthiness of borrowers may be insufficient, leading to the approval of loans to high-risk
individuals and entites and there is a lack of continuous monitoring and evaluation of loan
performance, which hinders the institution's ability to identify and mitigate potential risks in a
timely manner. Factors such as the increasing competition in
markets and the integration of new technology into the
industry further reinforce the importance of microfinance
risk management. Financial institution including micro finance institutions are a
business mostly associated with credit risk because of their high exposure to uncertainty.
Chua et al. (2000) also found that managing credit risk is one of the
basic tasks to be done in micro financial institutions , once
it has been identified and known. As a result, effective and sound credit risk management is
a foundation for the safe and sound operation of a micro finance institution to improve their
performance. This research will focuses on the credit risk
management practice of Addis credit and saving institution.
1.3. Basic research questions
What are the current challenges and deficiencies in the credit risk management system of
Addis Credit and Saving Institution?
What kinds of mechanisms are used by ADCSI to handle credit risk?
How effective are the current credit risk management practices at Addis Credit and Saving
Institution?
, what is the influence of broader economic factors on credit risk within microfinance
institutions
1.4. Objective of the study
1.4.1 General objectives of the study
The general objective of this study is to assessment credit management practice of Addis
credit and saving institution and its effect on loan performance.
1.4.2. Specific objectives
To determine the characteristics of credit risk that commonly faced by Addis credit and saving
institution.
To assess the ADCSI identification, measurement, monitor, evaluation and control
mechanism of credit risk.
To Determine the main challenges and deficiencies in the current credit risk
management practices.
To identify the effect of credit risk on Addis Credit & Savings Share Company.
To examine the capability and efficiency of management and staff in managing and
administrating the financed project properly.
,to examine the influence of broader economic factors on credit risk within microfinance
institutions
1.5 Significance of the study
The research will help to identify and address the deficiencies in the current credit risk
management system, the study aims to improve the financial stability of micro finance
institution by examining the influence of broader economic factors on credit risk within
microfinance institutions. A more stable financial institution can better serve its clients and
contribute to the overall economic development of the region. . Microfinance institution is
very important institution in Ethiopia by reducing poverty and creating employment
opportunity especially for the poor rural people. The research will provide insights into the
factors contributing to high default rates and suggest strategies to mitigate these risk and
This can lead to lower default rates, improving the institution's performance and contribute
for econonyc development of the country. Improved credit risk management can enhance the
institution's ability to extend credit to a broader segment of the population, promoting
financial inclusion and economic empowerment for underserved [Link], the
study is significant for future researchers who are interested to conduct a study in the credit
management area. Also it will have contribution by filling the existing gap observed in the
credit management researcher.
Scope
The research will focus on Addis Credit and Saving Institution, a leading microfinance institution in
Ethiopia and it will examine the credit risk management system of micro finance [Link] study
will Concentrates on branches of Addis Credit and Saving Institution within Addis Ababa and Potential
inclusion of a few branches outside the capital for comparative [Link] will cover the last
five years, to capture recent trends and practices in credit risk management [Link] study may be
constrained by the limited time frame available for data collection and analysis and Limited resources
for extensive data collection and analysis may impact the depth and breadth of the study.
Addis credit and saving institution have different branches However, the whole branches and
the entire micro finance institution will not include in the study due to time and financial
constraints will have a limitation on the study.
Methdology
Research Design
Research design process is a systematic and structured approach to conducting research.
Research design refers to the plan or road map identified to conduct research and best meet
certain intended objectives, which also involves the intersection of philosophical or worldview
position, research strategies and methods employed.
This research will adopted a descriptive and explanatory research design. descriptive
research type is appropriate to describe the state of affairs of present situation of an event or
problem in detail based on opinions, attitudes or practices that are observed or measured at
a given time and environment (Kothari, 2004).on the other hand, explanatory research aims
to bring ideas together in order to understand cause and effect, and it helps to explain what
is going on. This research will employ descriptive type of research to illustrate the existing
credit management practice and loan performance based on survey of opinion of employees,
interviews and discussion with employee and management official in the study [Link] using
Descriptive research the reasearch will provide an accurate portrayal of credit risk and its
management at Addis Credit and Saving Institution, in this study the explanatory method will
used to examine the relationship between credit management and loan performance and
their link with respective indicators.
This research will emplye both quantitative and qualitative methods to provide a
comprehensive assessment of the credit risk and management system of Addis Credit and
Saving Institution. This approach will allow for a thorough analysis of numerical data as well
as in-depth understanding of contextual factors. By using quantitative method the resaerch
will quantify the extent of credit risk at Addis Credit and Saving Institution and statistically
analyze the effectiveness of current credit risk management practices and by using this
method the research will identify the correlation between various factors influencing credit
risk. This research will employee qualitative method to understand the contextual factors and
challenges in managing credit risk and to explore the strategies and decision-making
processes of the institution’s management.
Sample and Sampling Technique
1. Population
The population for this study comprises all employees and clients of Addis Credit and Saving
Institution (ACSI) in Addis Ababa. This includes loan officers, credit analysts, risk managers, and
clients who have obtained loans from the institution. The target population of this study is 16
MFI found in Addis Ababa, of which Addis credit and saving institution will selected and
employees of credit management, credit analysis and credit portfolio will be the target group.
The total number of employee in Addis credit and saving institution is 165 and the researcher
will take 67 sample employee.
Procedures of Data Collection
Data will be collected through a combination of questionnaires and interview. Questionnaires
will be distributed to employees and clients to gather quantitative data on credit risk
management practices and their [Link] will be conducted with key personnel
such as senior managers and credit risk officers to gain qualitative insights into the institution's
credit risk management system.
3.4 Sources of data
The sources of the primary data will be from sample employees, managers. The secondary data
will collected from micro finance institutions, books, journals, articles, and published and
unpublished research reports relevant to the study.
Sampling Technique
A combination of stratified random sampling and simple random sampling will be employe:. By using
stratified Random Sampling the population will be divided into strata based on their roles and
involvement in the credit process. This ensures that different groups (loan officers, credit analysts, risk
managers, and clients) are adequately [Link] each stratum, a proportional sample will be
randomly selected. And also for selecting employees a simple random sampling technique will be
applied to ensure that every client has an equal chance of being included in the study. . About 68
employees will be selected for the survey questionnaire, and about 3 officials will be selected
from Addis credit and saving institution for the intense interview.
Data Analysis
The collected data will be analyzed using statistical methods to identify trends, correlations,
and potential areas for improvement in ACSI's credit risk management system. Descriptive
statistics, regression analysis, and thematic analysis for qualitative data will be employed to
ensure comprehensive results.
3.6.1 Quantitative data analysis
Quantitative research are used to quantify the size, distribution, and association of certain
variables in the study population. The quantitative data collected through questionnaire will be
first edited, .coded and filtered and entered into SPSS program, processed and thus descriptive
and inferential analysis will carried out
3.6.2 Qualitative data analysis
The qualitative data obtained through interview will be analyzed using qualitative method of
content, thematic and narrative methods of analysis. Hence, the findings of qualitative and
quantitative data will collaborated to address the research question.
REFERENCE
Afriyie & Akotey, 2012, p. 3 credit risk management in financial institution
Ayayi, A.G. (2011). Credit risk assessment in the microfinance industry: An application to a
selected group of Vietnamese microfinance institutions and an extension to East Asian and
Pacific microfinance institutions. Economics of Transition Volume 20(1) 2012,
Amanuel 2015 ‘ credit risk management and profitability in Ethiopia Microfinance’, Addis
Ababa University College of Business and Economic Department of Accounting and
Finance
Befkadu B. Kereta (2007) ‘Outreach and Financial Performance Analysis of Microfinance
Institutions in Ethiopia’, National Bank of Ethiopia, Economic Research and Monetary
Policy Directorate, Addis Ababa, Ethiopia
Cielens, M. 2010. Risk assessment and Risk management. Washington,D.C.
Churchill, C. and Coster, D. (2001). Microfinance Risk Management Handbook. CARE.
Chua, Paul Mosley, Graham A. N. Wright, Hassan Zaman Ronald T.
(2000) ‘Microfinance, Risk Management, and Poverty’.
Craig Churchill and Dan Coster (2001). CARE Microfinance Risk Management Handbook.
Available online: [Link] Retrieved on 11 July2015.
Fernando, N.A. (2008). Understanding and Dealing with High Interest Rates on Micro
credit. A Note to Policy Makers in the Asia and Pacific Region. Asian Development Bank.
Retrieved[Link] on 20 August201Nancy Natilson,
Pro Mujer Tillman A. Bruett (2001) ‘Financial Performance Monitoring’: A Guide for Board
Members of Microfinance Institutions.
Oldfield, G. S., and Santomero, A. M. (1997), “Risk Management in Financial Institutions,”
Sloan Management.
Samuel (2006) ‘Impact of Microfinance in Addis Ababa: The Case of Gasha Microfinance
Institution.