ASSESSMENT OF CHALLENGES AND PROSPECTS OF CREDIT

MANAGEMENT IN ADDIS INTERNATIONAL BANK S.C: THE CASE

OF MAIN BRANCH

A RESEARCH SUBMITTED TO THE SCHOOL OF GRADUATE STUDIES

OF MARYLAND INTERNATIONAL COLLEGE, IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR MA DEGREE IN
BUSINESS ADMINISTRATION

BY

MERIMA ALI KISO

MARYLAND INTERNATIONAL COLLEGE

SCHOOLL OF GRADUATE STUDIES
DEPARTMENT OF BUSINESS ADMINISTRATION

OCT, 2024

i
 ADDIS ABABA, ETHIOPIA

ASSESSMENT OF CHALLENGES AND PROSPECTS OF CREDIT

MANAGEMENT IN ADDIS INTERNATIONAL BANK S.C: THE CASE
OF MAIN BRANCH

A RESEARCH SUBMITTED TO THE SCHOOL OF GRADUATE STUDIES

OF MARYLAND INTERNATIONAL COLLEGE, IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR MA DEGREE IN
BUSINESS ADMINISTRATION

BY

MERIMA ALI KISO

UNDER THE GUIDANCE OF

DR SHEMELIS Z

MARYLAND INTERNATIONAL COLLEGE

SCHOOLL OF GRADUATE STUDIES
DEPARTMENT OF BUSINESS ADMINISTRATION

ii
 OCT, 2024
ADDIS ABABA, ETHIOPIA

Table of Contents

CHAPTER ONE...................................................................................................................
INTRODUCTION................................................................................................................
[Link] of the study.................................................................................................
[Link] of the Problem...............................................................................................
1.3. Research Questions...............................................................................................5
1.3.1. General research question............................................................................5
1.3.2. Specific research questions...........................................................................5
1.4. Objectives of the study.........................................................................................6
1.4.1. General objective..........................................................................................6
1.5. Significance of the study.......................................................................................6
1.6. Scope of the study.................................................................................................6
1.7. Operational definition of the key terms................................................................6
1.8. Organization of the study......................................................................................7
CHAPTER TWO..................................................................................................................
LITERATURE REVIEW.....................................................................................................
2.1. Introduction...........................................................................................................8
2.2. Theoretical Aspect: An Overview to the concept of credit management.............8
2.2.1. Credit Management Practices.....................................................................10
2.2.2. Challenges of Credit Risk Management in Banks.......................................12
2.2.3. Contributions of Credit Management on sustainability of Commercial
banks...................................................................................................................14
2.2.4. Importance of Credit and Credit Management. [Link]. Importance of
Credit..................................................................................................................15
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 2.3. Empirical Review...............................................................................................17
2.4. Conceptual Framework.......................................................................................18
CHAPTER THREE............................................................................................................
METHODOLOGY OF THE STUDY................................................................................
3.1. Background of the study area.............................................................................20
3.2. Research Design.................................................................................................20
3.3. Approach of the Study........................................................................................21
3.4. Sources of Data...................................................................................................21
3.5. Data Collection Tools.........................................................................................22
3.6. Sampling Techniques and Sample Size..............................................................22
3.7. Method of Data Analysis....................................................................................24

iv
 ABSTRACT
This study intends to assess challenges and prospects of credit management practice of the
Addis international bank s.c case of main branch. based on three basic dimensions namely
adequacy of credit policy content, credit process and credit management practice of bank
against the formulated policy and the overall existing credit control practice of the bank. The
research is designed as a case study on a single branch and a survey method is employed.
Sources of both primary and secondary data are used. Questionnaire was used as a main
instrument to collect primary data while secondary data were reviewed from different
[Link] and results are are going to be described based on statistical
percentage and tables.

v
 CHAPTER ONE
INTRODUCTION
1.1. Background of the study
Donald (2017) stated that credit management is a comprehensive process made up of the
monitoring of loan facilities, extension of credit, distinguishing the market segments as well
as delineating the returns generated. The policy on credit management comprises systems,
guidelines and principles that serve as a blueprint for employees in the credit department in
awarding loans and steering the total collection of credit facilities.

Accordingly, the policy on credit management is described as a combination of principles

devised to reduce expenditure connected with loan delivery while taking full advantage of the
gains that can be generated from them (McNaughton, 1996).

One critical prerequisite for being able to supervise credit delivery effectively is the capacity
to astutely and competently administer the lines of credit to clients. To be able to reduce the
vulnerabilities associated with uncollectable loans, companies must exercise a better
understanding of economic capacity of clients, history of customers‟ credit rating and varying
repayment arrangements.

It is obvious that the primary functionality of a financial institution is the provision of loan
facilities to deserving clients located in their sphere of jurisdiction. Banks are in business with
the sole aim of making profits and so, they seek to generate profits through giving out loans
and investment in other assets. Against this backdrop, loan supply and delivery are part of the
core business activities of financial institutions because without giving out credit in the form
of loans and advances to individuals and firms, their main objective for being in business
would be defeated (Emmanuel, 2018).

In the banking business credit has been recognized as one of the most important financial
services that contribute to the success of business venture and this success in turn contributes
to the major economic development of a country. However, the existence of credit facility
alone does not necessarily result in supporting economic development unless and otherwise, it

6
is accompanied by the existence of efficient utilization of credit funds and management as
well (Haile, 2020).

So that, credit management means the total process of lending starting from inquiring
potential borrowers up to recovering the amount granted. In the sense of banking sector, credit
management is concerned with activities such as accepting application, loan appraisal, loan
approval, monitoring, and recovery of non-performing loans (Shekhar, 2015).

Then when there is effective credit management process within a financial institute it often
reinforces and compliments its corporate objectives and goals (Kaitibi et al., 2018). The
ultimate goal of credit risk management is all about minimizing the loner bank’s risk, and to
maximize the rate of credit return by maintaining credit risks exposure within acceptable
parameters (Ahiable, 2012). In this regard, banks take into account many considerations as a
factor of credit management, which helps them minimize the risk of default that results in
financial distress and bankruptcy (Eskedare, 2019). The case in Development Bank of
Ethiopia is not exceptional.

According to Hettihewa (2007), credit management is extremely important as granting credit

is considered to be the equivalent of investing in a customer. Credit analysis is the first step in
the process to tailor-make solution to fit the customer's needs.

The assessment starts with an understanding of the customer's needs and capacities to ensure
there is a good fit in terms of the financing solution. Credit assessment is the most important
safeguard to ensure the quality of the credit being granted and is considered an essential
element of credit risk management.

The credit quality generally refers to the borrower's ability and willingness to meet the
commitments of the facility granted. It also includes default probability and anticipated
recovery rate (Saunders & Cornett, 2003). Credit assessment thus involves assessing the risks
involved in financing and thereby anticipating the probability of default and recovery rate. A
credit analysis is used by the credit official to evaluate a borrower's character, capital,
capacity, collateral and the cyclical aspect of the economy (Strischek, 2000).

7
Mensah (1999) stressed the importance of credit management as follows: Credit management
process deserves special emphasis because proper credit management greatly influences the
success or failure of financial institutions.

According to Ahmadyan (2018), sound credit risk management boosts profitability and bank
[Link] credit risk management reduces the profitability and survival of banks.
Credit risk management is the process of managing an institution’s activities which create
credit risk exposures, in a manner that significantly reduces the likelihood that such activities
will impact negatively a bank’s earnings and capital. The commercial banks' credit risk
management needs strong attention and follow up regarding performer capacity building to
minimize the high incidence of non-performing loan (Kargi, 2018). Therefore, it is a
significant issue to know and understand the effect of credit risk management and its
influence on the financial performance of commercial banks of Ethiopia.

cost per loan on the profitability of selected commercial banks from 2010 up to 2021
[Link] to Natufe OK, Evbayiro-Osagie EI (2023), Generally the aim of risk management
is not simply to reduce or even to eliminate risk it is also view the process of recognition,
measurement and control of risk that an investor faces. Indeed, this may not be possible given
various difficulties of measuring risk and the limitations of the instruments for controlling
risks.

Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in
individual credits or transactions. Banks should also consider the relationships between credit
risk and other risks. Effective management of credit risk is a critical component of a
comprehensive approach to risk management and essential to the long-term success of any
banking organization.

Therefore, the credit management is one of the major issues of banks that concern many
stakeholders where better credit risk management results in better bank profitability. This
research therefore, aims to assess challenges and prospects of credit management in Addis
International Bank s.c case of main branch.

8
1.2. Statement of the Problem
According to Rana al Mosharrafa (2013), the goal of the credit management is to maximize
the performing asset and the minimization of the nonperforming asset as well as ensuring the
optimal point of loan, advance and their efficient management.

Hagos (2020) also elaborated that the overall success in credit management depends on the
banks credit policy, portfolio of credit, monitoring, supervision and follow up of the loan and
advance. Continuous supervision, monitoring and follow up are highly required for ensuring
the timely repayment and minimizing the default. Actually, the credit portfolio not only
constitutes the bank's asset structure but also is a vital factor of the bank's success.

Here it is true that, only a proper credit analysis will bring to light the probability of credit
loss arising out of genuine business factors and explore the possible mitigates regarding this
ominous situation to put a check on it (Hagos, 2020).

Adequately managing credit in financial institutions is critical for the survival and growth of
the financial institutions. In the case of banks, the issue of credit management is even greater
concern because of the higher levels of perceived risks resulting from some of the
characteristics of clients, business conditions, and economic environment in which they find
themselves (Edward, 2015).

The very nature of the banking business is so sensitive because more than 85% of their
liability is deposits mobilized from depositors (Saunders, Cornett, etal, 2005).

Banks use these deposits to generate credit for their borrowers, which in fact is a revenue
generating activity for most banks. Credit assessment helps the banker to ensure selection of
right type of loan proposals and right type of borrower. For selecting the borrower, security
should not the only thing to be relied upon. So, responsibilities of the bankers to investigate
the client from different view point i.e. the strength and weakness of the client so that the
client will be able to repay the bank loan as repayment schedule with profit. To prevent future
financial crises, it is necessary to improve the borrowers’ financial literacy, the lenders’
process of transparency and to better assess loan product affordability and suitability.

9
Due to diversified and intensified investments in the country in the last 10 and or above years
there is an increase of loan demands among investors from commercial banks in the country.
In addition to these high demands for loan from commercial banks are highly busy in
launching branches across the country. These situations have created an environment in which
commercial banks to encounter risks in credit management. As Md. Sazzad & Nishat
Tasneem, (2019) stated in their research the banking sector currently facing the acute problem
of non-performing loan as a sign of ineffective lending practices and day by day the problem
increases although many reform measures have been carried out. Since commercial banks
expansion and high demand for loans are a recent phenomenon, the challenge they encounter
in the manner loans are managed are huge concern. Although there were some studies on
commercial banks risk management conducted in Ethiopia (Sahlemichael, 2018) on credit
management system in Ethiopian commercial banks, many commercial banks were not
included. Therefore, this research was filling the gap to assess the challenges and prospects of
credit management in ADIB Main branch.

1.3. Research Questions

1.3.1. General research question
The general research question of study is stated as “What are the Challenges and Prospects of
Credit Management in Addis International Bank S.C Main Branch?”
1.3.2. Specific research questions
The specific research questions of the study are:
1. What are the practices of credit management in Addis international bank s.c Main
Branch?
2. What are loopholes of the credit management policies and its impacts in Addis
international bank s.c Main Branch?
3. What is the status of credit management in contributing to the productivity of Addis
international bank s.c Main Branch?

10
1.4. Objectives of the study

1.4.1. General objective

The general objective of this study is to assess the Challenges and Prospects of Credit
Management in Addis International bank Case Of Main Branch.
1.4.2. Specific Objectives
The specific objectives of the study were:
1. To assess the practices of credit management in Addis international bank s.c main
branch.
2. To identify the loopholes of the credit management policies and its impacts in Addis
international bank s.c main branch.
3. To determine the status of credit management in contributing to the productivity of
Addis international bank s.c main branch.

1.5. Significance of the study

The study has its own significances. It helps to assess challenges and prospects of credit
management in ADIB, main branch. It gives hints for stakeholders on how to solve the
problems related to credit management performance, credit management processes, credit
management policies and related issues. Also it helps other researchers to further conduct the
study on the area.

1.6. Scope of the study

Geographically, this study was limited ADIB, main branch coverages. Thematically, there are
so many challenges and prospects of credit management of various financial institutions. This
study was focus on challenges and prospects of credit management in ADIB,main branch.
Timely, the scope of the title was on the current situation of credit management of the
institution under study.

1.7. Organization of the study

This research is going to be organized in to five chapters. Accordingly, chapter one contains
background of the study, statement of the problem, objectives of the study, significance, scope
and limitation of the study. Chapter two presents review of literatures in global perspectives,
11
theories and conceptual frameworks. Chapter three includes methodology of the study, design
of the study, source of data, sampling techniques and data gathering instrument and method of
data analysis. Chapter four is about data presentation, analysis and findings. The last chapter
five is about conclusion and recommendations.

12
 CHAPTER TWO
LITERATURE REVIEW

2.1. Introduction
This chapter assesses previous literatures related to challenges and prospects of credit
management. It reviews the past studies that help the researcher to understand and identify
the problem being studied more appropriately.

2.2. Theoretical Aspect: An Overview to the concept of credit management

As McNaughton (2006) described, credit management is a comprehensive process made up
of the monitoring of loan facilities, extension of credit, distinguishing the market segments as
well as delineating the returns generated. The policy on credit management comprises
systems, guidelines and principles that serve as a blueprint for employees in the credit
department in awarding loans and steering the total collection of credit facilities. The policy
on credit management is described as a combination of principles devised to reduce
expenditure connected with loan delivery while taking full advantage of the gains that can be
generated from them.

One critical prerequisite for being able to supervise credit delivery effectively is the capacity
to astutely and competently administer the lines of credit to clients. To be able to reduce the
vulnerabilities associated with uncollectable loans, companies must exercise a better
understanding of economic capacity of clients, history of customers' credit rating and varying
repayment arrangements. In order to make an intrusion into new markets as well as enroll
more clients depends on the competence to rapidly and effortlessly make well-informed credit
decisions and set appropriate lines of credit (Emmanuel, 2017).

Additionally, Conford (2010) stated that credit management means the total process of
lending starting from inquiring potential borrowers up to recovering the amount granted. In
the sense of banking sector, credit management is concerned with activities such as accepting
application, loan appraisal, loan approval, monitoring, and recovery of non-performing loans.

Banks take into account many considerations as a factor of credit management, which helps
them to minimize the risk of default that results in financial distress and bankruptcy. This is
13
due to the reason that while banks providing credit they are exposed to risk of interest and
principal repayment, which need to be managed effectively to acquire the required level of
loan growth and performance (Conford, 2010).

According to Hettihewa (2017), credit management is extremely important as granting credit

is considered to be the equivalent of investing in a customer.
Furthermore, Muller (2013) said that the issue of finance is major concern in modern time all
over the world. The need for financial institution is unquestionable. Banks are financial
institutions that are established for lending, borrowing, issuing, exchanging, taking deposits,
safeguarding or handling money under the laws and guidelines of a respective country.
Among their activities, credit provision is the main product, which banks provide to potential
business entrepreneurs as a main source of generating income. They also provide loans, credit
and payment services such as checking accounts, money orders, and cashier's checks. Banks
also may offer investment and insurance products and a wide whole range of other financial
services

Sahlemichael (2009) also elaborated that credit creation is the main income generating
activity for the banks. But this activity involves huge risks to both the lender and the
borrower. The risk of a trading partner not fulfilling his or her obligation as per the contract
on due date or anytime thereafter can greatly jeopardize the smooth functioning of a banks'
business.

On the other hand, a bank with high credit risk has high bankruptcy risk that puts the
depositors in jeopardy. Among the risk that face banks, credit risk is one of great concern to
most bank authorities and banking regulators. This is because credit risk is that risk that can
easily and most likely prompts bank failure (Conford, 2010). The credit quality generally
refers to the borrower's ability and willingness to meet the commitments of the facility
granted. It also includes default probability and anticipated recovery rate (Saunders &
Cornett, 2003).

Credit assessment thus involves assessing the risks involved in financing and thereby
anticipating the probability of default and recovery rate. A credit analysis is used by the credit

14
official to evaluate a borrower's character, capital, capacity, collateral and the cyclical aspect
of the economy (Strischek, 2000).

Understanding the payment behavior of potential customers is vital in assessing credit

management in every organization, since poor credit assessment can lead to major problems
in financial planning, Atradius (2011), as cited in Emmanuel (2012).

Also, Charles Mensah (1999) stressed the importance of credit management as follows: Credit
management process deserves special emphasis because proper credit management greatly
influences the success or failure of financial institutions.
2.2.1. Credit Management Practices
Credit management practices are considered as an integral component for the success of the
banks (Lalon, 2015). This is attributed to the fact that commitment to the credit management
practices ensures long term survival of the banking institutions through shielding from default
loans (Kithinji, 2010).
Poor credit management practices have adverse negative effects on the banks resulting in
reduced profitability and liquidity problems due to compressed profit margins from the rising
NPLs hence bringing about the most challenging environment for banks (Saunders & Allen,
2016).

In the past decade (2000-2010), most financial institutions were not keen in their efforts on
timely credit recovery and consequent reduction of Non-Performing loans as today (Montana
2012).

Debt collection is defined as a process of pursuing loans which have not been repaid. Few
customers have been established to complete their payments while others don't pay at all
(Kariuki, 2015).

This has resulted in the formulation of policies that an organization should adhere for
effective credit policies which may include debt collection policy to avoid non-performing
loans. The debt collection policies aim to stimulate the non-payers to pay therefore avoiding
non-performing loans. This is because lack of stringent debt collection policy leads to overdue
collection amounts and hence NPLs ([Link], 2012).

15
Client appraisal is a process undertaken mainly to determine the acceptance or rejection of a
proposal for credit by the clients. This involves an evaluation of the repayment capacity of the
borrowers ([Link], 2012). The primary objective is to ensure the loans are issued only to
creditworthy customers. Client appraisal process involves evaluating the capability of the
borrower and any specific risks associated (Auren, 2003).

Client appraisal is therefore crucial in any credit management that highly determines the level
of non-performing loans. Lack of adequate client appraisal guidelines and exclusive use of
qualitative methods of loan assessment results in loans not been repaid on time (Mathara,
2007).

The recognition of the importance of client appraisal system has led to commercial banks
adopting more comprehensive client appraisal method, both qualitative and quantitative
(Ombaba, 2013).During the process of appraisal terms, all aspects of the customers and
expected stream of future cash flows are assessed. Client appraisal yearns to assess the
reasonability or correctness of the cost estimates and expected expenses against the revenues
projected (Gennaioli, Andrei & Robert, 2012).

Through appraisals, bad credit may be steamed out through proper and early identification.
However, Auronen (2003) argues that information asymmetry is essential for ensuring the
desired effects are achieved thus reducing the chances of default greatly.

Lending in commercial banks ought to be effectively carried out as it is the basis for having a
sound developing economy (Gennaioli, Andrei & Robert, 2012). The lending system should
therefore be formulated to attain total benefit to all different interest groups of the bank,
which includes the shareholders, depositors and the borrowers (Parlour &Winton, 2008).

In this regard, lending policies enables the banks to offer the credit to worthy customers using
specified guidelines. The recognition of the importance of lending policy on non-performing
loans has led to banks constantly updating their lending policies to fit the changing
environment (Kibor, 2015).

Lending policies needed to be commensurate with the size and complexity of the institution
and be able to present a clear position on the commercial banks’ exposure. Lending policies
16
were also required to ensure transparency in the transactions relating to lending. Insider loans
to directors and related parties were also required to be disclosed (Central Bank of Kenya,
2018).

The lending policies guide the bank on issuing out loans to customers and ensuring proper
credit management (Kithinji, 2010). These should be aligned with the general bank plans and
factors such as existing credit policies and prevailing country's economy status. Prior to the
establishment of the lending policies, banks mainly issued out credit to anyone who expressed
interest to borrow. This resulted in large volumes of bad credit leading the banks to be more
cautious thereafter (Abor, 2004). Majority of commercial banks have customized their own
lending policies to fit the local market and to gain a competitive edge (Ombaba, 2013).

However, they still face from poor lending practices (Altunbas et al, 2009). It thus sensitizes
on the importance of monitoring and providing the necessary steps those are related to lending
both to individuals and corporate (Crowley, 2017).

2.2.2. Challenges of Credit Risk Management in Banks

Alam (2015) elaborated that credit risk management is an essential component of the financial
industry, with banks and other lending institutions constantly seeking to optimize their
strategies. However, with numerous challenges facing institutions today, achieving success in
credit risk management is easier said than done.
Yang (2013) wrote that increasingly complex regulatory requirements are one of the
challenges of credit risk management in banks. Banks must navigate a constantly evolving
regulatory landscape, frequently introducing new rules and requirements. Failure to comply
with these regulations can result in significant financial and reputational damage.

Alam (2015) also added that data quality and availability is also another challenge of credit
management. Accurate and timely data is essential for effective credit risk management.
However, many banks struggle with data quality and availability issues.

Additionally, lack of skilled personnel is the challenge of credit management. Credit risk
management requires a team with diverse skills, including statistical modeling, data analysis,

17
and risk assessment. However, finding and retaining these skilled personnel can be a
challenge (Solomon, 2013).

Rapidly changing market conditions are also the challenges of credit management in many
banks. The financial industry is constantly in flux, with market conditions changing rapidly
and frequently. Banks must be able to adapt to these changes quickly to minimize risk and
maximize returns (Patil, 2014).

Furthermore, counterparty risk is another challenge of credit risk management. The risk of
default or other negative actions by counterparties can significantly impact credit risk
management strategies (Million and Mathewos, 2015).

In addition, cyber security threats are a growing concern for banks and other financial
institutions, with the potential to cause significant financial and reputational damage (Million
and Mathewos, 2015).

Furthermore, economic downturns are also the challenges of credit management. Economic
downturns can majorly impact credit risk management, with default rates increasing and
credit quality deteriorating (Girma, 2016).

Also business strategy alignment can be taken as challenges of credit management. Effective
credit risk management requires clearly understanding an institution’s overall business
strategy. However, aligning credit risk management strategies with broader business goals can
be challenging (Atakilte, 2015).

Adapting to new technologies is also the other challenges of credit management. Technology
is constantly evolving, with new tools and platforms emerging regularly. Banks must adapt to
these new technologies quickly and effectively to remain competitive.

Atakilte (2015) said that balancing risk and return is another challenge of risk management.
Finally, balancing risk and return is one of the most significant challenges facing banks in
their credit risk management efforts. Banks must seek to maximize returns while minimizing
risk, a difficult task that requires a deep understanding of the markets, the economy, and
individual borrowers.

18
By and large, credit risk management is a complex and challenging area for banks and other
financial institutions, with numerous obstacles to success. However, these challenges can be
overcome with the right tools, technologies, and expertise.
2.2.3. Contributions of Credit Management on sustainability of Commercial banks
In any financial institution credit management is involved in various activities which cannot
be implemented without financial resources, for instance securing a new asset, employing
more staff, reconstructing and rehabilitating devastated places. Their decisions for such plans
and implementations require finances and resources related to them. Credit management
involves estimating income and expenses, estimating initial investments, determining the
financial implication /requirements, determining the financial plan, making the forecasts on
the sources both internal and external to support the financial plan, establishing and
maintaining a system of control for allocating and the use of adjusting the basics if conditions
change from forecast (Brightan, 2015).

According to Galin (2011), for organization to successfully achieve its objectives, planning is
for paramount significance and is a continuous process where plans are reviewed regularly
and performance measured against specific devised targets. It leads to management decision
making and measuring performance. The timeliness of financial information ensures that
banks react promptly to new development and measure project outcome. Basic financial
planning involves estimating income and expenses, estimating initial investments,
determining the financial implications and requirements of the financial plan and making
forecasts.
This is done by planning for the financial resources needed to accomplish given objective and
ensuring that they will be available when operation is implemented. Financial planning is a
necessary and a priority in both financial institutions and established governmental
organization for reasons such as listed below:

It helps formulate methods by which goals are to be achieved. Thus it acts as a motivating
factor and bench mark for measuring performance. It makes clear the link between
investments or expenditure proposal of the different operating activities and choices of the
available finance.

19
It helps the organization to clarify its position on the investment plan and how it will have the
various activities in mind financed. Determination of either success or failures can easily be
distinguished with a good plan. With financial planning identification of strength, weaknesses
opportunities and threats become easy. Hence evaluation of performance is facilitated
(Brightan, 2015).

Credit management is intended to put to use the budget plan to streamline operations by
utilizing budgetary indicators to foster changes and improved performance. That is, the
budget measures current financial performance and guides operations, it discovers the
significant transaction error and detects substantial changes in circumstances. Financial
decision making is the second important function to be performed by the financial manager
(Pamdey, 2009).

2.2.4. Importance of Credit and Credit Management.

[Link]. Importance of Credit
In a developing economy as that of ours, shortage of capital has always been stumbling block
on the road to industrialization progress, the role of commercial bank in overcoming the
difficulty by extending large credit facility is abundantly clear. This is because; credits
become so important in modern society so that to imagine a modern economy without credit
is rhizome. Today, almost all bulk economic transactions are settled by means of credit
instrument. By a mere stroke of bank check transactions involving large sum of money are
settled without involving any money payment (Vaish, 2013).

Credit is frequently called "the life blood of businesses," and it is true if we ponder over the
functions performed by credit on modern times. Some of the benefits that credit contributes to
the economy are as follows (Vaish, 2013). Credit provides conventional and economical
medium of exchange by supplementing or superseding other forms of money. It saves the
community the cost of acquiring large sums of standard money, the labor and cost involved in
handling metals and the loss through wear and tear incidental to the use of precious metals. It
renders the monetary system of the country elastic by permitting expansion and contraction of
the fiduciary money supply based on the metallic reserves.
20
Also, credit facilitates the production and exchange of goods and services in the economy. It
enables the state to finance its expenditure for rooting and socialized activities for in excess of
its immediate revenue. Alam (2015) explained that credit also increases consumption.
Through installment credit consumers are enabled to enjoy consumption of large of goods.
Credit promotes thrifts by providing productive employment for saving. Thus, by promoting
saving, credit encourages capital formation on the economy which is essential for the
economic development in the economy.

Emmanuel (2005) said that credit facilitates development of large scale enterprise and
specialized industry by encouraging the assembling of substantial amount of capital. Credit
makes the optimum use of economy’s capital resources possible. Through the use of credit not
only are the funds formed together; they are also apportioned between the different competing
uses in the most efficient manner. The borrower is more efficient be could use capital formed
as result of saving in his on productive activities.

When by means of credit the funds are given to those who pay the highest price in the form of
interest. Control of the productive capital is entrusted to those who are most likely to provide
additional consumer commodities for the community at low cost of productions (Emmanuel,
2005).

Credit benefits the render in at least two ways: firstly; it enables them to earn income on their
savings, secondly; it helps the saver-lender to get greater total utility or satisfaction by
differing consumption from time of low satisfaction to high satisfaction.

By influencing the rate of capital formation credit influences output and employment in the
economy. Expansion of credit helps to pull the economy out of depression while a restriction
of it may exercises a restraining influence up on boom. A cyclical expansion and
employments of unused factors, thus help in increasing the output which may stimulate
spending and saving and vice versa (Vaish, 2013).
[Link] Importance of Credit Management

21
As in the case of any other commercial entity commercial banks also strive to earn a profit.
But while earning profit, commercial banks should never forget the fact that they are doing
business with others' funds, which is acquired because of deposits made by the customers.
These deposits are either payable on demand or after expiry of a fixed period. In either case
the bank must be ready to make the liabilities as and when necessary or, as such, it has many
outstanding contracts for the future delivery of money. It should also bear in mind that
commercial banks are guardian of a very delicate mechanism which gave the way for future
economic development. Therefore, development of good credit management system helps to
solve the problems and meet the above contradicting objectives (Vaish, 2013).

2.3. Empirical Review

Various researchers have studied about credit management practice in bank from different
direction views. Among those researchers:
James (2011) explained empirical evidence on the use of bank lines of credit as a source of
corporate liquidity. Traditional explanation for lines of credit is that they provide insurance
against liquidity shocks in much the same as way of loading cash does.

However, this research suggests that assess to lines of credit is contingent on the credit quality
of the borrower as well as the financial condition of the lender. These finding suggest that
lines of credit are an imperfect substitute for cash as a source of corporate liquidity. Non-
performing loan ratios (NPLs) are loans especially mortgages which organizations lend to
borrowers but do not capitalize on. In other words, the borrower cannot pay loan back in full
or even enough for the bank to make profit (IMF, 2011).
According to the IMF (2011) poor credit management and plain bad luck in form of external
independent factors are the two main causes of NPLs. In fact, there is abundant evidence that
the financial/banking crisis in East Asia and Sub-Saharan African countries were preceded by
high non-performing loans. The current global financial crisis which originated in the US was
also attributed to the default of sub-prime loans/mortgages. Hagos (2020) 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 procedures.

22
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 limits affecting the performance of credit management. The existing
literatures indicate that several studies were carried out about credit management on
commercial banks abroad and in 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 risks in credit management. Loans are becoming large and at
the same time, bad loans have increased substantially during the past few years
(Sahlemichael, 2019).

23
 CHAPTER THREE
METHODOLOGY OF THE STUDY
To achieve the objective of the study, the researcher was use appropriate research
techniques, methods, sampling techniques, data sources and research tools as follows:

3.1. Background of the study area

Addis international bank s.c (ADIB) was legally established as a share company in 2011.
Since then, it has been playing significant roles in the development of the banking sector.
Currently ADIB has more than 750000 account holders in its more than 142 branches and
the number of Mobile and Internet Banking users are emerging time to time. Here the
researcher has focused on one branch of the bank, wich is Main branch for this study.

3.2. Research Design

Research design is the framework of research methods and techniques chosen by a
researcher to conduct a study. The design allows researchers to sharpen the research
methods suitable for the subject matter and set up their studies for success (Metro, 2018).
To assess the challenges and prospects of credit management in ADIB, main branch, the
study used descriptive research design. In descriptive research, a researcher is solely
interested in describing the situation or case under their research study. It is a theory-based
design method created by gathering, analyzing, and presenting collected data. This allows a
researcher to provide insights into the why and how of research. Descriptive design helps
others better understand the need for the research.
24
3.3. Approach of the Study
A research approach is the procedure selected by the researcher to collect, analyze, and
interpret data. There are three approaches to research: quantitative, qualitative, and mixed
methods (Lesson, 2013). Quantitative research is the collection and analyses of numerical
data to describe, explain, predict, or control phenomena of interest. The analysis of
numerical data is complex and must be addressed systemically. Quantitative research uses
deductive reasoning (Lesson, 2013).
Qualitative research is the collection, analysis, and interpretation of comprehensive
narrative and visual data to gain insights into a particular phenomenon of interest.
Qualitative research can be characterized as the simultaneous study of many aspects of a
phenomenon and the attempt to study things as they exist naturally. This approach uses
inductive reasoning. The study deployed both qualitative and quantitative approaches to
assess the challenges and prospects of credit management in ADIB, main branch.
Hence, qualitative approach was used to analyze the interview questions and focus group
discussion points from the bank credit manager and staff of the bank. On the other hand,
quantitative approach will be used to analyze the questionnaire distributed to different
credit receiver /borrowers/.
3.4. Sources of Data
Data is the backbone of any data analysis work done in the research process. Data is a
collection of unorganized facts and numbers from different sources. The sources of data
can be different depending on what the research needs. Data analysis and interpretation are
based solely on gathering different kinds of data from their sources. Researchers or analysts
do the work of data collection to collect information (Lesson, 2013).

Data can be gathered from two places: internal and external sources. The information
collected from internal sources is called “primary data,” while the information gathered
from outside references is called “secondary data.”

In order to achieve the objective of the study, both primary and secondary data sources was
be used. Primary data refers to the first hand data gathered by the researcher himself such

25
as surveys, questionnaire, personal interview, etc. Secondary data for this study was books,
journal articles and websites /online sources/.

3.5. Data Collection Tools

The study was used questionnaires and interview as research tools. For an interview both
structured and unstructured questions were used. For questionnaires both open-ended and
closed-ended types of questions were used.
3.6. Sampling Techniques and Sample Size
To achieve the goal of the study, both probability and non-probability sampling techniques
was used to select the participants in this study. Thus, the study was applying simple
random sampling techniques to select the size credit takers.

Hence, I have used Yamane’s formula to calculate the sample size of active population that
can actively answer the questionnaires. This population will be from 250 credit takers of
ADIB, main branch. The formula is that:

Where,
n = the sample size,

N= the population size,

e = the level of precision or margin of error

Therefore,

Population size, N = 100

Margin of error, e = 5% or 0.05

So that the sample size was calculated and becomes 165 respondents from credit takers.
Also 11 staffs of the ADIB Main branch will be selected for interview. Hence, the total
sample size of this study were 176 respondents.

26
3.7. Method of Data Analysis
Data analysis is a technique that typically involves multiple activities such as gathering,
cleaning, and organizing the data. These processes, which usually include data analysis
software, are necessary to prepare the data for business purposes. Data analysis is also known
as data analytics, described as the science of analyzing raw data to draw informed conclusions
based on the data (Kothari, 2006).
Data analysis methods and techniques are useful for finding insights in data, such as metrics,
facts, and figures. The two primary methods for data analysis are qualitative data analysis
techniques and quantitative data analysis techniques. These data analysis techniques can be
used independently or in combination with the other to help business leaders and decision-
makers acquire business insights from different data types. The researcher used descriptive
statistics such as frequency, tables, graphs and percentage to describe the existing situation of
challenges and prospect of credit management practice in ADIB main branch. The researcher
was also analyzing the interview for the realization of the goal of the study in the forms of
narrative.
3.8. Model Specification And Description Of The Study

3.8.1. Reliability Analysis

To test the reliability of the study, the researcher was analyzing the existing situations,
examining the questionnaires and focus group discussions. Hence the researcher is collect and
analyze the valid and reliable data to realize the objective of this study. For this goal the
researcher used tabular form of data presentation and pie chart and bar graph to interpret the
data.

Internal consistence of the reliability of the instrument was checked by Cronbach’s alpha. It is
useful to assess the consistence of the results across items within a test. It represents number
between 0 and 1

Cronbach’s coefficient alpha was developed by Lee Cronbach in 1955, measure’s reliability,
or internal consistency. There for Cronbach’s alpha tests to see if multiple- question likert

27
scale surveys are reliable. Based on as rule of thumb for interpreting alpha for likert scale
questions are as follows in table 3.1
Table 3.1: Interpretation of Cronbach‟s alpha
Cronbach‟s alpha Internal consistency
α ≥ 0.9 Excellent
0.9 > α ≥ 0.8 Good
0.8 > α ≥ 0.7 Acceptable
0.7 > α ≥ 0.6 Questionable
0.6 > α ≥ 0.5 Poor
0.5 > α Unacceptable
Source: from lee combach 1995
For measuring reliability of the items used in this research the reliability coefficient of
Cronbach's alpha value generated using SPSS package. Table 3.2 below shows the Cronbach's
alpha value of multiple items.
Table 3.2.: Reliability Statistics

Cronbach's Alpha Cronbach's Alpha Based on N of Items

Standardized Items
.75 .75 40
Source: survey 2024
According to Zikmundet al. (2010) stipulated that scales of coefficient alpha greater than 0.7
is considered as an acceptable to determine reliability.

3.8.2. Validity analysis

Validity, often called construct validity, refers to the degree in which the test is truly
measuring what it is supposed to measure. It states how good a test is for a particular
situation. If a test has poor validity, then it does not measure the content and competencies it
ought to.

According to Kothari (2004) content validity is the extent to which a measuring instrument
provides adequate coverage of the topic under study. If the instrument contains a
representative sample of the universe, the content validity is good. Its determination is
28
primarily judgmental and intuitive. It can also be determined using a panel of persons who
shall judge how well the measuring instrument meets the standards, but there is numerical
way to express it.

CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
This chapter deals with the data presentation, analysis and discussion of the major findings in
relation to the respondents in the research area
4.1. Response rate of respondents
Table 4.1 Response rate of the respondents
Questionnaire Respondents Percentage

Returned 155 93.9

Not returned 10 6.06
Total distributed 100 100.0
Source; field survey 2024
As shown in the above table 4.1, 165 questionnaires were prepared and distributed to
customers (credit takers), of Addis International bank s.c main branch. Out of 165
questionnaires that were distributed 93.9 were returned and 6.06 questionnaires were not
returned. The return rate indicates that there was a high rate of response from the respondents
at the research area.
This result shows that how the researcher convinces the respondents to get a high return rate
to fulfill the general and specific objectives of the study and make the study reliable.
4.2. Demographic characteristics of the respondents
Table 4.2 Demographic characteristics of the respondents

29
S.N Variables Classification of Frequency percent Valid percent
variables
1 Gender Male 124 80 80
Female 31 20 20
Total 155 100.0 100.0
2 Age 20-25 7 4.5 4.5
26-35 49 31.6 31.6
36-45 59 38.06 38.06
Above 46 40 25.8 25.8

S.N Variables Classification of Frequency Percent Valid percent

Variables
4 Educational Certificate 48 30.9 30.9
background Diploma 3 1.9 1.9
Degree 97 62.5 62.5
Master & Above 7 4.5 4.5
Total 155 100.0 100.0
Source; field survey 2024
As shown in table 4.2, respondents result shows that 80 % are male and 20% female the result
shows that the majority of the respondents were male. The answers of respondents to their age
category shows that, the majority of the respondents were 38.06% are from the age of 36 to
45, 31.6% are from the age 26 to 35, 25.8 % above age 46 and the remaining 4.5% are the age
of 18 to 25. The result shows that more than 63.86% of respondents were greater than 35
years old. Concerning educational statuses of the respondents are from certificate to higher
education. The majority of the respondents (62.5%) have degree and above, 30.9% certificate
level,1.9% diploma level and the rest of 4.5% have master and above.
This shows that more than 100 % of the respondents in the study area have certificate and
more than diploma.

30
4.3. Questionnaires for customers of ADIB
The primary data used for this study were collected from two types of respondents: from
ADIB staff working on loan area and from Addis Bank Main branch borrowers. These two
groups are selected because their opinion gathered through practical evidences is believed to
be relevant and meaningful for this study furthermore; Questionnaires were developed and
distributed to borrowers selected from different loan categories. Respondents were made
aware of the objective of the study so that they could give genuine and relevant information.
Attitude Questions in Credit Management Process 165 questionnaires were developed and
distributed to different types of loan borrowers and 155 were properly filled out and returned.
Table 4.3.: Effective management has been conducted on credit management of the bank.
Item Credit Service Fre SA A N DA SD Total
No.
1 Effective management has been No. 20 95 35 155
conducted on credit management of
the bank. % 12.9 61.2 22.5 100
2 There is strong monitoring and No. 10 9 54 82 155
supervision by banks on its customers
those take credits. % 6.4 5.8 34.8 52.9 100
3 The current credit management No. 18 19 60 58 155
practice of the bank paid sufficient
% 11.6 12.2 38.7 37.4 100
attention to the importance of proper

31
 Credit analysis or evaluation
4 Credit approval process in ADIB main No. 15 27 59 54 155
branch is transparent and efficient
% 9.6 17.4 38.0 34.8 100
6
5 The current credit management No. 39 75 41 155
services is enough to meet the needs
of borrowers % 25.1 48.3 26.4 100
6 If an adverse effect happened to No. 43 86 16 10 155
repay the loan granted, the Bank
% 27.7 55.4 10.3 6.4 100
helps the borrower
Aggressively
7 There is lack of legal procedures on No. 120 35 - - 155
deny to return credit payment
% 77.4 22.5 - - 100

Key; Freq =Frequency, S.A =Strongly Agree, A=Agree, D=Disagree,N=Neutral,S.D

=Strongly Disagree(Source: on survey)
No 1. As can be seen from the above Table respondents were asked about their attitude for
the statement, 61.2% were found to be disagree, 22.5% strongly disagree, 12.9% neutral.
These percentages implies that majority of the respondents disagreed with the statement.
No 2. As can be seen from the above Table respondents were asked about their attitude for
the statement, 52.9% of respondents strongly disagree, 34.8% Dis Agree, 6.4% Agree, 5.8%
neutral none strongly agree. This shows that the there is no strong monitoring and supervision
on credit takers.
No 3. We can learn from the above Table that, 11.6% of respondents were agree, 37.4%
strongly disagree, 38.7% Disagree, 12.2% stays neutral that current credit management
practice of the bank was not paid sufficient attention to the importance of proper Credit
analysis or evaluation This implies bank management toward proper credit analysis and
evaluation is not good. Thus, we can learn from the percentages that majority of the
respondents strongly disagree with the statements. Though one of the credit evaluation criteria
is paid sufficient attention to the importance of proper Credit analysis or evaluation.

32
No.4 When we look through the above Table from the respondents 38.06% were found to
be disagree, 34.8% strongly disagree,9.6% agree,17.4% neutral. This implies that all of the
respondents disagreed with the statement which means the Bank transparency and efficiency
towards credit approval process is not good and desired by customers.
No.5 As shown in the above Table respondents were asked about their attitude towards
credit management service rendered by bank to meet their needs. The finding shows that
48.3% of respondent disagree which is not good, 26.4% strongly disagree, 25.1% stays
neutral. Almost all respondents disagreed with the statements. This indicates that the bank
credit management service is not enough to meet the needs of borrowers.
No.6 As we can learn from the above Table respondents were asked their attitude with
statement, 27.7% were found Strongly Agree, 55.4% Agree, 10.3% Disagree and 6.4%
Strongly Disagree. Here also we can see that majority of the respondents Agree, it indicates
that the respondents were faced an adverse effect on their credit utilization. However, there
are still respondents who disagreed and Strongly Disagreed with the statement even though
the percentage is small. Thus, there is a little bit inconvenience procedure in terms of bank's
assistance towards the non - performing loans.
No.7 As shown from the above Table respondents were asked to express their
attitude, 77.4% were found to be Strongly Agree, 22.5% Agree, none are Disagree and
Strongly Disagree. We can have observed from the percentage; majority of the respondents
were agreed. This shows that there is no lack of legal procedure on denies returning credit
payment. Lending is to extend credit facility of affecting an advance to business on the basis
of certain rules, regulation and under prearranged set of conditions entered between the
parties concerned; the bank and the borrower. Procedures are a series of steps followed in a
regular definite order. Lending has its own disciplines that are to be strictly followed by all
who deal with bank credit matter. Step by step follow ups of procedures are the basis to a credit
facility to be healthy throughout its term of repayment. (ADIB's Credit Policy and Lending Principle,
2016).

33
 4.1.1. Attitude Questions in Credit Management Practice
Table 4: Borrowers attitude for bank's Credit Management Practice

Item Credit Service Fre SA A N DA SD Total

No.
1 The Bank gave many benefits to No - 14 27 44 70 155
its customers who took credits. % - 9 17.6 28.4 45 100
2 The bank is appropriate on its No 17 130 8 - - 155
rendering credit. % 10.8 84.2 5 - - 100
3 There is reasonable payment on No 49 106 - - - 155
returning credit to the bank. % 31.5 68.5 - - - 100
4 Timely supply of credit by the No - - - 126 29 155
bank exists % - - - 81.5 18.5 100
5 There is bank support No - - - 155 - 155
% - -- - 100 - 100
6 There is lack of awareness among No 132 23 - - - 155
customers on using the money they % 85.1 14.9 - - - 100
take as credit
7 Loans of the bank are highly No 101 54 - -- - 155
concentrated on few credit % 64.9 35.1 - - - 100
products
8 The bank makes necessary effort No - - 20 79 56 155
to avoid loan concentration on % - - 13.1 50.9 36 100
certain products
9 The poor risk assessment of the No 56 99 - - - 155
bank will reduce the quality of its
loan % 36.6 64.4 - - -- 100

10 The financing options offered by No - - 19 111 25 155

34
 ADIB main branch have met % - - 12.6 71.6 15.8 100
borrower needs.
11 ADIB's credit management team in No 64 91 - - - 155
the Main branch will give support % 41 59 - - - 100
or guidance to its borrowers

Key; Freq =Frequency, S.A =Strongly Agree, A=Agree, D=Disagree, S.D =Strongly
Disagree (Source: on survey)

When we go through the above Table we can observe the following rates including their
interpretation for different types of Credit Management;
Item No. 1 Credit management is rated 9% are Agree, 17.6% neutral, 28.4% Disagree, 45%
strongly disagree. Still 6% of the respondents ranked agree, meaning that they cannot give
benefit for the borrowers. The bank should have to give different kinds of benefit in order to
attract more customers and which can use for initiation to repay on time.

Item No. 2 Credit management is rated 84.2% agree, 10.8% strongly agree and 5% neutral.
Here the large percentages of respondents are agreed on the appropriateness of the bank service
to render the credit, meaning they may not face a problem to provide credit for his customers.
Item No. 3 Credit management is rated 68.5% are agree and 31.5% strongly Agree. Here the
all of the respondents are agree on the service like Item No. 3. There is reasonable payment on
returning credit to the bank.
Item No. 4 Credit management is rated 81.5% are disagree and 18.5% strongly Disagree. The
percentages indicate the Bank cannot timely supply of credit by the bank exists This cannot
motivate the client to borrow again and further to plan for other new business by doing with
bank for their financial assistances.

Item No. 5 Credit management is rated 100% disagree, none strongly disagree, none agree,
none neutral, and none strongly agree.
In these days of free competition, it is the banker who has to go extra miles to please his
customers and to make to more attract and give awareness on the technical part as well. With
this regard, the bank is not support customer properly.

35
Item No. 6 Credit management is rated 85.1% are strongly agree and 14.9% Agree and none
neutral, none disagree and strongly disagree. Here also we can observe that the all of the
respondent believe that there is no lack of awareness

Item No. 7 Credit management is ranked 64.1% strongly agree and 35.1% agree, none
disagree, none strongly disagree, none neutral. This shows that Loans of the bank are highly
concentrated on few credit products

Usually it is observed that either the borrower will come to the Bank seeking for a loan, or the
Branch Manager initiates the customer to take out a loan for his business because a customer
may not always know how to obtain credit from a Bank especially if he is a new one as a
borrower or as a business man.

Item No. 8 Credit management is rated 50% disagree, 36% strongly disagree and 13.1%
neutral.
We can observe from the percentage majority of the respondents rated the service very poorly.

Item No. 9 Credit management is rated 64.4% agree and 53.6% strongly agree. Here we can
learn from the ranks almost all respondents ranked above very good meaning that the poor risk
assessment of the bank will reduce the quality of its loan

Item No. 10 Credit management is rated 71.6% disagree, 15.8% strongly disagree. It is terrible
the large percentages rated disagree and strongly disagree. The financing options offered by
ADIB Main branch do not met borrower needs. The Bank should have to be keep it’s
prominent in offering different financing option to meet borrowers need; this encourages
peoples to do more with the bank.

Item No. 11 Credit management is rated 51% agree and 49 % strongly agree, this indicate that
ADIB's credit management team in the main branch and head office will give support or
guidance to its borrowers

36
 4.2. Questionnaires for Credit Managements of ADIB
4.2.1. Attitude Questions in Credit Management Process
11(eleven) questionnaires were developed and distributed to different Credit
management staffs at ADIB and all of them were properly filled out and returned.

Table 5: Practical Loaning Activity and Alignment to regulatory rule

No Evaluating statement Freq S.A A NE D S.D Total

1 In order to comply with NBE regulations, bank credit No. 11 - - 11
management has policies in place for credit provisioning
% 100% 100
and write-off.
2 Regular assessments of credit policies have been No. 1 1 8 1 11
conducted in an effort to improve the state of credit
% 9.09 9.09 72.2 9.09 100
management.
The branches' actual loan processing and appraisal No. 4 7 11
3 practices adhere to the bank's credit policy and procedure. % 36.66 63.44 100
No. 2 9 11
4 The credit management at a branch level improves the
credit control of the bank % 18.18 81.81 100

The existing credit policy and procedure of the bank is No. 6 5 11

5 encouraging and flexible to guide credit activities of the
bank % 54.54 45.45 100

No. 11
6 One effective credit management tactic is to impose loan 4 7
size limitations. % 36.36 63.64 100

Key; Freq =Frequency, S.A =Strongly Agree, A=Agree, D=Disagree, S.D =Strongly
Disagree (Source: on survey)

As can be seen from the above Table respondents were asked their attitude for the statement
1 100% were found to be agree. These percentages implies that majority of the respondents
are agreed with the statement. Therefore, there is no doubt for to comply with NBE
regulations, bank credit management has policies in place for credit provisioning and write-
off.

Although there is no hard and fast rule in the techniques of lending, which essentially is an
art, it is however necessary that a defined procedure has to be followed by a banker to
properly address the credit needs of its customers. ADIB customers must also have a feel of
what the Bank's requirements are as regards to procedures and documentation necessary to

37
 obtain credit facility from the Bank. Besides, it is quite important that customers perceive the
Bank as transparent and fair in its dealings and lending operation.

For the statement of that Regular assessments of credit policies have been conducted in the
bank most of the respondents 72.2% disagree, 9.09% strongly agree while the rest of 18.08%
agree with the statement. This implies the regular assessment of credit policy was not carried
out in the bank.

For the statement weather actual loan processing and appraisal practices adhere to the bank's
credit policy and procedure. Most of the respondents 63.44% agree and 36.66% strongly
agree with the statement. This implies the bank done actual loan processing and appraisal
practice according to the credit policy and procedure.

For the statement weather the credit management at a district level improves the credit
control of the bank. Most of the respondents 81.1% agree and 18.18% strongly agree with the
statement. This implies that the bank credit management at district level improves the credit
control.

For the statement weather the existing credit policy and procedure of the bank is encouraging
and flexible to guide credit activities of the bank. Most of the respondents 54.54% disagree
and 45.54% strongly disagree with the statement. This implies that the existing credit policy
and procedure of the bank not encourage flexibility to guide credit activities of the bank.

Table 6: Credit risk management

No Evaluating statement Freq S.A A N D S.D Total
e
1 No. 2 7 2 11
The bank is protected from significant credit
risks by its current credit risk measurement % 18.18 63.63 18.18 100
instruments.
2 The Branches' practical credit risk assessment No. 3 7 1 11
efforts assist the bank in lowering the risks
involved in making loans. % 27.27 63.33 9.09 100

3 The credit risk assessment of the bank No. 6 5 11

considers a quick response to market changes.
% 54.54 45.45 100

4 There is a proper system implementation for No. 9 2 11

38
 understanding credit risks in the bank.

% 81.81 18.18 100

Key; Freq =Frequency, S.A =Strongly Agree, A=Agree, D=Disagree, S.D =Strongly
Disagree (Source: on survey)

As can be seen from the above Table employees were asked their attitude for the statement
weather the bank is protected from significant credit risks by its current credit risk
measurement instruments. 63.63% of respondents agree, 18.18% strongly agree and 18.18%
Disagree and none strongly disagreed. Here we observed that the bank is protected from
significant credit risks by its current credit risk measurement instruments.
The successful and quality credit management of a commercial bank's funds requires
significant protection from credit risk.

For the statement of that efforts of the district offices' practical credit risk assessment efforts
assist the bank in lowering the risks involved in making loans. Most of the respondents 63.33% agree,
27.77% strongly agree and 9.09% disagree with the statement. This implies the branch efforts assist
the bank lowering the risk involved in making loans.

For the statement of that credit risk assessment of the bank weather they consider a quick
response to market changes. Most of the respondents 54.54% disagree, and 45.45% strongly
disagree with the statement. This implies the district credit risk assessment cannot consider a
quick response to market changes.
For the statement weather there is a proper system implementation for understanding credit
risks in the bank they consider a quick response to market changes. Most of the respondents
81.81% disagree, and 18.18% strongly disagree with the statement. This implies that there is
no proper system implementation for understanding credit risk in the bank.

39
 CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS

5.1. Conclusions
The following conclusions are raised based on the above analysis of primary and secondary
data findings.

 In the credit facility request approval process, the manual doesn't include detail
assessment and it is done in a conservative way. Though the credit approval process
is said on time by borrower's respondents. In contrary said lengthy by staff
personnel’s. Obviously, the staff response is acceptable because it is practically
justified. As per the discretionary lending limit all loan requests above Birr 30,000 go
to head office credit department from all 151 Branches and wait their order for
approval. These affect the quality of the service and dissatisfied loyal customers
because one of the determinants factor of quality is time.
 Lowering the collateral value resulted in inadequate financing. This makes a borrower
in shifting the loan for unintended purposes, also it creates customer’s dissatisfaction.
 Though emphasizing on collateral for credit approval minimizes a bank's risk in case
of an adverse effect, it doesn't give a chance for new idea promoters who don't have

40
 collateral. By the same token it affects innovation and development.
 Considering other factors rather than collateral like, Assessments of borrower's credit
history, analysis of financial statement and repayment capacity are essential. It allows
the credit management decision to give a right credit, to the right borrower for the
right purpose.
 In credit follow-up activities if the relationship between borrowers and the Bank is
friendly and if the Bank remind borrowers to repay on time, the collection procedure
will be smooth. This decreases Bank's NPL.

 If an adverse effect happens in borrower’s business to pay back the loan and if the
Bank doesn't aggressively support a borrower, it leads to non-performing loan.
 Irregular customer's business visiting is observed. This will lead the borrower to
divert the granted loan for other purposes.
 The Bank doesn't give recognition for good borrowers. This discourages good
borrowers to do more with the bank.
 Lack of proper financial statements submitted by borrowers affects the quality of
credit process, analysis and decisions or recommendations of credit facilities.
 Even though credit policy and procedure is carefully formulated, it is highly general,
centralized by top management less flexible and not up to dated. The Credit manual
depict the Discretionary Lending Limits how much the decision is centralized and not
flexible for a better credit Management.

41
5.2. Recommendations
Based on the conclusions presented above, the following suggestions are recommending to
Addis International Bank S.C management and other concerned parties.
 ADIB should make the credit policies and procedures in a clearly defined, flexible and
timely way.
 The credit procedures should include detail assessment of criteria for each credit
products. The loan request approval decision has to be done in a rational way and
transparent with lower level of managements. The bank must try to upgrade the
discretionary lending limit at all level thereby organizing a credit committee at branch
level and up grading the branch manager limit to entertain the request within a branch.
 The Bank's engineer service should make comparable or market orient estimation, by
forming competent measurement of building evaluation factors to give reasonable
property estimation services.
 Prioritization for feasibility study than collateral based, the bank should carefully
investigate new borrowers loan request through their business plan (feasibility study)
and to allow credit for new idea promoters, by strengthening Bank's project analysts to
provide project loan widely.
 The Bank should support borrowers while they are in an adverse effect happens on their
credit by arranging recovery means like, re-rescheduling, extension of due dates and
even allowing additional credit necessary to reinforce the borrower's capacity.
 The Bank should establish criteria that can effectively and regularly evaluate borrower's
performance and based on the evaluation, borrowers should be given recognition. This
should be done by providing customers day (Exporters, Importers … day) and giving a
prize for best performers in front of participants. It encourages doing more for the
existing customers and also attracting others.
 To give quality service the bank should carefully investigate background of the borrower
depending on the loan request. Unreliable sources like un-audited financial statement,
while evaluating & selecting customers among applicants, will lead the bank in poor
selection of customers. This poor selection also has an impact on future collection of
loan. So that, the bank should try maintain limitation of Birr, loan request to require an

42
 audited financial statement, which will alleviate this problem.
 Finally, ADIB has to give due attention to the internal factors those affecting fast and
timely decisions. Like hiring a necessary workforce for each level in the loan area
starting from branch up to head office credit department and giving continuous credit
operation training for the existing staffs to maximize their performance and to reduce
shortage of human power. In addition, adopting emerging technology to to get short
appointment for customer's collateral inspection & estimation.

5.3 SUGGESTION
Based on the recommendations presented above, the following suggestions are
recommending to Addis International Bank S.C management and other concerned parties.
 ADIB should redefine its credit policy
 The credit procedures should include detail assessment of criteria for each credit
products.
 The Bank's engineer service should give reasonable property estimation services..
 The Bank should support borrowers while they are in an adverse effect happens on their
credit by arranging recovery means like, re-rescheduling, extension of due dates and
even allowing additional credit necessary to reinforce the borrower's capacity.
 The Bank should establish strog follow up prccedures as it help the organization to
identify the the situation concerning the status of every provided loans
 To give quality service the bank should carefully investigate background of the borrower
depending on the loan request.
 Also ADIB should have to give due attention to the monitoring,evaluation
and technical support to the internal factors those affecting fast and timely
decisions. Merit based human resource hiring from branch to head office
department is also a very critical matter.

43
 REFERENCES
Abad, D., Sánchez-Ballesta, J. P., & Yagüe, J. (2017). The Short-term Debt Choice Under
Asymmetric Information.

Abdus.F (2004). Bahrain’s Commercial Banks Performance; Credit and financial performance.
New Delhi: Vikas Publishing House.

Anderson, Roger. (2000). Rewards for the Way You Run Your Account. New Statesman.

Baka, L. O. (2013). The challenges facing co-operative societies In Kenya A case Study: Kenya
Planter Co-operative Union (KPCU). Public Policy and Administration Research, 3(11),
32-44.

Binks, M., & Ennew, C. T. (2004). Fundamentals of Financial Management. New Dheli:
Prentice Hall.

CBK. (2017). The kenya financial sector stability report 2016. Nairobi: Financial Sector
Regulators Forum.

Duguma, G. J., & Han, J. (2018). Effect of Deposit Mobilization on the Financial Sustainability
of Rural Saving and Credit Cooperatives: Evidence from Ethiopia.

Edward, P., & Turnbull, P. (2004). The treatment for nonperforming loans in Macroeconomic
statistics. IMF Working Paper/01/209. Household Survey. Nairobi.

Conford A. (2000). The Basel Committee‟s Proposals for Revised Capital Standards: Rationale,
Design and Possible Incidence, G-24 Discussion Paper Series”, No.3, May. United
Nations.

Emmanuel Y. (2012). An Assessment of Credit Management Practices at Agricultural

Development Bank (ADB) Branches in the Eastern Region of Ghana.

Hagos, M. (2010). Credit Management (A Case Study of Wegagen Bank Share Company in
Tigray Region).

44
Kothari, C. (2004). Research Methodology, Methods and Techniques (Edition, Second Revised
ed.). University Of Rajasthan.

Natufe OK, Evbayiro-Osagie EI. Credit risk management and the financial performance of deposit money
banks: some new evidence. Journal of Risk and Financial Management. 2023 Jun 21;16(7):302.

Rochet, J.C. and Tirole, J., 1996. Interbank lending and systemic risk. Journal of Money, credit and

Banking, 28(4), pp.733-762.

Sahlemichael M. (2009). Credit Risk Management System of Ethiopian Commercial Banks

(Case of some public and private banks).

Tefera, T. (2011). Credit Risk Management And Profitablity Of Commercial Banks In Ethiopia
(Doctoral Dissertation, AAU).

Theodore [Link] and Ronald S Foster. (2004). Credits and collection, 8th edition. IM
Pandey, financial management, 10th edition.

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 APPENDIX-I
MARYLAND INTERNATIONAL COLLEGE

COLLEGE OF GRADUATE STUDIES

MA PROGRAM

Questionnaire: This questionnaire is for credit takers from ADIB MAIN BRANCH

Dear Respondents!

My name is MERIMA ALI KISO. I am a graduate student in marryland international college.

The main objective of this questionnaire is to gather data on the research topic “Assessment of
Challenges and Prospects of Credit Management In Addis International Bank S.C Main
Branch.” The questions are required only for research purpose. Therefore, you are kindly
requested to provide real responses so as to attain the objective of the study. For doing this, the
researcher has grateful for you.

Thank You!

46
Part one: General Information of Respondents

1. Sex A. Male B. Female

2. Age A. 20-25 B. 26-35 C. 36-45 D. above 46 years.
3. Level of education
A. 10th grade B. Certificate C. Diploma D. Degree E. Master % Above

Part Two: Questions for selected credit takers from adib main branch.

Please put tick (√) in the table provided for each given statement using the following scales

1= Strongly Disagree; 2=Disagree; 3=Neutral; 4=Agree; 5=Strongly Agree

No Perception on Credit Management in Adib main Ratings

branch
5 4 3 2 1

1. The Bank does have commitment to give credit for

its customers.

2. All credit users are trusted.

3 The Bank considered all procedures and existing

policy on credit rendering.

4. Effective management has been conducted on

credit management of the bank.

5. There is cash flow and financial difficulties faced

by Bank.

6. There is lack of transparency among credit takers.

7. There is lack of accountability among credit takers

8. There is strong monitoring and supervision by

banks on its customers those take credits.

47
 9. The Bank gave many benefits to its customers who
took credits.

10. The bank is appropriate on its rendering credit.

11. There is reasonable payment on returning credit to

the bank.

12. Timely supply of credit by the bank exists

13. There is bank support

14. There is lack of legal procedures on deny to return

credit payment

15. There is lack of awareness among customers on

using the money they take as credit

16. There is wastage of money in the bank

Part Three: Interview Questions for the leadership and staff of ADIB

1. What do you think that the situation of credit management of ADIB Main branch? Explain.

______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________

2. What do you think are the challenges of credit management of ADIB Main branch? Explain.

______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________

3. What do you think are the prospects of credit management of ADIB Main branch? Explain.

48
______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________

4. How many credits are given to customers in the last three years in Ethiopian birr?

______________________________________________________________________________
______________________________________________________________________________
__________________________________________________________

5. What measures should be taken to improve the credit management in ADIB Main branch?

_________________________________________________________________
_______________________ ______________________

6. What are your recommendations for the overall performance of credit management in ADIB
Main branch _________________________________________________________________
_______________________ _____________

Part Three: Questions for leadership and staff members of addis international bank s.c
credit management.

1. Your current position in the bank?

A. Credit manager B. Team leader C. Customer Relationship Manager
D. Credit operation officer E. Customer Relationship officer F. Credit Follow-up Officer
G. Credit Analysis Officer H. credit collection officer I. credit appraisal officer
 Please put tick (√) in the table provided for each given statement using the following
scales.

1. Rate the importance’s of credit Very High Medium Low Very

management in banking industry high

Credit risk

Liquidity risk

49
Market risk

Operational risk

Interest risk

Foreign Exchange risk

Others /please specify any/

2. How important do you believe each

of the following would be in the
implementation of a successful credit
risk management culture within the
Bank?

Hiring qualified staff

Documented records

Ability to adapt to changes

Implementation of technology

50