Addis Ababa University

College of Business and Economics

Accounting and Finance Department

AN ASSESSMENT OF CREDIT RISK MANAGEMENT PRACTICE: THE

CASE OF AWASH BANK S.C

By: ABIY MOGES

Under Guidance of HABTAMU BIRHANU (PhD)

December 2021 GC

Addis Ababa, Ethiopia

i
 ASSESSMENT OF CREDIT RISK MANAGEMENT PRACTICE: THE
CASE OF AWASH BANK S.C

Thesis submitted to the graduate studies of Addis Ababa University College of

Business and Economics in partial Fulfillment of the requirements for the
Award of Master of Science Degree in Accounting & Finance

By: ABIY MOGES

Under Guidance of HABTAMU BIRHANU (PhD)

December 2021 GC

Addis Ababa, Ethiopia

ii
 AN ASSESSMENT OF CREDIT RISK MANAGEMENT PRACTICE: THE
CASE OF AWASH BANK S.C

By: ABIY MOGES

APPROVED BY BOARD OF EXAMINERS

___________ __________

Dean, Graduate studies Signature Date

Habtamu Birhanu (PhD) ___________ __________

Research advisor Signature Date

___________________ ___________ __________

Internal examiner Signature Date

___________________ ___________ __________

External examiner Signature Date

iii
 Statement of Declaration
I, ABIY MOGES, declare that this thesis work entitled “assessment of credit risk management
practices: the case of Awash Bank” is my own original work. I have carried out it independently
with the guidance and suggestions of the research advisor. And it has not been presented in
Addis Ababa University or any other University.

Declared by:- Abiy Moges

Signature ________________

Date ____________________

Confirmed by: Habtamu Birhanu (PhD)

Signature ________________

Date ____________________

Addis Ababa University

December, 2021
Addis Ababa Ethiopia

iv
 Statement of Certification

This is to certify that, Abiy Moges carried out his research work on the topic entitled
“ASSESMNET OF CREDIT RISK MANAGEMENT PRACTICE: THE CASE OF AWASH
BANK S.C.” is original work and is suitable for submission for the award of Masters of Science
degree in Accounting & Finance.

Advisor: HABTAMU BIRHANU (PhD)

Signature ________________

December, 2021

v
 Acknowledgements
First and for most, I would like to give my glory and praise to the Almighty GOD for his
invaluable cares and supports throughout the course of my life and helped me since the inception
of my education to its completion and enabled me to achieve my career.

Next, I’m grateful to appreciate my Advisor Habtamu Birhanu (PhD) who has taken all the
trouble with me while I was preparing the paper. Specially, his valuable and prompt advice, his
tolerance guidance and useful criticisms throughout the course in preparing the paper,
constructive corrections and insightful comments, suggestions and encouragement are highly
appreciated. A special word of mouth is his credit.

My sincere and heartfelt gratitude goes to the employees of Awash Bank credit & risk
and compliance directorate at head office for spending their valuable time and giving their frank
response to my questionnaires. Without their help this paper would not come to life.

Finally, I’m greatly indebted to my family for their encouragement, appreciation and deep
prayer, and for staff members of my office for their unreserved support throughout the paper
work.

vi
 Table of Contents
Statement of Declaration ............................................................................................................ iv

Statement of Certification ........................................................................................................... v

Acknowledgements .................................................................................................................... vi

List of tables .................................................................................................................................... x

Abstract .......................................................................................................................................... xi
CHAPTER ONE ............................................................................................................................. 1
INTRODUCTION .......................................................................................................................... 1
1.1 Background of the Study ....................................................................................................... 1

1.2 Background of the organization ............................................................................................ 3

1.2. Statement of the Problem ..................................................................................................... 3

1.3. Research questions: .............................................................................................................. 5

1.5. Objective of the Study .......................................................................................................... 5

1.5.1. General objective ........................................................................................................... 5

1.5.2. Specific objectives ......................................................................................................... 5

1.6. Significance of the study ...................................................................................................... 6

1.7. Scope of the study ................................................................................................................ 6

1.8. Organization of the Paper ..................................................................................................... 7

CHAPTER TWO ............................................................................................................................ 8

REVIEW OF RELATED LITERATURE ...................................................................................... 8
2.1. Theoretical literature ............................................................................................................ 8

2.1.1. Risk and Banking Risks .................................................................................................... 8

2.1.2. Bank credit risk and risk management .............................................................................. 8

2.1.3. Credit Risk Management Policies ..................................................................................... 9

vii
 2.1.4. The Credit Process .......................................................................................................... 10

2.1.5 Process of Credit Management ........................................................................................ 11

2.1.5.1 Credit Application ..................................................................................................... 12

2.1.5.2 Credit Assessment ..................................................................................................... 12

2.1.5.3 Credit Disbursement .................................................................................................. 14

2.1.5.4 Credit Monitoring ...................................................................................................... 15

2.1.5.5 Credit Recovery (work out process) .......................................................................... 16

2.1.6 Credit Analysis and Appraisal.......................................................................................... 16

2.1.7 Non-Performing Loan ...................................................................................................... 19

2.1.8. Factors Influencing Effectiveness of Credit Risk Management practices ...................... 20

2.1.8.1 Credit Risk Management Process .............................................................................. 20

2.1.8.2 Risk – Adjusted Performance Measures .................................................................... 20

2.1.8.3 Credit Risk Management Practices ............................................................................ 21

2.1.8.4 Assessment of Borrowers .......................................................................................... 21

2.1.8.5 Clearly Established Credit Approval Process ............................................................ 22

2.2. Empirical evidence of the study ......................................................................................... 22

2.3 Conceptual Framework ....................................................................................................... 24

CHAPTER THREE ...................................................................................................................... 25

RESEARCH DESIGN AND METHODOLOGY ........................................................................ 25
Introduction ............................................................................................................................... 25

3.1 Research Design and Approach .......................................................................................... 25

3.2. Population, Sample Size and Sampling Technique ............................................................ 25

3.2.1 Population ..................................................................................................................... 25

3.2.2 Sample size ................................................................................................................... 26

3.2.3 Sampling technique ...................................................................................................... 26

3.3 Method of Data Collection, Sources and Research Instruments ......................................... 26

viii
 3.5. Ethical Consideration ......................................................................................................... 27

3.6. Data Analysis ..................................................................................................................... 27

CHAPTER FOUR ......................................................................................................................... 28

DATA ANALYSIS AND PRESENTATION .............................................................................. 28
Introduction ............................................................................................................................... 28

4.1. Demographic characteristics of the respondents ................................................................ 28

4.2. Descriptive Analysis .......................................................................................................... 30

CHAPTER FIVE .......................................................................................................................... 46

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION ........................... 46
Introduction ............................................................................................................................... 46

5.1. Summary of major findings ............................................................................................... 46

5.2. Conclusion.......................................................................................................................... 47

5.3. Recommendations .............................................................................................................. 48

5.4 Limitation of the Study ....................................................................................................... 48

References ................................................................................................................................. 49

Appendices ................................................................................................................................ 52

Appendix-I ................................................................................................................................ 53

A questionnaire to be filled by employees ................................................................................ 53

ix
 List of tables
Table 3.1 Carvalh sample size determination……………….…..……………………….…..27
Table 4.1: Summary of respondents’ demographic data………………………………….…30
Table 4.2 credit collection strategies adopted in credit management of AB……………..….31
Table 4.3 the factors that relates to the effectiveness of credit risk management in AB…….34
Table 4.4 the credit procedure of the Bank helping in reducing the NPL status loans………37
Table 4.5 mechanisms used by the bank for credit risk measuring and monitoring…………41

x
 Abstract
Credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a
borrower or counter party will fail to meet its obligations in accordance with agreed terms.
Credit risk is one of the most vital risks for any commercial bank. Credit risk arises from non-
performance by a borrower. Among the risks that face bank’s credit risk is one of great concerns
to bank authorities and banking regulators. This is because credit risk is that can easily and
most likely prompts bank;s failure. Managing credit risk is not a simple task comprehensive
consideration and practices are needed for identifying, measuring, controlling and minimizing
credit risk. The focus of this research is to assess the credit risk management of Awash Bank. In
this study, the researcher utilized simple random sampling technique in order to select
participants of the study. For the purpose of this study, both primary and secondary data were
used. Primary data were collected through questionnaires distributed to respondents found in
head office credit risk management and related directorates. Descriptive statistics such as
percentages, frequencies and tables were used to analyze and present the data. The study found
that non-performing loans (NPL) percentage of the bank’s credit is increasing time to time. This
is due to lack of continuous follow up and proper risk assessment and the current political and
contagious diseases (i.e. Covid-19). Also, the bank’s procedure was not effective in reducing the
NPL status and it needs to be improved. Based on the findings, the paper recommends that in
ensuring the existence of proper and clear guidelines in managing credit, the top managements
support is less and needs to be improved. Also, innovation on new ways of dealing with
borrowers is necessary for banks to be able to recover their loan.

Key words: Credit risk, credit risk management practice, credit policy and procedure, Non-
performing loans

xi
 CHAPTER ONE
INTRODUCTION

1.1 Background of the Study

Among the core activities of Banks, credit provision is one of their central businesses. Although
credit creation is the main income generating activity for the banks, 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 bank’s business (Pasha & Bayush, 2017).
Loan service can invariably boost the economy in many ways as it provides consumers with the
opportunity to borrow money to finance their economic needs. At personal or household level,
loan help to fund one’s own expenses that otherwise couldn’t afford to realize and loan aid
businesses finance their company. And since banks want the money, they lent back, they choose
borrowers carefully and monitor their performance closely. This in turn creates the platform for
healthy and efficient economy. Furthermore, by diversifying the loans, banks can easily lower
risk that must be faced. These in turn makes bank deposits safer and encourages even more bank
deposits and therefore even more loans (Encarta, 2009). Yet, issues of loan related possible risks
can easily raise and summons a concerted action for a worthy administration of the package.

Credit creation is the main income generating activity for the banks. Bank loans are the largest
and most obvious source of credit risk. Since exposure to credit risk continues to be the leading
source of problems in banks and can greatly put at risk the smooth functioning of a bank’s
business. Thus, banks and their supervisors should be able to draw useful lessons from past
experiences. 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 A., 2000).

Banks play an important function in the economy of many countries. They are the main
intermediaries between those with excess money (depositors) and those individuals and
businesses with viable projects but requiring money for their investment (creditors). Banks have
at least the following functions: lending money, safeguarding individuals deposit, transferring
money locally or globally and working as paying agent. In their operation banks face various

1
types of risks, the types and degree of risks to which banks are exposed depends upon a number
of factors such as its size, complexity of the business activities, volume etc. These are credit,
market, liquidity, operational, compliance/legal/ regulatory and reputation risks. Out of all risks
credit risk is believed to have adverse impact on profitability and growth. Credit management
also called credit control is a dynamic field where a certain standard of long-range planning is
needed to allocate the fund in diverse field and to minimize the risk and maximizing the return
on the invested fund by increasing collection, reducing credit cost, extending more credit to
credit worthy customers, and developing competitive credit terms.

Efficient credit management practices, according to Mekonnen, S. (2018), allow banks to choose
the right type of loan proposals/projects/ventures/enterprises and the right type of borrower.
Assuring proper protection is one of the most critical aspects of the loan approval process.
However, protection isn't the only thing to think about. The responsibility of bank professionals
to analyze is still one of the major issues. Credit lending principles such as the borrower's
liquidity and integrity enable credit lenders to assess whether the client would be able to repay
the Bank loan profitably according to the negotiated terms and conditions and repayment
schedule. It is important to control credit in order to strengthen borrowers' financial literacy and
lenders' transactional processes in order to prevent potential financial crises.

Loans are the most important items that banks sell to their clients, and lending accounts for the
bulk of the bank's annual revenue. It is also true that bank loans, as lucrative as they are, are also
risky. Bank loans, for example, fluctuate and are affected by changes in economic policy and the
economy in general. As a result, it is crucial that banks develop their loan policies in such a way
that the risk associated with them is reduced. Furthermore, banks benefit greatly from a sound
and comprehensive credit procedure and loan policy. It enables officials to treat loan problems
consistently, prevent misunderstandings, and make the credit process easier to manage. Sound
policy leads to transparency in lending activities (Jiménez, G., Ongena, S., Peydró, J. L.,
&Saurina, J., 2012).
Accordingly, the study tries to assess the credit management practice of Awash bank.

2
1.2 Background of the organization
Awash Bank is the pioneer private commercial bank in Ethiopia after the downfall of the military
regime and introduction of market economic policy in 1991. It was established by 486 founding
shareholders with a paid-up capital of Birr 24.2 million. Licensed on November 10, 1994, it
started banking operations on February 13, 1995. Awash Bank was named after the popular river
“Awash” which is the most utilized river in the country especially for irrigation and hydroelectric
power. The bank at present operates a paid up capital of birr 8.1 billion and over 4369
shareholders as of June 2021 (Awash Bank Annual Report, 2020/21).

Awash Bank as of June 30, 2021 has 566 branches and 12,188 employees and its total asset grew
to birr 128.7 billion. Of the total asset loans & advance took the lion share of birr 87.5 billion
(67%). Total deposit of the bank, including margins held on letters of credit, reached Birr 108.1
billion. In general, AB is the leading bank from private banks operating in Ethiopia and serve as
the major source of finance to the national development effect. The bank provides different types
of credit facilities such as overdraft, merchandise loan facility, pre-shipment export credit
facility, post shipment credit facility, letter of credit facility, short term loan, medium and long
term loans, agricultural input loan, agricultural investment loan, etc. (Awash Bank Annual
Report, 2021).

The loan portfolio of the bank was diversified across all sectors of the economy. Loan and
advances availed to the building and construction accounted for 21.1%, followed by domestic
trade and services 20.9%, export trade (20.8%), manufacturing (12.1%), import trade 11.7%
personal loans (7.2%) and transport (2.6%). The remaining 3.6% was accounted for by other
sectors. The total disbursed loan and advance have been increasing from year to year. At the end
of 2020/21 fiscal year, total loans advances reaches of birr 87.5 billion. (Awash Bank Annual
Report, 2020/21) This study assesses credit risk management policy and practice of the bank and
the policy environment and ways of alleviating credit risk.

1.2. Statement of the Problem

Studies indicate that a Bank’s continuing profitability and its financial stability majorly depends
on sound credit management whereas deteriorating credit quality is the most frequent cause of
poor financial performance (Das & Das, 2007; Kessey, 2015; Lalon, 2015). Exposure to credit

3
risk continues to be the leading source of problems in banks world-wide. As a result, Banks need
to have useful evidence-based information from prior experience and empirical studies. They
should have a keen awareness of the need to identify, measure, monitor and control credit risk as
well as to determine that they hold adequate capital against these risks and that they are
adequately compensated for risks incurred (Kessey, 2015).
Credit management can be seen as an essential part of lending and as such in its absence, good
loans can turn bad. Thus it is expedient to note that the importance of credit management cannot
be over-emphasized and good credit management requires qualified personnel and the
establishment of adherence to sound credit policies, procedures. If the loan is well managed; it
will increase the bank’s profitability and sustainability in the future. However, if failed to do so,
it will be the major threat to their survival (Koch & MacDonald, 2003). The very nature of the
banking business is so sensitive because more than 85% of their liability is deposits from
depositors (Sounderrss, Cornett, 2005 cited in Sahlemichael M. 2009). Banks use these deposits
to generate credit for their borrowers, which in fact it is a revenue generating activity for most
banks.
To date, a number of studies have been made on the issue of credit risk. These include studies on
the practice of credit risk management (Afande, 2014); the importance of credit risk management
(Das & Das, 2007); evaluation of credit risk management policies and practices( Luy, 2010) and
challenges of operationalizing credit risk management policies (Kessey, 2015). Findings from
the different studies reveal that though many Banks have risk management policies and
strategies, their implementation is not always effective.

In the case Awash Bank, Abdi’s (2018) analysis of the financial performance of the Bank shows
that for the period 2015- 2017, the Bank’s financial performance is not improving. Feyisa (2016)
on the other hand noted that poor loan assessment procedure, lack of effective use of man power,
lack of revision of credit management and unwillingness of borrowers to disclose their full
information are impacting Awash Bank’s loan recovery performance.
In addition, examination of the non-performing loan (NPL) of the Bank indicates that as of June
2020/21, from the total loans and advance amount of Birr 87.5 billion, around birr 1.67 billion or
1.9% is under the category of NPL. (Awash Bank Annual reports, 2021). However the NPL ratio
of the Bank is below the required celling of NBE (i.e. 5%), there is no improvement of NPL ratio
and fraction of change in NPL ratio have significant effect on the banks performance.

4
According to the annual report of 2017/18 to 2020/21 the NPL ratio of the bank has shown an
increment from 1% to 1.9%. The dynamic nature of credit risk with the change of time; the
presence of unexplored issues regarding credit risk management in Awash Bank, such as the
extent to which the credit risk management policy of the Bank is effectively implemented, and
the absence of improvement in NPL of the Bank with time necessitate a study in relation to
credit risk management. This study therefore investigates the credit risk management policy and
practice of Awash Bank.

1.3. Research questions:

In pursuit of the specific objectives, this study seeks to answer the following questions:
1. What credit collection strategies are adopted in the management of credit in Awash bank?
2. What are the factors that relates to the effectiveness of credit risk management in Awash
Bank?
3. How was the credit procedure of the Bank helping in reducing the NPL status of loans in
the past?

4. What kind of mechanisms used by the bank for credit risk measuring and monitoring?

1.5. Objective of the Study

1.5.1. General objective

The general objective of this study is to investigate the credit risk management policies and
practices of Awash Bank.

1.5.2. Specific objectives

Based on the general objective, the following specific objectives are formulated:
1. To identify credit collection strategies that adopted in the management of credit in Awash
bank
2. To assess the factors that relates to the effectiveness of credit risk management in Awash
Bank
3. To investigate the credit procedure of the Bank helping in reducing the NPL status loans
in the past

4. To identify the mechanisms used by the bank for credit risk measuring and monitoring

5
1.6. Significance of the study
Since credit is the back bone of the banking industry in generating income, the outcome of the
study is expected to be relevant to those parties who have similar objectives and seek
information on issues related to credit risk management. Specifically, the investigation expected
to help policy makers, credit processing and appraisal directorate, credit portfolio management
department and credit risk management department of Awash Bank by forwarding relevant
information that will help improve their credit risk management practice.
Accordingly, the study was expected to generate the following benefits.

The study tries to reveal the major factors that affect credit management practice. This helps
the Bank by indicating the areas where problems associated with non-performing loans
exist.
It helps the officers and analysts to understand what is required of them as professionals in
handling loans and advance delivery, which is a critical part of the Bank's operations.
The study findings also assist by making the needed information available for sound and
informed decision makings.
The study will provide information to Awash Bank to understand its credit risk exposure.
This will in turn to put in place the necessary policies & practices to manage those risks.
In addition to this, the study will also provide good insight to those who want to undertake
further research on the area of credit risk management practices and will utilize the study as
a source of secondary information. Moreover, it may help as a benchmark for researchers
who are interested in the area to extend it further.

1.7. Scope of the study

This study was conducted only on Head office staffs that have been involving in customers’
credit request handling process, analysis & appraisal, credit follow up & portfolio management
and credit risk management activities at Awash bank. Since it is difficult to address all concerned
employees in the head office and selected branch, the study delimits itself only sample
respondents. In addition, the issue of credit risk is a broad area of study, the present study
focuses on only assessing credit risk management policies and practices in awash bank excluding
other area of Bank risks such as operational, interest rate, liquidity risks etc. The focus of the
research is assessment of credit risk management policies of Awash Bank and the researcher

6
mainly focuses on credit analysis & appraisal, credit follow up & management, credit risk
management and related area at head office in order to gather relevant information about the area
of study. Therefore, the study is limited to the credit processing activities and credit risk
management practice of Awash Bank. Other operations of the bank are not the subject matter of
this research.

1.8. Organization of the Paper

This section of the paper guides readers on the organization of the research thesis. The central
theme of the thesis lies on assessment of credit risk management policies and practices. The first
chapter is about background information on the research problem, the motivations behind it
(research problem),objectives of the study, research questions, significance and scope of the
research. The second chapter briefly reviews relevant literature concerning the policies and
practices of credit risk management. The third chapter focuses on the methodology of the
research. It describes the research design, sampling technique, data Instruments used to collect
data, procedure of collecting the data, ethical issues and data analysis technique. Analysis of the
collected data and interpretation of the analyzed data is presented in the fourth chapter. And
finally, the fifth chapter presents summaries of major findings, the conclusions and the possible
recommendations.

7
 CHAPTER TWO
REVIEW OF RELATED LITERATURE

Introduction
This chapter reviews the existing literature on credit risk, credit risk management policy, and
credit risk management practices. The chapter presents theoretical, empirical literature and
conceptual framework, and provides highlight on the history of Awash Bank along with the key
constructs in the study.

2.1. Theoretical literature

2.1.1. Risk and Banking Risks

Risk is defined in multiple ways. Risks in banking business, risks in trading activities, risks in
our normal life or whatever kind of risks are what potentially happen sometime in the future and
will have unexpected impacts on risk recipients. The banking business, compared to other types
of business, is substantially exposed to risks, especially in this ever-changing competitive
environment. Banks no longer simply receive deposits and make loans. Instead, they are
operating in a rapidly innovative industry with a lot of profit pressure that urges them to create
more and more value-added services to offer to and better satisfy the customers. Risks are much
more complex now since one single activity can involve several risks (Lalon, 2015).

2.1.2. Bank credit risk and risk management

According to Tsai et al (2016), credit risk has been the most important management issue to
banks. The quality of credit risk management, good or bad, matters a lot to banks which absorb
the financial risks in exchange of benefits as their essence of business. In credit risk, the
borrower or the business counterparties are unable to fulfill the duty of their contracts out of the
deterioration and other factors from the entrepreneurs (such as entanglement between firms);
therefore this causes the risk of agreement violation and the loss of money.
Generally, from different contexts and behaviors, the credit risk could be divided into two types:
lending risk, also called, issuer risk and counterparty risk. Lending risk is due to the violation of
agreement when borrowers or bond issuers do not repay their debts or their credits get

8
deteriorated, causing the money loss. Lending risk or issuer risk are often correlated to borrowers
and bond issuers’ debt credit situations, and correlated to the risk sensitiveness degree of the
financial products. The second credit risk is counterparty risk; it could be further divided into
two risks: settlement risk and pre-settlement risk. Settlement risk is the risk that counterparties
do not fulfill their contract duties in the due settlement time and cause the loss of the equality
principal to the bank. Pre-settlement risk is the risk that counterparties violate the agreement
before the final settlement day and cause the risk of contract violation to the bank (Tsai et al,
2016).
Managing credit risk is a fundamental component in the safe and sound management of all
licensed financial institutions. Sound credit risk management involves prudently managing the
risk/reward relationship and controlling and minimizing credit risks across a variety of
dimensions, such as quality, concentration, currency, maturity, security and type of credit facility
(Bank of Jamaica, 2005).
Although the particulars of credit risk management will differ among institutions depending
upon the nature and complexity of their credit functions and portfolios, a comprehensive credit
risk management program requires identifying existing or potential credit risks to which the
institution is exposed in conducting its business activities and developing and implementing
sound and prudent credit policies to effectively manage and control these risks; developing and
implementing effective credit granting, documentation and collection processes; and developing
and implementing comprehensive procedures to effectively monitor and control the nature,
characteristics, and quality of the credit portfolio (Bank of Jamaica, 2005).

2.1.3. Credit Risk Management Policies

The foundation of an effective credit risk management program is the identification of the
existing and potential risks inherent in an institution’s credit products and credit activities, and
the development and implementation of clearly defined policies, formally established in writing,
that set out the credit risk philosophy of the institution and the parameters under which credit risk
is to be controlled. The credit risk philosophy is a statement of principles and objectives that
outlines the institution’s willingness to assume credit risk and will vary with the nature and
complexity of its business, the extent of other risks assumed, its ability to absorb losses and the
minimum expected return acceptable for a specific level of risk(The Bank of Jamaica, 2005).

9
Pressures for increased profitability, marketing considerations and a vastly more complex
financial environment have resulted in innovative credit instruments and approaches to credit.
Measuring the risks attached to each credit activity permits the determination of aggregate
exposures to counterparties for control and reporting purposes, concentration limits and
risk/reward returns. Credit policies establish the framework for lending and reflect an
institution’s credit culture and ethical standards. To be effective, policies must be communicated
in a timely fashion, be implemented through all levels of the organization by appropriate
procedures and revised periodically in light of changing circumstances (The Bank of Jamaica,
2005).
Credit policies need to contain, at a minimum: a credit risk philosophy governing the extent to
which the institution is willing to assume credit risk; general areas of credit in which the
institution is prepared to engage or is restricted from engaging; clearly defined and appropriate
levels of delegation of approval, and provision or write-off authorities, and sound and prudent
portfolio concentration limits. Credit policies need to be developed and implemented within the
context of a credit risk management environment that ensures that all credit dealings are
conducted in the highest possible standard of ethical behavior (The Bank of Jamaica, 2005).

A similar explanation of credit policy is the one given by Kessey, (2015). Credit policy
according to Kessey cover among others, the credit risk philosophy governing the extent to
which the institution is willing to assume that risk. That is general areas of credit in which the
institution is prepared to engage or is restricted from engaging. Again, credit policies establish
the rules and framework for effective management operation of credit portfolio. Credit policies,
if effectively implemented enable the financial institution to maintain sound credit underwriting
standards. Also, it assists the institutions to assess, monitor and control credit risk. Again, it
covers evaluation of new business opportunities, identify, administer and collect challenging
credits. This implies that credit policy framework for addressing risk has to be comprehensive.

2.1.4. The Credit Process

The credit process begins with a thorough analysis of the borrower’s creditworthiness, or
capacity and willingness to repay the loan (Bearing Point, 2006). The examiner should find an
assessment by the credit officer of the borrower’s current and expected financial condition; the
borrower’s ability to withstand adverse conditions or “stress”; the borrower’s credit history and a

10
positive correlation between historical and projected repayment capacity; the optimal loan
structure, including loan amortization, covenants, reporting requirements the underwriting
elements; collateral pledged by the borrower – amount, quality and liquidity; bank ability to
realize the collateral under the worst case scenario, and qualitative factors, such as management,
the industry and the state of the economy.
This process begins with the collection, analysis and evaluation of information required to
determine the creditworthiness of the borrower seeking credit from the bank. After the credit
analysis is completed and borrower has been determined to be an acceptable risk, the credit
officer proposes a loan structure for approval that preserves the strengths and protects against
identified weaknesses of the borrower. The process ends with determination of a risk rating for
the credit and loan approval (or rejection). The bank’s credit policy, lending standards and
procedures create the parameters for this process, thereby establishing the bank’s appetite for
risk, conservative or aggressive. The credit policy and standards should define acceptable loan
purposes, types of loans and loan structures, and industries to which the bank is willing to lend,
as well as the types of information the lender is required to obtain and analyze. The policy and
standards help to create the framework, requirements and tolerance limits for lending in which
all bank credit personnel will engage. The lender must understand the bank’s credit risk
management system and his/her role in it, as s/he engages in lending activities – analysis,
underwriting and monitoring.

2.1.5 Process of Credit Management

More than 80% of financial institution‟ balance sheet is related to credit. For this reason banks
should take a careful care when dealing with credit. The process of credit management begins
with accurately assessing the credit-worthiness of the customer base and his/her business
viability. This is done by looking in to loan applications carefully which is part of the loan
process. This is particularly important if the company chooses to extend some type of credit line
or revolving credit to certain customers. Hence, proper credit management is setting specific
criteria that a customer must meet before receiving the proposed credit arrangement. Basu and
Rolfes (1995) indicate that the success of a financial institution is built on a proper and quality
credit management process. As part of the evaluation process, credit management also calls for
determining the total credit line that will be extended to a given customer. Several factors are

11
used as part of the credit management process to evaluate and qualify a customer for the receipt
of some form of commercial credit. This includes gathering data on the potential customer’s
current financial condition, including the current credit track record that discloses the character
of a customer in meeting obligations as well as collateral value. As a result the writer discusses
the different procedures that can be employed in each of these areas with the sole aim of
examining the present loan management procedure of financial of institution mainly bank. A
weak credit risk management system is the reason for many none performing loans (Nishiru and
al, 2001).

2.1.5.1 Credit Application

The credit application is the primary step in the credit management process. Regardless of the
size and purpose of the loan, a loan application is required. Though it may appear as simple
questions to the applicants they should understand the importance of the document. The
application documents contain detail information about the applicant. The information among
other things include: name of the applicant, address, residential address, age, telephone number,
marital status, number of dependents, educational background, hometown, the type of business,
business location, number of years in business, reasons for the loan, amount required, the
repayment period, security pledge if any and guarantors. It is the content of this document which
financial institutions can take any legal action against a borrower who defaults. Since this is the
initial stage of the credit management process any error committed at this stage goes a long way
to negatively affect the whole process. A loan defaulter can escape legal punishment if the
content of the loan application form is not properly structured. Hence the need to evaluate the
existing loan application forms to ensure that they are properly structured to protect the credit
unions. (Abdou, H. A., &Pointon, J., 2011).

2.1.5.2 Credit Assessment

This is the procedure for gathering the necessary information on a potential borrower and
projects in other to conduct risk assessment exercise to determine the associated risk. This is
carefully done by the financial institutions before providing any loans. This is also done to check
the viability of the proposed project to be undertaken. This as well helps to examine the technical
viability, the economic viability and the financial viability of the project to be undertaken. The
risk associated with the loan can be reduced by doing the above. Credit risk simply means the

12
risk of default as a result of a borrowers‟ failure to repay the loan taken from a financial
institution.
Appropriate assessment of a customer determines the financial situation and also helps to
measure capability of the customer to repay the loan when due. This involves the authentication
of primary and collateral security provided by the customer which will be relied on when the
repayment of the loan becomes difficult. This is a fundamental point in the credit procedure. It is
said to be the heartbeat of a healthy credit portfolio. This involves collecting, analyzing and
processing information as provided by the applicant on the credit application form. This helps to
assess the applicants‟ credit worthiness and helps to reduce the difficulties between borrowers as
an agents and the financial institution as the principal. The lending institution’s loans
management processes procedures and directives controls the loan evaluation processes. The
question that must be answered before anything else is whether or not the borrowers have the
financial capacity to repay the loan, that is, repay the credit when due with the appropriate
interest rate. The factors underlying the evaluation of a borrower should be based on the credit
assessment principles of the financial institution which is the basic principles of lending which is
also used by the financial institution , it is also known as the 5 C‟s which is Character, Capacity,
Capital, Collateral and Conditions (Matovu and Okumu,1996). In another context, Rouse (1989)
referred to mnemonics used as common checklist to review loan application as: CCCPPARTS
(Character, Capital, Capability, Purpose, Person, Amount, Repayment, Terms and Security);
PARSER (Person, Amount, Repayment, Security, Expediency, Remuneration); CAMPARI
(Character, Ability, Margin, Purpose, Amount, Repayment, Insurance/Security).

The disparity in the mnemonics relates to the fundamental principle of evaluating the potential of
having credit repaid. Credit Appraisal thus ascertains the risks associated with lending functions
in financial institutions .This is an indication that if the credit assessment is not properly done by
the credit union, the risk associated with the credit will not be identified. It is generally carried
out by the trained staff of the credit department of the institutions which are engaged in
providing credit to their customers. In the present case, process used in credit risk assessment
and appraisal has been studied to identify the various parameters and stages in credit assessment;
appraisal and disbursement processes exist in the financial institution. It is intended to make sure
actions which lenders take which facilitate repayment or reduce repayment likely problems. This
information about the riskiness of the borrower makes the financial institution to take remedial

13
actions like asking for collateral, shorter duration of repayment, high interest rates and other
forms of payment (Stiglitz and Karla, 1990) .When a financial institution does not do it well, its
performance is highly affected. Edminster (1980) stressed the importance of credit analysis when
he observed that its abandonment often resulted into several banks using credit card to process.
The variables we have, according to Hunte (1996) added the period taken to process loan
applications, credit experience, part of collateral security to the loan approved. It was established
that long waited period of time reflected a shortage of credible credit information required to
make informed credit decisions and availability of funds for onward lending. This in turn leads to
a bigger risk, more extreme credit rationing and low repayment rates. Hunte (1996) also realized
that customers with loan experience showed the capability to manage the loans better hence good
quality borrowers for the financial institution. A less borrower who is not experienced has less
ability to handle a business loan and therefore is not credit worthy (Devaney, 1984; Robinson,
1962; Hunte, 1996). This shows that there are big risks linked with first time borrowers since the
loan officer has scanty information on their credit records and little knowledge on their ability to
repay the loan when due. When a financial institution does not do it well, its performance is
highly affected. DeYoung, R., Gron, A., Torna, G., & Winton, A. (2015) stressed the importance
of credit analysis when he observed that its abandonment often resulted into several Banks using
credit card to process. The variables we have, according to Hunte (1996) added the time it takes
to process loan applications, credit experience, and a part of collateral protection for a loan that
has been approved It was established that the long wait period represented a lack of reliable
credit information needed to make informed credit decisions, as well as the availability of funds
for further lending. This in turn leads to a bigger risk, more extreme credit rationing and low
repayment rates.

2.1.5.3 Credit Disbursement

After an applicant has been carefully assessed and it has been established that the applicant
meets the credit requirements. The credit officer and the credit committee sign the loan
application form to indicate that they have given their approval. This authorizes the Bank to
disburse funds to the applicant. The act of giving or paying money to customers who have been
accessed and approved for credit is known as credit disbursement. After all of the assessments
have been completed and approval has been granted, disbursement ensures that money is made
available to the customer (Duga, H., 2021).

14
Until funds are distributed to the qualified customer, the assessment process ensures that the
security and other required documentations are authenticated. If the loan pay-out control is weak,
the loan management process's effectiveness will suffer, and it will be undermined and misused
by the unscrupulous staff of the organization. (Duga, H., 2021).
This are important in the customers refuse to pay because the financial institution will be
adequately secured and will have legal backing to insure that the loan will be retrieved. This will
help financial institutions strengthen their financial condition by lowering their allowance for bad
debts. Once the credit application satisfies all of the Bank's credit conditions, a thorough a
comprehensive analysis is done to determine if the application complies with the institution’s
conditions, then approval is given for disbursement to the applicant. Financial institution has
distinct method of disbursing loans to its members which is different from how other financial
institutions do. The credit disbursement can be crediting the loan amount to the customer’s
account all at once or it is done phase by phase for project type loans (Hassan, K., 2002).

2.1.5.4 Credit Monitoring

Credit Monitoring is an integral part of lending activity. Financial institutions have a great
responsibility to maintain the quality of the assets and to recover the interest and principal due in
time. Though adequate precautions are taken during assessment and approval of a loan, a
financial institution has to be more vigilant. Unless early warning signals are captured, a
financial institution may not be able to take proper remedial measures to arrest and reduce bad
debt in the institution. A financial institution needs to put in place a very sound and effective
credit monitoring system for watching the borrower’s account from various angles for prompt
action. In line with Robinson (1962) and Anjichi (1994), many of the agonies, frustrations and
distress financial institutions can be reduced by good credit monitoring and follow up process. A
good supervision helps maintain a good loan. It may be by visiting the borrowers' places of
business to examine the general state of affairs. Insufficient maintenance is often an early sign of
financial distress. A financial institution can modify its own lending policies as well as loan
monitoring procedures. Furthermore, keeping track of deposits trend and deposits balances gives
a clue to the present state of affairs of the customer. Monitoring of loan facilities given to
customers is an important task in ensuring that the project from which repayment will be made is
successful. Huppi and Feder (1990) revealed that efficient monitoring leads to high retrieval of
loans by revealing likely dangers (like loan diversions) and reminding defaulters of their

15
responsibilities towards the lending institution ,thus calling for redoubling of efforts in the
direction of loan repayments. Monitoring of credit facilities has been directed characteristically
on ensuring repayment when there are signs of defaults for repayment of interest and principal
installments.

2.1.5.5 Credit Recovery (work out process)

It is an undeniable fact that any lending company will experience customers who will default on
payments or failure to accept at all. This is why financial institutions make provision in their
books for poor and uncertain debt to cover these eventualities. If the lender has made every effort
to negotiate an amicable repayment agreement and has been unwilling, it would be appropriate to
consider the loan as a recovery matter. This is especially apparent in financial institutions;
particularly where the institutions provide services that are ongoing rather than one-time. The
collection of a loan amount sum from a customer in default is known as loan recovery. In simple
terms, loan recovery refers to the pay back of the principal loan amount sum plus interest.
Financial institutions need to be aware of loans that are at risk of not being paid back (also
known as NPL or non-performing loan).Collections department of the Bank will begin
contacting the individual loan defaulter’s risk of non-repayment to an acceptable level. In
general, credit evaluations are based on the loan officer's subjective assessment or judgmental
assessment technique. Credit analysis is essentially default risk analysis. A loan officer attempts
to evaluate a borrower's ability and willingness to repay (Odonkor, A. A., 2018).

2.1.6 Credit Analysis and Appraisal

Golin, J., & Delhaise, P. (2013) credit analysis is described as the assessment of a borrower's
ability to properly service a loan. It is done to ensure that loans are only made to borrowers who
are capable of repaying them on time. The type and scope of analysis required is largely
determined by the type and size of loan, but the overall aim is to position good loans so that all
parties benefit and achieve their goals. Credit analysis is the most common tool for lowering a
loan request's credit risk on a loan request. Credit analysis is also the primary step in the credit
management process.
A Bank’s credit analysts often use the five C’s of credit to focus their analysis on the key
dimensions of an applicant’s credit worthiness. Disemadi, H. S. (2019) identified five C’s of
credit. They include; Character, Capacity, Capital, Condition and Collateral.

16
Character It is the degree to which the borrower's ability to repay the loan, according to Gatimu,
E. M. (2014). The debt repayment potential is worthless unless the borrower is able to repay the
loan. Character refers to the borrower's appearance in terms of achieving a well-defined goal and
having a responsible attitude toward using the borrowed funds. Responsibility, truthfulness,
serious purpose, and intention to repay are important elements in evaluating character.
Capacity It represents the debt repayment capacity of the borrower. Earning can be taken as a
good indicator of loan repayment capacity. For instance, for a poor farmer, the capacity can be
determined by looking the possible discretionary income he/she can have. That is income left
after meeting essential requirements like food, and clothing. The average family size should be
considered since it has a huge effect on discretionary income. Since the total income, which
seems to be constant, is shared by a large number as the family size grows, a family with three
members can have more discretionary income than a family with six members. Another factor
that can dictate the capacity of the borrower is the indebtedness of the borrower so far (Pulley, R.
V., 1989).
Capital The success of the business is determined by the motive attached to ownership interest.
Banks must ensure that the owners in the venture bear proportionate risk; hence, the level of
capital must be evaluated to ensure that the risk is borne by the party with ownership interest. In
this context, considerations such as the customer's net worth, home equity, and other assets
should be considered (Bodenhorn, H. (2002).

Condition According to Bodenhorn, H. (2002), borrowers are influenced by their surroundings.

Climate change (lack of rain, for example) is one factor that has an effect on the agricultural
sector. Drought, hail, and erratic rainfall have a major effect on farmers. The ability of farmers to
repay their debts is directly linked to such risk in terms of successful crops, selling stocks etc
Furthermore, the market for the product is another factor that influences farmers' ability to repay
their loans. For instance, if the productivity in other areas of the country is good, then the price
for agricultural product will decline which adversely affect the cash flow of the farmer. Before
the loan is granted, all conditions that will affect the borrower in the future should be assessed.
Failure to recognize such things may lead in bankruptcy, particularly if the loan portfolio is
concentrated in a certain regions.

17
Collateral is the security held to back up the loan in the event of possible default. It can be
anything of value, which is readily saleable. According to Golden and Walker (1993), there are
five Cs of bad debt; which represent things to guard against in order to help prevent problems.
They include: Complacency, Carelessness, Communication breakdown, Contingency, and
Competition.
Loan problems often arise when a Bank’s credit objectives and policies are not clearly
communicated. This is communication breakdown. Management should articulate and enforce
loan policies, and loan officers should make management aware of specific problems with the
existing loans as soon as they appear. A contingency refers to lenders’ tendency to play down or
ignore circumstances in which a loan might default. It involves following competitors’ behavior
rather than maintaining the Bank’s own Competition credit standards. During credit analysis
Bank uses various lending tool and techniques (Alemarga, E., Tekalign, H., &Abera, N., 2014).

Credit/Concentration/ limit: - One of the instruments that financial institutions use to manage
their loan portfolio is credit limits. Setting credit limits is one of the most common methods used
by financial institutions to manage their credit processes and reduce lending risks. Moges, M.
(2016) shows the significance of employing the credit limit process so as to avoid any credit risk
which could imperil the financial position of the institution.

Affordability: -Lenders must reconsider their affordability measures ahead of changes due to
increased regulatory focus and increasing interest rates. All lending institutions those want to
safely grow credit while reducing risk should carefully assess customers' affordability and
suitability. As lending institutions trying to balance growth with risk, some customers are faced
with insufficient disposable incomes; the current economic situation has made it necessary for
lending institutions to employ a better credit process. Failure to implement a proper credit
management process could put pressure on customers and lenders at a time when the economic
climate not improving. Affordability is assessment of a customer's capacity to afford for new and
outstanding loans now and in the future. Lin, C., Ma, Y., Malatesta, P., & Xuan, Y. (2011)
indicates that when assessing the affordability of a borrower it is their lack of cash flow and not
assets that causes loan default in institutions.

18
Risk assessment model: - Internal rating software created to aid a bank or financial institution in
assessing a borrower for credit is known as the Risk Assessment Model. This is in accordance
with the Basel II Accord's internal rating-based processes requirement.
Credit scoring/credit risk grading: - This is a mathematical system used to foretell the
possibility that a loan will be in arrears, become delinquent or a borrower will default in
repayment (Loretta 1997). This method is largely accepted as the primary system of examining
the creditworthiness of customers.
Arrears intervention: - Arrears is a legal term used by lending institutions to describe the
portion of a loan that has not been paid, is overdue, or it has been missed as per the agreed-upon
loan terms. Finlay Seudib, E. N., Dassah, F. T., &Adjei, S. K (2008) indicates that pressure
should be put on loan defaulters at the early stages of the default; this action reminds the
defaulters about their obligations towards the institution. In line with Finlay’s assertion,
Swanton, T. B., Gainsbury, S. M., &Blaszczynski, A. (2019) urges financial institutions to
integrate adequate communication process when retrieving debt in arrears from customers.

2.1.7 Non-Performing Loan

Loans and advances constitute the primary source of income by banks. As any business
establishment a bank also seeks to maximize its profit. Since loans and advances are more
profitable than any other assets, a bank is willing to lend as much of its funds as possible. But
banks have to be careful about the safety of such advances (Radha .M, et al, 1980). Bankers
naturally try to balance the issue of maximizing profit by lending and at the same time manage
risk of loan default as it would impair profit and thereby the very capital .Thus a bank needs to
be cautious in advancing loans as there is a greater risk which follows it in a situation where the
loan is defaulted. Under the Ethiopian banking business directive, non-performing loans are
defined as “loans or advances whose credit quality has deteriorated such that full collection of
principal and/or interest in accordance with the contractual repayment terms of the loan or
advances in question (NBE, 2008).” It further provides that:
…, loans or advances with pre-established repayment programs are nonperforming when
principal and/ or interest is due and uncollected for 90 (ninety) consecutive days or more beyond
the scheduled payment date or maturity (NBE, 2008). In addition to the above mentioned

19
category of non- performing loans, overdrafts and loans or advances that do not have pre-
established repayment program shall be non-performing when:
The debt remains outstanding for 90 (ninety) consecutive days or more beyond the scheduled
payment date or maturity;

The debt exceeds the borrower’s approved limit for 90 (ninety) consecutive days or more;

Interest is due and uncollected for 90 (ninety) consecutive days and more; or for the overdrafts,
1. The account has been inactive for 90 (ninety) consecutive days or
2. Deposits are insufficient to cover the interest capitalized during 90 (ninety) consecutive days
or
3. The account fails to show the 20% of approved limit or less debit balance at least once over
360 days preceding the date of loan review.

2.1.8. Factors Influencing Effectiveness of Credit Risk Management practices

Loans that constitute a large proportion of the assets in most banks' portfolios are relatively
illiquid and exhibit the highest credit risk (Koch and MacDonald, 2000). The theory of
asymmetric information argues that it may be impossible to distinguish good borrowers from bad
borrowers which may result in adverse selection and moral hazards problems. Adverse selection
and moral hazards have led to substantial accumulation of non-performing accounts in banks
(Bester, 2001).

2.1.8.1 Credit Risk Management Process

According to Basel (2004), the management of credit risk in banking industry follows the
process of risk identification, measurement, assessment, monitoring and control. It involves
identification of potential risk factors, estimate their consequences, monitor activities exposed to
the identified risk factors and put in place control measures to prevent or reduce the undesirable
effects. This process is applied within the strategic and operational framework of banks.

2.1.8.2 Risk – Adjusted Performance Measures

Several risk-adjusted performance measures have been proposed (Heffernan, 2002). The
measures, however, focus on risk-return trade-off, which include measuring the risk inherent in
each activity or product and charge it accordingly for the capital required to support it. This does
not solve the issue of recovering loanable amount. Effective system that ensures repayment of

20
loans by borrowers is critical in dealing with asymmetric information problems and in reducing
the level of loan losses, thus the long-term success of any banking organization (Basel, 2004).

2.1.8.3 Credit Risk Management Practices

Effective credit management involves establishing an appropriate credit risk environment;
operating under a sound credit granting process; maintaining an appropriate credit administration
that involves monitoring process as well as adequate controls over credit risk (Basel, 2004). It
requires top management to ensure that there are proper and clear guidelines in managing credit
risk, that is, all guidelines are properly communicated throughout the organization; and that
everybody involved in credit risk management understand them. Considerations that form the
basis for sound credit risk management system include: policy and strategies (guidelines) that
clearly outline the scope and allocation of a bank credit facilities and the manner in which a
credit portfolio is managed, that is, how loans are originated, appraised, supervised and collected
(Basel, 2004; Price Waterhouse, 2001). Screening borrowers is an activity that has widely been
recommended by, among others (Derban, Binner and Mullineux, 2005). The recommendation
has been widely put to use in the banking sector in the form of credit assessment. According to
the asymmetric information theory, a collection of reliable information from prospective
borrowers becomes critical in accomplishing effective screening.

2.1.8.4 Assessment of Borrowers

The assessment of borrowers can be performed through the use of qualitative as well as
quantitative techniques. One major challenge of using qualitative models is their subjective
nature (Bryant, 2001). However, borrowers attributes assessed through qualitative models can be
assigned numbers with the sum of the values compared to a threshold. This technique is termed
as “credit scoring”. The technique cannot only minimize processing costs but also reduce
subjective judgments and possible biases (Bluhm, Overbeck and Wagner, 2003). The rating
systems if meaningful should signal changes in expected level of loan loss. Chijoriga (2000)
concluded that quantitative models make it possible to, among others, numerically establish
which factors are important in explaining default risk, evaluate the relative degree of importance
of the factors, improve the pricing of default risk, be more able to screen out bad loan applicants
and be in a better position to calculate any reserve needed to meet expected future loan losses.

21
2.1.8.5 Clearly Established Credit Approval Process
Clearly established process for approving new credits and extending the existing credits has been
observed to be very important while managing credit risk (Heffernan, 2002). Further, monitoring
of borrowers is important as current and potential exposures change with both the passage of
time and the movements in the underlying variables and are also very important in dealing with
moral hazard problem (Derban et al., 2005).
Monitoring involves, among others, frequent contact with borrowers, creating an environment
that the bank can be seen as a solver of problems and trusted adviser; develop the culture of
being supportive to borrowers whenever they are recognized to be in difficulties and are striving
to deal with the situation; monitoring the flow of borrower's business through the bank's account;
regular review of the borrower's reports as well as an on-site visit; updating borrowers credit files
and periodically reviewing the borrowers rating assigned at the time the credit was granted
(Donaldson, 2000).

2.2. Empirical evidence of the study

To date, a number of studies have been made on different aspects/issues of credit risk. Afande
(2014), for instance, investigated the practice of credit risk management in commercial Banks of
Kenya. The study disclosed that together with other strategies, commercial banks in Kenya make
use of different credit risk management practices such as a thorough loan appraisal, asking for
collateral and checking the credit history of the borrowers, credit rationing, loan securitization,
and loan syndication.
A study by Kessey (2015) examined credit risk management practices in the Banking industry of
Ghana: processes and challenges and obtained the following findings. Some of the key findings
from the study revealed that the bank has documented policy guidelines on credit risk
management with a senior manager having oversight responsibility for implementation.
However, the study showed that there were some implementation challenges of the credit risk
policies which have resulted to low quality of loan portfolio of the bank. It is also recommended
that Bank’s risk policies should be reviewed frequently.
Another study by Chen and Shuping (2012) on credit management of Commercial Banks of
Lianyungang City for the small scale and medium enterprises (SMEs) also came up with its own
finding... Investigators have found out that the risk management plan and operation method that

22
really suit for credit demand for the SMEs is still not mature and it caused that the bad debts and
dead loan were overstocked in Lianyungang commercial bank, thus it seriously impact on the
capital operation of commercial banks, and then it has caused some adverse impact to the
development of local economy. Therefore, it is necessary for commercial banks in Lianyungang
city to supervise and manage the whole process of credit of the small and medium-sized
enterprises.
Abdus (2004) has examined empirically the performance of Bahrain’s commercial banks with
respect to credit (loan), liquidity and profitability during the period 1994-2001. Nine financial
ratios (return on asset, return on equity, cost to revenue, net loans to total asset, net loans to
deposit, liquid asset to deposit, equity to asset, equity to loan and non-performing loans to gross
loan) were selected for measuring credit, liquidity and profitability performances. By applying
these financial measures, the study found out that commercial bank’s liquidity performance was
not as per with the Bahrain Banking industry. Commercial Banks are relatively less profitable
and less liquid and, are exposed to risk as compared to banking industry. With regard to asset
quality or credit performance, this paper found no conclusive result.
Hagos (2010) investigated Credit Management on Wegagen Banks. The main objective of the
study was 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. 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 risk
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 (2009) investigated the newly emerging
challenges in credit risk management process that commercial banks encounter in Ethiopia.

23
2.3 Conceptual Framework
Conceptual frame work is an analytical tool with several variations and contexts. It is used to
make conceptual distinctions and organize ideas. It is particularly important in organizing
devices in empirical research. According to Miles and huberman (1994), a conceptual frame
work explains, either graphically or in narrative form (both much preferred), the main thing to be
studied, the factors, constructs or variables, and the presumed relationships among them (P. 18).
The whole purpose of developing conceptual frame work is to make research findings meaning
full. The center of the study is credit management

The aim of the Study is to assess the credit risk management practice at Awash Bank. The
study’s objectives will be examining the alignment of the credit risk management practice of the
bank with its credit risk management policy and procedures, assessing the bank specific factors
that influence the credit risk management practice and analyzing the mechanisms used by the
bank to handle credit risk. Therefore, the following conceptual framework is designed to
summaries the main target area and scope of the study.

Figure 2.1 Conceptual framework of the study

Credit risk policy,

Effectiveness of credit
guidelines and
risk management
procedures

Credit and risk

management practice

Non-performing loan Credit risk measuring

(NPL) management and monitoring

Source: Researcher own construction

24
 CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY

Introduction
This chapter deals with the research methodology used in the study. Research design and
approach, sources of data, sample size and sampling techniques, data collection instruments,
ethical considerations, and data analysis techniques are discussed.

3.1 Research Design and Approach

The study used a quantitative approach employing descriptive and cross sectional research
design in order to gather quantitative data. Descriptive study is undertaken in order to ascertain
and be able to describe the characteristics of the variables of interest in a situation. Descriptive
research is concerned with conditions or relationships that exist; practices that prevail; beliefs,
points of views, or attitudes that are held; processes that are going on; effects that are being felt;
or trends that are developing. The main objective of descriptive research is to analyze the state of
affairs as it prevails at the time of the study (Bramble, 1997). In this view, taking the Ethiopian
National Bank credit risk management guideline as a bench mark descriptive research will help
to analyze the existing credit risk management policy and practice of Awash Bank.

3.2. Population, Sample Size and Sampling Technique

3.2.1 Population
Population refers to the entire group of people, events, or things of interest that the researcher
wishes to investigate. The population of the study includes credit and risk directors, business
segment directors, credit analysts’, relationship managers, credit portfolio follow-up managers,
estimation officers who are working in head office. It consists of 1 credit analysis director, 1 risk
and compliance director, 4 risk and compliance officers, 4 segment directors, 32 relationship
managers, 2 credit portfolio management & follow up managers, 10 credit analysts, and 8
estimation officers; a total of 62 employees at Head Office.

25
3.2.2 Sample size
Among the different methods of the sample size determination, the one which developed by
Carvalh (1984) was used by the researcher to determine the number of respondents to be
included in the study. Accordingly, it is manageable population, the study was used the high
sample size.

Table 3.1 Carvalh sample size determination

Population Low Medium High
51-90 7 16 28
91-150 12 28 32
151-280 16 32 50
281-500 28 50 80
501-1200 32 80 125
1201-3200 50 125 200
3201-10000 80 200 315
10001-35000 125 315 500
35001-45000 200 500 800
Source: Carvalh 1984

As indicated in the table, the total population which is 62 falls between 51 and 90 which 28 is the
higher sample size for the study. As stated by Singh (2006, p.6) “descriptive research typically
uses larger samples; it is sometimes suggested that one should select 10-20 percent of the
accessible population for the sample.” Accordingly, this study has select 28 from 62 of total
population, utilized above maximum which is 45.16% of the population size.

3.2.3 Sampling technique

In order to give equal chance to all employees, questionnaires were distributed to the entire
group using simple random sampling method.

3.3 Method of Data Collection, Sources and Research Instruments

In order to get direct employees’ view on the credit and risk management practice of the bank, it
is imperative to collect data only from them. Hence, those employees selected in this group have
served as the main source of primary data.

26
Accordingly, demographic variables such as gender, age, year of service, educational
background and the like was directly collected from employees through questionnaire. Besides,
research problem related issues were collected mainly through questionnaire.

Data on previous works conducted in the subject matter was reviewed from related literature
mainly from books, journals, bulletins, and the bank’s credit and risk policy. Specifically, data
regarding the non-performing loan (NPL) of the Bank is taken from annual report of the Bank.
Questionnaires were administered by the researcher. The main research instrument utilized in
this study was questionnaire. The questionnaire contains two parts. The first part was about
demographic characteristics of respondents. This part consists of 5 items such as gender, age,
year of service in awash bank, current position and salary ranges.
The second part was related to the research questions. 24 items were developed on a five-point
Likert Scale. Respondents were requested to choose their level of agreement on a given item as
follows. 5 “Strongly Agree,” 4 “Agree,” 3 “I do not know”, 2 “Disagree” and 1 “Strongly
Disagree”. The items were divided in to categories and sub categories. These are general
questions about the bank’s credit and risk management practices.

3.5. Ethical Consideration

Informed consent of the respondents was obtained from research participants. The information
collected from the respondents through questionnaires was treated with strict confidentiality. To
keep anonymity of the respondents, they were asked not to write their name. The secondary data
used in the research was taken from official published and unpublished sources of the Bank.

3.6. Data Analysis

Based on the research questions of the study, a questionnaire and document analysis were
employed to collect data. After the data were collected from the sample using the specified
instrument, analysis was made to answer the research questions. Data analysis was done with
SPSS software. Accordingly the primary data gathered through questionnaires was analyzed
using descriptive statistics- frequency; percentage and mean were used for the data analysis.

27
 CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION

Introduction
In this chapter, the data collected through questionnaire is presented and analyzed. The research
questions were addressed by analyzing the data through descriptive statistics. Frequency,
percentage, means and standard deviation were employed as data analysis technique.
The questionnaire was distributed to 28 employees of the Bank at the Head Office. However, 1
respondent did not return the questionnaire. Thus, 27 questionnaires were finally used which is
about 96.4% of the total distributed questionnaires. This response rate is excellent to represent
the sample.

4.1. Demographic characteristics of the respondents

The first section of the questionnaire comprised of questions about demographic information of
the respondents. It covered sex, age, marital status, educational level and specialization, work
experience and current position in the Bank. The subsequent tables show the demographic
characteristics of the respondents.
Table 4.1: Summary of respondents’ demographic data
Frequency Percent Cumulative Percent
Male 16 59.26% 59.26%
Gender Female 11 40.74% 100.00%
Total 27 100.00%

20 – 25 1 3.70% 3.70%
26 – 30 6 22.22% 25.92%
31 – 35 10 37.04% 62.96%
36 – 40 9 33.33% 96.30%
Age in
41 – 45 1 3.70% 100.00%
years
Total 27 100.00%

< 1 year 0 0.00% 0.00%

1 - 3 yrs 1 3.70% 3.70%

28
 3 - 6 yrs 3 11.11% 14.81%
7 - 10yrs 9 33.33% 48.14%
> 10yrs 14 51.86% 100.00%
Total 27 100.00%

Frequency Percent Cumulative Percent

<15,000 0 0% 0%
15,001 – 20,000 3 11.11% 11.11%
20,001 – 25,000 4 14.81% 25.92%
Monthly 25,001–30,000 2 7.41% 33.33%
salary 30,001 – 35,000 8 29.63% 62.96%
>35000 10 37.04% 100%
Total 27

Business segment directors 2 7.41% 7.41%

Credit analysis & appraisal
1 3.70% 11.12%
director
Risk & compliance officers 2 7.41% 18.53%
Current Relationship Manager 13 48.12% 66.66%
position Credit Portfolio Management
1 3.70% 70.36%
and follow up Managers
Credit Analyst 5 18.52% 88.89%
Estimation officer 3 37.04% 100.00%
Total 27 100.00%
Source: Questionnaire, 2021

As table 4.1 indicates that 15 of 27 (59.26%) of respondents are male and the rest of 11 (40.74%)
are female. These results suggest that the sample is reasonably representative. With regards to
respondents by age category, the group with the highest number of respondents consists 10
respondents- (37.04%) fall under the age category of 31 - 35 which followed by 9(33.33%) fall
under the age category of 36-40, then 6 (22.22%) fall under the age category of 25-30and , 1
(3.70%) of 20-25 & 1 (3.70%) of 41-45. This indicates that the largest share of the respondents
or 17 (62.96%) are youngsters and at productive stage of below 35.

29
Regarding year of service in Awash bank, the largest portion of the respondents 14 (51.86%) fall
under the category of greater than 10 years of work experience, followed by 9 (33.33%) which
fall under the category 7 - 10 years of experience, 3 (11.11%) under 3-6 years and 1(3.7%) under
1 - 3 years of banking experience. This indicates that the majority of the respondents 23
(85.19%) of them are highly experienced staffs with greater than 7 years of banking experience.
Regarding monthly income, from the above table we can observe that comparatively the majority
10 of the respondents are earning greater than birr 35,000 per month which accounts for 37.04%
of the sample. The second largest is 8 respondents of the study are earning between birr 30,001 –
35,000.00 salary groups which is 29.63% of the sample followed by 4 (14.81%) earning between
birr 20,001 to 25,000, 3(11.11%) between 15,001-20,000 and the remaining 2(7.41%)
respondent earns between 25,001 – 30,000. This implies that almost all salary group of the bank
has been included and the researcher was not face difficulties to generalize its study for all salary
groups.

Regarding the current position of the respondents, the largest group of respondents fall under the
category of Relationship managers which 13(48.12%) of the total respondents, followed by
5(18.52%) of the respondents under credit analysts, 3(11.11%) estimation officers and 2(7.41%)
segment Directors, 2(7.41%) risk & compliance officers and 1(3.70%) Credit analysis Director
&.1(3.70%) Credit Portfolio Management and follow-up Director The result indicates that all job
positions available in the credit and risk related positions are included in the survey.

4.2. Descriptive Analysis

Table 4.2 what credit collection strategies are adopted in the management of credit in
Awash bank?
Frequency Percent Cumulative Percent
The bank has credit risk
Strongly agree 21 77.78% 77.78%
policy, guidelines and
Agree 5 18.52% 96.30%
procedures that explain
I don't know 1 3.70% 100.00%
objectives and
Disagree 0 0.00% 100.00%
principles of credit risk
Strongly disagree 0 0.00% 100.00%
management process
Total 27 100.00% Mean= 4.74

30
 Frequency Percent Cumulative Percent
Credit risk strategy and Strongly agree 12 44.44% 44.44%
policies are effectively Agree 9 33.33% 77.78%
communicated I don't know 1 3.70% 81.48%
throughout the Disagree 3 11.11% 92.59%
organization Strongly disagree 2 7.41% 100.00%
Total 27 100.00% Mean= 3.96
The Bank have Frequency Percent Cumulative Percent
strategies for granting Strongly agree 8 29.63% 29.63%
credits focus on who, Agree 12 44.44% 74.07%
how and what should be I don't know 2 7.41% 81.48%
done at the branch and Disagree 4 14.81% 96.30%
corporate division Strongly disagree 1 3.70% 100.00%
levels while assessing
Total 27 100.00% Mean= 3.81
borrowers
Frequency Percent Cumulative Percent
The credit and risk Strongly agree 9 33.33% 33.33%
policies and procedures Agree 13 48.15% 81.48%
exactly comply with I don't know 3 11.11% 92.59%
regulations of national Disagree 2 7.41% 100.00%
bank Strongly disagree 0 0.00% 100.00%
Total 27 100.00% Mean= 4.07
The practical loan Frequency Percent Cumulative Percent
processing and Strongly agree 5 18.52% 18.52%
appraisal activities of Agree 10 37.04% 55.56%
the department offices I don't know 3 11.11% 66.67%
comply with the bank Disagree 7 25.93% 92.59%
credit policy and Strongly disagree 2 7.41% 100.00%
procedures Total 27 100.00% Mean= 3.33
Source: Questionnaire, 2021

31
As shown on table 4.2, regarding the credit collection strategies are adopted in the management
of credit in Awash bank, the respondents were asked about whether the bank has credit risk
policy, guidelines and procedures that explain objectives and principles of credit risk
management process. Accordingly, the majority 21(77.78%) of the respondents strongly agree
and 5(18.52%) of the respondents agree that the bank has credit risk policy, guidelines and
procedures that explain objectives and principles of credit risk management process. On the other
hand, only 1(3.70%) respondent is not sure whether the bank has credit risk policy, guidelines
and procedures or not that explain objectives and principles of credit risk management process.
The total sum result and the mean value of 4.74 indicates that The bank has credit risk policy,
guidelines and procedures that explain objectives and principles of credit risk management
process.

Regarding credit risk strategy and policies in effectively communicated throughout the
organization, the majority 12(44.44%) of the respondents strongly agree and 9(33.33%) of the
respondents agree that Credit risk strategy and policies are effectively communicated throughout
the organization. On the other hand, 3 (11.11%) of the respondents disagree and 2(7.41%)
strongly disagree that strategies and policies are not effectively communicated throughout the
organization. The remaining 1(3.70%) respondent was unaware of the issue. The aggregate result
and the mean value of 3.96 indicate that Credit risk strategy and policies are effectively
communicated throughout the organization.

The next question was if the Bank has strategies for granting credits focus on whom, how and
what should be done at the branch and corporate division levels while assessing borrowers. In
this regard, 12 respondents with a contribution of 44.44% of the total respondents agree and 8
(29.63%) of the respondents strongly agree that the Bank has strategies for granting credits focus
on who, how and what should be done at the branch and corporate division levels while
assessing borrowers. On the contrary, 4(14.81%) of the respondents disagree and 1(3.70%)
respondent strongly disagree that the Bank doesn’t has strategies for granting credits focus on
who, how and what should be done at the branch and corporate division levels while assessing
borrowers. The rest of 2 (7.41%) respondents have no idea about the issue. The total sum result
indicates that the Bank have strategies for granting credits focus on who, how and what should

32
be done at the branch and corporate division levels while assessing borrowers, as the mean value
3.81 assures.

Concerning the credit and risk policies and procedures in exactly complying with regulations of
national bank, the majority 13(48.15%) of the respondents agree and 9(33.33%) of the
respondents strongly agree that policies and procedures exactly comply with regulations of
national bank. In contrast, 2(7.41%) of the respondents disagree by reflecting the policies and
procedures doesn’t comply with regulations of national bank. The remaining 3(11.11%)
respondents are unaware of the issue. However the total result and the mean value of 4.07
indicate that the credit and risk policies and procedures exactly comply with regulations of
national bank.

The last question in this section was about the practical loan processing and appraisal activities
of the department offices in complying with the bank credit policy and procedures. In this regard,
10 out of 27 respondents with 37.04% agree and 5(18.52%) of the respondents strongly agree
that the practical loan processing and appraisal activities of the department offices comply with
the bank credit policy and procedures. However, 7(25.93%) of the respondents disagree and
2(7.41%) of them strongly disagree by reflecting the practical loan processing and appraisal
activities of the department offices doesn’t comply with the bank credit policy and procedures.
The rest of 3 (11.11%) respondents have no idea about the issue. The mean value of 3.33 and the
total sum result of the respondents answer indicate the majority of the respondents agree that the
practical loan processing and appraisal activities of the department offices comply with the bank
credit policy and procedures.

Table 4.3 what are the factors that relates to the effectiveness of credit risk management in
Awash Bank?
Appropriate credit Frequency Percent Cumulative Percent
environment is Strongly agree 8 29.63% 29.63%
established through Agree 12 44.44% 74.07%
policy and strategies that I don't know 2 7.41% 81.48%
clearly outline the scope Disagree 5 18.52% 100.00%
and allocation of bank Strongly disagree 0 0.00% 100.00%

33
credit facilities Total 27 100.00% Mean= 3.85
Frequency Percent Cumulative Percent
An appropriate credit
Strongly agree 8 29.63% 29.63%
administration that
Agree 11 40.74% 70.37%
involves monitoring
I don't know 4 14.81% 85.19%
process as well as
Disagree 3 11.11% 96.30%
adequate control over
Strongly disagree 1 3.70% 100.00%
credit is maintained
Total 27 100.00% Mean= 3.81
Frequency Percent Cumulative Percent
Top management Strongly agree 5 18.52% 18.52%
supports to ensure that Agree 3 11.11% 29.63%
there are proper and clear I don't know 4 14.81% 44.44%
guidelines in managing Disagree 9 33.33% 77.78%
credit Strongly disagree 6 22.22% 100.00%
Total 27 100.00% Mean= 2.70
Frequency Percent Cumulative Percent
Reliable information is Strongly agree 8 29.63% 29.63%
collected from Agree 10 37.04% 66.67%
prospective borrowers in I don't know 5 18.52% 85.19%
accomplishing effective Disagree 3 11.11% 96.30%
screening Strongly disagree 1 3.70% 100.00%
Total 27 100.00% Mean= 3.78
Frequency Percent Cumulative Percent
Strongly agree 15 55.56% 55.56%
The Bank has high
Agree 9 33.33% 88.89%
quality staff with
I don't know 2 7.41% 96.30%
required depth of
Disagree 1 3.70% 100.00%
knowledge
Strongly disagree 0 0.00% 100.00%
Total 27 100.00% Mean= 4.41
All credit risk Frequency Percent Cumulative Percent

34
 management guidelines Strongly agree 4 14.81% 14.81%
are properly Agree 5 18.52% 33.33%
communicated in the I don't know 2 7.41% 40.74%
organization and Disagree 9 33.33% 74.07%
everybody involved in Strongly disagree 7 25.93% 100.00%
credit risk management
Total 27 100.00% Mean= 2.63
understands them
Supportive technologies Frequency Percent Cumulative Percent
and equipment are Strongly agree 9 33.33% 33.33%
utilized in credit Agree 11 40.74% 74.07%
analysis, monitoring and I don't know 4 14.81% 88.89%
control to make the task Disagree 3 11.11% 100.00%
easy and to keep track on Strongly disagree 0 0.00% 100.00%
trend of credits within the
Total 27 100.00% Mean= 3.96
portfolio
Source: Questionnaire, 2021

As shown on table 4.3, the respondents were asked about the factors that relates to the
effectiveness of credit risk management in Awash Bank. The first question was whether
appropriate credit environment is established through policy and strategies that clearly outline
the scope and allocation of bank credit facilities. In this regard, the majority 12(44.44%) of the
total respondents agree and 8(29.63%) of the respondents strongly agree that Suitable credit
environment is established through policy and strategies that clearly outline the scope and
allocation of bank credit facilities. On the contrary, 5(18.52%) of the respondents disagree that
the credit environment is not well-established through policy and strategies that clearly outline
the scope and allocation of bank credit facilities. The rest of 2(7.41%) respondents are not sure
whether the credit environment is well-established or not. The aggregate result and the mean
value of 3.85 clearly show the credit environment is well-established through policy and
strategies that clearly outline the scope and allocation of bank credit facilities.

The next question was about the maintenance of appropriate credit administration that involves
monitoring process as well as adequate control over credit. The majority 11(40.74%) of the

35
respondents agree and 8(29.63%) of the respondents strongly agree that a proper credit
administration that involves monitoring process as well as adequate control over credit is
maintained. On the other hand, 3(11.11%) of the respondents disagree and 1(3.70%) strongly
disagree that the maintenance of appropriate credit administration that involves monitoring
process as well as adequate control over credit is poor. The rest of 4(14.81%) respondents are not
sure the maintenance of credit administration is good or not. The total sum result indicates and
the mean value 3.81 show a proper credit administration that involves monitoring process as well
as adequate control over credit is maintained.

The other question was about the top managements support in ensuring that there are proper and
clear guidelines in managing credit. Accordingly, 9 out of 27 respondents with 33.33% value
disagree and 6(22.22%) strongly disagree that top management supports is not good enough to
ensure that there are proper and clear guidelines in managing credit. On the contrary, 5(18.52%)
respondents strongly agree and 3(11.11%) respondents agree in ensuring the existence of proper
and clear guidelines in managing credit, the top managements support is high. The remaining 4
(14.81%) of the respondents are unaware of the issue. The total sum result of the respondents
indicate that in ensuring the existence of proper and clear guidelines in managing credit, the top
managements support is less and needs to be improved, as the mean value of 2.70 show too.

Regarding collecting reliable information from prospective borrowers in accomplishing effective

screening, the majority 10(37.04%) of the respondents agree and 8(29.63%) strongly agree that
reliable information is collected from prospective borrowers in accomplishing effective
screening. However, 3(11.11%) of the respondents disagree and 1(3.70%) respondent strongly
disagree that the information is not collected from prospective borrowers for effective screening.
The rest of 5(18.52%) respondents are not sure whether the information is collected or not from
borrowers for effective screening purpose. The aggregate result and 3.78 mean value displays the
reliable information is collected from prospective borrowers in accomplishing effective
screening

Regarding the Bank in having high quality staff with required depth of knowledge, 15
respondents with 55.56% of the total, strongly agree and 9 (33.33%) agree that the Bank has high
quality staff with required depth of knowledge. In contrast 1(3.70%) respondent disagree that
high quality staff with required depth of knowledge are not appropriately incorporated in the

36
department. The rest of 2(7.41%) respondents are unaware of the issue. The sum result indicates
the Bank has high quality staff with required depth of knowledge as the mean value of 4.41
designates.

The other question was whether all credit risk management guidelines are properly
communicated in the organization and everybody involved in credit risk management
understands them, or not. Accordingly, the majority 9(33.33%) of the total respondents disagree
and 7(25.93%) respondents strongly disagree that the guidelines are not properly communicated
in the organization and only some of the employees’ involved in credit risk management
understands them. However, 5(18.52%) respondents agree and 4(14.81%) strongly agree that the
guidelines are properly communicated in the organization and everybody understands them.
Only 2(7.41%) respondents are unaware of the issue. The aggregate result indicates and 2.63
mean value show that there is inconsistency properly communicating guidelines in the
organization and qualifying everyone involved in credit risk management understands them.

The last question in the section was whether supportive technologies and equipment are utilized
in credit analysis, monitoring and control to make the task easy and to keep track on trend of
credits within the portfolio. Accordingly, 11(40.74%) of respondents agree and 9(33.33%)
strongly agree that supportive technologies and equipment are utilized in credit analysis,
monitoring and control to make the task easy and to keep track on trend of credits within the
portfolio. In contrast, 3(11.11%) of the respondents disagree, and the remaining 4(14.81%)
respondents are unaware of the issue. The mean value of 3.96 indicates that supportive
technologies and equipment are utilized in credit analysis, monitoring and control to make the
task easy and to keep track on trend of credits within the portfolio. Supportive technologies and
equipment such as updated software’s and completed database are useful in credit analysis,
monitoring and control, as they make it easy to keep track on trend of credits within the
portfolio.

37
Table 4.4 how was the credit procedure of the Bank helping in reducing the NPL status
loans?

Frequency Percent Cumulative Percent

Strongly agree 15 55.56% 55.56%
The NPL percentage
Agree 9 33.33% 88.89%
of the bank’s credit is
I don't know 2 7.41% 96.30%
increasing time to
Disagree 1 3.70% 100.00%
time.
Strongly disagree 0 0.00% 100.00%
Total 27 100.00% Mean= 4.41
Frequency Percent Cumulative Percent
Lack of continuous Strongly agree 8 29.63% 29.63%
follow up and proper Agree 11 40.74% 70.37%
risk assessment is the I don't know 3 11.11% 81.48%
main cause of NPL Disagree 4 14.81% 96.30%
%age increment Strongly disagree 1 3.70% 100.00%
Total 27 100.00% Mean= 3.78
Mistake on estimation Frequency Percent Cumulative Percent
of collateral and Strongly agree 3 11.11% 11.11%
evaluating the Agree 4 14.81% 25.93%
borrower’s financial I don't know 6 22.22% 48.15%
report is another cause Disagree 9 33.33% 81.48%
of NPL %age Strongly disagree 5 18.52% 100.00%
increment Total 27 100.00% Mean= 2.67
Frequency Percent Cumulative Percent
Current political and Strongly agree 15 55.56% 55.56%
contagious diseases Agree 8 29.63% 85.19%
(i.e. Covid-19) are the I don't know 0 0.00% 85.19%
main factors for NPL Disagree 1 3.70% 88.89%
increment Strongly disagree 3 11.11% 100.00%
Total 27 100.00% Mean= 4.15

38
 Frequency Percent Cumulative Percent
Strongly agree 5 18.52% 18.52%
The bank’s procedure
Agree 1 3.70% 22.22%
was effective in
I don't know 4 14.81% 37.04%
reducing the NPL
Disagree 10 37.04% 74.07%
status
Strongly disagree 7 25.93% 100.00%
Total 27 100.00% Mean= 2.52
Frequency Percent Cumulative Percent
Reviewing and Strongly agree 2 7.41% 7.41%
amendment of the Agree 4 14.81% 22.22%
bank’s procedure is I don't know 1 3.70% 25.93%
not necessary for NPL Disagree 13 48.15% 74.07%
related issues Strongly disagree 7 25.93% 100.00%
Total 27 100.00% Mean= 2.30
Source: Questionnaire, 2021

As indicated on table 4.4, the first question asked to the respondents was whether the non-
performing loans (NPL) percentage of the bank’s credit is increasing time to time. In this regard,
the majority 15(55.56%) of the respondents strongly agree and 9(33.33%) respondents agree that
The NPL percentage of the bank’s credit is increasing time to time. However, 1 (3.70%)
respondent disagrees about the NPL increment. The remaining 2(7.41%) respondents have no
information about the issue. The aggregate result as well as the mean value of 4.41 shows that,
The NPL percentage of the bank’s credit is increasing time to time.

In addition to that as per the annual reports of the bank (fcy 2017/18 to 2020/21), the non-
performing loans (NPL) ratio of the bank has been increasing as shown on the below chart.

39
 NPL 2017/18 - 2020/21
2
1,8
1,6
1,4
1,2
1 NPL
1.9
0,8 1.7

0,6
1 1.1
0,4
0,2
0
2017/18 2018/19 2019/20 2020/21

Source: Awash bank annual report 2017/18 – 2020/21

The next question was about whether lack of continuous follow up and proper risk assessment is
the main cause of NPL %age increment or not. Accordingly the majority 11(40.74%) of the
respondents agree and 8(29.63%) of the respondents strongly agree that the main cause of NPL
%age increment is lack of continuous follow up and proper risk assessment. However,
4(14.81%) of the respondents disagree and 1(3.70%) respondent strongly disagree that Lack of
continuous follow up and proper risk assessment is not the main cause of NPL %age increment.
The remaining 3(11.11%) respondents whether lack of continuous follow up and proper risk
assessment the main cause of NPL %age increment or not. The aggregate result and 3.78 mean
value indicate that lack of continuous follow up and proper risk assessment is the main cause of
NPL %age increment

The other question is whether mistake on estimation of collateral and evaluating the borrower’s
financial report is another of NPL %age increment. Accordingly, 9(33.33%) of the respondents
disagree and 5(18.52%) of the respondents strongly disagree that mistake on estimation of
collateral and evaluating the borrower’s financial report is not another cause of NPL %age
increment. In contrast, 4(14.81%) respondents agree 3(11.11%) respondents strongly agree that
another cause of NPL %age increment is mistake on estimation of collateral and evaluating the

40
borrower’s financial report. The remaining 6(22.22%) respondents are not sure whether the issue
is another cause of NPL %age increment. The total sum result indicates 51.85% of the
respondents agree that the cause of NPL %age increment is not mistake on estimation of
collateral and evaluating the borrower’s financial report, as 2.67 mean shows too.

The other question was whether current political and contagious diseases (i.e. Covid-19) are the
main factors for NPL increment. In this regard, 15 out of 27 respondents with 55.56%
contribution strongly agree and 8(29.63%) of the respondents agree that current political and
contagious diseases (i.e. Covid-19) are the main factors for NPL increment. On the other hand,
3(11.11%) of the respondents strongly disagree and 1(3.70%) respondent disagree that the main
factors for NPL increment is not the current political and contagious diseases (i.e. Covid-19).
However, 85.19% of the total respondents agree that the current political and contagious diseases
(i.e. Covid-19) are the main factors for NPL increment. The mean value of 4.15 also supports the
idea.

Regarding the bank’s procedure in effectively reducing the NPL status, the majority 10(37.04%)
of the respondents disagree and 7(25.93%) respondents strongly disagree that the bank’s
procedure was not effective in reducing the NPL status. On the contrary, 5(18.52%) of the
respondents strongly agree and 1(3.70%) respondent agree that the bank’s procedure was
effective in reducing the NPL status. The remaining 4(14.81%) respondents are not sure about
the issue. The aggregate result of the respondents indicates that the bank’s procedure was not
effective in reducing the NPL status. The 2.52 mean result also indicate the bank’s procedure
was not effective in reducing the NPL status.

The last question in this section was whether reviewing and amendment of the bank’s procedure
is not necessary for NPL related issues. Accordingly, 13(48.15%) respondents disagree and
7(25.93%) strongly disagree by reflecting reviewing and amendment of the bank’s procedure is
necessary for NPL related issues. However, 4(14.81%) respondents agree and 2(7.41%) strongly
agree that there is no need of amendment of the procedure for NPL related issues. The total sum
result and the mean value of 2.30 reflect that the reviewing and amendment of the bank’s
procedure is necessary for NPL related issues.

41
Table 4.5 what kind of mechanisms used by the bank for credit risk measuring and
monitoring?
Frequency Percent Cumulative Percent
Strongly agree 8 29.63% 29.63%
Agree 10 37.04% 66.67%
The bank frequently
I don't know 3 11.11% 77.78%
contact with borrowers
Disagree 5 18.52% 96.30%
Strongly disagree 1 3.70% 100.00%
Total 27 100.00% Mean= 3.70
Frequency Percent Cumulative Percent
The bank creates an Strongly agree 8 29.63% 29.63%
environment that it can Agree 11 40.74% 70.37%
be seen as a solver of I don't know 3 11.11% 81.48%
problems and trusted Disagree 4 14.81% 96.30%
advisor Strongly disagree 1 3.70% 100.00%
Total 27 100.00% Mean= 3.78
Frequency Percent Cumulative Percent
Strongly agree 7 25.93% 25.93%
The bank monitors the
Agree 9 33.33% 59.26%
flow of borrower’s
I don't know 3 11.11% 70.37%
business through the
Disagree 5 18.52% 88.89%
bank’s account
Strongly disagree 3 11.11% 100.00%
Total 27 100.00% Mean= 3.44
Frequency Percent Cumulative Percent
Strongly agree 12 44.44% 44.44%
The bank regularly
Agree 9 33.33% 77.78%
reviews borrowers
I don't know 2 7.41% 85.19%
reports as well as an
Disagree 1 3.70% 88.89%
onsite visit
Strongly disagree 3 11.11% 100.00%
Total 27 100.00% Mean= 3.96

42
The bank develops the Frequency Percent Cumulative Percent
culture of being Strongly agree 2 7.41% 7.41%
supportive to borrowers Agree 5 18.52% 25.93%
wherever they are I don't know 2 7.41% 33.33%
recognized to be in Disagree 11 40.74% 74.07%
difficulties and are Strongly disagree 7 25.93% 100.00%
striving to deal with the
Total 27 100.00% Mean= 2.41
situation
Frequency Percent Cumulative Percent
The bank updates
Strongly agree 9 33.33% 33.33%
borrowers credit files and
Agree 12 44.44% 77.78%
periodically review the
I don't know 2 7.41% 85.19%
borrowers rating assigned
Disagree 3 11.11% 96.30%
at the time the credit was
Strongly disagree 1 3.70% 100.00%
granted
Total 27 100.00% Mean= 3.93
Source: Questionnaire, 2021

As shown on Table 4.5 the respondents were asked about the kind of mechanisms used by the
bank for credit risk measuring and monitoring. The first question was whether the bank
frequently contacts with borrowers. Accordingly, the majority 10(37.04%) of the respondents
agree and 8(29.63%) respondents strongly agree that the bank makes frequently contact with
borrowers. In contrast, 5(18.52%) respondents disagree and 1(3.70%) respondents strongly
disagree by reflecting the bank doesn’t make frequently contact with borrowers. The remaining
3(11.11%) respondents have no idea about the issue. The total sum result, as well as the mean
value of 3.70 indicates borrowers are frequently contacted by the bank.

The next question was about the bank’s ability in creating an environment that can be seen as a
solver of problems and trusted advisor. In this regard 11(40.74%) out of 27 respondents agree
and 8(29.63%) of respondents strongly agree that the bank creates an environment that it can be
seen as a solver of problems and trusted advisor. On the contrary, 4(14.81%) respondents
disagree and 1(3.70%) respondents strongly disagree that the bank needs to work on creating an
environment that can be seen as a solver of problems and trusted advisor. The rest of 3(11.11%)

43
respondents are unaware of the issue. The majority of the respondent’s reflection indicates the
bank creates an environment that it can be seen as a solver of problems and trusted advisor, so
does the mean value of 3.78.
The other question was whether the bank monitors the flow of borrower’s business through the
bank’s account. Accordingly, 7 (25.93%) respondents strongly agree and 9(33.33%) agree that
the bank monitors the flow of borrower’s business through the bank’s account. But, 5(18.52%)
respondents disagree and 3(11.11%) strongly disagree that the bank had poor performance in
monitoring the flow of borrower’s business through the bank’s account. 3(11.11%) respondents
have no idea about the issue. The aggregate result and 3.44 mean value indicates that the bank
monitors the flow of borrower’s business through the bank’s account.

With regards to the bank regular review of borrowers reports as well as an onsite visit, the
majority 12(44.44%) of the respondents strongly agree and 9(33.33%) agree that the bank
regularly reviews borrowers reports as well as an onsite visit. However, 3(11.11%) respondents
strongly disagree and 1(3.70%) respondent disagree that there is no regular review of borrowers
reports as well as an onsite visit. 2(7.41%) respondents are unable to reflect their idea on the
issue. As the majority of the respondents reflection indicates the bank had been regularly review
borrowers reports as well as an onsite visit. The mean value of 3.96 also assures the result.

Another question was whether the bank develops the culture of being supportive to borrowers
wherever they are recognized to be in difficulties and are striving to deal with the situation. In
this regard, 11(40.74%) respondents disagree and 7(25.93%) strongly disagree that the bank
lacks the culture of being supportive to borrowers wherever they are recognized to be in
difficulties and doesn’t striving to deal with the situation. In contrast, 5(18.52%) respondents
agree and 2(7.41%) respondents strongly agree that there is a culture of being supportive to
borrowers wherever they are recognized to be in difficulties and are striving to deal with the
situation. As the majority of respondents’ reflection and 2.41 mean value indicate the bank had
poor performance in developing the culture of being supportive to borrowers wherever they are
recognized to be in difficulties and had lack of striving to deal with the situation.

The last question in this section was if the bank updates borrowers’ credit file and periodically
review the borrowers rating assigned at the time the credit was granted. Accordingly,

44
12(44.44%) of the respondents agree and 9(33.33%) respondents strongly agree that the bank
updates borrowers credit files and periodically review the borrowers rating assigned at the time
the credit was granted. In opposite to this, 3(11.11%) respondents disagree and 1(3.70%)
strongly disagree that the bank doesn’t updates borrowers credit files and didn’t periodically
review the borrowers rating assigned at the time the credit was granted. 2(7.41%) respondents
are unaware of the issue. The mean value of 3.93 and the majority of the respondents reflection
indicates that the borrowers’ credit files is up to date and the bank periodically review the
borrowers rating assigned at the time the credit was granted.

45
 CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

Introduction
In this chapter, major findings are going to be summarized and the subsequent conclusions are
made. Based on the conclusion, recommendations are forwarded in relation to literatures
reviewed to suggest the better credit risk and management practice for Awash bank.

5.1. Summary of major findings

The result obtained from questionnaire indicated that in terms of human resource, Awash Bank
credit and risk department at head office is in good stand. The Bank has young and qualified
credit staffs and they are at productive stage of below 35. Majority (62.96%) of the respondents
are in the age of below 35 years. And, the majority (96.3%) of the respondents has above 3 years
of banking experience. In addition to this, almost all salary range and job positions are included
in the study which represents the population perfectly. Generally, the result regarding credit
staff’s age and banking experience shows that the Bank is in a good position in terms of
productive staff. Other key findings of the study are:
The bank has credit risk policy, guidelines and procedures that explain objectives and principles
of credit risk management process and they are effectively communicated throughout the
organization. These policies are exactly complying with regulations of national bank.
The practical loan processing and appraisal activities of the department offices comply with the
bank credit policy and procedures and the credit environment is well-established. The bank also
has a proper credit administration that involves monitoring process as well as adequate control
over credit is maintained.
In ensuring the existence of proper and clear guidelines in managing credit, the top managements
support is less and needs to be improved. However, the reliable information is collected from
prospective borrowers in accomplishing effective screening. Bank has high quality staff with
required depth of knowledge
There is inconsistency in properly communicating guidelines in the organization and in
qualifying everyone involved in credit risk management understands them.

46
The non-performing loans (NPL) percentage of the bank’s credit is increasing time to time. This
is due to lack of continuous follow up and proper risk assessment and the current political and
contagious diseases (i.e. Covid-19). Also, the bank’s procedure was not effective in reducing the
NPL status and it needs to be improved
The bank frequently contacts borrowers and creates an environment that it can be seen as a
solver of problems and trusted advisor. The bank also monitors the flow of borrower’s business
through the bank’s account and had been regularly review borrowers reports as well as an onsite
visit.
The bank had poor performance in developing the culture of being supportive to borrowers
wherever they are recognized to be in difficulties and had lack of striving to deal with the
situation. However, the borrowers’ credit file is up to date and the bank periodically reviews the
borrowers rating assigned at the time the credit was granted.

5.2. Conclusion
As the results indicate, Awash Bank has young and qualified staff. Majority of the staff are also
experienced and at productive age. With the existing profile of the credit staff, together with
other factors, there is a greater chance for the Bank to be profitable and will have low rate of
non-performing loan.
In conclusion, the bank has a credit risk management procedure that effectively communicated
throughout the organization. These policies are exactly complying with regulations of national
bank. The practical loan processing and appraisal activities of the credit analysis and
management office complies with the bank credit policy and procedures and the credit
environment is well-established. The bank also has a proper credit administration that involves
adequate controlling & monitoring process over credit.

However, in ensuring the existence of proper and clear guidelines in managing credit, the top
managements support is less. There is inconsistency in properly communicating guidelines in the
organization and in qualifying everyone involved in credit risk management understands them.
The non-performing loans (NPL) percentage of the bank’s credit is increasing time to time. This
is due to lack of continuous follow up and proper risk assessment and the current political and
contagious diseases (i.e. Covid-19). Also, the bank’s procedure was not effective in reducing the
NPL status and the bank frequently contacts borrowers and creates an environment that it can be

47
seen as a solver of problems and trusted advisor. The bank also monitors the flow of borrower’s
business through the bank’s account and had been regularly review borrowers reports as well as
an onsite visit The study concluded that banks used different credit risk management tools,
techniques and assessment models to manage their credit risk, and that they all have one main
objective, i.e. to reduce the amount of loan default which is the principal cause of bank failures.

5.3. Recommendations
Based on the findings and conclusions of the study, the following recommendations are
forwarded which are aimed at improving the credit management of the bank.
Noting the importance, attractive, convenient and flexible credit policy and procedure, in
assisting loan creation and growth, the Bank’s top management need to periodically revise its
credit policy and procedure incorporating the feedback of clients and employees in order to
decrease the NPL percentage.
In ensuring the existence of proper and clear guidelines in managing credit, the top managements
support is less and needs to be improved. As a result, the top management should support other
staffs regarding proper and clear guidelines management.
Establishing a good relationship with borrowers was found to be an important strategy employed
by banks in the effort of reducing non-performing loans and the bank has been maintaining such
culture. This idea suggest that innovation on new ways of dealing with borrowers is necessary
for banks to be able to recover their money; and
Awash Bank need to strengthen its loan management process especially in monitoring its
borrowers and probably come up with new ways of monitoring them.

5.4 Limitation of the Study

Since the research topic involves a sensitive issue (credit), there will be limitation in getting
information that is confidential to the bank. Additionally, time and budget will also be major
constraints. So as to this, all the existing problems regarding risk management in banks cannot be
covered. In addition to this, since the study is conducted in a single organization it will be hard to
make generalization. Because of time and budget limitations, the research will be limited to only
cover the credit risk management practice of only one private bank namely Awash bank.

48
References
Abdi Dufera (2010). Financial performance evaluation: A case study of Awash International
Bank (AIB), MBA Thesis Mekelle University.

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

Afande, F. O. (2014). Credit risk management practices of commercial Banks in Kenya.

European Journal of Business and Management, 6, 34, 21-62.

Alam, Z. & Masukujjaman (2011).. Risk management practices: A critical diagnosis of some
selected commercial Banks in Bangladesh. Journal of Business and Technology, 6, 1, 15-
35.

Alebachew Fantu (2015). Assessment of credit risk management policies and practices in Nib
International Bank S. Co. MBA Thesis, St. Mary University.

Al-Tamimi, H. (2002). "Risk management practices: an empirical analysis of the UAE

commercial banks", Finance India, Vol. 16 No.3, pp.1045-57.

Awash International Bank (2017). Awash International Bank Annual Report 2016/17.

Bank of Jamaica (2005). Standards of sound business practices: Credit risk management.

Bassel (1999), “Principles for the management of credit risk”, Consultative paper issued by the
Basel Committee on Banking Supervision, Bassel.

Basel (2004). "Bank failures in mature economies", Working Paper No. 13, Basel Committee on
Banking Supervision, Basel.

Basel Committee on Banking Supervision (2006). “International convergence of capital

measurement and capital standards”, paper presented at Basel Committee on Banking
Supervision, Bank for International Settlements, Basel.

Bearing Point (2006). The Credit process. Central Bank of Iraq.

49
Bester, H. (2001). "The role of collateral in a model of debt renegotiation", Journal of Money,
Credit and Banking, 26 , 1, 72-86.
Bluhm, C., Overbeck, L & Wagner, C. (2003). Credit risk modeling, Wiley, New York, NY,

Bramble, William J. (1997) Research in education and the behavioral sciences: concepts
and methods : Brown & Benchmark Publishers.

Bryant, K. (2001). The integration of qualitative factors into expert systems for evaluating
agricultural loans, School of Information Systems and Management Science, Griffith
University, Gold Coast.

Chijoriga, M.M. (2000). "Application of credit scoring and financial distress prediction models
to commercial Banks lending: the case of Tanzania", Wirts Chaftsnnversitat Wien (WU),
Vienna

Colquitt, Joetta. 2007. Credit Risk Management: How to avoid lending disasters & maximize
earnings. 3rd Edition. McGraw-Hill. USA.

Crouhy, Michel; Galai, Dan & Mark, Robert. 2006. The Essentials of risk management.
McGraw-Hill. USA.

Das.S. & Das, S. ( 2007). Credit risk management practices –An evaluation of commercial Banks in
Bangladesh. Research Gate, 1-24. Https://www.researchgate.net/publication/228205841.

Feyisa Gurmu (2009). The trend of loan recovery performance in banking industry: A case study
of Awash International Bank S.Co. Master’s Thesis, Addis Ababa University.

Hagos, M (2010). Credit management (A Case Study of Wegagen Bank Share Company in
Tigray Region). Master’s Thesis, Mekelle University.

Heffernan, S. (2002). Modern Banking in theory and practice, Wiley, New York, NY,

History of Banking in Ethiopia. http://www.nbe.gov.et/aboutus/index.html).

50
Kasahun Ashine (2017). An assessment of credit risk management practice of Awash
International Bank. Master’s Thesis St. Mary’s University.

Kessey, K. D. (2015). Assessing credit risk management practices in the Banking industry of
Ghana: Processes and challenges. Global Journal of Management and Business Research:
C Finance, 15. 6, 1-11.

Koch, T.W & MacDonald, S.S. (2000). Bank management, The Dryden Press/Harcourt College
Publishers, Hinsdale, IL/Orlando, FL.
Lalon, R. M. (2015). Credit risk management (CRM) practices in Commercial Banks of
Bangladesh: “A Study on Basic Bank Ltd.”. International Journal of Economics, Finance
and Management Sciences, 3, 2, 78-90.
Luy, D.D.(2010). Evaluation of credit risk management policies and practices in a Vietnamese
Joint-Stock Commercial Bank’s Transaction Office. MBA Thesis, Vaasa University of
Applied Sciences.
Otieno, J. J. (2015). Credit risk management practices on loan portfolio of Barclays Bank of
Kenya. MBA Thesis, University of Nairobi.
Pasha, S. A. & Bayush Mintesinot (2017). Assessment of credit risk management system in
Ethiopian Banking. International Journal of Business and Management Invention, 6, 4 ,
98-110.

PriceWaterhouse (2001). "The credit policy of financial institutions and the factors underlying
it", paper presented at the 8th Conference of Financial Institutions, AICC, 5-7 December

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

International Journal of Economics, Finance and Management Sciences,1, 6, 382-387.

Sabeza, F. , Jaya S., & Gaurav B. (2015). Assessing credit risk management practices and
performance of Commercial Banks in Rwanda. International Journal of Social Science
and Humanities Research, 3, 1, 323-333.
Sahlemichael M. (2009) Credit risk management system of Ethiopian Commercial Banks (Case
of some public and private banks).

51
Appendices

52
Appendix-I ADDIS ABABA UNIVERSITY

SCHOOL OF GRADUATE STUDIES

MASTERS OF SIENCE

A questionnaire to be filled by employees

Dear Respondents,
I am a postgraduate student of Addis Ababa University. I am currently undertaking a research
thesis on assessment of credit risk management in Awash bank. Please recall that you are
selected as a possible participant because you are an employee of Awash bank. Your
participation in the study is completely voluntary. The research work is for academic purpose
only. Any information obtained in connection with this study will remain strictly confidential.
Your honest and true opinion will be valuable for this research. Thank you in advance for your
participation.
Abiy Moges Mobile: +251-911-86-53-65
Email: amogesm@gmail.com
Part 1: Demographic Information of the research
Instruction: Please fill the answer by putting “√” mark.
1. Gender: Male Female

2. Age in year: 18-25 26-30 31-35 36-40

41-45 >45

3. Year of service in AB: < 1year 1-3yrs 4 - 6yrs

7-9yrs >10Yrs

4. Current position: Business segment director Credit Analysis and appraisal

director R/ship Manager Credit Analyst Estimation officer
Risk & compliance officer Credit followup & management manager

5. Monthly gross salary in Birr: < 15,000 15,001-20,000 20,001-25,000

25,001-30,000 30,001-35,000 >35, 000

53
 Part 2: Questions Related to Credit Policy and Credit Risk Management Practice:

Using the scale given below, please tick √ the number in each phrase that best represents the
extent to which you agree with the given phrase. Before you start, quickly read through the
entire list to get a feel for how to rate. Remember there is no right or wrong answers, and your
honest opinion is critical to the success of this study.

5= “Strongly Agree” 4 = “Agree” 3 = “I don’t know” 2 = “Disagree” 1= “Strongly Disagree”

1. What credit collection strategies are adopted in the management of credit in Awash bank?
No Items 5 4 3 2 1
1 The bank has credit risk policy, guidelines and procedures that
explain objectives and principles of credit risk management process
2 Credit risk strategy and policies are effectively communicated
throughout the organization
3 The Bank have strategies for granting credits focus on who, how and
what should be done at the branch and corporate division levels while
assessing borrowers
4 The credit and risk policies and procedures exactly comply with
regulations of national bank
5 The practical loan processing and appraisal activities of the
department offices comply with the bank credit policy and procedures

2. What are the factors that relates to the effectiveness of credit risk management in Awash Bank?
No Items 5 4 3 2 1
1 Appropriate credit environment is established through policy and
strategies (guidelines) that clearly outline the scope and allocation of
bank credit facilities
2 An appropriate credit administration that involves monitoring process
as well as adequate control over credit is maintained
3 Top management supports to ensure that there are proper and clear
guidelines in managing credit

54
4 Reliable information is collected from prospective borrowers in
accomplishing effective screening
5 The Bank has high quality staff with required depth of knowledge
6 All credit risk management guidelines are properly communicated
throughout the organization and everybody involved in credit risk
management understands them
7 Supportive technologies and equipment are utilized in credit analysis,
monitoring and control to make the task easy and to keep track on trend
of credits within the portfolio

3. How was the credit procedure of the Bank helping in reducing the NPL status loans?

No Items 5 4 3 2 1
1 The NPL percentage of the bank’s credit is increasing time to time.
2 Lack of continuous follow up and proper risk assessment is the main
cause of NPL %age increment
3 Mistake on estimation of collateral and evaluating the borrower’s
financial report is another cause of NPL %age increment
4 Current political and contagious diseases (i.e. Covid-19) are the main
factors for NPL increment
5 The bank’s procedure was effective in reducing the NPL status
6 Reviewing and amendment of the bank’s procedure is not necessary
for NPL related issues

4. What kind of mechanisms used by the bank for credit risk measuring and monitoring?

No Items 5 4 3 2 1
1 The bank frequently contact with borrowers
2 The bank creates an environment that it can be seen as a solver of
problems and trusted advisor
3 The bank monitors the flow of borrower’s business through the

55
 bank’s account
4 The bank regularly reviews borrowers reports as well as an onsite
visit
5 The bank develops the culture of being supportive to borrowers
wherever they are recognized to be in difficulties and are striving to
deal with the situation
6 The bank updates borrowers credit files and periodically review the
borrowers rating assigned at the time the credit was granted

Thank you for your cooperation!

56