EFFECT OF LOAN COLLECTION MANAGEMENT ON FINANCIAL PERFORMANCE ON

CASE COMMERCIAL BANK OF ETHIOPIA

DIRE DAWA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
A RESEARCH PROPOSAL SUBMITTED TO DIRE DAWA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS DEPARTMENT OF
ACCOUNTING AND FINANCE IN PARTIAL FULFILLMENT OF
THE( BA) DEGREE IN ACCOUNTING AND FINANCE
PREPARED BY:
1.Amin Ahmed
2.Betelhem Getnet
3.Mekdelawit kassahun
ADVISOR: MR. Tilahun October, 2023 DIRE DAWA, ETHIOPIA
 CHAPTER TWO: REVIEW OF RELATED LITRATURE

a. Introduction
Financial institutions; especially, like developmental bank gives access to financial and non- financial
services to investment and economic development, who wish to access money for starting or
developing an investment generation activity. The individual loans and savings of the clients are so
significant. Developmental bank came into being from the appreciation of investment and some clients
can repay both the principal and interest, on time and also make savings, provided financial services are
tailored to suit their needs but some of the cannot; so the institution should make its efforts to collect
the loan it provided and make its best performance on loan collection. Bank as a discipline has created
financial products and services that together have enabled people to become clients of a banking
intermediary.

b. Definition of Key terms

Collection fees: - A fee (or charge) that a debt collector adds to the amount it attempts to collect from a
consumer. The fee must be authorized by an agreement or permitted by law.

Credit: - The ability of a consumer to borrow money with the promise to repay it, plus any interest and
fees, at a later date. As examples, credit includes loans and credit cards.

Credit Bureaus(also Credit Reporting Agencies, Consumer Reporting Agencies) Private companies
that collect and share consumer credit information and make it available on credit reports.

Creditor (also Original Creditor): A person, company, or entity to whom the debt is claimed to be
owed. The original creditor is the person or business that provided the original service, product, or
credit that is the source of a debt collection attempt.

Credit Report: - A record of a consumer’s credit history, as reported by creditors and other sources,
including: employment; addresses; credit inquiries; credit cards and loans; accounts; liens; wage
garnishments; and other data.

Debt collector (also Collector, Debt Collection Agency): A private company or person— including a
debt collection attorney or law firm—that attempts to collect personal or household debt from New
York City residents. The debt collector may:

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 1 own the debt (purchased from a creditor) and collect for itself; OR
2 Be hired by a creditor or other company to assist in collecting the debt.
Debt settlement or payment plan: - An agreement by the debt collector to accept from the consumer
an amount less than the originally claimed balance either as a payment in full or as scheduled partial
payments
Debtor: - A consumer who owes or is claimed to owe money to a creditor.
Default (also defaulting on a debt)Failure to meet the repayment obligations on a debt.
A default can occur when a consumer:
3 is unable to make timely payments;
4 misses payments; or
5 avoids or stops making payments
Dispute a debt (also Contest a debt): Consumers who do not recognize a debt or do not agree that
they owe the amount of debt claimed may contest all or part of the debt verbally and/or in writing.

Misrepresentation: - The use of false, deceptive, or misleading practices in debt collection.

Debt collectors may not make misrepresentations to consumers, including:
6 falsely representing or implying that the debt collector is an attorney, legal office,
government agency, marshal, or sheriff;

7 falsely representing or implying that the consumer committed a crime, or that

nonpayment of any debt will result in the consumer’s arrest or imprisonment or the
seizure, garnishment, attachment, or sale of the consumer’s property or wages unless the
action is lawful and the debt collector or creditor intends to pursue (source google)

2.3. Definitions and Concepts of Loan

Loan is any financial asset of bank arising from a direct or indirect advance or commitment to advance
funds by bank to a person that are conditioned on obligation of the person to repay the funds either on
specific date or date on demand, usually with interest (National bank of Ethiopia, 2008).

Loans are some provisions will be made for repayment of the principal (the original loan amount).
Loan might be repaid in equal installments or single lump sum (Jordan, 2000).

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Loan is the sale of goods, services and money claims in the present in exchange for a promise to pay in
the future. That means the debtor and the creditor agrees to settle their transactions. In respect of bank’s
meaning: credit means lending or granting money to those who are in need of it (investors) who fulfill
the bank’s requirements. It is a liability for the individual or corporation received it but an investment
comparable to bond, stock or other asset. For each borrower a loan is adept, an obligation to repay the
borrower money plus interest (Mishkin, 2003).

We live in a world of credit. Every day in every way we become more and more involved in various
aspects of this credit world. Credit contributes to the development of the country and to high standard
of living. The major participants in the credit world are banks. This is because most credits directly
or indirectly originated from financial institutions, and credit granting is one of the major activates of
banks. It is through this credit granting activates that they made up large portion of their earnings
(Bilihatu, 2007).

2.4. Types of Loans Made By Bank

A.Real estate loan; which are secured by a real reporting, land, building and other structure and
including short term loans constructions and land development and long term loans to finance the
purchase of farm lands, homes, apartments, commercial structures and foreign properties?

B. Financial institutions loans: including credit to banks, insurance companies, financial

companies and other financial institutions.

C. Agricultural loans: extended to farms and ranch operations to assess it in planning and
harvesting crops and to support the feeding and care of livestock.

D. Commercial and industrial: granted to the business to cover such expenses as purchasing
inventory, paying taxes and meeting payrolls.

E. loans to industrials: including credit to finance to the purchase of automobiles, homes,

appliances and other retail goods to repair and modernized homes, cover the cost of medical care
and other personal expenses with extended to directly to individuals or indirectly through retail
dealers.

F. Miscellaneous loans: which included all these loans reclassified above including securities

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 loans?

G. Loans financing receivables: when the bank buys equipment or vehicles and lease terms to
its customer [Peter, et.al. 2008].

2.5. The Business of Banking

Banks are financial institutions that accept deposits and make loans. Banks serve as intermediaries by
transferring fund from those with surplus to those who have productive need for them. For instance,
person who needs a loan to buy house or car usually obtain it from bank.

 Lending Procedures

 The Principle of Lending

Bank Lending policy is a statement of its philosophy, standards, and guidelines that its employees must
observe in granting or refusing a loan request. These policies determine which retail or corporate clients
will the bank approve for loans and which will be avoided, and must be based on the bank lending laws
and regulations (owino,2012). Lending must be designed in such a way that it could be a total benefit to
all different interest group of the bank, which includes the shareholders, depositors and the borrowers
(Owino, Michael Otieno, 2012).

Lending money is easy, it is ensuring that loan are repaid that skill is required when asked to make a
loan, the first concern of a bank will be to extract as much information as possible about the proposition
so as to be able assess the probability of repayment. Some loans will become bad debts and cannot be
recovered but this should never happen as the result a risk which could have been foreseen from the
outset. In coming to a decision you must check how well the proposition measures up to a number of
criteria. Some of the questions to be asked are vital other less so but all help the lending officer to
obtain an overall view of the proposals (Bilihatu, et al,, 2007).

In one sense these criteria can be looked on as a series of hurdles. Which would be borrowers must
clear; they fail to completely satisfy the bank on one of the important principles than the application
will probably not be pursued all the way through the rest of the decision-making process. On the other
hand, it has to recognize that few proposals for advance are perfectly satisfactory in all respects. In most
cases the baker must use skill judgment and experience in balancing the good points and the bank
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points of the proposition to judge the probability of the outcome (Bilihatu, et al,, 2007).

Each bank should immediately undertake a sample of the information and data sought for examination
of loan proposal from clients in the priority sectors for ascertain whether the demands made by the
bank are excessive and or unrealistic, with a view to initiating corrective action. Banks must enjoy on
their operating start to call for information data for examination of loan applications, as far as possible
in two or more installments (Bilihatu, et al,, 2007).

 Credit Worthiness of Customer

The most popular methods of analyzing customer worthiness (ability to repay loans) also known as 5c
are;

Character: the loan officer must be convinced that the customer has well defined purpose for
requesting credit and serious intention to repay. The loan officer must determine the borrower has
responsible, truthfulness, serious purpose and serious intention to repay owed make up.

Capacity: the loan officer must be sure that the customer has authority to request a loan and the legal
standing to sign a binding loan agreement.

Capital: does the borrower have ability to generate enough cash, in the form of cash flows to repay the
loan?

Collateral: assuring the collateral aspects of a loan request, the loan officer must ask and does the
borrower process adequate net worth or own enough quality assets to provide adequate support for the
loan? The loan officer must assess: the age, condition and degree of specialization of the borrower
assets.

Condition: the loan officer and credit analysis must be aware to recent trends the borrowers line of
industry and how changing economy condition may affect the loan (J. brand ford Delong, 2002).

 Nonperforming Loans (NPLs)

There is no common definition of nonperforming loans (NPLs) in the whole country since it is
recognized that it is possible that what is appropriate in one country may not be so in another. There is,
however, some common opinion on this issue. Accordingly the IMF’s Compilation Guide on Financial
Soundness Indicators, NPLs is defined as: “A loan is nonperforming when payments of interest and/or

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principal are past due by 90 days or more, or interest payments equal to 90 days or more have been
capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue, but there
are other good reasons such as a debtor filing for bankruptcy to doubt that payments will be made in
full" (IMF, 2005).

Generally, NPLs are loans that are outstanding both in its principal and interest for a long period of
time contrary to the terms and conditions under the loan contract. Any loan facility that is not up to date
in terms of payment of principal and interest contrary to the terms of the loan agreement is NPLs. Thus,
the amount of nonperforming loan measures the quality of bank assets (Tseganesh, 2012).

 Loan Collection Procedure

Efforts made by an Institution to collect loan from its loaner is an important element in reducing loan
default and is defined as an effort made by an institution to collect past due accounts (Rodrigo A. C
and Claudio G., 2016). This may result to a loss on goodwill between microfinance and the
individual borrower (Cole, Harold L. & Kehoe, Patrick J. 2007) as it includes, attaching the property of
the defaulter or group members who are guarantors and as this study found out involves hounding the
property to force repayment including the children of the defaulter (Rhyne & Elisabeth, 2008).

A Policy on collection procedures is therefore of essence because some clients do not pay the
repayments are not in continuum with all borrowers, hence they are aimed at accelerating collections
from slower payers to avoid bad debts in one hand and acceleration of Prompt payments on the other
hand (Bloem, M. A & Gorter N.C, 1995) while care must be taken to avoid severing the relationship
between the microfinance and its permanent customers, rest they move to more friendly MFI’s , who
are their competitors in the market (Eric B, 2006).

1. Loan Collection Procedures

The loan recovery procedures employed by various micro finances will contribute to loans default to a
greatest extent. Poor loan recovery procedures for example will create a huge portfolio of debt
uncollected thus lending to loan defaults and vice versa. Most Women Groups affiliated to MFI’s in
question have adopted a joint loan liability model also referred to as Grameen loan model where
members pay their loans on a weekly basis regardless of the profits made in their micro enterprises.
This study attempts an investigation to find out how the weekly collection procedures affect loan
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default under the area of study.

A collection procedure is a detailed statement of steps to be taken regarding when and how the past due
amounts of a debt is to be collected. Each company has its own collection procedure, with information
such as due dates, grace periods, penalties, date of repossession, date of turnover of delinquent account
to collection agency, among others. The collection procedure for any loan arrangement should be
spelled out as part of the loan terms. It is important for borrowers to be aware of the details of the
collection procedure so as to avoid penalties, and in the case of collateral or secured loans, repossession
of the collateral. While collection procedures may vary for each company they should all be complaint
with existing laws. Third party collection agencies must also adhere to set Acts, not just in the
collection procedure details but also the manner in which the collection takes place (Latifee, 2006). The
Acts specifies not only collection procedures to be followed by government financial institutions, but
also specifies that a person or organization indebted to the United States, against whom a judgment lien
has been filed, is ineligible to receive a government grant. What this means is that it is of utmost
importance to comply with the debt collection act, especially since non-compliance carries with
penalties that can range from steep fines to imprisonment. If microfinance institutions do not come up
with well administered collection procedures then this could be a recipe for one defaulting to repay the
loan (Christian A& Neville J., 2008).

 Five Strategies to Improve Loan collection

 Monitor Customers Behavior

Data-driven customer process is essential to better understand your customer behavior and map
customer journey. The process of aggregating data across all lines of business including structured and
unstructured data can provide a holistic customer view while eliminating the data silos issue. This
process enables the debt collectors to identify the key characteristics of defaulters and trends and
patterns of the debtors with potential high default risk.

 Leveraging on Alternative Data

Alternative data is critical to create a successful collection process by improving the data quality before
moving to the next collection step because inaccurate and outdated data does not serve the purpose to

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achieve high collection efficiency. All internal data include structured and unstructured data across all
departments and the online data sources especially those that provide indications of actual & current
situations should be utilized to enhance analytics results. The impact of external factors shouldn’t be
neglected too since it could directly affect the debtor’s or customer’s behavior. Therefore, external data
such as market trends, gaps and risks should be included when performing big data analytics and
predictive analytics. Artificial Intelligence must be embedded in this process to achieve nearly-real time
data aggregation to enhance business insights and improve the accuracy of prediction for a more
effective collection process.

 Early warning through Dynamic Models

Ruled based approach is the typical approach for most of the debt collectors in indicating the debtor’s
ability to pay and the data is largely static. This approach is no longer effective enough to provide on-
time insights to the lenders especially in this fast-changing era because it is a lagging indicator
that is not able to capture the latest change in trend and patterns of debtor’s credit risk. A dynamic
collection propensity scoring model is a leading indicator that improves indication accuracy by
including both static and dynamic data. Advanced technologies like AI and machine learning are
employed in the dynamic model to classified debtors into various segments in nearly real-time for
downstream processes and integrate with an early warning system to quickly alert and identify red flags
for proactive outreach plans.

 Provide Mediation Recommendation

The traditional approach is no longer effective enough to drive repayment action since one
debtor may hold more than one debt and not all of them may care about the delinquency consequences
especially when they are under financial pressure due to an economic downturn. Thus, providing a
mediation recommendation to the potential default debtors could result in a win-win situation if the
organizations policies permit. A targeted mediation plan based on the latest situations of the debtors
(such as reduce income short term) and powered by AI recommendations such as extending the
payment period and lowering the monthly payment could encourage the defaulters to pay your debt
first among the rest of the debts which reduce your non-performing loan and delinquencies rate.

 Leveraging Behavioral Science throughout the Process

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All applications are made for humans, either for internal employees, consumers, or other third- party
entities. Thus, understanding human behavior based on your data allows you to understand the
underlying behaviors of the debtors first before tailoring the approaches accordingly.
Behavioural Science methodologies can be embedded into analytics for effective segmenting the
debtors and customers so that you can select the right approach to the right debtors at the right time.
People react to a choice depending on how it is presented. By apply behavioral science in the system,
you are able to create great design personalized messages and channels to elicit positive responses from
the debtors. A government tax department added one sentence in the tax notice based on the behavioral
recommendation and it resulted in 66% more tax collection.( www.kowman com/resources/blogs).

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 The Future of Bank Loan Collection
The collection process is no longer as simple as previously because the number of debtors will not be
reducing in time and the debtor’s behavior will differ as to the previous generation. How can you
ensure the debtor will pay you first and how can you optimize your resources to improve collection
efficiencies? Here’s your solution: The enhanced approach with the above 5 strategies will not only
help your organization to survive an unexpected event but also allow you to achieve your desire
outcome with high debt collection efficiency.

 Traditional collection process

Loan collection is usually a process which is highly regulated. As the creditor wants to get back the
loan with its interest, they usually offer the loan with either a mortgage or a guarantor to back the
debtor. The debtor enters into a legal agreement with the lender to repay the loan by a particular time
and date.

This is monitored by both the creditor and the rating agencies to track how prompt a debtor is in
repaying the loan. This is used to calculate the credit score of a debtor for future loans.

Generally, the method to collect a loan follows the steps given below:

 Collect the money coinciding with the arrival of the debtor’s income cycle

 Maintain a systematic follow-up on how the customer can handle the repayment

 If the customer shows discrepancies in one or two installments, reach out to the customer
to find out the cause.

 If the customer is prompt, preserve goodwill and promote more offers to him.

When it comes to collecting back the loan, banks usually two methods of collection. As loans are paid
back to EMIs, the banks do not intervene or disturb a customer if the payment is prompt and on time.
They maintain a cordial relation with the debtor and accord them with further credit proposals if the
client exhibits discipline in the repayment process.

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However, not all debtors can pay back on time. Owing to various reasons, they may default on the
payment of their owed capital. Such defaulters are usually provided with several opportunities to pay
back their owed sum.
Credit assessment – Manual checking on each applicant’s credit behavior with own credit risk scoring
system or external party’s credit bureaus. Approve low-risk applicants and decline high-risk applicants.
Require more credit assessment on medium risk applicants.

1 Customer’s loan approved or accepted as a customer and start payment journey

2 Organizations collect payment

3 Detect late payment and gather to the collection database

4 Follow up with default customers – Pass the defaulters’ data to desk collector to proceed with
follow up, hire field collector to follow up more defaulters (usually applicable to banking
sectors.)

5 Debt Recovery – if the debt continues to go unpaid, the lender will hire a third party which is
known as a collection service to focus on collecting the debt and report delinquency if the
debtors or customers remain unpaid (Cole, Harold L. & Kehoe, Patrick J. 2007).

 Problems in Traditional Loan Collection/ Recovery

Debt collection process is increasingly focused upon by regulators and is heavily scrutinized by
regulatory bodies who have laid down several stipulations for traders to follow.

Since the current debt collection systems involve several legally mandated processes and involve
multiple layers of handling, they involve a huge amount of manpower to maintain records and involve
several repetitive functions with very little integration between them.

Debt collection agencies do not segment the customers efficiently. As these processes have been
handed down for decades, the processes do not account for the change in the mindset of creditors and
their earning patterns.

Segmentation of customers based on their income bracket is still inefficient. Collection agencies do not
dedicate resources to analyze a customer and his income bucket. They have a broad category where

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they tend to bring all defaulters under the same umbrella.
Some defaulters are capable of paying back their loans if they are motivated appropriately and offered
extended assistance. Since collectors are not provided with appropriate tools to accurately analyze
borrowers, they are unable to provide flexible payment arrangements.

Collectors currently do not have right tools at their disposal to maintain borrowers as customers. There
has been a lack of a consolidated borrower-centric approach, and the system makes it increasingly
difficult for debtors to get out of the interest trap. The current system does not allow collectors to recover
piecemeal segments of the owed money from customers.

 Time-consuming and insufficient workforce – manual credit assessment is time-

consuming and it may cause erroneous during the approval process due to human error;
manual collection process that purely relies on human resources to monitor and track
debtors’ payment and follow up all the debtors may experience insufficient workforce
when there is an unexpected increase in defaulters.

 One-size-fits-all communication methods - not all defaulters have the same profile,
background & behavior, thus a cookie-cutter approach that often adopted by lenders may
not bring significant effect.

 Inappropriate tones and actions – the debtors may feel threatened by the desk
collectors or field collectors with the harass typed calls and messages at an inconvenient
time.

 Customer’s inability to pay – continue to harass the debtors persistently by mass calling
or texting instead of coming up with a guided solution to lead the debtors who are in
financial difficulties will not encourage the debtors or customers to pay on time.(from
bank past performance transaction history)

 Evaluating the Effect of Credit Collection Policy

Credit management is an important activity that cannot be overlooked by any financial institution
irrespective of its business nature. It is the process of controlling and collecting payments from
customers for the service rendered to them. Credit management can be seen as the methods and
strategies employed by a firm to maintain an optimal level of credit (Myers and Brealey, 2003). Good
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credit management will help reduce the amount of capital tied up with debtors and minimize your
exposure to bad debts.
Credit management refers to the process of lending starting from inquiring potential borrowers up to
recovering the amount granted. In the banking industry, credit management involves accepting
applications, client appraisal, loan approval, monitoring, and recovering of these loans Credit
management is vital for any entity dealing with the grating of loans since it is impossible to have a zero
credit or default risk. Nelson (2002) opined that credit management deals with the way an entity
manages its credit sales effectively and efficiently. A weak credit management system automatically
leads to business failure. Charles (2009). Stressed the importance of credit management as follows;
Credit management process deserves special emphasis because proper credit management greatly
influences the success or failure of financial institutions; therefore, the need to employ proper credit
policies and procedures that enhance the performance of credit management and protect the banking
industry from failure. According to Hettihewa (2007). Credit Management is important as granting
credit is considered to be equivalent to investing in a customer. However, payment of debts should not
be delayed because bad debts are a cost to a firm as credit management is concerned with managing
debtors and financing debts.

3.6.1.1 Collection Policy and Portfolio Quality of Microfinance Banks

An effective collection policy strategy begins with a spelled out credit policy and credit management
tools for enforcing the policy. Success comes from the overall performance of the whole credit value
chain. Collection policies within financial institutions can make the difference between a good and
excellent performance for the bank, through making use of opportunities to make the collection
processes strategically effective, operationally efficient, and customer-oriented (Benveniste, 2003). A
debt collection policy can be defined as a legitimate and necessary business activity where creditors
and collectors are able to take reasonable steps to secure payment from customers who are legally
bound to pay or repay the money they owe (Kitua, 2002). Once a loan or credit agreement has been
finalized and paid out to a customer, the next phase of the credit provider’s task will start. The credit
agreement has to be actively managed over its life cycle up to the payment dates when customers are
expected to fully pay their debt. However, as a result of various reasons the payment agreement may
not usually be honored as anticipated, this could lead to late repayment (Benveniste, 2003). A sound
collection policy is paramount because some clients are slow payers while some do not pay at all.

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Collection efforts should therefore be aimed at accelerating collections from slow and non-payers
in order to reduce bad debt and for the bank to have enough funds to meet up with its customer's
demands.

Portfolio quality deals with how well or how best a microfinance institution can protect this portfolio
(loans) against all forms of risk. Portfolio Quality entails the total fund available for the MFIs to use as
loans to satisfy a client. The availability of funds by MFIs depends largely on the collection policy; if
the collection policy is effective and properly applied the portfolio quality automatically increases
likewise the customers’ satisfaction, on the other hand, overdue payment will have a negative impact on
the credit provider’s financial performance, since cash flow targets cannot be met and collection cost
increases. Risk is also indicated by overdue payments, taking into account that overdue payment may
become payment that cannot be collected and inevitably resulting in losses and bad debt. As a result of
all these negative consequences, the collection of overdue accounts is extremely important to any credit
provider (Harvey, 2005) Weak collection policy could mean poor asset quality while a sound collection
policy ensures high asset quality. The management's ability to recover loans disbursed to its client's
results to fat loan portfolio, with effective measures put in place by MFIs to ensure the full recovery of
loans, banks will record-high profit.

The loan portfolio is not only considered as the largest asset or pre-dominant source to generate
revenue but one of the biggest risk sources for the financial institution’s soundness and safety as well
(Richard, Chijioriga, Kaijage, Perterson and Bohman 2008). Hence, credit risk management is
considered to be one of the road maps for soundness and safety of the sector through prudent actions as
well as monitoring performance

3.6.1.2 Credit Management

The credit management process begins with assessing the creditworthiness of the customer and his or
her business viability. Nduta (2013) stressed that the first step in limiting credit risk involves screening
clients to ensure that they have the willingness and ability to repay a loan. This is very important if the
company chooses to extend some type of credit line or revolving credit to certain customers. Hence,
some specific criteria are established to ensure that the customer or client is qualifying for that credit.
The credit management process involves certain factors or elements used to evaluate the customer for
any form of financial services. 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 and
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collateral value. Hagos(2010). Sound credit management seeks to protect both the customers involved
and the bank extending the credit from possible losses.

When the process of credit management functions effectively, everyone involves benefits from that and
the chance of default is defeated. . Financial institutions should have a reasonable assurance that loans
granted to a client will be paid back within the agreed terms. This can only be possible with the help of
an effective credit policy. Credit policy can be seen as those decision variables that influence the
amount of credit given out to customers. The formulation of the policy is the responsibility of the bank
directors and management. The credit policy of any bank can be lenient or stringent depending on its
approach; Lenient Credit Policy: Banks operating a Lenient credit policy tend to give credit facilities to
customers very liberally that credit is granted even to those customers whose creditworthiness is not
known or is doubtful. Stringent Credit Policy: These are banks that are very selective in extending
credit or loans. They offer credit facilities to their customers who have proven creditworthiness. The
banks with stringent policies follow tight credit standards and terms and as a result, minimize cost, risk,
and chances of bad debts and also, the problem of liquidity.

3.6.1.3 Credit Management Variables

Sound credit management has the same certain key variables which the customers must meet before
receiving the proposed credit arrangement. These are; client appraisal, credit terms, Credit Risk
Control, and Collection Policy.

3.6.1.4 Collection Policy

The collection effort should therefore aim at accelerating collections from slow payers and reducing
bad debt losses (Kariuki, 2010). Micro Finance Institutions can develop policies to ensure that credit
management is carried out effectively since some of the customers are slow payers while others are
non-payers.

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o Empirical Review
According to Abigail (2012), in his study on the effectiveness of credit risk management on
financial institutions in Ghana illustrated that, Credit Risk Management is a management task
that generates chances for financial institutions to minimize bad debt provisions and loan
collection performance as well as credit risk. It was realized from the study that for financial
institutions to prevent credit risk, key methods and policies should be followed in order to attain
effective management practice. From the researcher findings, it was concluded that credit risk
management is effective because there was reduction of credit default rate, increase in cash flow,
increase in portfolio growth and a reduction of loan collection performance. (Schreiner, 2001))
used Australian banks data over 1990-2001 to investigate macro-economic determinants of non-
performing loan s using simple regression analysis on real GDP, CPI, industrial production,
money growth, stock market indices, interest rates and other macroeconomic variables as
explanatory variables. Stock market indices, interest rates, industrial production and business
confidence index strongly influenced the quality of loan s.
Schreiner, (2001) investigated the performance of Ethiopian MFI by using Micro banking
bulletin (MBB) benchmarks. In the study a sample of 16 MFIs utilized from year 2001 to 2007.
For the data analysis he has used sample t test, one way ANOVA and Pearson correlation
coefficient. The result of the study conclude that the Ethiopian MFI in general has poor
performance in properly using of debt capacity, depth of outreach, ratio of GLP to asset and they
allocate lower proportion of their asset into loan s. Whereas, most s are good in breadth of
outreach, efficiency and productivity and cost management. From the computation of correlation
he found a positive association between serving the poor and operationally self-sufficiency.
Indeed, he explained that the age of the s positively related with efficiency, productivity and the
use of debt financing.

Literature summery
The file contains information about different types of loans, including short-term loans, financial
institution loans, agricultural loans, commercial and industrial loans, loans to individuals, and
miscellaneous loans. It also discusses credit bureaus, credit reports, debt collectors, and
nonperforming loans. The file highlights the importance of collection procedures, borrower
assessment, and the challenges faced by collectors. It suggests leveraging behavioral science and
bank recommendations to improve loan repayment rates. Overall, the file provides insights into
the loan industry and strategies for managing loans effectively.
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