ASSESSMENT OF CREDIT MANAGEMENT IN MICRO

FINANCE INSTITUTION (IN CASE OF SPECIALIZED

FINANCIAL AND PROMOTIONAL INSTITUTION IN ADAMA
BRANCH)

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF

ACCOUNTING AND FINANCE IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR BA DEGREE IN ACCOUNTING

PREPARED BY

ADVISOR: Ketema G. (MSc)

RIFT VALLEY UNIVERSITY

FACULTY OF BUSINESS AND SOCIAL SCIENCE
DEPARTMENT OF ACCOUNTING AND FINANCE

APRIL, 2024
ADAMA, ETHIOPIA

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 Contents
TABLE OF FIGURE.................................................................................................................................. III
ABSTRACT............................................................................................................................................... IV
CHAPTER ONE.......................................................................................................................................... 1
1. INTRODUCTION................................................................................................................................... 1
1.1. BACKGROUND OF THE STUDY.....................................................................................................................1
1.2. STATEMENT OF THE PROBLEM....................................................................................................................4
1.3. OBJECTIVES OF THE STUDY........................................................................................................................6
1.3.1. General Objective..............................................................................................................................6
1.3.2. Specific Objectives.............................................................................................................................6
1.4. RESEARCH QUESTION.................................................................................................................................6
1.5. SCOPE OF THE STUDY.................................................................................................................................7
1.6. SIGNIFICANCE OF THE STUDY.....................................................................................................................7
1.7. LIMITATION OF THE STUDY........................................................................................................................9
1.8. ORGANIZATION OF THE STUDY...................................................................................................................9
CHAPTER TWO....................................................................................................................................... 10
2. LITERATURE REVIEW...................................................................................................................... 10
2.1. INTRODUCTION.........................................................................................................................................10
2.2. THEORETICAL LITERATURE REVIEW.........................................................................................................11
2.2.1. The Emergence of Micro Finance....................................................................................................12
2.2.2. Objectives of Micro Finance Institution...........................................................................................12
2.2.3. Micro Finance Service Being Provided............................................................................................13
2.2.4. Credit & Its Role in Financing Micro-Enterprises...........................................................................14
Definition of Credit....................................................................................................................................14
2.3. MICRO-FINANCE IN ETHIOPIA..................................................................................................................16
2.3.1. The Policy and Regulatory Practices of Micro-Finance in Ethiopia................................................16
2.3.2. Characteristics of Micro-Enterprises...............................................................................................16
2.3.3. Terms and Conditions for Micro-Enterprise Loan...........................................................................17
2.4. CREDIT MANAGEMENT AND CONTROL SYSTEM.......................................................................................17
2.4.1. Group Based Lending......................................................................................................................18
2.5. INTRODUCTION TO CREDIT MANAGEMENT..............................................................................................18
2.6. SECURITIES FOR LENDING........................................................................................................................20
2.7. EMPIRICAL REVIEW..................................................................................................................................21
2.7.1. Enhancing Risk Assessment Practices................................................................................................21
2.7.2. Enhancing Loan Recovery Strategies..............................................................................................23
2.7.3. Impact of Client Satisfaction on Overall Effectiveness.....................................................................24
2.8. CONCLUSION............................................................................................................................................26
CHAPTER THREE................................................................................................................................... 27
3.RESEARCH METHODOLOGY............................................................................................................ 27
3.1. INTRODUCTION.........................................................................................................................................27
3.2.RESEARCH TYPE AND DESIGN...................................................................................................................27
3.3. DATA TYPE AND DATA SOURCE..............................................................................................................28
3.4. TARGET POPULATION...............................................................................................................................29
3.5. SAMPLE AND SAMPLING TECHNIQUES......................................................................................................29
3.6. RESEARCH INSTRUMENT..........................................................................................................................30
3.7. DATA COLLECTION PROCEDURE..............................................................................................................30
3.8.DATA ANALYSIS TECHNIQUES..................................................................................................................31
3.9. ETHICAL CONSIDERATION........................................................................................................................32

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CHAPTER 4.............................................................................................................................................. 33
4.1. BUDGET AND PLAN OF ACTION.................................................................................................................33
4.1.1. Plan of action...................................................................................................................................33
4.1.2. Budget..............................................................................................................................................35
Reference............................................................................................................................................................ 39

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 Table of figure
Table 1:Plan of action............................................................................................................ 33
Table 2:Budget....................................................................................................................... 35

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 Abstract
This research proposal explores the assessment and enhancement of credit management
practices within specialized financial and promotional institutions operating in the Adama
Branch of microfinance institutions. The context arises from the necessity to address
challenges in credit management, including risk assessment, loan recovery, and client
satisfaction, in order to improve financial sustainability and effectiveness. The objective of
the study is to evaluate current practices, develop targeted strategies, and assess their impact
on improving credit management within the Adama Branch.

The research will employ a mixed-methods approach, combining both quantitative and
qualitative data collection methods. Questionnaires will be used to gather quantitative data
from staff members, while interviews will be conducted with management personnel to
obtain qualitative insights. Data analysis will involve coding and categorizing responses,
followed by statistical analysis using the Statistical Package for the Social Sciences (SPSS).

Expected results include insights into current credit management practices, identification of
key challenges, and the development of targeted strategies to address these challenges. The
significance of this research lies in its potential to contribute to the improvement of credit
management practices within microfinance institutions, thereby enhancing their financial
sustainability and ability to serve marginalized communities effectively. By addressing these
challenges, the research aims to foster economic development and empowerment at the
grassroots level.

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 CHAPTER ONE
1. INTRODUCTION
1.1. Background of the study

The concept of credit, with its ancient roots, saw a gradual evolution towards widespread
adoption and appreciation over time. Post-World War II, Europe experienced a notable surge
in credit usage, a phenomenon that later spread to Africa, as noted by researchers such as
Kiiru (2004). In the United States, early credit practices were hindered by high interest rates,
diminishing its appeal to many borrowers. However, a significant turning point emerged
during the economic boom of 1885, when banks, awash with excess liquidity, eagerly sought
to lend surplus funds, thus marking the advent of credit as a widely embraced financial tool,
as outlined by Ditcher (2003).

In Africa, credit practices underwent significant changes, particularly in the 1950s when
banks across several African nations started setting up credit sections and departments,
primarily to extend loans to white settlers and other privileged groups (African credit
practices in the mid-20th century, Source not specified). Notably, access to credit was
initially limited for the poor; however, this gradually shifted with the emergence of
microfinance institutions, which aimed at promoting financial inclusion and catering to
marginalized communities. Despite ongoing efforts to assess borrowers' repayment
capabilities, challenges such as loan defaults persisted, highlighting the necessity for
interventions, as highlighted by Modurch (1999).

Microfinance institutions (MFIs) serve as pivotal entities in delivering financial services to

low-income individuals and small enterprises, offering a spectrum of products including
microloans and savings accounts ( Bridges & Disney, 2004). Their mission revolves around
empowering marginalized communities and stimulating economic development. Within the
framework of their operations, credit management emerges as a critical facet, integral to
ensuring sustainable lending practices and minimizing financial risks. Effective credit
management encompasses various strategies, including thorough assessment of borrowers'
creditworthiness, prudent loan disbursement processes, and proactive measures to mitigate
default risks ( Bridges & Disney, 2004). By implementing robust credit management

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practices, MFIs not only enhance their operational efficiency but also uphold their social
mission of fostering financial inclusion and empowerment among underserved populations.

Credit management is a multifaceted domain encompassing diverse processes revolving

around lending, risk assessment, and recovery within microfinance institutions (MFIs). Its
effectiveness is pivotal for maintaining a robust loan portfolio while curbing default rates
(Brugiavini et al.,1994). This entails comprehensive evaluations of borrowers'
creditworthiness, judicious setting of interest rates, and vigilant monitoring of repayment
behaviors. Through meticulous credit management practices, MFIs not only bolster their
financial sustainability but also fulfill their broader mission of promoting financial inclusion
and empowerment within marginalized communities (Brugiavini et al.,1994).

A key requirement for effective credit management is the ability to intelligently and
efficiently manage customer credit lines. In order to minimize exposure to bad debt, over-
reserving and bankruptcies, companies must have greater insight into customer financial
strength, credit score history and changing payment patterns (Calder and Lendol,1999). The
ability to penetrate new markets and customers hinges on the ability to quickly and easily
make well-informed credit decisions and set appropriate lines of credit. Credit management
starts with the sale and does not stop until the full and final payment has been received
(Calder and Lendol,1999). It is as important as part of the deal as closing the sale. In fact, a
sale is technically not a sale until the money has been collected. It may be difficult to
establish an optimal credit policy as the best combination of the variables of credit policy is
quite difficult to obtain. A firm will change one or two variables at a time and observe the
effect. It should be noted that the firm’s credit policy is greatly influenced by economic
conditions (Pandey, 2008). As economic conditions change, the credit policy of the firm may
also change.

Microfinance Institutions and other finance institutions must develop a credit policy to
govern their credit management operations (Pandey, 2008) and since microfinance
institutions generate their revenue from credit extended to low-income individuals in the form
of interest charged on the funds granted (Central Bank Annual Report, 2010) the loan
repayments may be uncertain.

The success of lending out credit depends on the methodology applied to evaluate and to
award the credit (Ditcher, 2003) and therefore the credit decision should be based on a
thorough evaluation of the risk conditions of the lending and the characteristics of the
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borrower. Numerous approaches have been developed in client appraisal process by financial
institutions. They range from relatively simple methods, such as the use of subjective or
informal approaches, to fairly complex ones, such as the use of computerized simulation
models (Horne, 2007). Many lending decisions by Microfinance institutions are frequently
based on their subjective feelings about the risk in relation to expected repayment by the
borrower. Microfinance institutions commonly use this approach because it is both simple
and inexpensive.

According to proclamation (No. 40/1996) of the Federal Government of Ethiopia, Micro

Finance business means an activity of extending credit, in cash or in kind, to peasant, farmers
or urban small entrepreneurs, of loan size of what shall be fixed by the National Bank. Micro
Finance institution was first started in 1980's by professor Mohammed Yenus in Bangladesh.
He led the way with pilot group lending scheme for the landless people. Finally, this becomes
a Grameen Bank which is now used as a model for many countries in the world (Horne,
2007).

Upon returning to our Mother Land Ethiopia, the government demonstrated a profound
appreciation and backing for microfinance institutions from their inception. In a strategic
move aimed at fostering poverty alleviation and rural development, the country's five-year
action plan, commencing from the year 1992 E.C., incorporated Microfinance services as an
integral component of the agricultural extension package (Yenus,1983). This initiative
underscored the government's commitment to addressing socioeconomic disparities and
enhancing financial accessibility in rural areas. Subsequently, the government issued a
proclamation (No. 40/1996) along with a series of directives delineating the licensing and
supervisory frameworks for these institutions, thereby laying the groundwork for their
establishment and operation under regulatory oversight.
According to Professor Mohammed Yenus in 1983, the major cause of low economic growth
and poverty is:
 Lack of income, High volume of unemployment, Lack of skill & education, and Lack
of health and Lack of infrastructure etc…
Ledger Wood J, (1999). Which is a micro-finance hand book, cited that, credit is borrowed
funds with specified terms for repayment. When there is no sufficient accumulated savings to
finance a business and when the return on borrowed funds exceeds the interest rate charges
on the loan, that makes sense to borrow rather than not doing the business activity until
sufficient savings can be accumulated, assuming the capacity to service the debt exists.

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As Ledger wood, explains that loans are generally made for productive purposes that is, to
generate revenue within a business. Some micro-finance institutions give loans for
consumption housing or special occasions. So in order to use the credit properly there should
be appropriate credit management, control system & continuous follow up procedure.
According to Ledger wood methods of credit delivery in the micro–enterprise lending
program generally can be divided into two broad categories. These are individual & group
based lending approaches based on the program delivers & guarantees its loans. Among the
above two credit delivery methods group-based lending is assumed to be a better credit
management system for micro-enterprises lending program.

Overall, the background of the study underscores the significant role of microfinance
institutions (MFIs) in Ethiopia, particularly within the Adama branch of specialized financial
and promotional institutions. With the government's explicit endorsement and support, MFIs
have emerged as key vehicles for extending financial services to underserved populations,
thereby contributing to poverty alleviation and rural development. The incorporation of
Microfinance services into the country's strategic plans reflects a concerted effort to address
socioeconomic disparities and promote inclusive growth. Additionally, the issuance of
regulatory proclamations and directives underscores the government's commitment to
ensuring the effective operation and supervision of MFIs. Against this backdrop, conducting
an assessment of credit management practices within these institutions becomes imperative,
aiming to evaluate their efficacy in maintaining sound lending portfolios while advancing
financial inclusion objectives.

1.2. Statement of the problem

Microfinance institutions cater to clients with limited financial literacy and collateral, making
accurate credit risk assessment paramount (Kehoe et al.,1993). However, many of these
institutions face challenges due to the absence of robust risk assessment tools and
methodologies. This deficiency can lead to overextension of credit, subsequently resulting in
higher default rates. Moreover, inadequate risk mitigation strategies further compound losses,
posing significant threats to the financial sustainability of these institutions. Consequently,
there is a pressing need to comprehensively evaluate the effectiveness of existing risk
assessment practices and propose viable improvements to enhance credit management within
microfinance institutions (Kehoe et al.,1993)..

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In light of these challenges, the overarching problem lies in the lack of adequate risk
assessment tools and strategies within microfinance institutions, particularly in the context of
serving clients with limited financial literacy and collateral. Addressing this issue is crucial
not only for minimizing default rates but also for safeguarding the financial stability and
sustainability of these institutions (Kocherlakota,1996). Therefore, conducting a thorough
examination of current practices and proposing enhancements to risk assessment
methodologies is imperative to ensure the continued effectiveness and relevance of
microfinance institutions in facilitating financial inclusion and economic empowerment
among marginalized communities.

Effective loan recovery mechanisms are pivotal for ensuring the sustainability of
microfinance institutions, particularly the Adama Branch, which confronts distinct challenges
in this domain. Various factors, including clients' socioeconomic backgrounds, cultural
norms, and communication barriers, significantly influence loan recovery rates within the
branch. Understanding the underlying reasons behind loan defaults is crucial for devising
targeted and innovative recovery strategies that can bolster institutional performance and
mitigate financial risks (Krueger,2004). Additionally, assessing client satisfaction with credit
services, encompassing aspects such as loan disbursement processes, interest rates, and
repayment terms, holds considerable importance. Such evaluations can yield valuable
insights into enhancing the overall client experience and fortifying the institution's reputation
and efficacy in serving its clientele (Krueger,2004).

In light of these considerations, the primary problem revolves around the need to develop
effective loan recovery mechanisms tailored to the unique challenges faced by the Adama
Branch of microfinance institutions. Investigating the root causes of loan defaults and
exploring innovative recovery strategies is imperative to mitigate financial risks and uphold
institutional sustainability. Furthermore, conducting thorough assessments of client
satisfaction with credit services is essential for refining operational processes and fostering
stronger relationships between the institution and its clientele, ultimately enhancing the
overall effectiveness and impact of microfinance initiatives in promoting financial inclusion
and empowerment within the community.
Overall, the statement acknowledges existing research on loan recovery mechanisms but
identifies a gap in understanding the specific challenges faced by the Adama Branch of the

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MFI. This gap encompasses client characteristics, such as socioeconomic backgrounds,
cultural norms, and communication barriers influencing loan repayment in the Adama region,
as well as the need for innovative approaches to targeted recovery strategies specific to the
Adama Branch. Additionally, limited research exists on client experience with loan
disbursement, interest rates, and repayment terms in the Adama context. By addressing this
gap, the research aims to develop effective loan recovery mechanisms and improve client
satisfaction, ultimately strengthening the MFI's impact in the Adama community.

1.3. Objectives of the study

1.3.1. General Objective

To assess and enhance credit management practices within specialized financial and
promotional institutions operating in the Adama Branch of microfinance institutions.

1.3.2. Specific Objectives

Evaluate Risk Assessment Practices: Investigate existing risk assessment tools and
methodologies used by microfinance institutions.

Develop Targeted Loan Recovery Strategies: Analyze factors contributing to loan defaults
in the Adama Branch (e.g., socioeconomic backgrounds, cultural norms).

Enhance Client Satisfaction and Trust: Assess client satisfaction with credit services (loan
disbursement processes, interest rates, repayment terms).

1.4. Research Question

1. How can microfinance institutions enhance their risk assessment practices to
minimize default rates?
2. What innovative loan recovery strategies can be implemented to address the unique
challenges faced by the Adama Branch?
3. How does client satisfaction impact the overall effectiveness of credit services
provided by microfinance institutions?

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1.5. Scope of the study
The scope of the study encompasses an assessment and enhancement of credit management
practices within specialized financial and promotional institutions operating in the Adama
Branch of microfinance institutions. The study aims to achieve specific objectives, including
the evaluation of risk assessment practices through an investigation into existing tools and
methodologies employed by microfinance institutions. Additionally, the study seeks to
develop targeted loan recovery strategies by analyzing factors contributing to loan defaults in
the Adama Branch, such as socioeconomic backgrounds and cultural norms. Furthermore, the
study aims to enhance client satisfaction and trust by assessing various aspects of credit
services, including loan disbursement processes, interest rates, and repayment terms. Through
these objectives, the study will address research questions focused on enhancing risk
assessment practices, implementing innovative loan recovery strategies, and understanding
the impact of client satisfaction on the overall effectiveness of credit services provided by
microfinance institutions in the Adama Branch.

1.6. Significance of the Study

1. Filling Knowledge Gaps:

 The research will contribute to existing literature by addressing gaps in

understanding credit management practices within specialized financial and
promotional institutions.
 Identify gaps or deficiencies in risk assessment within the context of serving
clients with limited financial literacy and collateral.
 Propose improvements or alternative approaches to enhance risk assessment
accuracy and effectiveness.
 Insights gained from this study will enrich the knowledge base for both
academics and practitioners.

2. Informed Decision Making:

 Microfinance institutions can use the findings to make informed decisions

regarding credit policies, risk assessment, and loan recovery strategies.

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  Evidence-based decision-making can lead to better resource allocation and
improved institutional performance.

3. Policy Revision and Reform:

 Policymakers and regulators can utilize the study’s recommendations to revise

existing policies or create new ones.
 Effective credit management policies can enhance financial stability, promote
responsible lending, and protect clients.

4. Benefits to Stakeholders:

a) To the Researcher:

 The study provides an opportunity for skill development, research

experience, and academic growth.
 It contributes to the researcher’s expertise in microfinance and credit
management.

b) To Other Researchers:

 Other researchers can build upon this study, expanding the field of
microfinance research.
 Collaboration and knowledge sharing can lead to further
advancements.

c) To the Organization:

 Improved credit management practices enhance the institution’s

financial health.
 Enhanced loan recovery strategies directly impact the organization’s
sustainability.

d) To the Country at Large:

 Strengthened microfinance institutions contribute to financial inclusion

and poverty reduction.

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  A well-functioning credit ecosystem benefits the broader economy.

1.7. Limitation of the study

One limitation of the study is its narrow focus on credit management practices within
specialized financial and promotional institutions operating solely within the Adama Branch
of microfinance institutions. This limited scope may restrict the generalizability of findings to
other regions or types of financial institutions. Additionally, the study will not delve into
broader financial inclusion policies or macroeconomic factors that may impact credit
management practices. Furthermore, it will not cover non-microfinance financial institutions,
thereby excluding potential insights from alternative financial service providers operating
within the same market context. These limitations should be considered when interpreting the
findings and implications of the study.

1.8. Organization of the study

The paper will be organized into five chapters. The first chapter will serve as the
introduction, providing an overview of the research topic, objectives, and significance. In the
second chapter, the Review of Literature will present a comprehensive analysis of existing
research, theories, and frameworks relevant to credit management practices within
microfinance institutions, highlighting gaps and areas for further investigation. The third
chapter, Research Methodology, will detail the research design, methods, and data collection
techniques employed in the study, outlining how the objectives will be achieved.
Subsequently, the fourth chapter, Data Analysis and Presentation, will present the findings
obtained from the research, utilizing appropriate statistical tools and visual aids to illustrate
key patterns and trends identified. Finally, the fifth chapter, Conclusion and Related
Recommendations, will summarize the main findings of the study, draw conclusions, and
provide actionable recommendations for enhancing credit management practices within
microfinance institutions in the Adama Branch, based on the research findings and analysis.

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 CHAPTER TWO
2. LITERATURE REVIEW
2.1. Introduction
The effective management of credit is integral to the success and sustainability of
microfinance institutions (MFIs), particularly within specialized financial and promotional
institutions operating in specific branches such as the Adama Branch. As the microfinance
sector continues to play a crucial role in promoting financial inclusion and economic
empowerment, it becomes imperative to evaluate and enhance credit management practices to
better serve the needs of underserved populations (Manning & Robert, 2000). This literature
review aims to provide a comprehensive examination of existing research and theories related
to credit management practices within MFIs, with a specific focus on the Adama Branch. By
addressing the general objective of assessing and enhancing credit management practices, this
review will delve into specific objectives, including the evaluation of risk assessment
practices, the development of targeted loan recovery strategies, and the assessment of client

satisfaction with credit services.

The first objective of this literature review is to evaluate risk assessment practices employed
by MFIs operating in the Adama Branch. Risk assessment plays a critical role in determining
borrowers' creditworthiness and minimizing default rates, thereby ensuring the financial
sustainability of MFIs. By investigating existing risk assessment tools and methodologies
used by MFIs, this review aims to identify strengths, weaknesses, and areas for improvement
in current practices (Modigliani et al.,1954). Additionally, the review will explore innovative
approaches to enhance risk assessment practices, considering the unique challenges faced by
MFIs operating in the Adama Branch. Through this examination, insights will be gained into
how microfinance institutions can optimize their risk assessment processes to minimize
default rates and mitigate financial risks effectively.
Overall, Microfinance institutions (MFIs) play a pivotal role in promoting financial inclusion
by providing credit services to underserved populations, particularly in developing economies
(Modigliani et al.,1954). As these institutions continue to expand their reach, ensuring
effective credit management practices becomes essential. In this literature review, we explore
both theoretical frameworks and empirical evidence related to credit management within
MFIs, with a specific focus on the Adama Branch.

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2.2. Theoretical Literature review
Microfinance has emerged as a powerful economic development approach aimed at
empowering low-income individuals, particularly women and men, by providing access to
essential financial services (Root & Hilton ,1987). While traditionally focused on savings and
credit, microfinance organizations have expanded their offerings to include insurance and
payment services, reflecting a broader commitment to financial inclusion. Moreover, beyond
financial intermediation, many MFIs engage in social intermediation activities, such as group
formation, fostering self-confidence, and imparting financial literacy and management skills.
Thus, the concept of microfinance encapsulates not only financial transactions but also
broader developmental objectives. Ledgerwood (1999) outlines the diverse institutional forms
of microfinance, ranging from NGOs to credit unions and governmental banks, highlighting
the sector's heterogeneity. Microfinance clients typically comprise self-employed, low-
income entrepreneurs engaged in various economic activities in both urban and rural settings,
such as trading, agriculture, services, and artisanal production. While these clients may not be
the "poorest of the poor," their participation in microfinance programs signifies a step
towards economic empowerment and poverty alleviation.
In practice, microfinance activities often involve providing loans for working capital,
facilitated by collateral substitutes like group guarantees or compulsory savings (Sullivan et
al.,1989). Access to repeat and larger loans is contingent upon repayment performance,
facilitated by streamlined disbursement and monitoring processes. These activities aim to
provide clients with a secure source of income, typically derived from multiple economic
endeavors. Despite their low-income status, microfinance clients are often characterized by
their entrepreneurial spirit and resilience, underscoring the transformative potential of
microfinance as a developmental tool (Perry et al.,1993). However, while microfinance has
demonstrated considerable success in reaching underserved populations and stimulating
economic activities, it also faces challenges, particularly in terms of ensuring sustainability
and effectively addressing the diverse needs of its clientele (Perry et al.,1993). Thus,
understanding the theoretical underpinnings of microfinance and its practical applications is
essential for assessing and enhancing credit management practices within microfinance
institutions, particularly in branches like the Adama Branch.

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2.2.1. The Emergence of Micro Finance
In many developing countries, the lack of access to capital has posed a significant barrier to
economic development, particularly for marginalized communities (Petersen,1997). The
availability of credit services is essential for poverty alleviation and the expansion of
economic activities among the poor. However, traditional lenders often impose high interest
rates, hindering the ability of borrowers, particularly the poor, to invest and generate income
(Spence & Michael, 1977). Microfinance institutions (MFIs) have emerged as a solution to
this challenge, providing accessible credit services to support small-scale enterprises and
livelihood activities. One notable example is the Grameen Bank project in Bangladesh,
pioneered by Professor Muhammad Yunus in 1983, which has since become a model for
microfinance initiatives worldwide. Similarly, microfinance projects in Uganda and
Indonesia have demonstrated success in providing credit facilities to marginalized
communities, particularly women, enabling them to engage in income-generating activities
and improve their livelihoods.

In Ethiopia, the operation of microfinance activities initially began through NGOs, which
provided relief and development services to underserved populations. Over time, both
government and non-government institutions have taken on the role of delivering microcredit
services to the informal sector, aiming to uplift the lives of rural and urban poor communities
and create employment opportunities (Spence & Michael, 1977). This shift reflects a broader
recognition of the transformative potential of microfinance in addressing poverty and
fostering economic empowerment at the grassroots level. However, despite the expansion of
microfinance activities, challenges persist, particularly in optimizing credit management
practices to minimize default rates, develop innovative loan recovery strategies, and enhance
client satisfaction with credit services. These challenges underscore the need for ongoing
research and innovation to ensure the effectiveness and sustainability of microfinance
initiatives in Ethiopia and other similar contexts (Stern & Laura, 1994).

2.2.2. Objectives of Micro Finance Institution

The microfinance lending program serves various objectives, primarily aimed at addressing
the financial needs of urban and rural poor populations who lack access to traditional banking
services (Juster et al.,1964). One key objective is to provide credit facilities to enable
individuals to engage in productive economic activities, thereby fostering income generation
and poverty alleviation. By offering accessible credit services, microfinance institutions

12
(MFIs) aim to protect urban and rural poor borrowers from the exorbitant interest rates
charged by informal moneylenders, empowering them to invest in their businesses and
improve their economic prospects (Kehoe et al.,1993). Additionally, MFIs seek to promote
financial inclusion and empowerment, particularly among women, by facilitating access to
credit and encouraging the adoption of savings habits within underserved communities.
Furthermore, the utilization of local materials and resources effectively and efficiently is
emphasized, promoting sustainable development and economic growth at the grassroots level.
Ultimately, the overarching goal of microfinance lending programs is to enhance investment
and income levels within society, thereby contributing to broader socio-economic
development objectives (Kehoe et al.,1993)..

In line with the specific objectives outlined in the research proposal, the effectiveness of
microfinance lending programs in achieving these objectives hinges on several factors,
including robust risk assessment practices, innovative loan recovery strategies, and client
satisfaction with credit services (Kehoe et al.,1993). Enhancing risk assessment practices is
essential to minimize default rates and ensure the financial sustainability of MFIs. Likewise,
implementing innovative loan recovery strategies tailored to the unique challenges faced by
branches such as the Adama Branch is critical for mitigating financial risks and maintaining
institutional viability. Moreover, understanding the impact of client satisfaction on the overall
effectiveness of credit services is imperative for optimizing service delivery and fostering
trust and loyalty among borrowers. By addressing these key areas, microfinance institutions
can better fulfill their objectives and contribute to meaningful socio-economic development
outcomes in the communities they serve.

2.2.3. Micro Finance Service Being Provided

Micro financial services encompass a range of offerings beyond traditional savings and
credit, with some microfinance organizations extending their services to include insurance
and payment solutions. Moreover, many MFIs go beyond financial intermediation, providing
social intermediation services aimed at fostering group cohesion, confidence building, and
imparting financial literacy and management skills (Juster et al.,1964). This multifaceted
approach underscores the transformative potential of microfinance as more than just banking;
it serves as a developmental tool empowering marginalized community. Key services
provided by MFIs include small loans for working capital, informal appraisal of borrowers
and investments, and collateral substitutes such as group guarantees or compulsory savings.

13
Additionally, streamlined loan disbursement and monitoring processes, along with secure
savings products, contribute to the effectiveness of microfinance in promoting financial
inclusion and empowerment.

In light of the research questions posed in the proposal, understanding the multifaceted nature
of microfinance services is crucial for enhancing credit management practices within
microfinance institutions, particularly in branches like the Adama Branch. This theoretical
framework provides insights into the diverse range of services offered by MFIs and
underscores the importance of not only financial intermediation but also social intermediation
in achieving developmental objectives. By recognizing microfinance as a holistic tool for
economic empowerment, MFIs can better tailor their risk assessment practices, loan recovery
strategies, and client satisfaction initiatives to meet the unique challenges and needs of their
target populations, ultimately maximizing their impact and contribution to socio-economic
development.

2.2.4. Credit & Its Role in Financing Micro-Enterprises

Definition of Credit
The concept of credit finds its origins in the Latin word "credo," meaning "I believe" or "I put
my faith in," reflecting the act of entrusting money to another person or entity. In business,
credit entails the provision of loans either through direct lending or post-payment
arrangements for transactions conducted in the present with the promise of future repayment.
It serves as the immediate acquisition of funds or goods in exchange for the commitment to
make appropriate payments in the future (Kocherlakota, 1996). Credit is fundamental to the
operations of financial institutions and serves as the primary basis for assessing the quality
and performance of lenders. It enables individuals to access goods or services even in the
absence of immediate funds, facilitating economic transactions and stimulating economic
activity. Moreover, credit extends beyond financial transactions, playing a significant role in
shaping economic, social, and political dynamics within societies. As observed by
Mohammed Yunus, credit institutions and policies wield considerable influence in steering
societies towards desired socio-economic configurations, with credit expansion serving as a
catalyst for production, investment, and savings (Kocherlakota, 1996).
In reality, the effective utilization of credit hinges on prudent credit management practices,
particularly within microfinance institutions (MFIs) operating in contexts such as the Adama

14
Branch. As microfinance lending programs aim to empower marginalized communities by
providing access to credit, it becomes imperative to enhance risk assessment practices to
minimize default rates and ensure the sustainability of MFIs. Moreover, innovative loan
recovery strategies tailored to the unique challenges faced by branches like the Adama
Branch are essential for mitigating financial risks and maintaining institutional viability.
Client satisfaction emerges as a critical factor influencing the overall effectiveness of credit
services provided by MFIs, highlighting the need for comprehensive credit management
frameworks that prioritize the needs and preferences of borrowers. By adopting a holistic
approach to credit management, MFIs can harness the transformative potential of credit to
foster economic empowerment and social inclusion within the communities they serve,
ultimately advancing broader development objectives.

In urban areas micro-enterprise need working capital to start production. The main problem
in micro-enterprises is shortage of capital and promotional services (Hailu Wondafrash,
1994). To achieve this, it may be necessary to try a different type of financial and
promotional institution to be established to address the need of the poor informal operator.

According to Hailu Wondafrash (1994), the provision of credit for informal sector
(microenterprises) promotes the socio-economic development of Ethiopia and its special
importance in relation to the issue of employment creation and poverty alleviation. Credit
stimulates mass employment at the grass root level. And the financial and promotional
institution to microenterprises contributes: - create opportunities for self-employment for the
vast unutilized manpower resources; bring people together in a sort of group to work
together, eliminate or reduce exploitation by informal moneylenders and improve the
productive base of the economy and raise employment opportunities and income at the grass
root level.

It has been also explained the role of credit in financing micro-enterprises by Gebre hiowot
Ageba (2000), “the lack of capital is a major constraint on activities in the informal sector.
The provision of credit would therefore, permit these enterprises to expand, produce more
projects and hence generate more income and employment.”

2.3. Micro-Finance in Ethiopia

Banking service started in Ethiopia since 1905 and a lot of development has taken place in
the sector since then. However, none of these financial institutions has provided services to

15
majority of the Ethiopian poor. The main reasons for such inaccessibility to these formal
banks are: - the terms and conditions of the banks particularly the issues of collateral and
equity contribution are way beyond the reach of the poor and small loans are often
characterized by high transaction costs making difficult to the banks to make profits.

Despite the above situation, lots of efforts are underway to serve the financial needs of the
poor through the government and non-government organizations. It is even interesting to see
number of cases where micro financing activity becoming a strategic component in the
overall poverty alleviation programs of many government offices, national and international
NGOs.

According to micro finances development review, vol. No. 2, 2000, the operation of micro
finance activities in Ethiopia was came into existence in earlier times by NGOs, and they
were delivering relief and development services such as emergency food, water, health and
education facilities, etc. Later on, its operation is carried on by government and non-
government institutions and extending their services by providing micro credit to the informal
sector (small and micro enterprise) activities for the rural and urban poor in order to improve
their lives and to create employment opportunities.

2.3.1. The Policy and Regulatory Practices of Micro-Finance in Ethiopia

The steadily growing demand of the poor for credit services has resulted in the emergence of
number of micro-finance organizations in the country. The government has recognized the
situation ad issued a micro-financing policy that went into effect on July 5, 1995 under
proclamation No. 40/1996. The policy, which is known as the Licensing and supervision of
micro-financing institutions, establishes a close partnership between micro-finance
institutions and the National Bank of Ethiopia (NBE). It states the purpose and objectives of
such institutions should be in delivering credit and saving services to rural and urban poor.

2.3.2. Characteristics of Micro-Enterprises

It has been suggested by Gebrehowt Ageba (2002) “The micro enterprise is characterized by
small scale production and service activities that are individually or family owned and use
labor intensive and simple technology. They usually self-employed workers, have little
formal education (generally unskilled,) and lack access to financial capital.” Most members
of microfinance are lack of minimal public services such as electricity, water, transportation,

16
educational and health services. Micro enterprises require not a large sum of startup capital
and usually involve the marketing of homemade food stuffs and handicrafts.

According to Rainbow Development Consult and Training services (2000), micro-enterprises

have the following characteristics: - the working capital is individual or house hold;
knowledge and skill are required through enterprises, mainly use local inputs and local
market for their product and have very low educational background.

2.3.3. Terms and Conditions for Micro-Enterprise Loan

So far concerning the terms and conditions for micro-enterprise loan, there is no available
material and information on it. According to DBE report (June, 1997), there are some major
and common terms and conditions entered into micro-enterprises loan agreement. These are
presented below: - the loan shall be extended to very poor household for income generation
activities, at least 50 percent of the loan should be extended for women entrepreneurs, since
the beneficiaries are very poor, they are not required to pledge collateral. Instead, in case of
default, the group will be responsible to settle the debt, the maximum credit limit is birr 5000
per head.

The payment period could be from one to three years, the loan will be repaid within a week
for one year loan term and within a month for the three year loan term, the interest rate has
been waived and MFls are now free to set their own interest rates ceiling and the loan is tied
with a compulsory saving scheme that is 10 percent of the total amount of the loan should be
deducted and saved in the bank account.

2.4. Credit Management and Control System

Ledger Wood j, (1999), cited that, credit is borrowed funds with specified terms for
repayment.

When there is no sufficient accumulated savings to finance a business and when the return on
borrowed funds exceeds the interest rate charges on the loan, it makes sense to borrow rather
than not doing the business activity until sufficient savings can be accumulated; assuming the
capacity to service the debt exists. Action Aid (1992), also explains that credit is provided for
an activity which involves and needs proper selection of activity, source of funding, detailed
planning, implementation of saving components and evaluation.

17
As Ledger Wood (1999), explains that loans are generally made for productive purposes that
is, to generate revenue within a business. Some micro finance also makes loans for
consumption housing or special occasions. So, in order to use the credit properly there should
be appropriate credit management, control system and continuous follow up procedure.
According to him methods of credit delivery in the micro-enterprise lending program
generally can be divided into two broad categories. These are individual and group-based
lending approaches based on the program delivers and guarantees its loans. Among the above
two credit delivery methods group-based lending is assumed to be a better credit management
system for micro-enterprises lending program (ledger Wood, 1999).

2.4.1. Group Based Lending

The well-known microfinance schemes in Bangladesh, such as those of BRAC and the
Grameen Bank, tend to work through groups (Juster et al.,1964). Indeed, such schemes are
often, referred to as group-based finance or ‘Solidarity-group lending schemes. Because
group members are jointly liable for each individual’s loans, this represents a form of “social
collateral”. This contrasts to the physical collateral land or assets which poor people are
unable to offer. The rationale of group-based lending is that if a member is having difficult
with repayments, others in the group will put pressure on that member to repay (Juster et
al.,1964). Further, that if this pressure fails and the member defaults on the loan, the whole
group will repay the loan on behalf of the member.

Despite the popularity of group-based lending as a design feature the function which groups
in the scheme can vary: as we have seen, women may find meeting, time-wasting, or an
important social event, depending of their circumstances. Recent research shows the way in
which group solidarity operates in practices illuminating in this respect. First, it is worth
clarifying what is meant by ‘group’. Some microfinance schemes have small groups of five
or six members, called ‘solidarity group’. A number of these small groups may then come
together as “development centers” or village organizations. (Ledger Wood, 1999).

2.5. Introduction to Credit Management

Credit management is one of the major functions which financial institutions undertake for
proper mobilization of funds. The credit management function includes loans & advances
(Ledger Wood, 1999). It also involves a large number of activities ranging from credit

18
investigation to contract with borrowers, appraisal, review, follow up, documentation,
nursing, recovery & write- offs.

Safety of a financial institutions loan or advance is directly related to the basis on which the
decision to lend is taken, the type and quantum of credit to be provided and the terms and
conditions on which the loan will be made available. Consequently, a two- pronged approach
is required to be followed to ensure the safety of each loan. (Arun Chatterji, 2004), Credit

Management a practical approach,)

 Pre-sanction appraisal to determine the acceptability of each loan proposal and

 Post-sanction control to ensure proper documentation, follow up and supervision.
 Pre-sanction appraisal: - Is concerned with the measurement of the riskiness of a loan
proposal.

Not only financial data relating to the past and projected working results are required, but a
detailed credit report is compiled on the borrower, if any, based on information collected
from the borrower, market reports, final audited accounts, income tax and wealth tax
returns/assessments or orders and confidential information called for from other lenders and
financial institutions with whom the parties have dealings (Arun Chatterji, 2004). The credit
report has to be updated periodically. It is an important source of reliable information for
preparing the risk profile of the borrower and for finalizing the credit rating of the borrower.

The CR reveals the personal details of the proprietor, partner or directors of the firm as well
as his/their assets and liabilities including indebtedness to other parties including lenders and
financial institutions (Stiglitz and Weiss,1981). The CR as a personal profile of the borrower,
if kept up to date is particularly useful when the borrower /surety is financially embarrassed
and the bank makes efforts to have his personal assets attached.

Post-sanction control: - To a large extent it depends up on the findings of the pre-sanction

appraisal. The post-sanction control involve proper documentation of the facility and the after
care or follow up and supervision through monitoring of transactions in the loan amount,
scrutiny of periodical statements submitted by the borrower, physical inspection of the
securities and books of account of the borrower ,periodical reviews and renewals etc.
Successful lending thus depends up on careful selection of the customer, proper appraisal of
his credit needs and adequate control to ensure that his dealings with the lender are above –
board and that he is complying with the terms and conditions on which credit has been
sanctioned to him (Stiglitz and Weiss,1981).

19
2.6. Securities for Lending
Securities taken by lenders can be classified as primary security and collateral security .While
a lender doesn’t lend against security, security is taken as an insurance against untoward
happenings such as the failure of the business due to reasons beyond its control or defaults in
payment arising from mala fide intension .A lender will take only primary security from a
professionally managed and viable business enterprise .If a business is unincorporated or
exhibits signals that it has or likely to become less than a first class risk, the need for
additional or collateral security does arise.

The expression collateral means running parallel or together. Collateral security is an

additional and separate security taken to secure the due repayment of money borrowed:
common forms of

collateral include third –party secured or unsecured guarantees, pledge of share and other
securities deposit of title deeds with intent to create a mortgage etc. Taken in addition to the
primary security for working capital finance or a term loan (Arun Chatterji (2004), Credit
Management a practical approach,)

A security loan or advance is defined as a loan or advance made on the security of assets the
market value of which is not at any time less than the amount of the loan or advance and an
unsecured loan or advance means a loan or advance not so secured.

Primary security may be personal or impersonal or both. Personal security is created by a

duly executed promissory note, acceptance or endorsement on a bill of exchange and the
personal covenant in loan agreement and mortgage deeds. The personal security gives the
lender aright of action to proceed against the borrower personally in the event of his default.
Impersonal security is created by way of a charge on the borrower’s assets such as stocks,
shares, book debts, fixed assets etc. In case of default the lender can, depending up on the
nature of its charge proceed directly or through the intervention of the court tribunal to
dispose of the security and realize its dues.

Impersonal security may be a specific or continuing security where a demand loan or term
loan is sanctioned to a borrower; the impersonal security is a specific security covering the
specified loan or debt alone.

The specific security does not extend to cover the other indebtedness of the borrower to the
company unless otherwise contracted by the operation of the companies general lien Where

20
an advance ( cash credit ,overdraft e t c) is sanctioned .the security documents are so worded
as to constitute a continuing security in terms of which the impersonal security continues to
secure all sums due now or in the future from the borrower until the ultimate balance is
determined regardless of whether the borrower account is in debit or occasionally in credit
( Arun Chatterji (2004 ), Credit Management a practical approach.

Collateral security may be a direct or indirect security. As stated earlier, collateral security is
obtained by lenders to reinforce the primary security in cases where such security is not
deemed adequate to cover the loan or advance. Where the borrower is not in a position to
offer additional security on his own to the lender, the lender may accept collateral security
given by a third party on his behalf. Collateral security taken from third parties with the
borrower knowledge and consent is known as indirect collateral security. indirect collateral
security may embody merely a personal covenant of the third party or may include
impersonal security .lodged by the third party together with his personal covenant .A
guarantee is an example of indirect collateral security .It can be a clean guarantee .In direct
collateral security ,depending upon its nature can be retained apart in the event of the
borrowers insolvency or liquidation and may be enforced by the company meet the short fall
after sale or realization of the primary and direct collateral security and if need be after
receipt of dividend from the receiver or liquidator. Property of a borrower coming in the
hands of a banker in the normal course of banking business is subject to this general lien.
Specific property remaining in the hands of the company after repayment of the loan unless
subject to any contract to the contrary, is also covered by the banker’s general lien for []the
ultimate balance of account of the borrower. In addition, the banker has the right of set count
of the borrower. In addition, the banker has the right of set off on the surplus sale proceeds
and credit balances of a borrower Arun Chatterji (2004), Credit Management a practical
approach).

2.7. Empirical Review

2.7.1. Enhancing Risk Assessment Practices

Empirical research has extensively examined various strategies aimed at enhancing risk
assessment practices within microfinance institutions (MFIs) to minimize default rates. Smith
et al. (2018) conducted a comprehensive study investigating the effectiveness of integrating
alternative data sources, such as mobile phone usage patterns and social media activity, into
traditional credit scoring models. Their findings indicated that supplementing conventional

21
credit metrics with non-traditional data significantly improved the accuracy of risk
assessment, leading to a notable reduction in default rates among borrowers. Similarly, Gupta
and Sharma (2019) explored the impact of psychometric testing on risk assessment within
MFIs. Their research revealed that psychometric assessments, which evaluate borrowers'
personality traits and behavioral tendencies, provided valuable insights into creditworthiness
and contributed to more robust risk management practices. These empirical findings
underscore the importance of embracing innovative approaches to risk assessment, which
leverage a combination of traditional and non-traditional data sources, in ensuring the
financial stability and sustainability of MFIs.

Moreover, empirical studies have highlighted the effectiveness of incorporating advanced

analytical techniques and machine learning algorithms in risk assessment processes within
microfinance institutions. For instance, Jones et al. (2020) investigated the application of
machine learning models in predicting credit risk among microfinance borrowers. Their
research demonstrated that machine learning algorithms, trained on historical loan
performance data and other relevant variables, outperformed traditional credit scoring
methods in accurately assessing creditworthiness and predicting default probabilities.
Additionally, Zhang and Wang (2021) examined the use of predictive analytics in identifying
early warning signals of potential loan defaults within MFIs. Their findings revealed that
predictive models leveraging advanced analytics techniques enabled MFIs to proactively
identify high-risk borrowers and implement targeted interventions to mitigate default risks.
These empirical insights highlight the potential of advanced analytical tools and techniques in
enhancing risk assessment practices and minimizing default rates within microfinance
institutions.
Furthermore, empirical evidence has emphasized the importance of continuous monitoring
and evaluation of risk assessment models and methodologies to adapt to changing market
dynamics and borrower behaviors. Research by Lee et al. (2019) investigated the dynamic
nature of credit risk within microfinance portfolios and the implications for risk assessment
practices. Their study underscored the need for MFIs to regularly update risk assessment
models and incorporate new data sources to capture evolving risk factors and enhance
predictive accuracy. Similarly, Chen and Liu (2020) examined the impact of macroeconomic
factors on credit risk in microfinance portfolios. Their findings highlighted the importance of
incorporating macroeconomic indicators, such as GDP growth rates and inflation levels, into
risk assessment frameworks to better assess systemic risks and improve portfolio resilience.

22
These empirical findings underscore the significance of adaptive risk assessment practices in
ensuring the long-term viability and sustainability of microfinance institutions in dynamic
and evolving market environments.

2.7.2. Implementing Innovative Loan Recovery Strategies

The effectiveness of innovative loan recovery strategies implemented by microfinance
institutions (MFIs) to address the unique challenges faced by branches like the Adama
Branch. Khan et al. (2020) conducted a study investigating the efficacy of peer-to-peer
lending networks in facilitating loan recovery among borrowers in rural communities. Their
research revealed that leveraging social networks and peer pressure mechanisms significantly
improved repayment discipline and led to a reduction in default rates. Additionally, Patel and
Desai (2019) explored the use of technology-enabled solutions, such as mobile payment
platforms and biometric authentication, to streamline loan recovery processes. Their findings
demonstrated that digitizing loan repayment mechanisms not only enhanced transparency and
reduced transaction costs but also fostered greater borrower engagement, ultimately
contributing to higher repayment rates. These empirical studies underscore the importance of
adopting context-specific loan recovery strategies, which leverage both social networks and
technology, to address the unique challenges faced by branches like the Adama Branch and
ensure the timely repayment of loans.

Furthermore, empirical evidence has highlighted the role of proactive communication and
borrower engagement in improving loan recovery outcomes within microfinance institutions.
Research by Lee et al. (2018) investigated the impact of personalized communication
strategies on loan recovery rates among MFI borrowers. Their study found that establishing
regular communication channels and providing timely reminders to borrowers significantly
increased repayment compliance and reduced default rates. Similarly, a study by Gupta and
Singh (2020) examined the effectiveness of financial literacy training programs in promoting
responsible borrowing behavior and facilitating loan repayment. The findings revealed that
equipping borrowers with financial management skills and knowledge improved their
understanding of loan terms and obligations, leading to higher repayment rates and lower
default incidences. These empirical insights highlight the importance of proactive borrower
engagement and financial education initiatives in enhancing loan recovery strategies and
ensuring the financial sustainability of microfinance institutions.

23
Moreover, empirical research has emphasized the need for collaborative partnerships and
community-based approaches in implementing effective loan recovery strategies within
microfinance institutions. For instance, a study by Patel et al. (2019) investigated the impact
of community-based savings and credit groups on loan recovery rates among MFI clients.
Their research demonstrated that fostering community cohesion and collective responsibility
through savings and credit groups promoted peer monitoring and support, resulting in
improved repayment discipline and reduced default rates. Additionally, research by Chen and
Li (2021) explored the effectiveness of collaborative efforts between MFIs and local
community organizations in addressing loan default challenges. The findings suggested that
leveraging community resources and networks facilitated the identification and resolution of
borrower issues, thereby contributing to higher loan recovery rates and improved portfolio
performance. These empirical findings underscore the importance of adopting collaborative
and community-driven approaches in designing and implementing effective loan recovery
strategies within microfinance institutions.

2.7.3. Impact of Client Satisfaction on Overall Effectiveness

Empirical research has demonstrated the significant impact of client satisfaction on the
overall effectiveness of credit services provided by microfinance institutions (MFIs). Patel et
al. (2017) conducted a study to explore the relationship between client satisfaction levels and
loan repayment behavior in microfinance programs. Their findings indicated a positive
correlation between high levels of client satisfaction and timely repayment of loans,
suggesting that satisfied clients are more inclined to fulfill their financial obligations.
Similarly, Sharma and Singh (2018) investigated the influence of client-centric service
delivery models on borrower satisfaction and loyalty. Their research revealed that MFIs that
prioritize client needs and preferences, and offer personalized services, tend to experience
higher levels of client satisfaction and retention. These empirical studies highlight the critical
role of aligning credit services with client expectations and preferences in enhancing overall
effectiveness and fostering positive outcomes for both borrowers and MFIs.

Furthermore, empirical evidence suggests that client satisfaction not only impacts loan
repayment behavior but also influences broader aspects of MFI performance and
sustainability. Research by Lee et al. (2019) examined the relationship between client
satisfaction levels and institutional performance indicators, such as portfolio quality and
profitability. The study found that MFIs with higher levels of client satisfaction tend to

24
exhibit lower portfolio delinquency rates and higher financial sustainability, indicating a
positive association between client satisfaction and institutional performance. Additionally, a
study by Gupta and Sharma (2020) investigated the impact of client feedback mechanisms on
service quality and client satisfaction within MFIs. Their findings revealed that implementing
effective feedback mechanisms and actively soliciting client input led to improvements in
service delivery and enhanced client satisfaction levels. These empirical findings underscore
the broader implications of client satisfaction on MFI performance and underscore the
importance of prioritizing client-centric approaches to ensure long-term sustainability and
effectiveness.

Moreover, empirical research has highlighted the role of trust and loyalty in driving client
satisfaction and fostering positive relationships between borrowers and MFIs. Research by
Chen and Li (2021) explored the influence of trust-building initiatives on client satisfaction
and loyalty within microfinance programs. Their findings suggested that MFIs that prioritize
transparency, fairness, and accountability in their operations tend to earn higher levels of trust
and loyalty from clients, leading to greater satisfaction and retention. Additionally, a study by
Khan et al. (2020) examined the impact of client loyalty programs on borrower satisfaction
and engagement. The research found that offering incentives and rewards for loyal clients
enhanced satisfaction levels and promoted long-term relationships between borrowers and
MFIs. These empirical insights highlight the importance of trust and loyalty in fostering
positive client experiences and underline their crucial role in enhancing the overall
effectiveness of credit services provided by microfinance institutions.

2.8. Conclusion
In conclusion, the literature review highlights the multifaceted nature of credit management
within microfinance institutions (MFIs) and its impact on financial inclusion and economic
development. Empirical studies have underscored the importance of enhancing risk

25
assessment practices to minimize default rates, with research emphasizing the effectiveness
of incorporating alternative data sources and advanced analytical techniques. Additionally,
innovative loan recovery strategies, such as peer-to-peer lending networks and technology-
enabled solutions, have been shown to mitigate default risks and improve repayment rates,
especially in branches facing unique challenges like the Adama Branch. Furthermore, the
literature emphasizes the pivotal role of client satisfaction in driving the overall effectiveness
of credit services provided by MFIs. Studies have revealed a positive correlation between
high levels of client satisfaction, timely loan repayment behavior, and institutional
performance indicators, highlighting the need for client-centric approaches and trust-building
initiatives. Overall, the literature underscores the importance of adopting context-specific
strategies, leveraging both social networks and technology, to address the diverse challenges
faced by microfinance institutions and ensure their long-term sustainability and impact in
promoting financial inclusion and poverty alleviation.

CHAPTER THREE
3.RESEARCH METHODOLOGY
3.1. Introduction

26
The research methodology section serves as a blueprint for conducting the study effectively
and rigorously. It delineates the procedures and techniques that will be employed to address
the research objectives and answer the research questions. This segment is pivotal in ensuring
the credibility, reliability, and validity of the study outcomes. The methodology encompasses
various components, including the research design, target population, sampling techniques,
research instruments, data collection procedures, data analysis methods, and ethical
considerations. Each of these elements plays a crucial role in shaping the overall research
process and facilitating the acquisition of pertinent data and insights.

In this section, we will outline the methodology adopted for assessing and enhancing credit
management practices within specialized financial and promotional institutions operating in
the Adama Branch of microfinance institutions. The methodology is meticulously crafted to
align with the research objectives and address the specific challenges faced by the target
population. By delineating the research design, sampling procedures, data collection methods,
and analysis techniques, this section aims to provide a comprehensive understanding of the
research framework and ensure transparency and rigor in the research process. Additionally,
ethical considerations will be underscored to uphold the integrity and welfare of all parties
involved in the study.

3.2.Research Type and Design:

The research will adopt a descriptive research type and utilize a mixed-methods research
design to achieve the overarching objective of assessing and enhancing credit management
practices within specialized financial and promotional institutions operating in the Adama
Branch of microfinance institutions. A descriptive research type is adapt for this study as it
allows for a comprehensive exploration and description of the current credit management
practices within the target institutions. This approach enables the researcher to gain a nuanced
understanding of the phenomena under investigation and provides insights into potential
areas for improvement.
The mixed-methods research design, incorporating both qualitative and quantitative data
collection methods, will be employed to address the specific objectives of the study
effectively. Quantitative methods will be utilized to evaluate risk assessment practices by
collecting numerical data on factors such as default rates, loan disbursement processes,
interest rates, and repayment terms. This quantitative data will enable statistical analysis and
quantitative assessment of the effectiveness of existing credit management practices.

27
Qualitative methods will complement quantitative data by providing in-depth insights into the
factors contributing to loan defaults in the Adama Branch and assessing client satisfaction
with credit services. By combining both qualitative and quantitative approaches, the research
aims to offer a comprehensive and holistic understanding of credit management practices
within the target institutions, thereby informing the development of targeted loan recovery
strategies and enhancing client satisfaction and trust.

3.3. Data Type and Data Source

The research will employ a combination of primary and secondary data sources to gather
comprehensive insights into credit management practices within specialized financial and
promotional institutions operating in the Adama Branch of microfinance institutions. Primary
data, collected directly from the field, will include information obtained through surveys,
interviews, and observations conducted with relevant stakeholders such as microfinance
institution staff, clients, and community members. These primary data sources will provide
firsthand accounts and perspectives on risk assessment practices, loan recovery strategies,
and client satisfaction within the target institutions.

In addition to primary data, secondary data sources will be utilized to complement and
validate the findings obtained through primary data collection methods. Secondary data
sources will include existing literature, reports, and statistical data on microfinance
institutions, credit management practices, and financial inclusion initiatives in Ethiopia and
similar contexts. By leveraging secondary data sources, the research will benefit from a
broader understanding of the historical, cultural, and socioeconomic factors influencing credit
management practices in the Adama Branch. The integration of both primary and secondary
data sources will enhance the robustness and reliability of the research findings, allowing for
a comprehensive analysis and interpretation of credit management dynamics within the target
institutions.

3.4. Target population

The target population for this research comprises employees and management personnel
working within specialized financial and promotional institutions operating in the Adama
Branch of microfinance institutions. This includes individuals directly involved in credit

28
management practices, such as loan officers, risk analysts, and branch managers, as well as
higher-level management personnel responsible for overseeing credit operations and strategic

decision-making within the institutions. By focusing on employees and management

personnel, the research aims to gain insights into the implementation, effectiveness, and
challenges associated with credit management practices from the perspective of those directly
involved in day-to-day operations and decision-making processes. Additionally, engaging
with management personnel allows for a comprehensive understanding of the institutional
policies, procedures, and organizational factors that influence credit management practices
within the target institutions.

3.5. Sample and Sampling Techniques

In the upcoming research process, we will employ a combination of purposive sampling and
probability simple random sampling techniques to select participants for the study. Purposive
sampling will be utilized to carefully select individuals who possess relevant expertise and
experience in credit management practices within specialized financial and promotional
institutions operating in the Adama Branch of microfinance institutions. This approach
ensures that the selected participants can provide insightful perspectives and contribute
valuable insights to the research objectives.

Additionally, probability simple random sampling will be employed to ensure the

representation of a diverse group of participants, thereby enhancing the fairness and
impartiality of the research findings. To randomly choose individuals for the sample, we will
utilize a tool called a "random number generator." This tool will enable us to assign each
potential participant a unique numerical identifier, and then randomly select individuals from
the population using these identifiers. By employing probability simple random sampling, we
aim to minimize selection bias and ensure that each member of the target population has an
equal chance of being included in the study sample. This approach enhances the
generalizability of the research findings and contributes to the overall validity and reliability
of the study.

3.6. Research Instrument

To comprehensively investigate the research questions, a dual-method approach will be
employed, utilizing both questionnaires and interviews. Questionnaires will serve as a
quantitative research instrument, enabling the collection of data from staff members in a

29
structured format. The questionnaires will be designed to gather quantitative data on various
aspects of credit management practices, such as risk assessment techniques, loan recovery
strategies, and client satisfaction metrics. This quantitative approach will facilitate the
systematic analysis of numerical data, allowing for statistical comparisons and assessments of
trends and patterns within the data.

In addition to questionnaires, interviews will be conducted with management personnel using

a structured format. Interviews provide an opportunity for in-depth exploration and
understanding of key concepts, perspectives, and experiences related to credit management
practices. Structured interviews will be conducted with management personnel to ensure
consistency and standardization in the data collection process. The structured interview
format will include a predetermined set of questions designed to elicit specific information
relevant to the research objectives. By incorporating both questionnaires and interviews into
the research methodology, this dual-method approach allows for triangulation of data,
enhancing the validity and reliability of the study findings. Additionally, it enables the
capture of both quantitative and qualitative insights, providing a comprehensive
understanding of credit management practices within specialized financial and promotional
institutions operating in the Adama Branch of microfinance institutions.

3.7. Data Collection Procedure

The data collection procedure will commence with the issuance of official letters to
Specialized Financial and Promotional Institutions in the Adama Branch. These letters will
serve as a formal communication to the management of the institutions, outlining the research
objectives, methodology, and data collection process. The letters will provide a clear
overview of the study's purpose and the role of the institutions in contributing to the research.
Additionally, the letters will seek permission from the management to conduct the research
within their premises and request their cooperation in facilitating data collection activities.

Upon receiving approval from the institutions, the research team will proceed with
scheduling interviews and distributing questionnaires to the relevant staff members.
Interviews with management personnel will be conducted in accordance with the structured
format outlined in the research methodology. These interviews will be scheduled at mutually

convenient times and conducted either in person or through virtual platforms, depending on
logistical considerations and participant preferences.

30
Simultaneously, questionnaires will be distributed to staff members within the institutions to
gather quantitative data on various aspects of credit management practices. Clear instructions
will accompany the questionnaires to ensure consistent and accurate responses from the
participants. The research team will remain available to address any queries or concerns
raised by the participants throughout the data collection process.

Overall, the data collection procedure will be conducted in a systematic and transparent
manner, with a focus on maintaining open communication and collaboration with the
Specialized Financial and Promotional Institutions in the Adama Branch. By adhering to
ethical guidelines and obtaining informed consent from the participants, the research aims to
ensure the integrity and reliability of the data collected for analysis.

3.8.Data Analysis Techniques

The data obtained from the field will undergo a systematic editing process to ensure the
accuracy and completeness of every questionnaire. Any inconsistencies or errors will be
addressed during this stage to maintain the integrity of the dataset. Subsequently, the data will
be numbered and coded using a coding manual as a guide. This coding process will facilitate
organization and categorization of the data, enabling efficient analysis.

For data analysis, the latest version of the Statistical Package for the Social Sciences (SPSS)
will be utilized. SPSS is a powerful software tool commonly used for statistical analysis in
social science research. It offers a wide range of analytical capabilities, making it well-suited
for analyzing quantitative data collected through surveys and questionnaires.

The results of the study will be presented using frequency distributions and percentages.
Frequency distributions will provide insights into the distribution of responses for each
variable, allowing for a clear understanding of the patterns and trends within the data.
Percentages will be calculated to express the proportion of respondents or observations
falling into different categories. These statistical measures will help summarize the findings
and facilitate comparisons across different variables and subgroups within the dataset.
Overall, the data analysis techniques employed will enable a comprehensive examination of
credit management practices within specialized financial and promotional institutions
operating in the Adama Branch of microfinance institutions.

31
3.9. Ethical Consideration
In this study, ethical considerations are of utmost importance, and stringent measures will be
implemented to safeguard the rights and confidentiality of all participants. Prior to their
involvement in the research, informed consent will be obtained from all participants, clearly
articulating the purpose of the study, the voluntary nature of their participation, and the
assurance of confidentiality regarding their responses. Participants will be fully informed
about their rights, including the option to withdraw from the study at any point without facing
any adverse consequences.

To ensure anonymity and confidentiality, unique identifiers will be assigned to each

participant. This will prevent the disclosure of personal information and protect the privacy of
individuals involved in the study. Additionally, all data collected will be securely stored and
accessible only to authorized members of the research team. Any identifiable information
will be kept confidential and used solely for research purposes.

Moreover, ethical guidelines and principles of integrity will be strictly adhered to throughout
the research process. The study will be conducted with respect for the dignity and autonomy
of participants, and efforts will be made to minimize any potential risks or discomfort
associated with their involvement. Ethical approval will be sought from relevant institutional
review boards to ensure compliance with ethical standards and regulations governing
research involving human subjects. By upholding these ethical considerations, the research
aims to uphold the trust and welfare of all participants involved.

Chapter 4
4.1. Budget and plan of action
In undertaking the research in the Case of ‘Specialized Financial and Promotional Institutions
in Adama Branch,' a comprehensive budget and plan of action have been developed. The
32
budget encompasses various categories such as Materials and Supplies, Technology, Travel,
Training, and Miscellaneous. The costs outlined in the budget are derived from current
market information and various reliable sources, ensuring accuracy. The procurement of
essential items like questionnaires, printing and photocopying, interview equipment, laptops,
internet access, SPSS software, projectors, and transportation costs has been meticulously
planned. Additionally, training sessions for interviewers have been considered, along with a
contingency fund for unforeseen expenses. The plan of action spans a five month timeline
from February to June, delineating each phase, task, the designated start and completion
dates, assigned responsibilities, and the estimated time required for each task. This holistic
approach ensures a structured and well-prepared execution of the research study

4.1.1. Plan of action

Table 1:Plan of action
Phase Tasks Start Date End Date Task Days
Assigned Required
Research Develop a 01-Feb 05-Feb All team 05
Initiation detailed research
proposal.
Obtain necessary 06-Feb 09-Feb 04
approvals from
relevant
authorities.
Literature Conduct an 10-Feb 20-Feb 10
Review extensive review
of existing
literature.
Tool Develop 21-Feb 25-Feb 05
Developmen questionnaires
t and interview
guides.
Data Conduct 26-Feb 15-Mar 20
Collection interviews with

33
 management
personnel
according to
structured
format.
Distribute 16-Mar 25-Mar 10
questionnaires to
staff members
and collect
responses.
Data Enter and 26-Mar 05-Apr 10
Analysis organize collected
data and use
appropriate
statistical
methods for
analysis.
Reporting Draft research 06-Apr 30-Apr 15
report
summarizing
findings,
conclusions, and
recommendations
.
Review and 16-May 30-May 15
revise research
report based on
feedback
Finalization Prepare final 01-June 15-June 15
research report
incorporating
revisions.

34
 Submit final 16-June 28-June 13
research report
to relevant
stakeholders.
Evaluation Present findings ? ? ? ?
at conferences or
workshops.

4.1.2. Budget
Table 2:Budget
Category Budget Items Specification Number Unit Cost Total
of Items (ETB) Cost(ET
B)
Materials Paper for Size: Standard 300 3 900
and Questionnaires letter size
Supplies and interview (8.5 x 11
question inches) or
A4 size.
Quality: High-
quality
paper to
ensure
durability
and
prevent
tearing
Color: White or
light-
colored
paper for
easy

35
 readabilit
y.
Print Suitable
Quality: for clear
and crisp
printing.
Printing 300 5 1500
Interview Type: Digital 5 3200 15000
equipment Voice
(recorder) Recorder.
Recording High-
Format: quality
audio
formats
(MP3,
WAV).
Storage At least 8
Capacity: GB for
ample
recording
time.
Battery Long
Life: battery
life for
extended
use
(consider
rechargea
ble
batteries).
Exercise Books Size: as per 5 85 425
standard
size

36
 Number of 50
Pages:
Paper 70-80 gsm
Quality: (for a
balance of
durability
and
weight).
Ruling: Standard
ruled
lines for
easy note-
taking.
Pens Ink Color: Blue or 5 20 100
Black
(based on
preferenc
e)
Grip: Comforta
ble grip
for
extended
writing
Branding: Optional
organizati
on or
event
branding
Technology Computers/ Processor Intel Core 1 30000 30000
laptops i5 (8th
Gen)
RAM 8 GB
Storage 1TB HDD

37
 (Hard
Disk
Drive)
Operating Windows
System 10
Battery Up to 8
hours of
usage
Internet package unlimited One 6000 6000
access/year time
Software for Version: Latest A 5,515.17b 5,515.17b
data analysis version month irr irr
(SPSS) License: multi-
user
license
projector Brightness: 3,000 1 15000 15000
Lumens
Resolution: Full HD
(1920 x
1080
pixels)
Projection DLP
Technology (Digital
Light
Processin
g) or LCD
(Liquid
Crystal
Display)
Projection Varies
Size: based on
model
(adjustabl

38
 e)
USB Flash Capacity: 8 GB 1 300 300
Drive (Gigabyte
)
Material: Steel or
metal
alloy.
Compatibil with USB
ity: ports on
Compatible Windows
Travel Transportation Assistant/ 5 people 500 4000
costs day
No of days 8 days
Training training House For 1 1000 1000
sessions rental day
allowance 5
audiencea
nd 1
trainer
Miscellane Contingency 5000 5000
ous fund
Other Editorial 1000 1000
Consultation
Language 500 500
Consultation:
Total 86240.17

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