WERABE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

DETERMINANTS OF CREDIT RISK MANAGEMENT PRACTICES, THE

CASE OF SELECTED PRIVATE COMMERCIAL BANKS IN WERABE
TOWN, CENTRAL ETHIOPIAN REGION, ETHIOPIA.

THESIS SUBMITTED TO DEPARTMENT OF ACCOUNTING AND FINANCE FOR THE

PARTIAL FULFILMENT OF THE REQUIRMENTS FOR THE MASTER OF SCIENCE
DEGREE IN ACCOUNTING AND FINANCE (M.Sc.)

BY:
SONIYA KEBEDE
(Reg.No. ID No.: MScAc/W/025/13)

UNDER THE GUIDANCE OF ADVISOR:

Dr. MATEWOS K.
Assistant Professor
CO- ADVISOR:
ENDALKACHEW N. (M.Sc.)

DECEMBER, 2023
Werabe, Ethiopia

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 DECLARATION
I hereby declare that this research thesis work entitled with; “Determinants of Credit Risk
Management Practices, The Case of Selected Private Commercial Banks in Werabe Town,
in Central Ethiopian Region.” submitted for the award of M.Sc. degree in Accounting and
Finance, is my original work and that all sources of materials used for the study have been duly
acknowledged. I also confirm that the research paper prepared, on the case of Private
Commercial Banks in Werabe town, in Central Ethiopian Region; by taking the revised standards
of Practice of Credit Risk Management and evidences from selected Branches working in
werabe town, as a yard stick and on the same topic earlier has not been submitted either in part or
in full to any other higher learning institution for the purpose of earning any degree.

Researcher:

____________________ __________________ ____________

Name Signature Date

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 CERTIFICATION
This is to certify that the thesis prepared by Soniya Kebede, entitled: “Determinants of Credit
Risk Management Practices, the Case of Private Commercial Banks in Werabe Town.”
under my supervision. This work is submitted in partial fulfillment of the requirements for M.sc.
Degree in Accounting and Finance complies with the regulations of the University and meets the
accepted standards with respect to originality and quality.

Approved by: Advisors:

Main Advisor: Dr. Matewos Kebede Signature ______________Date________

Co-Advisor: Endalkachew N. Signature _______________Date ________

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 ACKNOWLEDGEMENTS

First of all, my greatest thank goes to the Almighty God and for his mother St. marry, for giving
me the direction, strength, wisdom and dedication to start and accomplished this thesis paper
successfully. Immense gratitude also goes to my Advisor: Dr. Matewos K. (Asst.Prof.) and Co-
advisor: Mr. Endalkachew N. (M.Sc.) to which their unreserved advices were guiding me
throughout the thesis/research processes.

Finally, yet importantly special thanks and most profound gratitude deserves to my mother Wzo
Weyneshet Alemu and my brothers; Solomon Kebede and Semahegn kebede for their
unconditional love and consistent support without their support I would have never been able to
complete my study.

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 Abstract
This study tried to assess factors that affect credit risk management practices of some selected
private commercial banks in worabe town, silte zone, Central Ethiopian Region. In light of this,
the study identified some dimensions such as, credit granting process, credit risk measurement
and monitoring process, market risk, operational risk, legal risk, the establishment of credit risk
environment. So as to come up with the desired results data were collected from eleven private
commercial banks in werabe town namely: Abay Bank, Awash Bank, Bank of Abyssinia.
Cooperative Bank of Oromia, Dashen Bank, Debub Global Bank, Hibret Bank, Hijira Bank, Nib
International Bank, Oromia Bank and Zemzem Bank. A total of 98 respondents participated in
this study selected purposively. In the study both descriptive and explanatory designs were used.
Frequency percentage, mean, standard deviation, Pearson correlation coefficient as well as
regression were used for data analysis process using SPSS version 21. The result of correlation
coefficient showed that all variables are statistically significant and positively correlated with
the credit risk management practices of the mentioned private banks. As per the regression
coefficient which intensely shows the effect of the independent variables on dependent variables,
lack of appropriate credit risk environment (beta = .993, t = 9.612, p = < .000), followed by lack
of operational risk management (beta = .713, t =1.003, p = .318) and lack of credit
measurement and monitoring process (beta =.610, t= -571, p < .569) respectively and
significantly affect credit risk management practices of the studied private banks. Having all this
big crystals of truth in hand, the study gave some recommendations that the management body
may need to take so as to come up with a more effective and efficient risk management practices.

Key words: Credit Risk management, Legality assessment, Market risk, operational risk, private banks,

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 Contents
DECLARATION................................................................................................................. 1
CERTIFICATION ............................................................................................................... 2
ACKNOWLEDGEMENTS ................................................................................................ 3
Abstract ............................................................................................................................... 4
CHAPTER ONE ................................................................................................................. 7
BACKGROUND OF THE STUDY ................................................................................... 7
1.1. INTRODUCTION ................................................................................................... 7
1.2. Background the organization ........................................................................................................ 9
1.3. Statement of problem .................................................................................................................. 10
1.4. Research Questions ..................................................................................................................... 12
1.5. Objectives of the Study ............................................................................................................... 13
1.5.1. General objective ................................................................................................................ 13
1.5.2. Specific objectives .............................................................................................................. 13
1.6. Significance of the study ............................................................................................................. 13
1.7. The scope of the study ................................................................................................................ 13
1.8. Organization of the Study ........................................................................................................... 14
CHAPTER TWO .............................................................................................................. 15
2. LITERATURE REVIEW .......................................................................................... 15
INTRODUCTION ............................................................................................................ 15
2.1. Theoretical Review ..................................................................................................................... 15
2.1.1. Definition of Credit Risk..................................................................................................... 15
2.1.2. Concept of Credit Risk Management .................................................................................. 16
2.1.3. Main Source of Credit Risk ................................................................................................ 17
2.1.4. Credit Assessment ............................................................................................................... 18
2.1.5. Credit Risk Enhancement.................................................................................................... 20
2.1.6. Tools of Credit Risk Management ...................................................................................... 21
2.1.7 The two Dimensions of Credit Risk Management .............................................................. 22
2.1.8 Factors Influencing Effectiveness of Credit Risk Management Practices .......................... 23
2.1.9 Internal Performance Measures of Bank Lending .............................................................. 25
2.2 Empirical Review........................................................................................................................ 28
2.2.1. Impact of Bank Size on Credit Risk Management .............................................................. 28
CHAPTER THREE .......................................................................................................... 31
RESEARCH METHODOLOGY...................................................................................... 31
3.1. INTRODUCTION ...................................................................................................................... 31

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 3.2. Research Design.......................................................................................................................... 31
3.3. Population and sampling ............................................................................................................. 31
3.5. Method of data collection ........................................................................................................... 33
3.6. Source of Data............................................................................................................................. 33
3.7. Methods of Data Analysis and Processing .................................................................................. 33
CHAPTER FOUR............................................................................................................. 34
RESULT AND DISCUSSION .......................................................................................... 34
4. Introduction ..................................................................................................................................... 34
4.1. Response Rate ............................................................................................................................. 34
4.2. Risk Identification Methods ........................................................................................................ 36
4.3. Factors Affecting Credit Risk Handling Techniques .................................................................. 37
4.4. Descriptive Result using Mean and Standard Deviation............................................................. 39
4.4.1. Factor Affecting Establishment of Appropriate Credit Risk Environment ......................... 40
4.4.2. Credit Granting Process of the Study Area ......................................................................... 42
4.4.3. Maintaining an Appropriate Credit Administration, Measurement and Monitoring Process
44
4.4.4. The Effect of market Risk on Credit Risk Management ..................................................... 45
4.4.5. Operational Risk Analysis‟s................................................................................................ 46
4.4.6. Legal Risk Analysis and Handling Techniques .................................................................. 48
4.4.7. Correlation Analysis on the Determinants of Credit Risk................................................... 49
4.5. Discussion of the Results ............................................................................................................ 51
CHAPTER FIVE .............................................................................................................. 54
SUMMARY, CONCLUSION AND RECOMMENDATION .......................................... 54
5.1. Introduction ................................................................................................................................. 54
5.2. Summary of Findings .................................................................................................................. 54
5.3. Conclusion of the Study .............................................................................................................. 56
5.4. Recommendation ........................................................................................................................ 58
Reference .......................................................................................................................... 59
Appendix: Questionnaire .................................................................................................. 61

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 CHAPTER ONE
BACKGROUND OF THE STUDY
1.1. INTRODUCTION
Most of the time economic problems are common to all poor society in the world even if its type
and degree differ from time to time. Economic problems are present in both urban and rural
areas. However, people may take different mechanisms to overcome this problem. Credit is one
mechanism of overcoming economic problem for society. The term credit thus means reposing
trust of confidence in some body. By credit we mean that, the power which one person has to
induce another to put economic good at this disposal a time on promise or future payment. Credit
is thus an attribute of power the borrower (Thomas 1990).

The financial sector plays an important role in the development of the economy and growth in
any country. The banking sector is considered as an important source of financing for most
businesses. The past decade has seen dramatic changes in managing risk in this industry. In
recent years, supervisors and financial institutions have increased the focus on the importance of
risk management (Davide and Thangavel, 2008).

According to Edward (2006) risk management defined as the identification, assessment, and
prioritization of risks followed by coordinated and economical application of resources to
minimize, monitor, and control the probability and/or impact of unfortunate events or to
maximize the realization of opportunities. Credit risks can come from uncertainty in financial
markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as
well as deliberate attacks from an adversary. The strategies to manage risk include transferring
the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting
some or all of the consequences of a particular risk (Yuqi Li, 2006)

Credit risk is by far the most significant risk faced by Banks and the success of their business
depends on accurate measurement and efficient management of this risk to a greater extent than
any other risk. Increases in credit risk will raise the marginal cost of debt and equity, which in
turn increases the cost of funds for the Bank (Basel Committee, 2011).

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Credit creation is the main income generating activity for the Banks. But this activity involves
huge risks to both the lender and the borrower. The risk of a trading partner not fulfilling his or
her obligation as per the contract on due date or anytime thereafter can greatly jeopardize the
smooth functioning of Bank‟s business. On the other hand, a Bank with high credit risk has high
bankruptcy risk that puts the depositors in jeopardy. To maintain adequate profit level in this
highly competitive environment, Banks have tended to take excessive risks. However, it exposes
the banks to credit risk. The higher the Bank exposure to credit risk, the higher the tendency of
the Banks to experience financial crisis and vice-versa (Cebenoyan, 2004). The Basel Committee
on Banking Supervision (2003) asserts that loans are the largest and most obvious source of
credit risk.

Having an effective risk management is a crucial for banking business. Without a doubt, in
present day‟s unpredictable and explosive atmosphere all banks are in front of enormous risks
such as, credit risk, liquidity risk, operational risk, market risk, foreign exchange risk and interest
rate risk, along with other risks, which may possibly affect the survival and successes of banks
(Richard, 2011).

Credit risk management is very important to banks as it is an integral part of the loan process. It
maximizes bank risk, adjusted risk rate of return by maintaining credit risk exposure with view to
shielding the bank from the adverse effects of credit risk. Banks are investing a lot of funds in
credit risk (Tibebu, 2011).

Banking industry in Ethiopia was dominated until very recently by the public owned commercial
banks namely Commercial Bank of Ethiopia and Development Bank of Ethiopia. The sector was
opened for private investors since the early 90s. Since then some 25 private banks have been
established and have been a significant engine for the growing economy. Private commercial
banks in Ethiopia extend credit (loan) to different types of borrower for many different purposes.

In developing countries, including Ethiopia, Private commercial Banks emerged with unique
opportunity to the large people (as a deficit unit) who are interested to access a credit from these
commercial Banks.

However, as the private banks in the country are very young they can be threatened by the lack
of effective credit management practice.

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Therefore, this study were conducted on credit Risk management practice of Private commercial
Bank branches which were founded in different times specifically to assess Determinants of
credit Risk management issues in these branches in werabe town.

1.2. Background the organization

In Ethiopia, the National Bank of Ethiopia (NBE) began its operation in January 1964 after its
establishment in 1963 by proclamation 206 of 1963. According to National Bank of Ethiopia
(NBE Report 2022), currently, by excluding the two public banks namely Commercial bank
of Ethiopia and Development bank of Ethiopia; there are around Twenty Five privately owned
commercial banks have been operating in Ethiopia. These Banks are listed below:

Table 1: List of Private Commercial Banks in Ethiopia: As of 18 Aug 2022 (from NBE Report)
S.no Name of Bank Year of No of Branch Gross Profit (in Remark
establish ETB Millions)
1 Abay Bank S.C 2010 159 Branches 190,000
2 Addis International Bank 2011 >52
3 Ahadu Bank 2021
4 Amhara Bank
5 Awash International Bank 1994 43 1,381.00
6 Berhan International Bank 2010 46 131.00
7 Bunna International Bank 2009 205 625.00
8 Bank of Abyssinia 1996 233 534.00
9 Cooperative Bank of Oromia 2005 467 1.7mill
10 Debub Global Bank 2012 123 19.00
11 Dashen Bank 1995 438 1.8mill
12 Enat Bank 2013 7 39.00
13 Goh Betoch Bank SC 2021
14 Hijira Bank 2021 17
15 Lion International Bank 2006 235 480.33
16 Nib International Bank 1999 98 420.80
17 Oromia International Bank 2008 14 205.40
18 Siinqee Bank 2021 402
19 Shabelle Bank 2021
20 Tsedey Bank
21 Tsehay Bank 2022

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22 United Bank/Hibret Bank 1998 380 350.00
23 Wegagen Bank 1997 211 478.00
24 Zemen Bank 2009 1 131.00
25 ZemZem Bank 2021 10
In line with this, out of these total lists of Private commercial Bank branches in Ethiopia; this
study was focused on eleven Banks (on a total of 15 Branches) those have been working in
werabe town as a Branch office.
S.N Name of the Bank Year of Establishment No. of Branches in Werabe Town
1 Zemzem Bank 2021 1
2 Hijira Bank 2021 1
3 Debub Global Bank 2012 1
4 Abay Bank 2009 1
5 Awash Bank 1994 2
6 Dashen Bank 1995 2
7 Bank of Abyssinia 1996 1
8 Nib International Bank 1999 2
9 Cooperative Bank of Oromia 2005 1
10 Oromia Bank 2008 2
11 Hibret Bank 1998 1

1.3. Statement of problem

In its simplest form, credit risk management involves the identification, evaluation and
management of a company's exposures to loss resulting from borrowers default to pay the
principal and interest on loan on the due date. In other words, credit risk management attempts to
mitigate the occurrence of losses while initiating advance planning to assure that adequate funds
will be available to cover those losses that occur (Yong, 2003).

While financial institutions have faced difficulties over the years for a multitude of reasons, the
major cause of serious banking problems continues to be directly related to credit standards for
borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes
in economic or other circumstances that can lead to a deterioration in the credit standing of a
bank‟s counterparties (Cebenoyan, 2004).

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The outcome of banks credit risk management practices can be affected by internal and external
factors. Government policy, infrastructure facilities, inflation, global economic crises, credit
culture of the society and economic level of the countries are among external factors that can
affect credit risk management practice of commercial banks, on the other hand, Poor credit
assessment technique, poor credit approval process, lack of credit management tools, lack of
supervisory monitoring and evaluating, lack of effective credit guideline and inadequate
employee are some of the internal factors that determine credit risk management practice of
commercial banks (Yuqi Li, 2006).

Since exposure to credit risk continues to be the leading source of problems in banks World-
wide, banks and their supervisors should be able to draw useful lessons from past experiences.
Banks should now have a keen awareness of the need to identify measure, monitor and control
major credit risk factors before the bank incurred to risks (Atakelt, 2015).

Developing a strong credit risk management framework can help commercial banks to minimize
exposures to risks and to improve the competitive ability within the market.

Private banks in Ethiopia provide several types of credit facilities such as, overdraft credit
service, merchandise loan facilities, pre-shipment export facilities, revolving credit facilities,
special truck loan financing, short term loan, medium and long term loan agricultural input loans,
etc.,.

According to the survey National Bank of Ethiopia (NBE) (2010), the private commercial
banking system in Ethiopia has been witnessing a significant expansion over the past ten years
than before even though the Ethiopian banking industry was still Underdeveloped. The survey
believes that such growth should be matched with strong credit risk management practices. This
is because with the fastest economic growth of the country, societal demand of credit service also
increase and this situation may increase credit risk on the banks unless and otherwise banks have
effective credit risk management program. Accordingly, this research believes that to come up
with a more advanced form of credit risk management practice of private banks an academic
study should focus first of all, on identifying factors that affect credit risk management practice
of private banks. Based on this, the study focused on identifying major factors that determine
credit risk management of private banks. With related to credit risk issues the study tried to

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assess different published and unpublished research results to reduce similarities with other
researches.

Accordingly, there are a number of studies provided on issues related to credit risk management
in Ethiopia: majority of the studies done in the banking sector of Ethiopia has been focused on
the impact of credit management on financial performance, tools of credit management, liquidity
risk and bank performance determinants.

To mention just a few among the studies conducted by different postgraduate students on private
commercial banks as follows (case in Bunna, Wegagen Nib Banksand others); and researchers
such as, Yalemzewd (2013) assess credit management practice of Bunna International Bank S.C
and analyzed the process of accessing credit, credit control process and credit collection strategy
against non-performing loan of the bank.

Tibebu (2011) assesses credit risk management practice of Nib International Bank S.C and find
out that risk which emanates from credit is due to high degree of credit concentration in few
sector and borrowers, and Girma (2010) in his study of tools used to credit management in
Wegagen Bank deal only focusing on the tools used by the bank to manage risk. However, in
Ethiopia none of the studies addresses in examining factor affecting credit risk management
practice of private banks. The main purpose of the study was to follow a comprehensive
approach towards identifying credit risk determinant factors taking into account some private
commercial bank branches in the werabe town.

To this end, the underlying motivation of the researcher is to fill this gap on literature and to
make an effort to bring empirical evidence by identifying major Determinants of credit risk
management practice of private commercial banks in werabe town. Thus, this study would
contributes to the limited literature on credit risk management practice of private commercial
bank Branches in werabe town; Central Ethiopia and it would contributes in identifying major
determinate factors on its future findings.

1.4. Research Questions

Based on the provided statement of the problem above, the study was trying to answer the
following basic research questions:-

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 1. How establishing Credit risk environments affect credit risk of the banks?
2. How Credit Granting processes affect the Banks Credit risk management Practice?
3. How Credit Measurement and Monitoring process Affect Credit risk management Practice?

1.5. Objectives of the Study

1.5.1. General objective

The major objective of the study is to assess Determinants of credit risk management practice of
private commercial Bank Branches in werabe town; Central Ethiopian Region

1.5.2. Specific objectives

The specific objectives of the study would be:-
1. To examine the effect of establishing Credit risk environments on credit risk management
practice of the Private commercial Bank Branches in werabe town;
2. To assess credit granting processes of the banks and its effect on credit risk management
practice of the Private commercial Bank Branches in werabe town;

3. To examine the effect of Credit Measurement and Monitoring process of the banks in credit
risk management practice of the Private commercial Bank Branches in werabe town.

1.6. Significance of the study

The findings and recommendations of this study would be important for management of the
banks and it might draw attention to some of the points which a corrective action and that would
enable them to make such corrections. Furthermore, this study would serve as an input and basis
for other researchers, academicians, consultants and some associations who are in desire of
conducting further researches on related issues.

1.7. The scope of the study

This study was delimited only to assess the Determinants of credit risk management practice of
private commercial Banks operating in werabe town; Central Ethiopian Region. The study was
also delimited to all of fifteen branches of 11 private commercial Banks operating in werabe
town. Since there is limited number of private commercial banks operating in werabe town, this
study covered all of these private commercial bank branches. And assessing of similar areas

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might help to indicate their common challenges in aggregate. The study would also be delimited
itself on the primary data that had been gathered using questionnaires.

1.8. Organization of the Study

The whole thesis research was organized in to five chapters. The first chapter was the
introduction of the study, statement of the problem, objective of the study, significance of the
study, delimitation (scope of the study). The second chapter introduces review of related
literature in the area. The third chapter deals with the research design and methodology. The
fourth chapter would be presents the analysis and the fifth chapter would contains summary of
the major findings, conclusion and recommendation of the study. Finally list of references and
appendices were annexed at the end of the page.

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 CHAPTER TWO

2. LITERATURE REVIEW
INTRODUCTION
This chapter presents what other scholars have written about the Determinants of credit risk
management practice of private commercial banks, the variables and methodology they would
use and their findings and recommendations. Therefore, this study was trying to indicate some of
the theoretical and empirical related literature which defined and elaborates the theories about
each dependent and independent variables including the measurements of banks credit risk.

2.1.Theoretical Review
The theoretical part of the review provides theoretical literatures related to factors affecting
credit risk management practices of commercial banks. Banks in today world have many
functions. Lending is the most important one. Credit or loans covers the large portion of banks
total asset and a backbone of every bank structure. In formulating policies and procedures for the
credit granting process several basic steps must be taken by credit management (Beckman use&
Foster1924).

2.1.1. Definition of Credit Risk

Credit risk is most simply defined as the potential that a bank borrower or counterparty would
fail to meet its obligations in accordance with agreed terms. The goal of credit risk management
is to maximize a bank‟s risk adjusted rate of return by maintaining credit risk exposure within
acceptable parameters (Yuqi Li, 2006).

Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in
individual credits or transactions.

Banks should also consider the relationships between credit risk and other risks. The effective
management of credit risk is a critical component of a comprehensive approach to risk
management and essential to the long-term success of any banking organization (Edward, 2006).

Credit risk, as defined by the Basel Committee on Banking Supervision (2003), is also the
possibility of losing the outstanding loan partially or totally, due to credit events (default risk). It

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can also be defined as the potential that a contractual party fail to meet its obligations in
accordance with the agreed terms. Credit risk is also variously referred to as default risk,
performance risk or counterparty risk. A Bank exists not only to accept deposits but also to grant
credit facilities, therefore inevitably exposed to credit risk. Credit risk is by far the most
significant risk faced by Banks and the success of their business depends on accurate
measurement and efficient management of this risk to a greater extent than any other risks
(Cebenoyan, 2004).

According to Davide and Thangavel, (2008), credit risk is the degree of value fluctuations in
debt instruments and derivatives due to changes in the underlying credit quality of borrowers and
counterparties.

Koehn and Santomero (2006) define credit risk as losses from the refusal or inability of credit
customers to pay what is owed in full and on time. Credit risk is the exposure faced by Banks
when a borrower (customer) defaults in honouring debt obligations on due date or at maturity.
This risk interchangeably called “counterparty risk” is capable of putting the Bank in distress if
not adequately managed. Credit risk management maximizes Bank‟s risk adjusted rate of return
by maintaining credit risk exposure within acceptable limit in order to provide framework for
understanding the impact of credit risk management on Banks‟ profitability (Edwad, 2006).

2.1.2. Concept of Credit Risk Management

According to Tseganesh (2012) credit risk management includes all management function such
as identification, measurement, monitoring and control of the credit risk exposure. The writer
further indicated that for long term achievement of banking sector effective credit risk
management practice is a vital issue in the current business environment and poor credit risk
management policy will create serious source of crisis in the banking industry.

According to Atakelt (2015) Credit risk management practice define as the process of analyzing
and renewing Credit risk management documents and apply constantly in actual Credit granting
process, Credit administration and monitoring and risk controlling process with suitable Credit
risk environment, understanding and identification of risk so as to minimize the unfavorable
effect of risk taking activities and the effectiveness of credit risk management process is
dependent on different variables such as proper application of best Risk management documents,

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Staff quality, Credit culture, devoted top management bodies, sufficient training program, proper
organizational structure, ample level of internal Control and Performance of intermediation
function. This indicates that credit risk management includes different issues such as developing
and implementing suitable credit risk strategy, policy and procedure, accurate identifications of
risk, best credit granting process, credit administration, monitoring and reporting process
determining and controlling the frequency and methods of reviewing credit policy and procedure
and setting authority and responsibility clearly. Besides he mentioned that by establishing
suitable credit risk environment, acceptable level of credit limit, best credit granting process,
proper monitoring and controlling credit risk and optimizing risk return of a bank credit risk
management develop credit performance.

2.1.3. Main Source of Credit Risk

The main source of credit risk include, limited institutional capacity, inappropriate credit
policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity
levels, direct lending, massive licensing of Banks, poor loan underwriting, laxity in credit
assessment, poor lending practices, government interference and inadequate supervision by the
central Bank (Davide and Thangavel, 2008).

Credit risk is critical since the default of a small number of important customers can cause large
losses, which can lead to insolvency (Basel Commute, 2003).

An increase in Bank credit risk gradually leads to liquidity and solvency problems. Credit risk
may increase if the Bank lends to borrowers it does not have adequate knowledge about. Richard
(2011) state that the most obvious characteristics of failed Banks poor operating efficiency.

Cebenoyan (2004), suggest that Bank risk taking has pervasive effects on Bank profits and
safety. Edward (2006) asserts that the profitability of a Bank depends on its ability to foresee,
avoid and monitor risks, possible to cover losses brought about by risk arisen. This has the net
effect of increasing the ratio of substandard credits in the Bank‟s credit portfolio and decreasing
the Bank‟s profitability.

According to NBE (2010), Revised Risk Management Guidelines, credit risk arises any time
bank funds are extended, committed, invested, or otherwise exposed, whether reflected on or off

17
the balance sheet as a result of lax exposure management, poor economic conditions, or a variety
of other factors. However, generally the risk is assumed to be a rise from transaction (default)
risk, operation risk, lack of supervision and portfolio risk. These signify the role of credit risk
management and therefore it forms the basis of present research analysis.

2.1.4. Credit Assessment

A thorough credit and risk assessment should be conducted prior to the granting of loans, it
should also focuses on the credit risk assessment of other determinate factors. The results of this
assessment should be presented in a Credit Application that originates from the relationship
manager/account officer (RM‖), and is approved by Credit Risk Management (CRM). The RM
should be the owner of the customer relationship, and must be held responsible to ensure the
accuracy of the entire credit application (Yong, 2003).

According to Ayalew (2011) Credit Applications should summaries the results of the RMs risk
assessment and include, as a minimum, the following details:

Borrower Analysis
The majority shareholders, management team and group or affiliate companies should be
assessed. Any issues regarding lack of management depth, complicated ownership structures or
inter group transactions should be addressed, and risks mitigated.

Industry Analysis

The key risk factors of the borrower‟s industry should be assessed. Any issues regarding the
borrower‟s position in the industry, overall industry concerns or competitive forces should be
addressed and the strengths and weaknesses of the borrower relative to its competition should be
identified.

Supplier/Buyer Analysis
Any customer or supplier concentration should be addressed, as these could have a significant
impact on the future viability of the borrower.

Historical Financial Analysis

An analysis of a minimum of 3 years historical financial statements of the borrower should be
presented. Where reliance is placed on a corporate guarantor, guarantor financial statements

18
should also be analyzed. The analysis should address the quality and sustainability of earnings,
cash flow and the strength of the borrower‟s balance sheet. Specifically, cash flow, leverage and
profitability must be analyzed.

Projected Financial Performance

Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower‟s future
financial performance should be provided, indicating an analysis of the sufficiency of cash flow
to service debt repayments. Loans should not be granted if projected cash flow is insufficient to
repay debts.
Account Conduct
For existing borrowers, the historic performance in meeting repayment obligations (trade
payments, cheques, interest and principal payments, etc.) should be assessed.
Adherence to Lending Guidelines
Credit Applications should clearly state whether or not the proposed application is in compliance
with the bank‟s Lending Guidelines. The Bank‟s Head of Credit or Managing Director/CEO
should approve Credit Applications that do not adhere to the bank‟s Lending Guidelines.

Mitigating Factors
Mitigating factors for risks identified in the credit assessment should be identified. Possible risks
include, but are not limited to: margin sustainability and/or volatility, high debt load
(leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; New
business line/product expansion; management changes or succession issues; customer or supplier
concentrations; and lack of transparency or industry issues.

Loan Structure
The amounts and tenors of financing proposed should be justified based on the projected
repayment ability and loan purpose. Excessive tenor or amount relative to business needs
increases the risk of fund diversion and may adversely impact the borrower‟s repayment ability.
Security

A current valuation of collateral should be obtained and the quality and priority of security being
proposed should be assessed. Loans should not be granted based solely on security. Adequacy
and the extent of the insurance coverage should be assessed.

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2.1.5. Credit Risk Enhancement
Credit enhancement is the technique of risk-sharing and mitigation to facilitate commercial
performances and operations in line with the institute‟s objectives and goals. The fundamental
tasks include customers or client development operations, credit-based financial transactions
efficiency and effectiveness, transactions performance, innovations, transparency, and risk
awareness and others (Basel Committee, 2003).

Client development is basic and integral part of the commercial success and profitability. It is a
demand-driven operation that grounded into the financial institutes‟ strategies and interests‟
frameworks towards the economic developments (Richard, 2004).

Efficiency and effectiveness is a key to the commercial sectors in terms of their development and
impacts it focusing on healthy and operable financial transactions and its comparative advantages
(in consideration of their long-term and/or sovereign risk) while letting its financing clients focus
on their comparative advantages (such as short-term, medium-term, and/or commercial risks)
(Cebenoyan, 2004).

Lending Process
Process and Work Analysis of Bank Lending Activity
Koch and Macdonald (2000) pointed out that the activities in the process of commercial and
industrial (C&I) loans follow eight steps. These steps are application, credit analysis, decision,
document preparation, closing, recording, servicing and administration, and collection.
Internal Measures before Lending Decision
According to Menkhoff, Neuberger and Suwanaporn (2006), the factors for evaluation generally
used in this situation are in line with the 6C principles of basic lending. These 6C's are Character,
Capacity, Capital, Collateral, Conditions and Control, which are also important reference indexes
for banks when making a credit analysis to decide whether or not a borrower is worthy of a loan.
Viewed overall, according to the principles, the internal measure for measuring the value or
quality of the output at this stage, regarding the visiting report, can be determined by whether the
collection of information by the loan officer concerning the is accurate and complete, or not
(Haider and Birley, 2001).

20
By analyzing a borrower's situation using the 6C principles, the comparatively more difficult
situations encountered by a loan officer become capacity and condition because in addition to the
understanding and analysis of the information about capacity and condition, it is also necessary
to determine whether any future changes will affect the financial situation and the loan repaying
ability of an enterprise. Therefore, if an excellent, professional loan officer can accurately and
completely collect information in these capacity and condition, the value of the visiting report
will be high (Koch and Macdonald, 2000).

2.1.6. Tools of Credit Risk Management

2.1.6.1. Credit Risk Control Tools
Tools like covenants, collateral, credit rationing, loan securitization and loan syndication have
been used by banks in developing the world in controlling credit losses (Hugh, 2001).

Marphatia and Tiwari (2004) argued that risk management is primarily about people – how they
think and how they interact with one another. Technology is just a tool; in the wrong hands it is
useless. This stresses further the critical importance of qualified staff in managing CR.

According to Davide and Thangavel (2008) the tools through which credit risk management is
carried out are:

Exposure Ceilings
Prudential Limit is linked to Capital Funds - say 15% for individual borrower entity, 40% for a
group with additional 10% for infrastructure projects undertaken by the group, Threshold limit is
fixed at a level lower than Prudential Exposure; Substantial Exposure, which is the sum total of
the exposures beyond threshold limit should not exceed 600% to 800% of the Capital Funds of
the bank (i.e. six to eight times).
Review/Renewal
Multi-tier Credit Approving Authority, constitution wise delegation of powers, Higher delegated
powers for better rated customers; discriminatory time schedule for review/renewal, Hurdle rates
and Bench marks for fresh exposures and periodicity for renewal based on risk rating, etc are
formulated.

21
Risk Rating Model
Set up comprehensive risk scoring system on a six to nine point scale. Clearly define rating
thresholds and review the ratings periodically preferably at half yearly intervals. Rating
migration is to be mapped to estimate the expected loss.

Risk based scientific pricing

Link, loan pricing to expected loss. High-risk category borrowers are to be priced high. Build
historical data on default losses. Allocate capital to absorb the unexpected loss.

Portfolio Management
The need for credit portfolio management emanates from the necessity to optimize the benefits
associated with diversification and to reduce the potential adverse impact of concentration of
exposures to a particular borrower, sector or industry. Stipulate quantitative ceiling on aggregate
exposure on specific rating categories, distribution of borrowers in various industry, business
group and conduct rapid portfolio reviews.

Loan Review Mechanism

This should be done independent of credit operations. It is also referred as Credit Audit covering
review of sanction process, compliance status, and review of risk rating, pickup of warning
signals and recommendation of corrective action with the objective of improving credit quality.
It should target all loans above certain cut-off limit ensuring that at least 30% to 40% of the
portfolio is subjected to LRM in a year so as to ensure that all major credit risks embedded in the
balance sheet have been tracked.

2.1.7 The two Dimensions of Credit Risk Management

According to Yalemzewd (2013) credit risk management practice can classified in to two distinct
dimensions as preventive measures and curatives measures. Preventive measures include risk
assessment, risk measurement and risk pricing, early warning system to pick early signals of
future defaults and better credit portfolio diversification. The curative measures, on the other
hand, aim at minimizing post sanction loan losses through such steps as securitization, risk
sharing, legal enforcement etc. It is widely believed that an ounce of prevention is worth a pound
of cure.

22
2.1.8 Factors Influencing Effectiveness of Credit Risk Management Practices
Loans that constitute a large proportion of the assets in most banks' portfolios are relatively
illiquid and exhibit the highest. The theory of asymmetric information argues that it may be
impossible to distinguish good borrowers from bad borrowers, which may result in adverse
selection and moral hazards problems. Adverse selection and moral hazards have led to
substantial accumulation of non-performing accounts in banks. The very existence of banks is
often interpreted in terms of its superior ability to overcome three basic problems of information
asymmetry, namely ex ante, interim and ex post (Uyemura and Deventer, 2000).

Credit Risk Management Process

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

Risk – Adjusted Performance Measures

Several risk-adjusted performance measures have been proposed (Heffernan, 2002; Kealhofer,
2003). The measures, however, focus on risk-return trade-off, which include measuring the risk
inherent in each activity or product and charge it accordingly for the capital required to support it.
This does not solve the issue of recovering loanable amount. Effective system that ensures
repayment of loans by borrowers is critical in dealing with asymmetric information problems and
in reducing the level of loan losses, thus the long-term success of any banking organization
(Basel, 2003).

Credit Risk Management Practices

Effective CRM involves establishing an appropriate CR environment; operating under a sound
credit granting process; maintaining an appropriate credit administration that involves
monitoring process as well as adequate ensure that there are proper and clear guidelines in
managing CR, that is, all guidelines are properly communicated throughout the organization; and
that everybody involved in CRM understand them. Considerations that form the basis for sound
CRM system include: policy and strategies (guidelines) that clearly outline the scope and

23
allocation of a bank credit facilities and the manner in which a credit portfolio is managed, that
is, how loans are originated, appraised, supervised and collected The recommendation has been
widely put to use in the banking sector in the form of credit assessment. According to the
asymmetric information theory, a collection of reliable information from prospective borrowers
becomes critical in accomplishing effective screening (Basel, 2004).
Assessment of Borrowers

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

Clearly Established Credit Approval Process

Clearly established process for approving new credits and extending the existing credits has been
observed to be very important while managing. Further, monitoring of borrowers important as
current and potential exposures change with both the passage of time and the movements in the
underlying variables, and are also very important in dealing with moral hazard problem
Monitoring involves, among others, frequent contact with borrowers, creating an environment
that the bank can be seen as a solver of problems and trusted adviser; develop the culture of
being supportive to borrowers whenever they are recognized to be in difficulties and are striving
to deal with the situation; monitoring the flow of borrower's business through the bank's account;
regular review of the borrower's reports as well as an on-site visit; updating borrowers credit files
and periodically reviewing the borrowers rating assigned at the time the credit was granted
(Donaldson, 2000; Tummala and Burchett, 2000; Mwisho, 2001; Basel, 2004; Treacy and Carey,
2004;).

24
2.1.9 Internal Performance Measures of Bank Lending
2.1.9.1. Risk management Process
Risk management is a process which involves an interlinked of sequence of function which
should be performed in order to measure, manage and control risk. Different methodologies for
identifying capture, analyzing and reporting credit market, liquidity and operational risks are at
the disposal of financial institutions (Bonnevie, 2003).

According to Bennevie, credit risk management process as a methodology of identifying,

capturing and containing risk has eight different phases. These phases are shown on appendices 5
and 6 are also explained below:

The first phase involves position and market analysis. According to Bonnevie (2003), this phase
is marked by the following: first there is need for the financial institution to understand the
market environment in which it operates. In this case the financial institution should analyze its
position in the market, the intensity of competition in the market, the price elasticity of demand
for its product and customers‟ needs having identified its position and own share in the market,
the financial institution should also identify the sources of data after which an information
management structure is established. Finally, there is need to understand the legal aspect of the
risk to be taken.

The second phase is concerned with developing the knowledge about the risk awareness and
identification of tools to be used to manage risk. In this phase, there is need to evaluate the
degree of risk awareness, risk incentives, risk reward, perceptions and the risk acceptance limits.
In this phase, the institution should evaluate the risk in terms of volatilities and probabilities or
occurrence. The institution should also priorities the risk areas in relation to organizational goals
and risk appetite.

According to Bonnevie (2003) and Vanden (2004), risk appetite is the degree to which an
organization links its objectives and goals to risk finally, this phase is characterized with the
identification and deciding of the tools to be used in measuring monitoring and controlling risk
and how to integrate them into other organizational processes.

25
The next phase is the decision making phase. This involves deciding and agreeing on strategies
and tactics that should be used to link the risk appetite to business activities. Such strategies and
tactics may include the top-down or bottom techniques of measuring, evaluating and reporting
risks.

The fourth phase is concerned with the defining and deciding on the limits to steer the risk
management process. There is need to define and expose the stop-loss limits for each credit risk.
The institution should also decide on the corrective measure to be taken, the channels of
responsibility and the decision process to be followed.

Phase five involves communication of plans and decisions. In this phase, there is need to
establish a communication process among working groups between reporting lines and to decide
on the periodicity and means of communication. There is also a need to ensure that the risk
culture is widespread in the entire organizations‟ staff.

Phase six is the implementation of plans and decisions. According to Bonnevie (2003) and BIS
(2004), this phase requires senior management sponsorship, a clear vision of what is to done and
to ensure commitment to the organization‟s objectives.

The next phase is monitoring of results and events. It involves the linking of the assessed risk to
the established risk limits, aggregating of risk, diversification of risk and reporting of risk. In this
monitoring phase the top-down or bottom-up reporting method may be adopted. The last phase
in the management process has to do with management of the risk data in order to meet
organizational goals and expectations.

In conclusion, there are eight phases that constitute the requisites of measuring, managing and
controlling risk. In a commercial bank, the most dominant risk to measure and contain is the
credit risk. Although credit risk is not the only risk faced by a commercial bank, it is the risk that
has caused financial devastation in Uganda Commercial Banks for example; Green land bank,
(Ssewagudde, 2000).

According to Sewagudde (2000), the business of banking is measuring and accepting risk.
Because the major risk faced by commercial banks is the credit risk. Credit risk can be
interchangeable called loan default risk. Guidelines and procedures to measure and contain

26
default risk are explained in the next subsection as part of commercial bank credit policy,
procedures and guidelines.

2.1.9.2. Credit Policy in Commercial Banks

Credit policy is a frame work which provides the guidelines, procedures and responsibilities
involved in measuring, monitoring and controlling loan default risk.

According to Sewagudde (2000), a credit policy should provide parameters define

responsibilities and establish a system of checks and balances. It should include general policies,
specific loan strategies, miscellaneous loan policies and quality control committees whose role is
to guide the credit decision taken by the bank. A credit policy should be specific, clear, concise,-
relevant and should be supported by credit procedures. It should also define the bank‟s
acceptable and unacceptable risks.

A good number of authors BIS (2003), Sinkey (1998), Santomero (1996) and Ssewagudde
(2000) agree that since taking is central to banking, it is profitable for banks to take risks that are
reasonable, controllable and within their financial resources and competences According to these
authors, banks need not engage in businesses in a manner that necessarily impose risks on them.
Similarly, they should not absorb risks that can adversely affect their clients. In their strategic
planning, there is need for the banker to clearly specify and if need be quality the risk factors and
level of risk for each market target, target customer segments and loan concentration.

According to Sunkey (1998) and Ssewagudde (2000), the lender must weigh the pros and cons of
specialization and concentration of lending to industry sector, groups and individuals borrowers
to establish limits on their overall exposure to risk. If the loans in the portfolio are highly
concentrated and correlated with existing loans, then the lender is also concentrating loans on
loan default risks. If loans portfolio risk becomes excessive, it manifests itself in the form of bad
loans. High bad loans provisions and loan losses destroy the bank value (Ssewagudde, 2000).

Credit procedures are steps clarifying the techniques used by the bank to execute its credit
policy. Credit directives on the other hand are those to address credit policy issues in response to
the market and economic changes. Credit directives provide general parameters for the type of
clients and market the bank is willing to serve, the loan concentration levels and the acceptable
risk in each market and industry.

27
According to Sewagudde (2000), when a bank strategy, credit policy procedures and directives
have been carefully formulated and administered from the top and well understood all
organizational levels, it enables the bank to maintain proper credit standards, avoid excess risk
and evaluate business opportunities properly.

2.2 Empirical Review

This part of the study will summarizes various studies conducted in different countries which are
related with factor affecting credit risk management practice of commercial banks. Risk
Identification Risk identification is vital for effective risk management. In order to manage risks
effectively, management of bank have to know what types of risks the bank face. The important
thing during risk identification is not to miss any risks out. There are a number of different
techniques that can be used in risk identification The first step in organizing the implementation
of the risk management function is to establish the crucial observation areas inside and outside
the corporation (Edward, 2006). Then, the departments and the employees must be assigned with
responsibilities to identify specific risks.
For instance, interest rate risks or foreign exchange risks are the main domain of the financial
department in relation to commercial banks‟ practice of risk management, as study by Machiraju,
(2003), found that the UAE commercial banks were mainly facing credit risk. The study also
found that inspection by branch managers and financial statement analysis are the main methods
used in risk identification. The main techniques used in risk management are establishing
standards, credit score, credit worthiness analysis, risk rating and collateral.

The recent study by Richard (2012) was conducted on banks‟ risk management of Kenya‟s
national and foreign banks. Their findings reveal that the three most important types of risks
encountered by Kenya‟s commercial banks are foreign exchange risk, followed by credit risk,
then operating risk.

2.2.1. Impact of Bank Size on Credit Risk Management

The empirical evidence relating to the impact of bank size on credit risk appears to be mixed.
For instance, some studies report a negative association between credit risk and bank size, Koehn
and Santomero (2006) according to these studies, the inverse relationship means that large banks
have better risk management strategies that usually translate into more superior loan portfolios

28
vis-a-vis their smaller counterparts. There are also studies which provide evidence of a positive
association between NPLs and bank size (Rajan and Dhal, 2003).

In this study the size variable is constructed by computing the relative market share of the asset
of each commercial bank. Theoretical arguments suggest a negative relationship between these
two variables. Such a relationship is justified by the most natural argument that is diversification
by size. Indeed, larger banks are expected to have lower risks because they have the capability of
holding more diversifiable portfolios. Natural logarithm of total assets has been used as a proxy
for measuring bank size in most prior research (Basel Committee, 2003).

The empirical evidence relating to the impact of bank size on credit risk appears to be mixed. For
instance, some studies report a negative association between credit risk and bank size Cebenoyan
(2004) and Edward (2006).

According to these studies, the inverse relationship means that large banks have better risk
management strategies that usually translate into more superior loan portfolios vis-a-vis their
smaller counterparts. There are also studies which provide evidence of a positive association
between NPLs and bank size (Rajan and Dhal, 2003).

In this study the size variable is constructed by computing the relative market share of the asset
of each commercial bank. Theoretical arguments suggest a negative relationship between these
two variables. Such a relationship is justified by the most natural argument that is diversification
by size. Indeed, larger banks are expected to have lower risks because they have the capability of
holding more diversifiable portfolios (Girma, 2001).

The relation between Regulatory Capital and Credit Risk Management The literature on
regulatory capital and bank credit risk shows an inverse relationship. For example, Richard
(2004), in the context of 11 developing countries has shown a negative relationship between
capital ratio and portfolio risk.

Davide, and Thangavel, (2008) have presented a comparative study of all factors contributing to
the credit risks of commercial banks in a multi-country setting: Australia, France, Japan and the
U.S. represent developed economy banking systems while emerging ones are represented by
India, Korea, Malaysia, Mexico and Thailand. They have found that the regulatory capital is an

29
important factor influencing the credit risk of any banking system that offers a range of services.
This study also highlights that the credit risk in emerging economy banks is higher than that in
developed economies and that risk is formed by a larger number of bank specific factors in
emerging economies compared to their counterparts in developed economies. In the context of
emerging countries,

Basel committee (2011) has found that the regulation of capital and risk are negatively related.
The Effect of Loan Growth on Credit Risk Management Practice Credit growth sometimes called
loan growth implies credit expansions by banks. Excessive rapid loan growth, as well as sharp
declines in bank capital levels are useful pointers to the deterioration in the financial health of
banks and can be employed as early warning indicators of future problem loans (Richard, 2011).

A study by Tibebu (2011) shows growth in loan is a cause for credit risk. A strong loan growth
translates into significantly higher credit losses with a lag of 2-4 years (Basel Committee, 2011).

Impact of Operating Inefficiency on Credit Risk Management Regarding operating efficiency,

Richard (2011) found a negative but insignificant relationship with credit risk of Pakistan
commercial banks. Inefficient managers would not cope successfully with the process of
granting and monitoring loans that would lower the banks‟ credit quality and bring about a
growth in problem loans. Inefficient banks hold riskier portfolio (Lis, Pages and Saurina, 2000).

As studied by Berger and De Young (1997), poor management in the banking institutions results
in bad quality loans, and therefore, escalates the level of nonperforming loans. They argue that
bad management of the banking firms result in banks inefficiency and affects the process of
granting loans.

2.13. Conceptual Framework

Conceptual framework is a visual diagram that captures the main things to be studied that is
the key factors, concepts, or variables and the presumed relationships among them. As it can
be seen from the following conceptual frame work the variables involved are inter dependent
on one another and also affects the credit management practice of a bank directly or
indirectly.

30
 CHAPTER THREE
RESEARCH METHODOLOGY

3.1. INTRODUCTION
This chapter gives an outline of the research design and methodology that will be used in the
study. Therefore, research design, research approach, study Population and data Collection
Methods, data collection instruments, validity and reliability, method of data analysis and model
specification would be discussed respectively.

3.2. Research Design

This study employed the descriptive and explanatory research method. The descriptive method
has special importance for this particular study to portray several factors affect the activities of
credit risk management practice of the selected banks. On the other hand, by using explanatory
research design, this study tested whether the independent variables explained credit risk in the
bank branches under study.

3.3. Population and sampling

According to Majid (2018), the study population is the larger population in which the researcher
ultimately like to generalize the results of the study. Accordingly, the target population of this
study was all employees and managers of commercial bank branches operating in Werabe Town.
Accordingly, there are eleven private commercial banks in werabe town namely: Abay Bank,
Awash Bank, Bank of Abyssinia. Cooperative Bank of Oromia, Dashen Bank, Debub Global
Bank, Hibret Bank, Hijira Bank, Nib International Bank, Oromia Bank and Zemzem Bank. From
total number of 130 employees and Managers who work in these Banks, the total sample sizes of
98 respondents were selected by using Yamane formula; for the Data Collection purpose. This
study determines this sample size by using Stratified sampling technique.

Sampling method: The sample size determination focuses on view of each Bank‟s respondents.
The choice of employee respondents from the given banks were only focus on employees
working related to credit analysis and appraisal; credit monitoring, risk management. The total
staffs involved in all bank branches in werabe town; is 130, it‟s from all Banks and Branch
offices in werabe town.

31
S.N Name of the Bank Name of Branches in No. of Employees No. of Selected
Werabe Town in each Bank respondents (as a
Branches Sample size) from each
Branches
1 Zemzem Bank Werabe Branch 17 98/130*17 = 13
2 Hijira Bank HajiAliye Branch 7 98/130*7 = 5
3 Debub Global Bank Werabe Branch 14 98/130*14 =11
4 Abay Bank Hajane Branch 7 98/130*7 = 5
5 Awash Bank Mina Branch & 12 98/130*12= 9
Werabe Branch 13 98/130*13 = 10
6 Dashen Bank Werabe Branch & 6 98/130*6 = 5
Duna Branch 4 98/130*4 =3
7 Bank of Abyssinia Likot BaWerabe Branch 9 98/130*9 = 7
8 Nib International Werabe Branch & 12 98/130*12 = 9
Bank Halal Hakika Branch 7 98/130*7 = 5
9 Cooperative Bank of Omer Ibn Alkattab Branch 7 98/130*7 = 5
Oromia
10 Oromia Bank HajiFedlu Branch 5 98/130*5 = 4
Duna branch 4 98/130*4 = 3
11 Hibret Bank Werabe Branch 6 98/130*6 = 4
Total 130 98
A stratified sampling proportion to size was used to divide the total sample to each bank. Based
on this the total sample size of 98 respondents were selected from each banks, by using Yamane
formula; for the Data Collection purpose.
According to Yamane (1967)), sample size can be computed in the formula,
…………………………………………………………. (1)

Where, n= sample size

N= population size of the study
e= level of precision

To this study the sample size computed as:

3.4. Sampling size

Statistical sampling was used by applying Yamane Formula as Yamane (1967). Therefore,
sample of 98 employees were considered as a sample size who has been working in selected
Private Commercial Bank in Werabe Town.

32
3.5. Method of data collection
The quantitative and qualitative data collection tools were applied to collect data from the
concerned bodies. Accordingly, the likert types of questionnaires were used as instrument of data
collection. Secondary source of data had been used as supportive tool from available of
organization documents, such as books, published and unpublished materials.

3.6. Source of Data

To conduct this study the researcher majorly used the primary data to its successful
accomplishment. And secondary data which would be used as supportive document. This
secondary data was collected from different banks written materials like magazine, journals,
bank`s website and other relevant materials. The primary data was collected from credit manager
of selected Private Commercial Bank Branches in Werabe Town.

3.7. Methods of Data Analysis and Processing

This study would employ both descriptive and inferential tools for analyzing the data. After data
has been collected through questionnaires they were edited and categorized according to their
dimensions. Based on this, the study would be analyzed by using descriptive and explanatory
data analysis method. In the descriptive analysis method the study was described as respondent‟s
response by using table, frequency, graph, percentage, mean and standard deviation. On the other
hand, in the explanatory part, the data were analyzed as the cause – effect relation between the
dependent and independent variables by using correlation and regression analysis. Based on this
analysis, the cause effect relationship in this study was developed by the following model;

Yᵢ= (β₀ + β₁ACREᵢ₁+ β₂SCGPᵢ₂ + β ₃CAMMPᵢ₃ + ɛᵢ

Y is the outcome variable (dependent variable), β₁ is the coefficient of the first predictor
(ACRE₁), β₂ is the coefficient of the second predictor (SCGP₂), β₃ is the coefficient of the third
predictor (CAMM₃), and εᵢ is the difference between the predicted and the observed value of Y
for the participant. CR=ƒ (ACRE, SCGP, &CAMMP). Where: ACRE = Establishing an
Appropriate Credit risk environment: SCGP = Operating under a sound Credit granting process
CAMMP=Maintaining an Appropriate Credit Administration, Measurement and Monitoring
process.

33
 CHAPTER FOUR
RESULT AND DISCUSSION

4. Introduction
This Chapter presents Results and discussion of data collected by structured survey
questionnaires from selected Private Banks of ninety-eight respondents in the Central Ethiopian
Region. The data analysis is in harmony with the specific objectives where patterns were
investigated, interpreted and inferences drawn on them.

4.1. Response Rate

As indicated in the methodology part the study basically conducted using questionnaires filled by
respondents. The study totally distributes 98 questionnaires, similarly, the analysis were also
done based on those all 98 (100%),
Background of Respondents

Analyzing background of respondents is very necessary to associate how employee educational

level, work experience, and demographic factors effect on credit risk management practice of the
given banks. Accordingly, below table 4.1 indicate demographic characteristics of respondents.
Character Category Frequency Percentage (%)
Gender Male 65 66.3
Female 33 33.7
Total 98 100
Age 20-25 Years 13 13.3
26-35 Years 24 24.5
36 - 45 Years 44 44.9
Above 46 17 17.3
Total 98 100
Education Level College diploma 20 20.4
First Degree (BSc, BA) 66 67.3
Second Degree (MSc, MA) 12 12.2
Total 98 100.0
Experience Less than 3 years 16.3

34
 3 - 6 years 16 40.8
6 - 10 years 40 36.7
Above 10 years 36 6.1
Total 6 100.0
98
Authorized Body to Branch manager 15 15.3
Asses Risk Senior manager 21 21.5
Internal Auditor 10 10.7
External Auditor 7 7.5
Board of director 40 40.8
Risk management department 5 5.3
Total 98 100.0
Source: -Questionnaire 2023

Based on the above table from 98 total respondents whose work is related to risk management
area of the banks 63.3% of them were male while the rest, 33.3% of them were female. With
regards to the age condition of the respondents, the distribution of frequency and percentage
shows that, 13% of respondents found between the age groups of 25 – 28, about 14.5% of them
found between the age groups of 26 - 35 on the other hand 49.5%) of them found between the
age group of 36 – 45, the rest 17.3% were above 46 years.

According to the age distribution of the respondent‟s majority of them found at the adult age
group. With regards to educational level of the respondents, majority of the respondents
accounted for 67.3% hold their first degree, while the rest 20. 4 % and 12% of them hold College
Diploma and master degree respectively. Regarding with the educational level the study implied
that, as the area of risk management need well educated person, there is still a gap covering the
area through advanced education.

Regarding with, respondent‟s service years most of the employee fall in the range service years
of 3 – 6 years accounted for 40.8% and 6 – 10 years (36.7%) and the rest 16.3% and 6.1%
respectively served less than 3 years and above 10 years. For the Risk assessing body, the result
in the above table shows highest percentage for board of director (40.8%) and senior manager

35
(21.5%). Similarly, the NBE‟s risk management guideline of (2009) indicates that in all banks
top management and board of directors have the authority to assess risk in their organization
because the top-level management has the authority to establish risk management and decides the
objectives and strategies for organizational risk management activities.

4.2. Risk Identification Methods

Credit Risk identification is the process of identifying an organization risks and vulnerabilities
and raising awareness of these risks in the organization. It is the starting point for understanding
and managing Credit risks – activities central to effective management of financial institutions.
There are different types of techniques that can be applied to identify a credit risks identification
technique, such as, financial statement analysis, Audit and physical inspection, inspection by the
bank risk manager, and internal communication. Based on these respondents were asked types of
questions that asked them to indicates widely used techniques of credit risk identification in their
branches. Table 4.2 indicates the participant‟s response on Risk identification methods.
Table 4.2:-Risk identification practice of the Banks

Basic Methods of Credit Risk identification Frequency Percent

Financial statement analysis 23 38.8
Audit and physical inspection 38 23.5
Inspection by the bank risk managers and other staffs 27 27.6
Internal communication 10 10.2
Total 98 100.0
Sources:-Survey Data (2023)

It can be seen from the table 4.2 that Financial Statement Analysis is the widely used method
with total score of 38.8% and followed by Inspection by the bank risk managers and other staffs
with the score 27.6 % and then audit and physical inspection total score of 23.5%. Overall, these
results indicate that majority of the private banks used the above major three methods of risk
identification (Financial Statement Analysis, audit and physical inspection and inspection by the
risk manager as the most important and widely used method in Ethiopian private commercial
banks.

36
 4.3. Factors Affecting Credit Risk Handling Techniques
Its known that the biggest risk faced by the banks today remains to be the credit risk. As a result,
the banks are now more equipped in handling credit risk, in the allocation of its on-going credit
allocation activities. But, the analysis of credit risk was limited to reviews of individual loans,
which the banks kept in their books to maturity. Similarly, as indicated in NBE‟s 2009 survey
report, credit risk is the highest and most important risk than other type of risks in Ethiopian
banks. It is known that for most banks, loans are the largest and most obvious sources of credit
risk.
Credit Risk can‟t be avoided but has to be managed by applying various risk mitigating
processes. Banks can reduce its credit risk as it can get vital information of the inherent
weaknesses of the accounted by applying a regular evaluation and rating system of all investment
opportunities. Related to this idea, the researcher asked respondents, which credit handling
system of their bank mostly affected the banks effective credit handling and assessment system
such as, collateral risk, risk of payment collection or risk of credit rationing, accordingly, below
in table 4.3 their respective response were presented as follows:

Table 4.3:-Credit risk more affected the bank Credit risk handling techniques

Credit Risk Handling Techniques Frequency Percent

Collateral risk 51 52.0
Credit payment risk 26 26.5
Credit rationing risk 21 21.4
Total 98 100.0
Sources, Survey Data (2023)
The above table indicates respondents view on credit handling techniques which frequently faced
in their bank risk handling practice. Accordingly respondents implied that, the main reason for
which the banks are taking Collateral is credit default reduction, especially during the time of the
debt default. The above table shows that the average collateral risks faced by banks were very
high as implied by 52% of the respondents.

The other type of credit risk that challenged credit risk handling practice of the banks was
payment collection risk, as implied by 26.5 % respondents, this loss is generated from loss of

37
principal from a borrower's failure to repay a loan or meet a contractual obligation. Finally, the
above table indicates challenges of credit rationing risks as indicated by 21.4% respondent even
though the challenging is lower than the collateral risk and credit payment risk but still the
problem is faced on the banks credit risk handling process. To reduce one of the risk area the
study asked respondents what methods where applied to reduce one of the challenges.
Accordingly, respondents implied their respective answer below in Table4.4

Table 4.4, Credit risk handling techniques frequency and percentages

Reduction Transfer Retention

Credit Risk Handling Techniques Total
Percent %
Collateral risk 56 39 5 100
Payment Collection risk 60 29 10 100
Credit rationing risk 40 34 25 100
Source: Questionnaire survey, 2023
To handle specifically each type of credit risk, different techniques have been used by the banks.
For collateral risks, reduction is the most suggestible technique as 56% respondents suggested
and followed by transfer 39 % of respondents retention indicated by 5% respondent. Similarly,
for payment collection risk, risk reduction and retention is suggestible by respondents to handle
it. 60% of the respondents respond that risk reduction is the suitable risk controlling tool for
payment collection. While 29% of them said transfer payment collection risk is
suitable and a small percentage suggests accounted for 10% refers retention. Respondent also
indicate their view regarding to rationing credit risk minimization techniques, accordingly, 40%
and 34% of them respectively indicated using reduction and transfer is available technique while
the rest, 25% implied retention. The result of open ended question stated that there are a number
of techniques banks used in the mitigation of credit risk. Among them the most commonly used
are Collateral and guarantees. In credit risk, all collateral risks, payment collection risks and
limiting borrower‟s risks are handled through risk reduction, since it is not possible for the banks
to avoid businesses in this area and unprofitable to transfer all risks to another parties which
takes premium. Next to reduction, accepting and financing credit risk is advisable depends on
finding of this study.

38
Generally, in order to reduce credit risk, Banks should assess the credit worthiness of the
borrower before sanctioning loan and fix prudential limits on various aspects of credit. There
should be maximum limit exposure for single/ group borrower.

As stated in NBE 2011 Annual report, in monitoring credit risk exposure, consideration is given
to trading instruments with a positive fair value and to the volatility of the fair value of trading
instruments. To manage the level of credit risk, the Group deals with counter-parties of good
credit standing, enters into master agreements whenever possible, and when appropriate, obtains
collateral. The Group also monitors concentrations of credit risk by industry and type of
customer in relation to the Group loans and advances to customers by carrying a balanced
portfolio. The Group has a significant exposure to individual customers or counter parties.

4.4. Descriptive Result using Mean and Standard Deviation

The descriptive part of this study was analyzed based on using a descriptive statistics of mean
and standard deviation. Accordingly, the composite mean value shows the average of all
respondents‟ perceptions on a certain related questions of credit risk determinate factors. While,
standard deviation shows how diverse are the perceptions of respondents for a given questions.
For instance, high standard deviation means that the data are wide spread, which implies
respondents give variety of opinion while, low standard deviation implies respondents closeness
of opinions whether positively or negatively. Based on these, the result mean score value and
standard deviation of the study represented referring rule of thumb that pertaining to the intervals
for breaking the range in measuring variables that are captured with five point scale (that ranges
from strongly disagree to strongly agree) is 0.8, which is actually found by dividing the
difference between the maximum and minimum scores to the maximum score (Thumb, 2012).
Hence, a calculated composite mean value that ranges from 1 to 1.80 implies strong
disagreement, whereas the remaining ranges of 1.81 to 2.6, 2.61 to 3.4, 3.41 to 4.2 and 4.21 to
5.00 representing respondents‟ perceptions of disagreement, neutrality, agreement and strong
agreement respectively. Therefore, composite scores of mean and standard deviation were
calculated for each of the variables as follow:

39
 4.4.1. Factor Affecting Establishment of Appropriate Credit Risk Environment
Establishing Appropriate Credit risk environment is preliminary activities of Credit risk
management process. To assess the banks whether they established appropriate credit risk
environment or not the study had developed a five scale Likert types of questions and
respondents were invited to indicate their views for each of the questions. The results mean score
value and standard deviation implied below in the table.

Table 4.4:-Respondents View on establishing credit risk environment

Std.
Facilities to establish better credit risk environment N Mean
Deviation

The existing organizational culture helps to know how to assess and handle risks 98 3.4286 1.20137
Risks are assessed regularly and its changes handled properly 98 2.9592 1.27561
The reported hazards been effectively controlled 98 3.0306 1.17932
There is an effective strategy established according to size of the bank 98 2.5551 1.30866
Adequate resources are allocated for assessing risk 98 2.1020 0.24759
Banks have strong group risk and internal audit functions which report directly to
98 2.9388 1.22530
the Center
There is experienced staff, which recognizes potential problems, and brings them to
98 2.1796 0.13046
the attention of their supervisors
Banks should assess the credit worthiness of the borrower before sanctioning loan 98 4.1327 0.18093
The bank offer training for employees on credit risk management 98 2.1469 1.25470
Sources, Survey Data (2023)

As indicated from the above table the study asked whether the studied banks credit risk
management practice affected by the existing organizational culture or not, hence, the majority of
the respondents implied at a mean score value of 3.4286 with a standard deviation of 1.20137
there is a good organizational culture which helps to understand credit risks of the studied banks.
In Ethiopian banking environment there is similar rules and guidelines developed at the Head
Office for each bank, which helps to understand the risks that affect the bank. In addition, the
interview held with branch managers state that the banks followed policies and guidelines of
National Bank of Ethiopia (NBE), which may help to control risks, especially external risks like

40
interest rate risk, foreign exchange risk, and risks that came from countries economic and
monetary policy.

With related to the question assessed whether credit risks assessed regularly and its changes
handled properly or not, respondents implied, at a mean score 2.9592 and Std. Deviation 1.27561
frequent assessment of risks were not done regularly and the risks handled properly.

Similarly, the study were assessed whether the observed hazards of risk controlled effectively or
not, respondents implied at a mean score value of 3.0306 indicates the banks tried to tackle the
observed hazards of risks, however, the result implied by a respondents at a standard deviation at
1.17932 implied still there is some challenges in effectively tackling the reported hazards. The
interview result also indicates that the risks found and reported to the center have been controlled
by head office Board of Directors (BoD) and senior management by informing branches through
reports, meeting and direct contacts.

Regarding with the bank size the study assessed the size of the Bank in terms of its asset
position. Large Banks are expected to have low credit risk that emanate from their capacity to
establish sound credit risk management framework. In this regard the result mean value and Std.
Deviation at 2.2245 and 1.30866 respectively implied respondent‟s negative response on the
challenge of the bank size in managing or controlling the credit risk easily.

With regard to allocation of resources for assessing credit risk, the mean score is lowest indicated
at 2.1020 with a Standard deviation 0.24759 this show respondents disagreement or the studied
banks have a problem with allocating adequate resources to handle risks effectively. Therefore,
from the result the study deduced that, lack of budget to asses credit risk of the banks are one of
the major cause that affect credit risk management practice of private banks.

With related to whether banks have strong group risk and internal audit functions which report
directly to the Center or not, the study implied at average mean score value of 2.9388 indicated
that there were moderate group risk and internal audit functions which directly report to the Head
Office because internal auditors of banks do not independently review effectiveness of banks‟
risk management functions and also the authority to deal with risk management is given to risk
management department at the Head Office.

41
The result presented regarding employee potentials and experience in identifying potential credit
risks of their respective banks respondents at lowest means core value of 2.1796 shows that for
the variable of there is no that much experienced staff, which recognizes potential problems and
brings them to the attention of their supervisors in the studied banks. In Ethiopia the banking
sector is one of the institutions with experienced and educated staff, however, most of the
competent employee, after they serve some years, leave to other organizations such as local and
international NGOs and other well paid organization.

Finally, the study assessed whether the banks provide their employee credit risk training or not,
however the mean score value of the respondent at 2.1469 implied there was no adequate
training program for employee.

Generally, the study analyzed that, understanding credit risk strategy, policy and procedures as
well as identifying risks are the cornerstone for Credit risk management process. Lack of
Common understanding on Credit risk strategy, policies and procedures across the banks may
cause inconsistent interpretation and application of Credit policy and procedures across the banks
and finally lead to lack of common code of conducting Credit risk management activities. In this
regard some of the challenges observed in providing and implementing the appropriate policy,
procedures, and other necessary facilities that can reduce the problems were affected by some of
the problems such as, inadequate allocation of budget, lack of employee training on the areas and
lack of well experienced employees.

4.4.2. Credit Granting Process of the Study Area

Operating under a Sound Credit granting process is the Basis for an effective Credit risk
management process under which feasible and creditworthy client is identified. In this regard the
study provided related questions to assess credit granting processes of the study area. The table
indicates credit granting process of the study banks.
Table 4.5:-Respondents View on Credit granting Process
Std.
Credit Granting and Management related questions N Mean Deviation
The Bank uses well defined Credit-granting Criteria for assessing
98 3.3163 1.18057
credibility of each loan applicants.
Banks should assess the credit worthiness of the borrower before
98 3.5007 0.26817
sanctioning loan

42
Adequacy, marketability and enforceability of collateral requirement
is properly evaluated and measured by professional personnel or 98 2.2796 0.25163
expertise
The bank critically follows Sound Credit granting process for
approving new credits as well as amending, renewing and re 98 2.9592 1.21772
financing existing credits
The bank has established comprehensive Credit limit for the main
98 2.3163 1.17181
categories of risk factors in all types of credit facilities
Sources, Survey Data (2023)
As indicated on the above table the study respondents forward their view for each of the
questions asked, accordingly, the mean score value 3.3163 implied respondents response was
neutral whether their bank uses well defined Credit-granting Criteria for assessing credibility of
each loan applicants or not, this implied that, still respondents are not confident on their banks
criteria credibility in providing loan for each applicant. Based on the banks credit criteria the
study forwarded a question whether the bank assess credit worthiness of borrower or not before
sanctioning loan; in this regard respondents implied their agreement at a mean score value of
3.5007 with smaller variation of std. deviation at 0.26817 which implies commercial banks
assess credit worthiness of borrower before sanctioning of a loan.

Regarding with adequacy, marketability and enforceability of collateral requirement, evaluation

practice the study forwarded a questions for the selected respondents of each banks accordingly,
respondents implied their disagreement at a mean value of 2.2796 with smaller indicated std.
deviation 0.25163. in this regard some of the employee implied that, the banks asked borrowers
equivalent collateral for the money they lend, however, collaterals marketability were not studied
in detail.

Regarding the questions asked whether the bank critically follows Sound Credit granting process
for approving new credits as well as amending, renewing and re-financing, respondents implied
at a mean score vale of 2.9592 and Std. 1.21772 there is some challenges specially, new
borrowers are not treated based on several encouraging criteria.

Finally the study assessed whether the bank has established comprehensive credit limit for the
main categories of risk factors in all types of credit facilities or not in this regarding the mean

43
value of 2.3161 with a std. deviation value of 1.17181 implied their disagreement which means
the banks didn‟t established well organized and comprehensive credit limit for main categories
of risk factors.

4.4.3. Maintaining an Appropriate Credit Administration, Measurement &Monitoring Process

Proper administration of Credit documentation as well as monitoring the status of borrowers,

loan term and conditions and collateral coverage periodically as well as keeping Credit file up to
date and repayments continuously are the basic post Credit approval activities of Credit risk
management process that help to discover mistake at early stage while management information
system and internal risk rating are the main ingredient for monitoring, reporting and controlling
risks. With related to this questions the study were forwarded related questions for
respondents to assess the study banks appropriateness in measuring, monitoring as well as
documenting the credit file. The response indicated below in the table:

Table 4.6:-Respondents View on credit measurement and monitoring practice of the banks

Practice of credit measurement, monitoring related Std.

N Mean
questions Deviation
The bank strictly monitors loan terms and conditions that have
98 3.1531 1.25470
been stipulated at the time of loan approval
The bank regularly reviews and monitors the performance of
98 3.1327 1.24053
Credit quality at individual and portfolio level
There is a complete, neatly organized and regularly updated
98 2.6143 1.24354
credit file in our bank
The bank has developed its own internal risk rating system and
98 3.4673 1.12505
applying in credit risk management process effectively
Sources, Survey Data (2023)

As indicated by respondents the bank strictness in monitoring loan terms that have conditions
stipulated at the time of loan approval the average mean score value at 3.1531 implied
respondents neutrality, which implies there is moderate strict monitoring of loan terms. Similarly
the average mean score value 3.1327 with a std. 1.24053 implied that, even though the bank
follow up and monitor the performance of credit quality at individual level, however,

44
respondents response implied still the banks are not effectively assessing individuals portfolio
after granting credits. The study also asked respondents whether there is a complete, organized
and regularly updated credit file in the studied banks or not, in this regard respondents at a lowest
mean value of 2.6143 implied their negative response or disagreement which implies, still the
banks are weak in providing updated credit file. With regards to the banks internal risk rating
system and applying in credit risk management process the highest mean value of 3.4673 implied
positive response of employee which means the banks use their own internal credit risk rating
system.

Generally, in the studied banks, establishing effective management information system,

Communication and reporting risk related data and quantifying credit risk both at individual and
portfolio level are some issues that require great attention of top management and regulatory
bodies respectively. It indicates that appropriate Credit administration, Measurement and
Monitoring process are maintained somewhat in line with the guideline of NBE and Basel
(1999). However, there are challenges in continuously monitoring, measuring, filing and
reporting credit risk on time.

4.4.4. The Effect of market Risk on Credit Risk Management

The study assessed how the banks manage the marketing strategy and what is its effect on credit
risk management practice. This is because, Poor reaction in the market leads to negative
reactions from investors to the banks poor earnings declarations which rocked the Credit risk
management practice. In this regard, the study provided a related questions and respondents were
forwarded their respective view on the provided questions below in the table.
Table 4.7:-Respondent view on the effect of market risk of the bank on credit risk management
Std.
Questions related to market strategy on credit risk N Mean
Deviation
The bank applied an effective marketing reaction 98 2.4571 1.49914
There is lack of benchmarking against competitors 98 3.1837 1.47381
The bank critically assess commercial locations 98 3.5000 1.05762
The bank effectively work to fulfill customer demand and expectation 98 2.8469 1.25470
The bank manage interest rate instability 98 4.9694 1.27185
Sources, Survey Data (2023)
As the above table indicates, the studied banks didn‟t applied an effective marketing reaction this
was implied by the lowest mean value at 2.4571 which indicates high risk of poor market

45
reaction and high variation between respondents which implied at std. deviation 1.49914. The
result of this study also showed, there is moderate exposure related to lack of benchmarking
against competitors as indicated at a mean score value of 3.1837. The other credit risk which
affects Ethiopian banks is declining of commercial location. As the above table shows, declining
commercial location affects more private banks as its mean shows high risk of 3.5000. The study
also asked whether the banks effectively work to fulfill customer demand expectation or not;
however the result mean value at 2.8469 implied the banks moderately fulfill customer
expectation on the demand of loan.

Finally, in Ethiopia the interest rate risk did not bring high loss, since the interest rate is constant
for a long period of time and no competition between Ethiopian banks on interest rate. In
Ethiopia, bank deposits and lending held for a fixed interest rate, which is determined by national
bank of Ethiopia. The benchmark interest rate in Ethiopia was last recorded at 7% percent.
Similarly, regarding the result from the above table the risks of interest rate fluctuation shows
less than the average amount of risks at a mean score value of 4.9694.

4.4.5. Operational Risk Analysis’s

In modern flexible world there is no single working process continued ever. When banks change
the existing process and implement the new one, they may face different risks. Currently
Operational risk becomes another source of danger in managing and controlling credit risk, with
related to these activities the study provided related assessment questions to assess the problems
on the area. In this regard, below in the table respondents implied their view as follows:
Table 4.8:-Respondents view on the effect of operational risk on the effectiveness of credit risk
management
Std.
Questions related to operational risk N Mean
Deviation
There is a problems when Risk of transition from the existing
98 3.1531 1.15189
process to the new one
Worker‟s skill, experience and training risk challenges
98 3.9041 1.26784
frequently affect
There is frequent Systems failure 98 3.5918 1.04375
There is failure of transaction risk 98 3.2245 1.16239
Failure to communicate with each other 98 3.1939 1.19844
There is failure whether Internal or external risk reporting 98 3.0204 1.25984

46
There is failure in an electronic transfer of payments 98 3.0510 1.26306
Sources, Survey Data (2023)
Related to the problem of financial transaction, respondents implied at a mean value score of
3.1531 even though the banks are well done and reduced credit risk of in the process of financial
transaction, however, some of the respondents at a std. deviation of 1.15189 implied there are
still problems, some of the interview related to this idea implied that, even if one side of
transaction is settled however, the other may fail. Lack of workers skill, experience and training
are another exposure that leads banks to a loss. The banks should improve the worker‟s skill by
providing appropriate training through establishing best practices for professional development.
In relation to this the above result indicated at highest mean value score of 3.9041 is with std.
deviation of 1.26784 implied that, lack of skilled and experienced professionals on the operation
of credit risk affect the bank effectiveness in reducing credit risk.

The risk of system failure which includes, network failure, hardware failure, software failure,
interdependency risk, and so on leads the banks to loss. The above table shows a mean and
standard deviation of 3.5918 and 1.043753 respectively, implied that, the studied banks have
faced frequent system failure, as some of the respondents implied as the problem of system
failing is countrywide. It is difficult to solve the challenges only in an effort of private
commercial banks. Transaction risks such as execution error, booking error, settlement error,
commodity delivery risk and etc. Have another exposure which leads banks to loss. Most of the
banks do not rely entirely on external sources of information for transactional risks, but the
smaller banks are more inclined to rely more heavily on such sources due to lack of resources.
The result of this study on transactional risk shows a mean of 3.2245 and std. deviation of
1.16239 implied the problem is still affects the bank credit risk management practice.

Failure to communicate with each other brings risks related to misunderstanding of information.
Accordingly the mean value at 3.1939 and std. deviation 1.19844the of the study banks implied
even though the problem is not widely exposed the banks to loss, however, some of the problem
related to the area is still affects the banks performance.

Banks have internal and external reporting requirements regarding the different kinds of risks
and impacts associated with its portfolio. There are some risks related to this Internal/external
reporting which includes not reporting Overall exposure to banks and performance at the branch

47
level. The values from the table indicate a mean and standard deviation of 3.0204 and 1.25984
respectively shows moderate risk are observed in the studied banks.
4.4.6. Legal Risk Analysis and Handling Techniques
The legal exposures of any particular bank which includes the risk of collateral damage,
misinterpretation of law and whether the documentation is relatively easy to understand or
difficult to understand were depends on the independence of judge and the sophistication of
contract associated with risks. In this regard the study provided a related question to assess the
challenges of legality risk on credit risk management practice of the banks. Based on these the
study assessed the area, if misinterpretation of law and legislation problem faced in the banks,
criminal activities as well as documentation process of the contracts. In this regard respondents
forwarded their respected view below in the table.

Table 4.9:-Respondents view on the effect of legality risk on the effectiveness of credit risk
management
Std.
Questions related to legality risk N Mean Deviation

There is Misinterpretation of law and legislation problem faced in the

98 3.0000 1.18409
bank

Criminal activities (fraud, theft, and property damage) affected the

98 2.3878 1.17212
bank risk management practice

Documentation/contract risk affected the bank risk management

98 3.2653 1.23147
practice

Sources, Survey Data (2023)

To analyze the result from the table above, the risks related to misinterpretation of law is
moderate which was implied by 3.0000 and 1.18409 mean value and std. deviation respectively.
This is because the laws and the legislation of the credit risk management program as a whole
governed by NBE, policies and legislations; however, some specific rules mandate are given for
individual‟s banks to develop internal rules and regulation to control their bank credit risk
management. As indicated by lowest mean value of 2.3878 criminal activist are rare case in
commercial private banks of Ethiopia, so that the effect of Criminal activities (fraud, theft, and
property damage) didn‟t that much affect the bank risk management practice.

48
Finally the study assessed the studied banks contract documentation practices, accordingly,
resulted at a mean value of 3.2653 implied still there is a moderate problem observed on the area,
in this regards the NBE‟s survey report (2009), implied that majority of banks having strategies,
policies, programs and procedures related to credit risk management, have also secured
approvals on the documents from relevant authorities so that the problem on the
area is less.
4.4.7. Correlation Analysis on the Determinants of Credit Risk
To find out the relationship the dependent and independent variables Pearson‟s correlation
coefficient (r) which measures the strength and direction of a linear relationship between two
variables were used. Values of Pearson‟s correlation coefficient are always between -1 and +1. A
correlation coefficient of +1 indicates that two variables are perfectly related in a positive sense;
a correlation coefficient of -1 indicates that two variables are perfectly related in a negative
sense, and a correlation coefficient of 0 indicates that there is no linear relationship between the
two variables. A low correlation coefficient; 0.1 - 0.29 suggests that the relationship between two
items is weak or nonexistent. If r is between 0.3 and 0.49 the relationship is moderate. A high
correlation coefficient i.e. >0.5 indicates a strong relationship between variables.

The direction of the dependent variable's change depends on the sign of the coefficient. If the
coefficient is a positive number, then the dependent variable will move in the same direction as
the independent variable; if the coefficient is negative, then the dependent variable will move in
the opposite direction of the independent variable. The table below presents the result of the
correlation analysis.
Table 4.10:-Correlation coefficient analysis of the respondents
Correlations
Variables ACRE SCGP CAMMP MRA ORA ALR CR
N 98 98 98 98 98 98 98
ACRE 1 .303** .900** .904** .876** .797** .922**
SCGP 1 .454** .358** .525** .597** .726**
Pearson
CAMMP 1 .894** .975** .909** .820**
Correlation
MRA 1 .902** .778** .799**
Sig. (2-tailed) N
ORA 1 .922** .790**
ALR 1 -.721
CR 1
**Correlation is significant at the 0.01 level (2-tailed).
*Correlation is significant at the 0.05 level (2-tailed).

49
The result of correlation coefficient shows that all variables are statistically significant and
positively correlated with the credit risk. Accordingly, the bank‟s credit risk management is more
affected by lack of establishing appropriate credit environment which represented by a sign
(ACRE) at ( r = 0.922), followed by challenges of credit administration, measurement and
monitoring (CAMMP) at (r = .820**) , Lack of Market risk analyses (MRA), at (r = 799**),
Operational risk (ORA) at (r= .790**) and challenges sound Credit granting process (SCGP) at
(r= 726), however, Legality risk assessment has a negative relation with credit risk management
at (r = - 721). Thus from this result the study confirmed that, all of the independent factors that
are provided in the questioner are related to credit risk management practice of the studied
private banks.

Regression Analysis
Regression analysis was employed to examine the effect independent variable over the
dependent one; the result also helps us to understand which variables affect more credit risk
management practice of private commercial banks in Ethiopia. Based on these below the
regression analysis of the study summarized as follow:

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .936a .876 .868 .37891
Table 4.11:-Model Summary of the study
a. Predictors: (Constant), ALR, SCGP, MRA, ACRE, CAMMP, ORA
As it can be depicted from the table there is a positive and statistically significant Relationship
between the independent variables and the dependent variable. In overall, the results revealed
that all independent variables accounted for 87.6% of the variance (R2 = 0.876). Thus, 87.6 % of
the study assessed the studied banks factors affecting credit risk management practice on the
provided questionnaires, however, 12.4% unexplored or not addressed in this study.
Table 4.12:-ANOVA Result of the study
Sum of Mean
Model Df F Sig.
Squares Square
Regression 92.608 6 15.435 107.503 .000b
1 Residual 13.065 91 .144
Total 105.673 97
a. Dependent Variable: CR
b. Predictors: (Constant), ALR, SCGP, MRA, ACRE, CAMMP, ORA.

50
The result in the ANOVA table confirmed the significance of the overall model by p- value of
0.000 which is below the alpha level, i.e. 0.05, which means, the independent variables taken
together have statistically significant relationship with the dependent variable under study.
Accordingly, among the major factors which affect credit risk management practice of private
commercial banks were, establishment of credit environment, appropriate measurement and
monitoring of credit, operational challenges, challenges of credit granting, market challenges as
well as legality challenges are the most important factors that affect effective credit risk
management of private banks.

Table 4.13:-Coefficients Analysis of the study

Unstandardized Standardized
Model Coefficients Coefficients t Sig.
B Std. Error Beta
1 (Constant) 1.146 .149 7.666 .000
Appropriate credit risk
.863 .090 .993 9.612 .000
environment
Sound of challenges
.172 .046 .195 -3.776 .000
Credit granting process
Credit measurement
.591 .160 .610 -.571 .569
and monitoring process
Market risk analyses .154 .076 .222 -2.025 .046
Operational risk
.693 .192 .713 1.003 .318
management
Legality risk
.11 .097 .-.43 1.150 .253
assessment
Dependent Variable: CR
In the table- above, coefficients indicated how much the dependent variable varies with an
independent variable, when all other independent variables are held constant. The beta
coefficients indicated that how and to what extent the independent variables influence the
dependent variable. Accordingly the result coefficient value of regression analysis indicated that,
ACRE, (beta = .993, t = 9.612, p = < .000), ORA (beta = .713, t =1.003, p = .318) and CAMMP
(beta =.610, t= -571, p < .569) has the highest influence or significant impact on credit
management practice of the studied private banks.

4.5. Discussion of the Results

According to Sullivan, & Drecnik (2002) commercial banks used several types of method to
control credit risk such as, credit rationing, loan syndication, loan securitization, and collateral.

51
However, the finding of this study indicated most of the studied private banks in Ethiopia, used
tools to control credit risks that are collateral and credit rationing. Tools like covenants,
collateral, credit rationing, loan securitization and loan syndication have been used by banks in
developing world in controlling credit losses (Benveniste and Berger, 2001; Greenbaum and
Thakor, 2000). Yuqi Li,(2006) the findings also show that the respondent commercial banks
undertook various activities with respect to monitoring borrowers. These included the following:
Frequent contact with borrowers, creating an environment that the bank can be seen as a solver
of problems and trusted advisor, development good organizational culture of the banks, Similarly
this study also indicated that, management practice of the private banks in Ethiopia affected by
the existing organizational culture this were indicated by the majority of respondents at a mean
score value of 3.4286 with a standard deviation of 1.20137 implied there is a good organizational
culture which helps to understand credit risks of the studied banks. This is because in Ethiopia‟s
banking environment there is similar rules and guidelines developed at the Head Office for each
bank, which helps to understand the risks that affect the banks credit risk.

The study‟s finding also indicated that credit growth of the banks negatively affected credit risk
management practices of the banks, however most of a similar studies implied a result in reverse
to this study, such as a study results of Das & Ghosh, (2007), Jimenez & Saurina (2006),
Thiagarajan, S., et al (2011), Ahmad & Bashir (2013) who found a positive influence of Credit
growth on credit risk. This is due to the reason that the banks may develop the best experience of
dealing with borrowers (build the capacity of solving the borrower‟s problem by giving
consultant and other service to improve their loan repayment), developing strong credit risk
culture as well as develop sound Credit risk management system whenever a problem arise due
to credit growth .

Regarding with the banks size and credit risk management most of the similar studies such as
Yong (2003) implied that, large banks are expected to develop better credit risk management
practice than small size banks. It is due to the fact that large banks have ability to deal with credit
risk by formulating sound and effective Credit risk management system, introducing modern risk
management instruments and adopt new technology as well as a better portfolio diversification
opportunity and gaining competitive advantage on economies of scale so that it contributes to the
minimization of problems related to loan.

52
The result of correlation coefficient shows that all variables are statistically significant and
positively correlated with the credit risk management practice of the studied banks. Accordingly,
the bank‟s credit risk management is more affected by lack of establishing appropriate credit
environment which represented, followed by challenges of credit appraisal measurement and
monitoring, Lack of Market risk analyses, Operational risk and challenges sound Credit granting
process, however, Legality risk assessment has a negative relation with credit risk management.

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 CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION

5.1. Introduction
The previous chapter presented the analysis of the findings, while this chapter deals with the
Conclusions and recommendations provided based on the findings of the study. Accordingly, this
Chapter presents the summary of major findings of the study, relevant discussions, conclusions
and the necessary recommendations.
5.2. Summary of Findings
The study‟s analysis was dissected into two parts; in the first part the study analyzed variables
using descriptive approach and in the second part the study tried to analyze using inferential
statistics such as, testing correlation between dependent and independent variables as well as
regression analysis. Based on these, major findings are discussed as follows:

With regards to the study area risk assessing body, the result, the finding implied that, in the
highest percentage of risk assessing body were board of director (40.8%), followed by, senior
manager (21.5%).

In relation to the banks credit risk identification processes the finding showed that, most of the
studied banks used Financial Statement Analysis method with total score of 38.8% and followed
by Inspection by the bank risk managers and other staffs with the score 27.6 % and then audit
and physical inspection total score of 23.5%. With related to challenges of credit risk handling,
collateral risks faced by banks were very high as implied by 52% of the respondents, followed by
payment collection risk, this loss is generated from loss of principal from a borrower's failure to
repay a loan or meet a contractual obligation.

In relation to the study‟s assessment of whether there is regular assessment of the bank credit
management system or not the study implied at average mean score of 2.9592 and Std. Deviation
of 1.27561, even though some of the branch banks are weak in proper assessment of practice of
credit risk and handled the assessed report properly, however, most of the studied banks were
efficient in their practice. Similarly, the average score of the respondents with regard to

54
controlling the reported hazards at a mean score 3.0306 indicates their agreement with little
difference among some respondents of banks represented by 1.17932 St. Deviation is good.

Regarding the relation between the bank size and credit risk management practice, the study
implied that, the banks size affect credit risk management, this is because large size banks need
huge resources to control the banks credit effectively Related to credit granting process of the
study, the mean score value 3.3163 implied respondents response was neutral whether their bank
uses well defined Credit-granting Criteria for assessing credibility of each loan applicants or not,
the study‟s assessment on credit worthiness of borrower before sanctioning loan respondents
implied their agreement at a mean score value of 3.5007 with smaller variation of std. deviation
at 0.26817 which means the banks assess credit or worthiness before credit. Similarly the studied
banks also assess the collateral of the borrower marketability before granting the loan.

Regarding the banks Maintaining an appropriate Credit administration, Measurement and

Monitoring process, the banks perform very well in some area, however there were also a
challenges in some areas such as, bank strictness in monitoring loan terms that have been
conditions stipulated at the time of loan approval the average mean score value at 3.1531 implied
respondents good. The average means score value 3.1327 with a std. 1.24053 implied the banks
are not effectively assessing individual‟s portfolio after granting credits.

With Related to Market Risk and credit risk of the studied banks the result implied that, there is
high exposure related to lack of benchmarking against competitors. The other credit risk which
affects the studied banks was declining of commercial location. The average score mean value at
2.4571 implied that, the studied banks were not used an effective marketing reaction to minimize
credit risk. The banks credit risk management practice were also affected by operational
challenges such as, risk transaction, frequent Systems failure, failure to communicate with each
other, failure whether Internal or external risk reporting and failure of electronic transfer.

The assessment of the study with the relation between legality risk and credit risk, the studied
banks were not that much affected by a legality risk. This is because majority of banks having
strategies, policies, programs and procedures related to credit risk management, have also
secured approvals on the documents from relevant authorities so that the problem of legality was
not significant.

55
In overall, the results of the correlation and regression revealed that, except tangibility all
independent variables (service quality dimension) are significant with customer satisfaction at
the level p < .05. Furthermore, multiple regressions identify the relative contribution of each
variable and determine the best predictor variables among a set of variables. The results
demonstrate that all variables contributed significantly to credit risk.

The result of correlation coefficient shows that all variables are statistically significant and
positively correlated with the credit risk management practice of the studied banks. Accordingly,
the bank‟s credit risk management is more affected by lack of establishing appropriate credit
environment which represented, followed by challenges of credit appraisal measurement and
monitoring, Lack of Market risk analyses, Operational risk and challenges sound Credit granting
process, however, Legality risk assessment has a negative relation and insignificant impact on
credit risk management practices of the study banks.

The Result regression coefficients also implied that, to what extent the independent variables
influence the dependent variables. Accordingly the result coefficient value of regression analysis
indicated that, ACRE, (beta = .993, t = 9.612, p = < .000), ORA (beta = .713, t =1.003, p = .318)
and CAMMP (beta =.610, t= .571, p < .569) respectively and significantly affect credit risk
management practice of the studied private banks.

5.3. Conclusion of the Study

The study investigated factors affecting credit risk management practice of selected private
banks in Ethiopia, to assess the credit risk area of each banks the study identified some of related
areas that can affect the activities of the banks such as, banks establishment of credit risk
environment, credit granting process, credit monitoring process, market assessment, operational
risk analysis, legal risk analysis. To test the effect of such variables on banks profitability, the
study used both descriptive and inferential statistics. Accordingly the major fining‟s of the study
includes the following:

1. Regarding Credit Risk Environment management of the studied banks the result implied that,
even though, the boards and higher officials of the banks tried to establish an appropriate
credit risk management producers based on NBE guidelines and others well developed
principles, the criteria‟s and polices affected in each branches of the banks during their

56
 implementations. Related to this, the finding implied that, the existing organizational culture
helps to know how to assess and handle risks, however, when it is implemented at several
level of the banks management there were a problems such as, lack of assessing risks
regularly, lack of adequate resources allocation assessing credit risks, lack of experienced
staff on the areas of credit risk, and lack of training and development program on credit risk
handling and management program.

Therefore, In relation to effect of the establishment of credit risk environment on credit risk
management practices, the study implied that, credit risk management practice of the studied
banks were not affected by the establishment on the policies, procedures and criteria‟s,
however, risk management of the banks were affected when the established rules
implemented at different levels of the bank management.

2. Related to the banks credit granting process and the bank risk management practices the
study found that, in some of the credit granting processes the banks perform well such as, the
Banks use well defined Credit granting Criteria for assessing credibility of each loan
applicants, and banks assess the credit worthiness of the borrower before sanctioning loan,
however, there were also a challenges in some of the areas that the banks were not performed
well such as, lack of professionals evaluation and measurements of marketability collaterals,
lack of renewing and re-financing existing credits, lack of establishing comprehensive Credit
limit for the main categories of risk factors in all types of credit facilities.
3. Regarding with credit administration, Measurement and Monitoring process, the study
implied that, appropriate Credit administration, Measurement and Monitoring process are
maintained somewhat in line with guideline of NBE and Basel (1999). However, there are
challenges in continuously monitoring, measuring, filing and reporting credit risk on time.
4. The result of the finding also implied that, credit risk management practice of each banks
were affected by operational challenges such as, risk transaction, frequent Systems failure,
Failure to communicate with each other, failure whether Internal or external risk reporting
and failure of electronic transfer.
5. Finally the study implied that, effect of legality risk on credit risk of the studied banks were
not as such significant compared to the others variables. This is because majority of banks
having strategies, policies, programs and procedures related to credit risk management, have

57
also secured approvals on the documents from relevant authorities so that the problem of
legality was not significant.

5.4. Recommendation
1. As indicated on the findings one of the major challenges faced by the studied banks were,
implementing the established credit risk strategy provided by the higher officials of the
banks, to solve and minimize these problem the study advises that, the board of directors may
need to have responsibility for approving and periodically (at least annually) reviewing the
credit risk strategy and significant credit risk policies of the bank.

The strategy may need to reflect the bank‟s tolerance for risk and the level of profitability the
bank expects to achieve for incurring various credit risks. In addition, senior management
should have responsibility for implementing the credit risk strategy approved by the board of
directors and for developing policies and procedures for identifying, measuring, monitoring
and controlling credit risk. Such policies and procedures should address credit risk in all of
the bank‟s activities and at both the individual credit and portfolio levels.
2. With related to credit granting criteria and process the banks were also affected in some
areas, to minimize the challenges‟ the study suggests that, Banks must operate within sound,
well-defined credit-granting criteria.

These criteria should include a clear indication of the bank‟s target market and a thorough
understanding of the borrower or counterparty, as well as the purpose and structure of the
credit, and its source of repayment. There also need that, banks should have a clearly-
established process in place for approving new credits as well as the amendment, renewal and
re-financing of existing credits.

58
 Reference
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Commercial Bank. Addis Ababa, Published Thesis (MSc), Addis Ababa University

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13. Basel Committee on Banking Supervision, Basel.

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 Appendix: Questionnaire
Dear respondents, I‟m a M.Sc. Student at werabe University in the Department of Accounting
and finance. Currently, I‟m conducting a thesis entitled „Determinants of Credit risk
Management Practices: the case of selected Private Commercial banks in werabe town‟. The
purpose of this questionnaire is to gather data for the proposed study, and hence you are kindly
requested to assist the successful completion of the study by providing the necessary
information. Your participation is entirely voluntary and the questionnaire is completely
anonymous. I confirm you that the information you share will stay confidential and only used for
the aforementioned academic purpose. So, your genuine, frank and timely response is vital for
the success of the study. I want to thank you in advance for your kind cooperation and dedication
of your precious time to fill this questionnaire.
Sincerely,

Please Note:
1. No need of writing your name.
2. Indicate your answer with a check mark (√) on the appropriate block/cell for all questions.

Part One: Biographical Information (please use the right (√) mark to show your choice)
1. Indicate a bank name you belong____________________________
2. Gender: Male Female
3. Age: 25 or below 26 –35 36 –45 > 46 years
4. Educational Background: Diploma BA/BSc MA/MSc
If other Specify ---------------------------------
5. Work Experience:
Less than 3 Years 3-5 years 6-10 years Above, 10 years
6. Authorized body to assess risk in the bank:
Senior manager
Internal Auditor
External Auditor
Board of director
Risk management department

61
The following table hold risk identification practice of banks, based on the type of risk
identification system of your bank indicate using (√) marks

Financial statement analysis

Audit and physical inspection

Inspection by the bank risk managers and other staffs

Internal communication

Survey analysis

Others

7. Which one of the following credit risk more affected your bank Credit risk handling
techniques?
A. Collateral risk
B. Credit payment risk
C. Credit rationing risk
D. If any others please explain _______________________________
8. Based on the question number 8 which one of the following techniques applied in your bank
to reduced credit risk Handling
Reduction Transfer Retention
Collateral risk
Credit payment risk
Credit rationing risk
Section II: Main Questionnaire
Please indicate your choice by putting the tick mark (√) on the appropriate cell.
Where, 1 = strongly disagree, 2 = disagree, 3 = neutral, 4 = agree, 5 = strongly agree.
Please indicate the degree to which you agree with the following statements regarding the factor
affecting credit risk management practice of your bank
S.N Statement Stron Dis Ne A Strong
o gly agr ut gr ly
Dis ee ral ee Agree
agree 2 3 4 5

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 1
Establishing Appropriate Credit risk
environment
1 The existing organizational culture helps to know
how to assess and handle risks
2 Risks are assessed regularly and its changes
handled properly
3 There is an effective strategy established according
to size of the bank
4 The reported hazards been effectively controlled
5 Adequate resources are allocated for assessing risk
6 Banks have strong group risk and internal audit
functions which report directly to the Center
7 There is experienced staff, which recognizes
potential problems, and brings them to the attention
of their supervisors
8 Banks should assess the credit worthiness of the
borrower before sanctioning loan
9 The bank offer training for employees on credit
risk management
Operating under a Sound Credit granting
process
1 The Bank uses well defined Credit-granting
Criteria for assessing credibility of each loan
applicants
2 Banks should assess the credit worthiness of the
borrower before sanctioning loan
3 Adequacy, marketability and enforceability of
collateral requirement is properly evaluated and
measured by professional personnel or expertise
4 The Bank conducts comprehensive Credit
worthiness analysis properly before granting loan
5 The bank critically follows Sound Credit granting

63
 process for approving new credits as well as
amending, renewing and re-financing existing
credits
6 The bank has established comprehensive Credit
limit for the main categories of risk factors in all
types of credit facilities
Maintaining an appropriate Credit
administration, Measurement and Monitoring
process
1 The bank strictly monitors loan terms and
conditions that have been stipulated at the time of
loan approval
2 The bank regularly reviews and monitors the
performance of Credit quality at individual and
portfolio level
3 There is a complete, neatly organized and regularly
updated credit file in our bank.
4 The bank has developed its own internal risk rating
system and applying in credit risk management
process effectively

64