### 1.
1 Background of the Study
Credit risk management is a fundamental component of banking operations, pivotal in maintaining a
bank’s financial health and stability. The primary objective of credit risk management is to minimize the
potential losses arising from borrowers' inability to repay loans. This involves a systematic approach to
identifying, measuring, monitoring, and controlling credit risk, which is the risk of loss due to a
borrower's default on a financial obligation (Basel Committee on Banking Supervision, 2001).
The banking sector, being the backbone of any economy, plays a crucial role in financial intermediation
by mobilizing deposits and extending credit to various sectors. Effective credit risk management ensures
that banks can continue to perform this vital function while safeguarding their assets and sustaining
profitability (Saunders & Allen, 2010). It also helps in maintaining the confidence of depositors,
investors, and other stakeholders (Rose & Hudgins, 2017).
In recent years, the financial sector has witnessed significant changes due to globalization, technological
advancements, and regulatory reforms. These changes have heightened the complexity of managing
credit risk. Financial institutions now face increased pressure to adopt robust credit risk management
frameworks that can handle a wide range of risks, including those related to macroeconomic conditions,
regulatory compliance, and market volatility (Mishkin, 2016).
Oromia Bank Share Company, one of the prominent financial institutions in Ethiopia, operates in a
dynamic environment where effective credit risk management is critical. The bank has established a
comprehensive credit risk management framework designed to identify, assess, and mitigate risks
associated with lending activities. This framework includes policies and procedures for credit appraisal,
credit approval, risk rating, loan monitoring, and recovery processes (Oromia Bank Share Company,
2023).
Despite the bank's efforts, challenges in credit risk management persist, particularly at the branch level.
The Aweday Branch, located in a region with unique economic and social dynamics, faces specific
challenges that necessitate a tailored approach to credit risk management. These challenges include
variations in borrowers' creditworthiness, fluctuations in local economic conditions, and the need for
continuous staff training on risk management practices (Ndegwa, 2014).
Moreover, the increasing demand for credit, coupled with competitive pressures, requires the bank to
enhance its credit risk management capabilities. This involves leveraging advanced analytical tools,
adopting best practices, and ensuring compliance with regulatory standards such as those set by the
National Bank of Ethiopia (National Bank of Ethiopia, 2023).
The assessment of the credit risk management system at the Aweday Branch of Oromia Bank Share
Company is timely and essential. It aims to provide insights into the effectiveness of current practices,
identify areas for improvement, and recommend strategies to strengthen the branch's credit risk
management framework. By doing so, the study will contribute to the overall objective of minimizing
credit risk and enhancing the bank's financial performance (Beck, Demirgüç-Kunt, & Levine, 2009).
This research is particularly significant as it addresses the broader implications of credit risk
management in the Ethiopian banking sector. Effective management of credit risk not only supports the
financial stability of individual banks but also contributes to the stability and growth of the national
economy. It helps in fostering a healthy credit culture, encouraging responsible borrowing and lending
practices, and ensuring the efficient allocation of financial resources (Adebisi & Matthew, 2015).
In conclusion, this study on the assessment of the credit risk management system at Oromia Bank Share
Company's Aweday Branch is poised to provide valuable insights that can enhance the bank's risk
management practices. It underscores the importance of continuous evaluation and improvement in
credit risk management to adapt to the evolving financial landscape and sustain long-term growth and
stability (Mwaura, 2013).
### References
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