ASSESSEMENT OF CREDIT RISK MANAGEMENT PRACTICE.

IN CASE STUYDY OF
DASHEN BANK ASSELA BRANCH

A RESEARCH PROPOSAL SUBMITTED TO DEPARTMENT OF ACCOUNTING AND

FINANCE IN PARTIAL FULFILMENT OF REQUIREMENT OF THE BACHELOR ARTS
(BA) DEGREE IN ACCOUNTING AND FINANCE

ARSI UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Prepared by: TSEHAY ABDI

ID NO - EX-UG/0304/13

Advisor: RADIET

MAY ,2025

ASSELA, ETHIOPIA
Acknowledgement
First of all I would like to thanks the Almighty God for giving the aptitude, determination, and
endurance throughout our daily lifes. Without his support nothing can be accomplished. And I
would like to express our gratitude and appreciation to our advisor Radiet whose dedication and
support have made possible to the completion of the activities of the study. I would like to say
thanks to employees, credit manager and manager of Dashen Bank in Assela Branch for
providing the relevant data.

i
Abstract
The overall objective of the study was found out to assess credit risk management practice in
Dashen Bank Assela branch. The study was granted by these objectives: To assess the credit
risk management practice applied at Dashen Bank, to identify whether there is effective credit
risk management and follow-up in the bank, to identify the major challenges that affect credit
risk management practice in the bank. The study used qualitative research approach and the
data was collected from primary sources. The study was undertaken by employing total
population sampling method. Moreover, it is found that the bank had well organized credit
policy and guidelines that guides its operations, there are factors that increases the credit risk in
the bank such as, economic and market fluctuation and absence of real financial statement from
customers, the bank analyses the credit worthiness of the customer before approving the loan,
the bank uses credit risk management tools, techniques and assessment procedures with main
objectives to reduce amount of loan default. Since, the risk which leads financial institutions in
to failure is associated with credit and the counter Parties default, bank practitioners should put
it in mind that credit management is not to be introduced or stopped at a particular stage of the
banking activity rather it should be a continuous process. In order to attain its overall objectives
and improves the miss-implementation of credit risk policies or guidelines, the bank should
follow-up the implementation of credit policies and standards that confirm the regulatory
requirement.

ii
Table of Contents

Acknowledgement……………………………………………………………………………………………i
Abstract.......................................................................................................................................................ii
List of table.................................................................................................................................................vi
CHAPTER ONE..........................................................................................................................................1
1. INTRODUCTION...................................................................................................................................1
1.1. Background of the study...................................................................................................................1
1.2 Statement of the problem...................................................................................................................2
1.3 Objective of the study........................................................................................................................3
1.3.1 General objectives......................................................................................................................3
1.3.2 Specific objectives......................................................................................................................3
1.4 Scope of the study..............................................................................................................................3
1.5 significance of the study.......................................................................................................................3
1.6 Limitation of the study……………………………………………………………………………………………………………………3

1.7 structure of the paper............................................................................................................................4

CHAPTER TWO.........................................................................................................................................5
2. REVIEW LITERARURE........................................................................................................................5
2.1 Introduction.......................................................................................................................................5
2.2 Theoretical Review............................................................................................................................5
2.2.1 Definition and Concept of Risk Management.............................................................................5
2.2.2 Sources of credit risk..................................................................................................................6
2.2.3 General Principles of Sound Credit Risk Management in Banking.............................................6
2.2.4 Establishing an Appropriate Credit Risk Environment..............................................................6
2.2.5 Operating under a Sound Credit Granting Process......................................................................7
2.2.6 Maintaining an Appropriate Credit Administration, Measurement and Monitoring Process……9
2.2.7 Analysis of the creditworthiness of bank loan applicants..........................................................10
2.2.8 Credit Risk Management in Banks...........................................................................................11
2.2.9 Credit Risk Management Policy...............................................................................................12
2.2.10 Credit Risk Management Practices.........................................................................................13
2.2.11 Credit Risk Management Strategies........................................................................................13
 2.2.12 Credit Risk Management process............................................................................................13
2.2.13 Tools of Risk Management.....................................................................................................14
2.3 Empirical literature..........................................................................................................................16
2.4 conclusions of literature and knowledge gap...................................................................................17
CHAPTER THREE...................................................................................................................................19
3. RESEARCH DESIGN AND METHODOLOGY..................................................................................19
3.1 Introduction.....................................................................................................................................19
3.3 Research Design..............................................................................................................................19
3.4. Source of data.................................................................................................................................19
3.5 Method of data collection................................................................................................................19
3.6 Target population/population of the study.......................................................................................20
3.7 Sampling techniques........................................................................................................................20
3.8 sample size of the study...................................................................................................................20
3.9. Method of data analysis..................................................................................................................20
CHAPTER FOUR.....................................................................................................................................21
TIME AND BUDGET SCHEDULE……………………………………………………………………………………………………………….21
4.1Timeschedule………………………………………………………………………………………….21
4.2 Budgetschedule…………………………………………………………………………………………….……………………………....22

REFERENCE…………………………………………………………………………………………………………………………….23
List of table
Contents Page
Table 4.1 Time plan .....................................................................................................................21
Table 4.2 Buget schedule………………………………………………………………………..22
 CHAPTER ONE

1. INTRODUCTION

This section provides the general over view of the study. The general information included in this chapter
are the back ground of the study, statement of the problem, objective of the study, scope of the study,
significance of the study as well as structure of the study.

1.1. Background of the study

Bank is financial institutions that accept deposit and make loans. Banks in Ethiopia extend credit (loan)
to different types of borrower for many different purposes. For most customers, bank credit is the primary
source of available debt financing and for banks; good loans are the most profitable assets (Frederic’s,
Mishkin, 2004, pp. 8 - 9)

In recent times, banks’ risk management has come under increasing analysis in both academia and
practice. Banks have attempted to sell sophisticated credit risk management systems that can account for
borrower risk and perhaps more importantly, the risk reducing benefits of diversification across borrowers
in a large portfolio

Credit risk occurs when debtor/borrower fails to fulfill his obligations to pay back the loans to the
principal/lender. In banking business, it happens when “payments can either be delayed or not made at all,
which can cause cash flow problems and affect a banks, liquidity” (Greening and Bratonovic 2003,161).
Hence credit risk management in the bank basically involves its practices to manage/minimize the risk
exposure and occurrence.

In order to reduce the rate of default, banks all obliged to establish own credit risk management strategy.
Credit risk management in a financial institution starts with the establishment of sound lending principles
and an efficient framework for managing the risk policies, industry specific standards and guide lines,
together with risk concentration limits are designed under the supervision of risk management committee.
‘‘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’ (Bassel I,2000). Hence, the purpose of this study is to
assess credit risk management problems of Dashen Bank, Assela Branch in light of the practices of
modern credit risk management in financial institutions.

1
1.2 Statement of the problem
Credit risk is the risk of loss due to a debtor’s nonpayment of loans or other line of credit. Credit risk is
defined as the potential that a bank and borrower or counterparty would fail to meet its obligations in
accordance with agreed terms. Default occurs if the debtor is unable to meet its legal obligation according
to the debt contract. The examples of default event include the bond default, the corporate bankruptcy, the
credit card charge-off, and the mortgage foreclosure. Other forms of credit risk include the repayment
delinquency in retail loans, the loss severity up on the default event, as well as the unexpected change of
credit rating (Aijun, 2009). The objective of credit risk management is to minimize the risk and maximize
bank’s risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable
parameters. The risk must be assessed to derive a sound investment decision and decision should be made
by balancing the risks and returns. The role of credit risk management is assessing the risk, conducts
monitoring and reviews of the performance of the bank (Machiraju, 2008).

Poor credit risk management results in, impeding (reducing) banking system profitability and stability in
many places, and bank failures. For example, Udunze (2013) reports that as a result of investigations
regarding poor corporate governance and poor credit risk management, the chief of executive officer of
Eco bank transnational agreed to forgoUS$1.14milion bonus to earn for the 2012 financial year as part of
efforts to rebuild public confidence in the bank against the back drop of accusations of maladministration,
fraud, and technical incompetence in the bank in Nigeria. To give emphasis for the credit risk
management practice, still now some studies has already been made to the literature on credit risk
management in Ethiopian banks, such as that of Girma Mekasha (2011) and TibebuTefera (2011). But,
still there is gaps related with the credit risk management practice in banks. Here, our study would try to
assess these gaps by employing primary data sources, which may help us to investigate data directly from
the practitioners and experts.

Therefore, this study was conducted with the aim of providing answers for the following basic questions.

1. How credit risk management is practiced in Dashen Bank, Assela Branch?

2. What are the challenges in the deployment of an effective risk management at Dashen Bank,
Assela Branch?
3. What are the solutions to the problems that are identified?
4. What are the factors contributing for the problems both at clients and banks side?
5. Is there effective credit risk management and follow up within the bank?

ddfghjkertyuikbvcaertyuimnbvc
2
1.3 Objective of the study
1.3.1 General objectives
The main objective of the study is to assess the credit risk management practice in Dashen Bank, Assela
Branch.

1.3.2 Specific objectives

The specific objectives of this study would be:

o To assess the credit risk management practice applied at Dashen Bank, Assela Branch.
o To identify whether there is effective credit risk management and follow up within the bank.
o To identify the major challenges, if any that affects credit risk management practice in Dashen Bank,
Assela , Branch.
o To identify the factors contributing for the problems both at clients and banks side.

1.4 Scope of the study

The scope of the study would be based only to assess credit risk management practice of Dashen Bank,
Assela Branch. The bank activities of Dashen Bank are one of the greatest private banks. The
magnitude of risk managements is mainly in number however, the study would encompass credit risk
management

1.5 significance of the study

The study would result in a clear understanding of the credit risk management for Dashen Bank, Assela,
Branch how to manage and assess the risk faced by the bank. And also the study on credit risk
management will contribute to existing knowledge and literature on the subject under investigation.
Moreover, the study will also serve as a reference material to other researchers. In fact, it is hoped that the
study will have paramount importance in providing information related to problems associated with credit
risk management so that remedial action, especially in the area of providing information for enhancing
policies and procedures on credit risk management at the banks. Moreover, it will also give an insight to
management in how to systematically approach risks associated with credit management.

1.6. Limitation of the study

The outcomes of the study should be understood having the limitation in to considerations. Since the
study does not cover all branches that exist in the district, the result of the study may not give full
information about credit risk management.

3
1.7 structure of the paper
This paper is organized in to four chapters. The first chapter focuses on introduction, chapter two focuses
on different literatures written on issues related to risk management practices. The third chapter shows
methodology of the research and chapter four time and budget schuchule.

4
 CHAPTER TWO

2. REVIEW LITERARURE

2.1Introduction
In the previous chapter, the main problems and objectives which will be addresses in the study are stated.
This chapter provides theoretical and empirical literature reviews of the study. besides, conceptual model
is includes under this chapter which is framed to summarize the main focus and scope of this study.

2.2 Theoretical Review

The theory that researchers used is bank credit risk management theory. It was developed by David H.
pyle University of California and it was used to study why risk management is needed and our lines some
of the theoretical under pinning of contemporary bank risk management, with an emphasis on credit risk.

2.2.1 Definition and Concept of Risk Management

Management is the simplest understand definition can be defined as the act of planning directing,
controlling, monitoring and testing for designed results to be obtained. Risk on the other hand defined as
uncertainty concerning the occurrence of loss (E. Radjda 2011). When companies indulge in business, it
is obvious that they would be exposed to one type of risk or another which in most cases in uncertainty
although at times it can be certain that it would occur. Banks are one of such business whose risk is very
sure because they do not function in isolation given the dynamic environment in which they operate.

Risk management is” a systematic process for the identification and evaluation of pare loss exposures
faced by an organization or individual and for the selection and implementation of the most appropriate
technique, for treating such exposures” (E. Radja, 2011). Credit risk can be defined as the potential that a
contractual party would fail to meet its obligations in accordance with agreed terms. Credit risk is the
largest element of risk in the books of most banks and, if not managed in a proper way, can weaken
individual banks or even cause many episodes (divisions) of financial instability by impacting the whole
banking system. Thus to the banking sector, credit risk is definitely an inherent and crucial part as by

Jackson and Perraudin (1999). Credit risk management on the other hand defined as the process of
controlling the potential consequence of credit risk. Effective credit risk management

5
2.2.2 Sources of credit risk

The main source of credit risk includes, limited institutional capacity, economic and market fluctuation,
inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, ineffective
control process, poor loan underwriting, poor lending practice, government interference, absence of
refinancial statement from the custome, customer awareness problem, and inadequate supervision by the
central bank (Kithinji,2010). He identified poor project supervision, evaluation and management,
untimely loan disbursement, division of funds, and dishonesty of loan beneficiaries as a case of loan
default which ultimately leads to credit risk. To reduce the probability of credit risk, financial institutions
should take-part in different situations that may enables them to overcome the occurrence of un-expected
default. So as to attain these objectives institutions should create a trustworthy information to both the
staffs and borrower’s, develop the habit of good understanding (relationship) between the high level
executives’ and those who are operates through the organization, follow-up regularly the performance of
the debtor’s, recover loans which are due.

2.2.3 General Principles of Sound Credit Risk Management in Banking

Reviewing the general principles of credit risk management can provide a clearer picture on how banks
carry out their credit risk management, despite of the specific approaches that may differ among banks.
Some of the principles of sound practices of bank credit risk management as outlined in the Basel
committee publications (http://www.ibm.com/us, 2008) cover the following four areas:

2.2.4 Establishing an Appropriate Credit Risk Environment

To establish an appropriate credit risk environment mainly depends on a clear identification of credit risk
and the development of a comprehensive credit risk strategy as well as policies. To banks, the
identification of existing and potential credit risk inherent in the products they offer and the activities they
engage in is a basis for an effective credit risk management, which requires a careful understanding of
both the credit risk characteristics and their credit-granting activities. Besides, the design of objective
credit risk strategies and policies that guide all credit-granting activities is also the cornerstone in bank
credit risk management process.
It is stated that a credit risk strategy should clarify the types of credit the bank is willing to grant and its
target markets as well as the required characteristics of its credit portfolio. According to Saunders (2006),
these strategies should reflect the bank’s tolerance for risk and the level of profitability the bank expects
to achieve for incurring various credit risks.

6
Again, Boateng’s (2004) study shows that the credit risk strategy of a bank should give recognition to the
goals of credit quality, earnings and growth. Every bank, regardless of size, is in business to be profitable
and, consequently, must determine the acceptable risk-return trade-off for its activities, factoring in the
cost of capital. Richard S. (2010)

While credit policies express the bank’s credit risk management philosophy as well as the parameters
within which credit risk is to be controlled, covering topics such as portfolio mix, price terms, rules on
asset classification, etc. According to Boating (2004), a cornerstone of safe and sound banking is the
design and implementation of written policies and procedures related to identifying, measuring,
monitoring and controlling credit risk. Such policies should be clearly defined, consistent with prudent
banking practices and relevant regulatory requirements, and adequate for the nature of the bank and that
the credit risk strategies and policies should be effectively communicated throughout the organization. All
relevant personnel should clearly understand the bank’s approach to granting and managing credit and
should be held accountable for complying with established policies and procedures.
Moreover, establishing an appropriate credit environment also indicates the establishment of a good credit
culture inside the bank, which is the implicit understanding among personnel about the lending
environment and behavior that are acceptable to the bank

2.2.5 Operating under a Sound Credit Granting Process

The Basel Committee (2000) asserts that in order to maintain a sound credit portfolio, a bank must have
an established formal transaction evaluation and approval process for granting of credits. Approvals
should be made in accordance with the bank’s written guidelines and granted by the appropriate level of
management. There should be a clear audit trail documenting that the approval process was complied
with and identifying the individual(s) and/or committee(s) providing input as well as making the credit
decision (Boating, 2004).
A sound credit granting process requires the establishment of well-defined credit granting criteria as well
as credit exposure limits in order to assess the creditworthiness of the obligors and to screen out the
preferred ones. In this regard Thomas (2002) asserts that banks have traditionally focused on the
principles of five Cs to estimate borrowers’ creditworthiness. These five C’s are:
i. Character. This refers to the borrower’s personal characteristics such as honesty, willingness and
commitment to pay debt. Borrowers who demonstrate high level of integrity and commitment to repay
their debts are considered favorable for credit.

7
ii. Capacity. This also refers to borrowers’ ability to contain and service debt judging from the success or
otherwise of the venture into which the credit facility is employed. Borrowers who exhibit successful
business performance over a reasonable past period are also considered favorable for credit facility.
iii. Capital. This refers to the financial condition of the borrower. Where the borrower has a reasonable
amount of financial assets in excess of his financial liabilities, such a borrower is considered favorable for
credit facility.
iv. Collateral. These are assets, normally movable or unmovable property, pledged against the
performance of an obligation. Examples of collateral are buildings, inventory and account receivables.
Borrowers with a lot more assets to pledge as collateral are considered favorable for credit facility.
v. Condition. This refers to the economic situation or condition prevailing at the time of the loan
application. In periods of recession borrowers find it quite difficult to obtain credit facility.
Banks must develop a corps of credit risk officers who have the experience, knowledge and background
to exercise prudent judgment in assessing, approving and managing credit risks.

A bank’s credit-granting and approval process should establish accountability for decisions taken and
designate who has the absolute authority to approve credits or changes in credit terms.

8
2.2.6 Maintaining an Appropriate Credit Administration, Measurement and Monitoring Process
Credit administration is a critical element in maintaining the safety and soundness of a bank. Once a
credit is granted, it is the responsibility of the bank to ensure that credit is properly maintained. This
includes keeping the credit file up to date, obtaining current financial information, sending out notices and
preparing various documents such as loan agreements, and follow-up and inspection reports.
Credit administration, as emphasized by Wesley (1993), can play a vital role in the success of a bank,
since it is influential in building and maintaining a safe credit environment and usually saves the
institution from lending problems. Therefore, banks should never neglect the effectiveness of their credit
administration operations. Then talking about credit risk measurement in banks, it is required that banks
should adopt effective methodologies for assessing the credit risk inherent both in the exposures to
individual borrowers and credit portfolios The last focus in this area of principles is related to credit risk
monitoring, which is definitely a must in banks’ risk management procedure.
A proper credit monitoring system will provide the basis for taking prompt corrective actions when
warning signs point to deterioration in the financial health of the borrower. Ensuring Adequate Controls
over Credit Risk

In order to ensure adequate controls over credit, there must be credit limits set for each officer whose
duties have something to do with credit granting. Material transactions with related parties should be
subject to the approval of the board of directors (excluding board members with conflicts of interest), and
in certain circumstances (e.g. a large loan to a major shareholder) reported to the banking supervisory
authorities.
The means for guaranteeing adequate controls over credit risk in banks lay in the establishment of
different kinds of credit reviews. Regular credit reviews can verify the accordance between granted
credits and the credit policies, and an independent judgment can be provided on the asset qualities.

As types of credit, facilities of one banks can be broadly classified in to two groups’ funded and non-
funded credit. Any type of credit facility which involved direct flow of banks fund on account of
borrowers is treated as funded credit facility.

Funded credit facility may be classified in to four major types: - loans, cash credit, overdraft and bill
discounted and purchase. A type of credit facility where there is no involvement of direct out of banks
find on account of borrower termed as non-funded credit facility. Non funded credit facilities
may turn in to funded facilities at times.

9
As such, liabilities against those types of credit facilities are termed as contingent liabilities.

The major no funded credit facilities are letter of credit bid bond, performance bond, advance
payment guarantee and foreign counter guarantee.

2.2.7 Analysis of the creditworthiness of bank loan applicants

The notion ‘creditworthiness’ can be defined as a presumed ability to meet agreed deadlines
related to repaying the credit and interest accrued without affecting the vitality of the borrower,
that means the repayment process should be based on the income received in the process of the
borrower’s usual activity, without affecting adversely his financial situation, his financial results
as well as other business entities (stoyanov,2008).

2.2.7.1 Pre-requisites of creditworthiness

According to stoyanov, the prerequisites of credit worthiness are divided in to personal and
financial prerequisites.

Personal prerequisites: the will to work and demonstrate enterprise along with courage in
decision making and ability to respond quickly and adequately to the changing environment. To
the personal creditworthiness, prerequisites belong: the ability to make an estimate when
comparing incomes and expenditure for the corresponding business activity for higher
achievements and to implement effective management.

Financial pre-requisites: it is the data about the financial and economic situation of the loan
applicant. These includes forecast about expected development of the industry and the role that
the enterprise plays in it, a study whether the loan can be repaid in accordance with the terms and
using revenue from the activity of the business entity.

2.2.7.2 Accounting information and creditworthiness analysis

From the presented data of creditworthiness analysis of bank loan applicants, the accounting
information has highest relative share in the total value of this information. The minimal required
number of accounting reports presented by the loan applicants is as follows:
 Accounting balance sheet
 Profit and loss account
10
 Statement of liability on previous credits and their servicing
 Statement of changes in equity
 Statement of cash flows

2.2.8 Credit Risk Management in Banks

Although the effects of all risks type cause negative consequences to the bank, credit risk has
been identified as the key risk associated with negative consequences, in terms of its influences
on the bank performance (Sinkey, 1996). This means if credit risk is not well managed it can
lead to failure. Thus for any bank to succeed its credit risk management, it must be handled with
a lot of effective follow up activities.

A clear reason why a correct management of credit risks is very important that before a banking
gives out a loan, it should try are as much as possible to have a reliable view of the borrower.

The bank has to assess the credit risk worthiness of the borrower even after the loan is granted in
terms. Monitoring is required until when the borrowers has finished repaying the loan. This
monitoring is very important because with the uncertainty in the future any potential event that
can cause a borrower to default payment can be fast identified or a mechanism can be part in
place on time to reduce the frequency of loss should it occur. Early identification of borrowers at
risk is good because it enables services adequately staff collections departments, determine the
most effective type of customer we reached and initiate repayment plans before borrower’s
situation worsens to the point which for closure is on a voidable, (Cocardi, 2009).

2.2.8.1 Obstacles to credit Risk Management

According Machiraju (2002), the task of management of credit risk is rendered difficulty in
developing markets by government controls, political pressures, delays in production schedule
and frequent instability in production schedule and frequent instability in a business environment
undermine the financial information is unreliable and the legal frame work does not support debt
recovery. The difficult external context is re informed by internal weakness of banks further
undermine the asset quality.

11
2.2.8.2 Deficiency in Credit Risk Management
The common deficiencies observed in credit risk management according to Machiraju (2008) in
Banks are:
- Absence of written policies
- Absence of portfolio concentration
- Inadequate financial analysis of borrowers
- Credit rationing contributing to determination of loan quality
- Excessive reliance on collateral
- Inadequate checks and balance in the credit process
- Absence of loan supervision
- Failure to control and Audit the credit process effectively.

2.2.9 Credit Risk Management Policy

Banks like any other firm have formal laid down policies and principles that have been put in
places by the board of directors on how to manage credits and this have to be supervisors or
managers on how to take action. Manass and Zietflow 2005 specifies that credit policy has three
major components. The primary component is credit sanders which is the profile of minimally
acceptable credit period stipulating how long from the invoice the customer has to pay and the
cash discount to ( if any).the second, is credit limit that the dollar amount that cumulative credit
is extended and the last is collection procedures and these are detailed statement regarding when
and how the company would carry out collection of past due accounts, Despite the rules it does
not mean that credit policies are stereotyped. “A good lending policy is not very restrictive, but
allows for the presentation of loans to the board that officers believe are worthy of consideration
but which do not fall within the parameters of written guide lines”. Since the future is uncertain
flexibility must be allowed for easy adaption to changing condition (may be internal or
environmental). For the risk management policies and philosophies have to be used in order to
control the credit risk (Geruring and Bratanvic, 2003).

12
2.2.10 Credit Risk Management Practices
Banks have different credit risk management policies or philosophies same do the risk
management practices differ from the financial institution to another despite the fact that they
can open to the same risk. The policies and philosophies each and every bank has their individual
level of risk that they can decide to let go based on how it is out lined in their risk management
policy. To exit from firms in the same industry but the implementation in practices differs
practices is not consistent with theory in most cases because of data limitation for most
industries, it difficult to describe which firms manage more risk than others or whether firms
language in dynamic risk management strategies and more importantly it cannot be reliably
tested whether firms language in dynamic risk management strategies and more importantly
it cannot be reliability tested whether a firms management practices conform with existing of
theories (Tufa no, 1996).

2.2.11 Credit Risk Management Strategies

E. Michael (1996) defines a strategy as a plan (Method) for achieving something. A strategy
thus, simply means a way to go about activity. This thus goes that as a bank has different credit
risk policies (philosophies and different practices, their strategy to attain their deferred goals in
the same way differ. A strategy position means performing different activities from rivals or
performing different activities from rivals or perform its rivals only if it can establish a
difference that it can preserve by effective strategy (porter, 1996). When banks carry out its
operational activities which are the same activities carried out by other banks, they should try to
make differences from their rivals by not only typing to be more efficient but also try to make a
difference. For example, maintaining an appropriate credit administration, monitoring process,
ensuring adequate control over credit, but these practices in conjunction with sound practice
related to the assessment of asset quality adequacy of provision and reserves and the disclosure
of credit risk.

2.2.12 Credit Risk Management process

The same way that bank has different credit culture (the policies, practices, and philosophy and
management style). They also have different credit risk management process.

13
It is a set of out lined activities aimed at managing credit risk.

The activity is just like the one’s out line for the risk management process and would convert the
range from credit granting to credit collection. They are risk identification, measurement,
assessment control and monitor. The first step is to identify the risk involved in the credit
process. After identification, the risk is measured by evaluating the consequences if it is not well
managed. After the evaluation phase, the risk is then assessed to know the impact, the likelihood
of occurrence, and possibility for it to be controlled. The control and monitoring phase then
comes in. These phases are not distinct like the other three phases. In the control phase, measure
which can be used to avoid, reduce, prevent, or eliminate the risk are put in phase. The
monitoring phase is used to make a constant check so that all process or activity which have been
put in place for the risk management process are well implemented for desired result to be gotten
and in case of any distortion, corrections are then made. All this is done because credit risk is a
very important and delicate risk that banks face and needs to be managed with great care
(precaution) because its consequences are always every detrimental to the bank. Despite the
changes in the financial services sector, credit risk remains the major single cause of banks
failure (Greuning of Bratanovic, 2003).

2.2.13 Tools of Risk Management

Risk is handled in several ways most authors give the following risk handling tools. These are
avoidance, loss prevention and reduction, separation, diversification /combination, non-insurance
transfer, retention and insurance. Those tools are classification to two (1) Risk Control and, (2)
Risk finance tools.

2.2.13.1 Risk control tools

Avoidance: Avoidance of risk exists when the individual or the organization free itself from the
exposure through abandonment of refusal to accept the risk, an individual can avoid third person
disability by not owing a care product, liability can be avoided by dropping the product. Leasing
avoids the risk organizing from property ownership.

14
Advantage: the chance of loss is reduced to zero it the loss exposure is abandoned; the
possibility of loss is either eliminated or reduced because the activity of product that could
produce a loss has been abandoned (avoided).

Disadvantage: - it may not be possible to avoid all loss example the company cannot avoid the
premature death of a key executive.

Avoidance is that it may not be practical to avoid the exposure for example a point factory can
avoid loss arising from the production of point however, without any production the firm would
not be business.

Avoidance is a useful common approach to handle the risk. By avoiding a losses or uncertainties
that exposure may generate.

Loss prevention and reduction measurement: This measure refers to the safety taken by the
firm to prevent the occurrence of the loss or reduce its severity. Loss reduction measurements try
to minimize the severity of the loss once the partial happened. Example automobile accidents can
be prevented or reduced by having good road, better light and sound affect regulations and
control fast first aid service and control. The libel loss prevention and loss reduction measures
must be considered the risk manager considers the application of any risk financing instrument.

Separation; Separation of the firm exposure to loss instead of concentrating them at one location
where they might be involved in some loss. For example, instead of placing its entire inventory
in one wear have, the firm may prefer to separate this exposure by placing equal parts of the
inventory in ten widely separated warehouses.

Combination or Diversification: Combination is a basic principle of insurance that follows the

low of large numbers. It can reduce risk by making loses more predictable with a higher degree
of accuracy. The difference is that unlike separation, which spreads a specified number of
exposure unit under the control of the firm. In case of firm’s combination results in the pooling
of resources of two or more forms.

Diversification most speculative risk in the business can deal with diversification.

15
 A business firm diversifies their product, i.e. a decline in profit of one business could be
compensated by profits from others.

Non-insurance transfer- this may be accomplished on two ways: -

Transfer of the activity or property: The property or activity responsible for the risk may be
transferred to some another person or group of person. This type of transfer is closely related to
avoidance through risk control measure because is eliminates a potential loss that may strike the
firm must pass in to someone else.
Transfer of the probable loss: The risk but not the property or activity, may be transferred leasing

2.2.13.2 Risk financing tools

Retention: this is the earliest method of handling risk. The firm consciously or unconsciously,
decides to assume the risk. The loss is to be burned by the person or firm, and specific
measurements should be taken to retain the loss it the loss is less is severity. The firm decides to
retain the risk for a number of reasons. It is probably impossible to transfer the risk as in the case
of gambling besides the attitude of the individual of the firm towards risk. The value of goods to
be insured compared to insurance cost is another factor that may force businesses to assume risk,
cost benefit analysis. Retention can be effectively used in a risk management program when
contain conditions exit.

-1st no other methods of treatment are available: Insurers may be un-willing to write a certain
type of coverage.
-Non- insurance transfer may not be available.

2.3 Empirical literature

As studied by researcher Tibabu CBE, Dire Dawa area according to respondents or information
since the researcher concludes that credit risk is a fact of life in bonks, it is not possible to
eliminate loan problem all to gather but you can minimize by different mechanisms.

The most credit policy and procedures of the bank include providing service on loan application,
and applying acceptable credit analysis and appraisal functions.

16
The objective of credit risk management is to insure a uniform bank approach to assess decision
making of all level in the bank to enable lending officers to focus on better quality clients and to
analysis the degree of the risk involvements on credit.

The cause for the existence of credit risk in the bank is lack of prudent lending, market failure,
incomplete information, and weakness in collateral arrangement.

The mechanism to improve the credit risk management include providing independent report to
the sub-board risk management committee of the bank and indicating revision of the guidelines
as and when situations demand so.

The weakness identified in the research is delay of payments and independency of finance. To
minimize the incidence of credit risk incites customer to pay their repayment, by making
understand about credit risk, to assign and advice of the customer by the organization to improve
the credit risk management.

The researcher recommended that the bank should assign skilled, professional and experienced
individuals to their proper positions.

The bank should design cost effective and efficient techniques in order to minimize credit risk of
the bank. The bank should implement effective credit risk evaluation system.

2.4 conclusions of literature and knowledge gap

NBE sets requirements for a banking business operation by NBE.thus,a bank shall fulfil
sound information management and internal control systems, risk management policies and
procedures, and human resource organization and such other essential obligations to carry out
banking business as determine by the directive to be issued by the national bank (proclamation
No.592/2008).under the umbrella of international credit principals,NBE has its banking business
proclamation and directives that helps to insure safety, soundness and stability of the banking
system by having a compressive law for the licensing and supervision of the banking system.

17
The conceptual framework for this study, Dashen bank credit risk management practice is
assessed by taking consideration the international principles for the management of credit risk
and NBE proclamations, policies and procedures as well as different directives since sound credit
risk management system and practice in bank is not an alternative rather it is a matter of survival
for not only safety of individual bank and depositors but also for national and global financial
stability.

The student researchers will try to define credit risk management practice as the process of
reviewing and updating credit risk management document and apply consistent in actual credit
granting process, credit administration and monitoring and risk controlling process with
appropriate credit risk environment, the rule of supervision, understanding and identification of
risk so as to minimize the adverse effect of risk taking activities. Basel (1999) and other
literature in the area of credit risk management suggested that banks should have sound and
updated credit strategy, policy and procedures, sound credit granting process, proper credit
administrating and monitoring and credit risk controlling system that consistently applied in each
credit cycle with appropriate credit risk environment in order to have effective credit risk
management system and practice.

18
 CHAPTER THREE

3. RESEARCH DESIGN AND METHODOLOGY

3.1Introduction
This chapter of the study constitutes the study design and methodology as well as ethical
consideration that underpinning the study.the methodology of a study involves the types of data
used in under taking the study as well as the process and procedures used in data collection. The
chapter is categorized in to the following sub headings: research design and approach, population
in sampling technique, type of data and tools /instruments of data collection, methods of data
analysis ethical, validity, and reliability consideration.

3.2Research Design
This study was conducted with a qualitative research method by employing descriptive research
approach because it involves a systematic collection and presentation of data and describe
(justify) the current nature of credit risk management practice in Dashen Bank Assela Branch.

3.3. Source of data

This study used primary data in order to get efficient and relevant information about the study,
researchers used primary data. Primary data were collected from respondents through
questionnaires and personal interviews.

3.4 Method of data collection

For the purpose of this study, primary data were used. Unstructured interviews and closed
questionnaires were used to collect primary data. Unstructured interview were prepared and
administered to staff’s working in loan area and district managers and assistant district manager
of the bank. This helps to address the research questions more specifically or to concentrate more
on the topic itself. Interview was undertaken by researchers in order to effectively gather
pertinent information to the study.

19
3.5 Target population/population of the study
The target population of the study are employees who are directly involve in credit risk
management and administration. This means senior bank professionals, department heads,
branch manager, assistance branch managers, loan section heads, loan/credit analysis officers.

3.6 Sampling techniques

Purposive sampling was used under the non-probability sampling to collect data from the
employee of the bank in line of the research question. The rationale behind employing this
purposive sample type is to identify the employee that have specialized knowledge of credit risk
management and to share their understandings about the study.

3.7 sample size of the study

Researchers used purposive 20 respondents, which represent the total population, employees
directly involved in credit risk management and administration, and branch manager, credit
analysts’ customer service officers

3.8. Method of data analysis

The relevant information that was collected from primary source of data shall depend on the
basis of descriptive analysis method. Because, descriptive analysis used to transformation of raw
data in to a form and would made easy to understand to the reader and enterprise. Descriptive is
largely the study of the distribution of one variable form. In line with descriptive data analysis
the study used tabulation, charts and percentage analysis.

20
 CHAPTER FOUR

TIME AND BUDGET SCHEDULE

4.1. Time schedule
To prepare this research the researcher makes time plan up to the submission date. in this time to
prepare the final report the researcher will communicate with advisors, collect data , analyze data
, summarize data , make conclusion and recommendation on a predetermined date.

Table 1. Time plan

2024 2025

N Activities Se octobe Novembe Decembe Janu Fe Marc Apir Ma Jun Jul

o p r r r a b h l y e y

1 Titil selection x

2 Preparing x
data
collection
tools
3 Data x
collection
and
organizing
4 Data x
analyzing
and
interpretatio
n
5 Report write x
up and first
draft
submission
6 Submission X
of final
research
report
7 Presentation X
 of research
report

21

4.2 Budget
schedule

To prepare this proposal research the researcher spends different expenses, and the researcher
makes a plan to minimize unwanted expenses.

Table 2. Budget schedule

No Items Unit Quantity Unit price Total price

1 Paper No. 1 700.00 700.00
2 Pen No. 3 25.00 75.00
3 Ruler No. 1 15.00 15.00
5 CD RW No. 1 200.00 200.00
7 Transportation cost No. 8 15.00 120.00
8 Research report writing No. 200.00
and binding
Grand Total 1310.00
 22

REFERENCE

Basel Committee,(2000),Best Practice for Credit Risk Disclosure, Basel Committee on Banking
supervision, September.

Boating, G.,(2004), Credit Risk Management in Banks.

David H.pyle, (1997), Bank Credit Risk Management Theory, University of California.A

Fredric S. Mishikin,(2004), The Economics of Money, banking, and financial markets.

7thedition.Colombia University. Pearson Addisson Wesley press.

George. E. Raja,(2011), principle of risk and insurance 11th, edition,Neyork.

Greuning, H.V., and Bratanovic S.,(2003) “Analyzing and Managing Banking Risk: A
framework for assessing corporate governance and financial risk ; the World Bank
Washington DC.

GirmaMekasha,(2011), Credit Risk Management and its Impact on Ethiopian Commercial

Banks, Un-published Master’s Thesis, Addis Ababa University

H.r.Machiraju,(2008), Modern Commercial Bank 2nd edition.

Jackson, P. and Perradin, W.(1999) The nature of credit risk: The effect of Maturity, types of
obligor and country of domicile, financial stability review, November.

Kithinji, A.M.,(2010), Credit Risk Management and Profitability of Commercial Bank in Kenya,
School of Business, University of Nairobi.

Lapteva, M.N., (2009), Credit Risk Management in Banks.

Maness and Zeiflow,(2005), Short term financial Management 3rd edition.

Michael E. Porter,(1996),“What is Strategy?”,Harvard Business Review, November-
December:61 -78.

Peter Tufano,(1996), Who Manage the Risk? An Empirical Examination of Risk Management
Practice in the Gold Mining industry”

23.

Richard, S., (2010), Assessment of Credit Risk Management Practices of Kokum Rural Bank
Limited, Unpublished Master’s Thesis, University of Cape Cost.

Saunders, A.,(2006) Financial Institution Management; A Risk Management Approach,. London:

McGraw Hill.

Sinky,(1996), Commercial Bank Financial Management.

Stoyanov, St., (2008),Credit Risk Analysis and Information Supply.

Thomas, L.,(2002), Survey of Credit and Behavioral Scoring; Forecasting financial risk of
lending to consumers, University of Edinburgh, Edinburgh.

TibebuTefera,(20011), Credit Risk Management and Profitability of Commercial Bank in

Ethiopia, Unpublished Master’s Thesis, Addis Ababa University.

Udunze B.,(2013), Eco bank’s CEO forgoes$1.14m bonus: daily sun. vol.10, pp.55

Weasly, D.H.,(1993), Credit Risk Management: Lesson for Success Journal of Commercial
Lending.

…………………………………….
24