ASSESMENT OF CREDIT COLLECTION MANAGEMENT IN LION

INTERNATIONAL BANK (CASE ON HAWASSA BRANCH)

SENIOR ESSAY, SUBMITTED FOR THE PARTIAL FULFILLMENT

OF THE REQUIREMENTS IN AWARD OF BACHLOR OF ART (BA)
IN ACCOUNTING AND FINANCE

WACHEMO UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

BY: ASNAKE BOGALE

ID No: 2475

ADVISOR: MEAZA M. (MSC)

JUNE, 2019

HOSSANA, ETHIOPIA
 Acknowledgement
First of all I would like to deserve a great gratitude to God for me the endurance and
tolerance all through the way.
Next I would to express my deep appreciation and gratitude to my advisor Meaza M.
(MSC) for his patience and dedication in providing his continues valuable and
constructive comments throughout the preceding of this year.
I want to express my heart full thanks to Lion international Bank of Ethiopia employees
for their full-fledged assistance and cooperation in distributing, answering and collecting
the questionnaires and providing the necessary materials for this study.
I also indebted to my friends, parents for their moral and financial support during the
study.

i
 Abstract
This paper aimed at assessing the credit collection management of Lion international
bank in Hawassa branch. To assess some procedure related to granting loan, to evaluate
how the bank evaluates the credit worthiness of its borrowers. The investigator used
descriptive method of approach, and also judgmental sampling techniques were carried
out. The study was accomplished primary and secondary data was used. The findings of
the study showed many strengths and weakness of the branch regarding credit collection
management practice. Among the weaknesses identified in this study include the bank
does not regularly follow up the customers that are the reason for customers being
default in repaying the loan, the bank set the same interest rate for all types of loan.
Among the strength identified was the bank grants mostly short term loans to minimize
collectability risk. Based on the weakness identified the bank was recommended to follow
up regularly to decrease the default rate of the borrowers, and the bank has to set
different interest rate depends on the loan size of the debtors. In conclusion when we
generally consider the credit collection management of Lion international bank going to
be good and mood, this would justify by using efficient method of customer screening
techniqu

Table of Contents

ii
Acknowledgementi……………………………………………………………………………………………………………………….. i
Abstract…………………………………………………………………………………………………………………………………………ii
CHAPTER ONE……………………………………………………………………………………………………………………………..1
1.INTRODUCTION1………………………………………………………………………………………………………………………1
1.1. BACK GROUND OF THE STUDY……………………………………………………………………………………1
1.2. STATEMENT OF THE PROBLEM…………………………………………………………………………………1
1.3. OBJECTIVES OF THE STUDY…………………………………………………………………………………………….2
1.3.1. GENERAL OBJECTIVE………………………………………………………………………………………………...2
1.3.2 SPECIFIC OBJECTIVE………………………………………………………………………………………………….2
1.4. SIGNIFICANCE OF THE STUDY……………………………………………………………………………………2
I. 1.5. SCOPE AND LIMITATION OF THE STUDY……………………………………………............3
1.5.1. SCOPE OF THE STUDY…………………………………………………………………………………………….3
1.5.2. LIMITATION OF THE STUDY...............................................................................................3
CHAPTER TWO.......................................................................................................................................5
2. REVIEW OF RELATED LITERATURE...........................................................................................5
2.1. MEANING AND DEFINATION OF CREDIT............................................................................5
2.1.1.MEANING OF CREDIT............................................................................................................6
2.1.2.CREDIT CREATION.................................................................................................................6
2.2. TYPES OF CREDITT......................................................................................................................6
2.3. FORMS OF CREDIT.......................................................................................................................7
2.4.ATTRIBUTES OF CREDIT INSTRUMENTS.................................................................................8
2.5. CREDIT CONTROL........................................................................................................................9
2.5.1. OBJECTIVE OF CREDIT CONTROL.....................................................................................9
2.5.2. METHODS OF CREDIT CONTROL.....................................................................................10
2.6. CREDIT RISK................................................................................................................................13
2.6.1. NATURE OF CREDIT RISK..................................................................................................13
2.6.2. CREDIT RISK AND COLLECTION MANAGEMENT........................................................13
2.6.3. DEFICIENCIES IN CREDIT RISK MANAGEMENT...........................................................14
2.6.4.PRINCIPLES IN CREDIT RISK MANAGEMENT................................................................14
2.6.5.METHOD OF REDUCIN CREDIT RISK...............................................................................15
2.7.CREDIT POLICY...........................................................................................................................15
2.7.1. CREDIT POLICY IN ETHIOPIA.......................................................................................15

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 2.8.SETTING THE COLLECTION POLICY.......................................................................................16
2.8.1.THE NEED FOR CREDIT MANAGEMENT..........................................................................16
CHAPTERTHREE..................................................................................................................................17
3. METHODOLOGY OF THE STUDY................................................................................................17

3.1.RESEARCH DESIGN...................................................................................17
3.1.1 DATA TYPE………………………………………………………………………………………………17
3.2. METHOD OF DATA COLLECTION...................................................................................17
3.3. POPULATION AND SAMPLE SIZE............................................................................................17
3.4. METHOD OF DATA ANALYSIS AND INTERPRETATION...........................................18
CHAPTER FOUR.....................................................................................................................................19
4. DATA ANALYSIS AND INTERPRETATION...................................................................................19
4.1.DATA ANALYSIS BASED ON PRIMARY DATA......................................................................19
4.1.1.DATA ANALYSIS BASED ON QUESTIONER....................................................................19
4.1.2.DATA ANALYSIS BASED ON INTERVIEW...........................................................................28
4.2. DATA ANALYSIS BASED ON SECONDARY DATA...............................................................30
CHAPTER FIVE.......................................................................................................................................34
5. CONCLUSION AND RECOMMENDATION.....................................................................................34
5.1.CONCLUSION...............................................................................................................................34
5.2. RECOMMENDATION..................................................................................................................35
Reference...................................................................................................................................................36
APPENDIX...............................................................................................................................................37

List of tables

Table page

Table4.1: analyze the age structure of respondents………………………… 19

iv
 Table4.2: To summarize sex structure of respondents:………………………..
20

Table4.3: summarizing the educational level of respondents:………………..

20

Table 4.4: summarizing work experience of employees………………………..

21

Table4.5: summarizing the presence of loan in lion bank………………………….. 21

Table4. 6: Summarizing the types of loan term mostly customer use……………… 22

Table4.7: summarizing the existence of credit collection report………………..

22

Table4.8: who is the debtor contract first to request a loan?.................................

23

Table4.9: does the bank asses borrowers past financial history credit

worthiness and perform in detail before extending the loan?...........................

24

Table4.10: when the borrower faces a certain problem and unable

to pay the loan, what mechanism do you apply in order the loan to be collected……
24

Table4.11: which kind of screening techniques that the bank

uses to evaluate credit worthiness of borrowers? ………………………………

25

Table4.12: which type of loan disbursement is your bank use for borrowers?.......... 26

Table4.13: does your bank evaluate collateral before granting a loan?........................ 26

Table4.14: does your bank permitting over draft for the customers? ……………….. 27

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Table4.15: how your bank set the same interest rate for different amount of loan?.......
27

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 CHAPTER ONE

1. INTRODUCTION
1.1. BACK GROUND OF THE STUDY
A banking institution various types of service are providing among those credits is
one of the most important core businesses of most banks. The word credit itself is
derived from the Latin word“credere” to believe to put confidence in some one trust
same one( Conant 1899, baltnsperger 1987)
Bank is financial institution that are established for lending , borrowing, issuing,
exchanging, taking deposit, safe guarding or handling money under the law and
guidelines of respective country. Among their activities credit provision is the main
product which bank provides to potential business entrepreneur as main source of
income. While providing credit as main source of income bank takes in to account
many considerations as factor of credit collection management which helps them to
minimize the risk of default that result in financial distress and bankruptcy. This is
due to the reason that while a bank providing credit they are exposed to risk of
default( risk of interest & principal payment) which needs to be managed effectively
to acquire level of loan growth and performance (bass, 1991)
In competitive environment more lines of business which need huge environment
are being opened. Some of this investment is financed through commercial bank
loan. With this respect bank play major role in the overall economy development of
the country. However, in this process of extending credit to customers. A bank
should have a way securing its borrowers so that it will minimize the risk of default
(Bas, 1998) fundamental of risk 3rd edition).
1.2. STATEMENT OF THE PROBLEM
Credit collection management is one part of the bank service. But it has wide
approaches. There is high demand of borrowing money used for different
purposes.Investors, individuals and government itself needs money for their own
purposes. Most of the time the economic units needs to satisfied the banks. The
previous studies focused their attention only on credit collection management of

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 lion international bank of Ethiopia. Thus it focused on determining efficiency
and effectiveness of assessing credit collection of the company. Thus study was
try to investigated the problem of lion international bank due to the fact that
some of loans and advances grant to its users turned to be bad loans. Because
level o loans that grant by lion international bank to its uses to be bad loans
(probability that loan returned by the customer is low) is increased year to year.
Therefore it is necessary to raise the following research questions to identify the
problems.
1. How the bank evaluated the credit worthiness of the debtors?
2. What are the criteria used by lion international bank credit worthiness of the
borrowers?
3. What are the causes of customer in ability to pay the loan to the bank?

1.3. OBJECTIVES OF THE STUDY

1.3.1. GENERAL OBJECTIVE

The main objective of the study was to examine and assess the credit collection of
management procedures and performance in the lion international bank in adishum duhun
branch

1.3.2 SPECIFIC OBJECTIVE

1. To assess the insolvency of the customer or the borrowers.
2. To identify the criteria used to evaluate and estimate the collateral used as
pledge for granting loan.
3. To identify the causes of customers default in repaying loan

1.4. SIGNIFICANCE OF THE STUDY

The study on assessment of credit collection management on lion international bank

Hawassa branch has a vital role. This role to contribute the organization i.e. banks is to
get interest and to attract the new customers and to satisfy the existing customers because
it provides information that was enable effective measures to be taken to improve the
performance of credit collection process of lion international bank Hawassa branch. This

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study is useful in bringing in to light the strong and weak point in managing credit risk.
The paper was mentioned several important ideas, which is relevance for the researcher.

1.5. SCOPE AND LIMITATION OF THE STUDY

1.5.1. SCOPE OF THE STUDY

Lion international bank is privately owned Share Company which is currently
has 60 branches both in Addis Ababa and regional towns.This study are
focused on assessing credit collection management in lion international bank
Hawassa branch.

1.5.2. LIMITATION OF THE STUDY

There are some limitation that are expected to face on this research work the
following are among some limitations

1. Because of far from the campus in my study area is difficult to study

effectively.
2. The short span of the time for interview collecting and analyzing of questions
of the data for final report.
3. Lack of skill and experience of the researcher about the research finding.
4. There was shortage of time when the researcher does the research there was
some tests and quizzes.

.
.

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 CHAPTER TWO

2. REVIEW OF RELATED LITERATURE

2.1. MEANING AND DEFINATION OF CREDIT

Banking signifies some form of dealing in money and securities. It is essentially the business
of playing between the lenders and borrowers. It is middling and intermediation function
between the saving surplus and saving deficit economic units within the society ( B.M.L.all
Nigam, 2988)

In the extension of bank accommodation, nothing is more significant than the ability and
characte0r of the borrowers. Practical bankers theoreticians alike suggest that safest and
the most dependable security that could be obtained is integrity and business like dealing of
customers. It is not the tangible collateral to generate earnings and maintain solvency. This
measurement of the overall standing of the firm and its future is what is called “credit
analysis” or “credit investigation” it is in effect financial analysis conducted by supplier of
funds with a view to finding the position, progress, and prospects of a borrowers (B.MLall
Nigam, 1988).

The business of banking is credit and credit is the primary basis on which banks quality
and performance are judged studies of banking crises show that the frequent factors in the
failure of banks has been poor loan quality. The credit risk management process of banks
is believed to be a good indicator of a quality of the bank’s loan portfolio (HR Machiraju,
2003)

Credit risk covers all risks related to a borrower not fulfilling his obligations on time. Even
where assets are exactly matched by liabilities of the maturity, the same interest rate
conditions and the same currency, the only on the balance sheet risk remaining would be
credit risk.

Credit risk exposure is measured by the current mark to market value. The magnitude of
credit risk depends of the likelihood of default by the counter party, the potential value of
outstanding contracts, and the extent to which legally enforceable netting arrangements

4
allow the value off setting contracts with that counter party to be netted against each other
or the value of the collateral held against the contracts. (HR. Maharaja, 2003)

2.1.1.MEANING OF CREDIT
The word credit is derived from Latin word(credo) which means I believe to the creditors
believes that the debtors will return the loan and so decides to give the loan. Advancing
credit or loan essentially decides to give the loan, confidence, character, capacity, capital
and collateral of the debtor. It is a medium of exchange to receive money or goods on
demand of the some future date. R.p kent defines credit as the right to receive payments of
the obligation to make payment on demand of some future time on account of the
immediate transfer of goods (R.R Paul, (1996)

2.1.2.CREDIT CREATION
A bank differsfrom other financial institutions because it can create. Banks have the
ability to expand their demand deposits as multiple of their cash reserves. This is because
of the fact that demand development of the banks serve as the principal medium of
exchange, and in this way the banks manage the payments system of the country.

In short the ability of banks to expand the deposits makes them unique and distinguishes
them from other non-banking financial institution. The whole structure of banking is based
on credit. Bank credit means bank loans and advances. Bank keeps a certain proportion of
its deposits as a minimum and lends out the remaining excess reserve to earn income. The
bank loan is not paid directly to the borrower but is only credit in this account; every bank
loan creates an equivalent deposit in the bank. Those credit creations means multiple
expansion of bank deposits(R.R Paul, 1996)

2.2. TYPES OF CREDITT

There are four common division of credit.

1. Production versus consumption

Credit may extend for either production or consumption purposes. In the twentieth
century, consumption loans have grown in importance largely as a result of growing
importance of automobiles other consumer durable goods, a generation ago,
bankers tended to look askance of consumption credit.

5
 2. Long, short and intermediate
Short term credit includes any period up to a year in length, intermediate credit
generally runs from one to five years and long term credit extends over five years.
3. Direct versus indirect
Originally all credit was direct. Someone lent spare money on goods directly to the
borrowers. But an important character of modern society is the financial institution
which extends credit indirectly. Funds are deposited with a saving bank, which take
over the responsibility of finding safe and profitable lending opportunities.
4. Public credit
Public credit which includes governmental units on all levels from municipal to
national. The credit extended to the public sector depends primarily on its ability to
tax. Since this ability to represent its capacity for repayment public credit like
private credit, may be long term, short term or intermediate. Like most private
credit also, it may be for production or consumption credit is not entirely clear in
this area, however because most government operation are not operated like
business to make a profit.

2.3. FORMS OF CREDIT

Credit may also classify as to whether or not it is extended on the basis of formal
documents called credit instruments.

Informal credit arrangements

Some credit is handled informally with little or no actual evidence. Small sums are often
lent with only an oral promise to repay. Charge accounts involve no regular credit
instruments.Telephone and electric bills usually are paid monthly and in many other cases
credit is commonly extended to customers on a retail,whole sale or manufacturing level.

Credit instruments

They are formal documents drawn up as evidence of credit. They are of two types: promise
to pay and orders to pay. Most instruments may be transferred easily from one holder to
another. Some such as checks, used as a means of payment, almost entirely replacing coins
for all but the smallest transactions.

6
Promises:There are two types of promises to pay;

Notes: which tend to be concerned with short term credit and bonds which usually involve
long term credit. This distinction, however, does not always hold. In either case we simply
have an instrument of credit which indicates that the borrower agrees (promises) to repay
the sum lent aspecified annual rate of interest and at a specific time.

Order: a credit instrument may be an order to pay is called drafts. A draft may be drawn
against persons, a corporations or a bank. The most common draft is the check.

2.4.ATTRIBUTES OF CREDIT INSTRUMENTS

The most important attributes of any financial instrument are its yield, liquidity and safety.
Infact the major functions of financial intermediaries is to provide greater liquidity and
own financial claims to depositors, for financial claims on borrowers.

Scale of economics

Credit allows mass production economics to develop. If manufactures used only retained
earnings to expand their production, many companies would never be able to expand.
Extension on of credit provides manufactures with capital to expand their production and
potential profits. Also in some industries the large the production volume, cheaper the
production costs. This means more profit for manufactures can again expand production
and renew the cycle. In this cyclical expansion pattern, credit is almost indispensable.

Regulation of the economy

Financial intermediaries, especially the Federal Reserve System are largely responsible for
credit conditions in our economy. They can encourage credit expansion or force a
contraction in credit. When inflationary pressures are strong, the banking system
primarily is responsible for containing them by putting brakes on credit easier the
regulation of credit together with the allocation of credit are the primary function of
Federal Reserve System. Through its dominant role in the credit structure the banking
system carrier a formidable responsibility for regulating the economic.

7
2.5. CREDIT CONTROL

Credit control is the regulation of credit by central bank for achieving some definite
objective. Modern economy is a credit economy because credit has come to play
transactions in the modern economic system. Change in volume of credit influence the level
of business activity and the price level in the economy unrestricted credit creation by the
bank by money, by pose a serious threat the national economy. Hence, it becomes
necessarily for the central bank to keep the creation of credit under control in order to
maintain in the economic system (R.R Paul, 1996).

2.5.1. OBJECTIVE OF CREDIT CONTROL

Important objectives of credit control are given below:

1. Price stability
Violent price fluctuations cause disturbances and maladjustments in the economic
system and have serious social consequences. Hence price stability is an important
objective of credit policy.
2. Economic stability
Operation of the business cycle brings in stability in capitalist economy. The
objective of credit control policy of cent fluctuations and ensure economic stability
in the economy.
3. Maximization of employment
Unemployment is economically waste full and socially undesirable. Therefore
economic stability with full employment and high per capita income has been
considered as an important objective of credit control policy of a country.
4. Economic growth
The main objective of credit control policy in the under developed countries should
be the promotion of economic growth with in shortest possible time. This country
generally suffers from the deficiency of financial resources. Hence, the central banks
in these countries should solve the problem of financial scarcity through planned
expansion of bank credit.
5. Stabilization of money market

8
 Another objective of central bank’s credit control policy is the stabilization of
money market so as to reduce fluctuations in the interest rates to the minimum.
Credit control should be exercised in such a way that the equilibrium in the demand
and supply of money should be achieved at all times.
6. Exchange rate stability
It can also be an objective of credit control policy. In stability in the exchange rates
is harm full for the foreign trade of the country. Thus, the central bank in the
countries largely dependent up on foreign trade, should attempt to eliminate the
fluctuations in the foreign exchange rates through its credit control policy.
(R.R.paul,1996).

2.5.2. METHODS OF CREDIT CONTROL

The various methods or instruments of credit control used by central bank can be
broadly classified in to two categories.

A. Quantitative or general method

B. Qualitative or selective methods
A. Quantitative or general methods
The method used by central bank to influence the total volume of credit in the
banking system, without any regard for the use to which it is put, without any
regard for the use to which it is put; are called quantitative or general methods
of credit control.
These methods regulate the lending ability of the financial sector of the whole
economy and do not discriminate among the various sectors of the economy.
The important quantitativemethod of credit control is
i. Bank rate
ii. Open market operation
iii. Cash rate policy
I. Bank rate policy
It is the traditional method of credit control used by the central bank. The bank
rate or the discount rate is the rate at which central bank is prepared to discount
the first class bill of exchange. According to M.s palding, the bank rate is “the

9
 minimum rate charged by the central bank for discounting approved bills of
exchange.
Bank rate policy aims at influencing
 The cost and availability or credit to the banks.
 Interest rates and money supply in the economy.
 The level ofeconomic activity of the economy.

A rise in the bank rates makes the credit costs lies reduces the volume of credit,
discourages economic activity and brings down the price level in the economy. Similarly the
volume credit encourages as the level of economic activity and the price level.

Effects of bank rate policy

 Effects on the level of economic activity.

 No simultaneous determination of interest rates and money supply.
 Announcement effects.
 Bank rate policy during inflation and depression.
 Effect on balance of payment.

Limitation of bank rate policy

 In sensitivity of investment.
 In effective in controlling deflation.
 Conflicting effect.
 In effective in controlling balance of payment disequilibrium.
 In discriminatory.
II. Open market operations
Purchase and sell government securities and other credit instruments in the
open market as an additional and to some extent, alternative instruments of
central bank policy are a logical step.
Effect of open market operation
 Effect on interest rate.
 Effect on future expectation.

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  Simultaneous determination of interest rate and money supply.
 Open market operation during inflation.
 Effect on balance of payment.

Objective of open market operations policy

 To influence the cash reserves with the banking system.

 To influence interest rate.
 To stabilize the securities market by avoiding up due fluctuations in the prices
and yields of securities.
 To control the extreme business situations of inflation and deflation.
 To achieve a favorable balance of payments position.
 To supplement the bank rate policy and thus to increase its efficiency.

Limitation of open market operations

 Lack of well-developed security market.

 In adequate stock of securities.
 Excessive cash reserve.
III. Variable cash reserve ratio
It is a new method of credit control used by the central banks. This method is
first adopted by the federal reserve system of the U.S.A in 1935 in order to
prevent juror’s credit expansion or contraction. Thus changes in reserve
requirements affect money supply in two ways.
 It change the level of excess reserves
 In changes the credit multiplier
B. Qualitative or selective methods
The bank rate the open market operations and the variable reserve ratio operate
primarily by affecting the cost, volume and viability of bank reserve and there
by tend to regulate total supply of credit. On the other hand the quantitative or
selective credit control meant to regulate term on which credit is granted in
specific sectors. They seek to control the demand of credit for different uses by:

11
  Determining minimum down payments
 Regulating the period of time over which the loan is to be repaid

The important qualitative or selective methods of credit control are: - marginal

requirements, regulation of consumer credit, control through directives, credit rationing,
moral suasion and publicity, and direct action.

2.6. CREDIT RISK

The business of banking is credit and credit is the primary basis on which banks qualify
and performance is judged. studies of banking crises show that the most frequent factors in
the failure of banks has poor loan quality. The credit risk management process of bank is
believed to be a good indicator of the quality of the bank’s loan portfolio (HR Machiraju,
2003).

2.6.1. NATURE OF CREDIT RISK

Credit risk covers all risk related to borrowers no fulfilling his/her obligations on time.
Even where assets are exactly matched by liabilities of some maturity, the same interest
rate conditions, and the same currency, the only on balance sheet risk remaining would be
credit risk exposure is measured by the current mark to market value. The magnitude of
credit risk depends on the likely hood of default by the counter parties, the potential value
of outstanding contracts, and the extent to which legally enforceable netting arrangements
allow the value of setting contracts with that counter.

Partly be netted against each other or value of the collateral to be netted against each other
or value of the collateral held against the contracts (HR Machiraju, 2003).

2.6.2. CREDIT RISK AND COLLECTION MANAGEMENT

Credit and collection management provides the capabilities to segment the borrowers
according to risk, set up controls in sales and service and monitor continuously or when an
regarding treatment of borrowers in collections taking to account business rules borrowers
history skills capacities. Collectors get the complete pictures of their borrowers and have

12
access to all the tools they need to take adequate measures. Collection managers can
monitor the collection process at any time and take appropriate action when necessary.

 Improving borrower’s service.

 Increasing transparency and accountability.
 Reducing operating cost and increasing efficiency (Wikipedia).
 Borrower segmentation.
 Credit update.
 Determination and execution of collection activities.
 Managing collection work list.

2.6.3. DEFICIENCIES IN CREDIT RISK MANAGEMENT

The common deficiencies observed in credit risk management in banks are:

 Absence of written policies.

 Absence of portfolio concentration limits.
 Poor industry analysis.
 Inadequate financial analysis of borrowers.
 Absence of loan supervision.
 In adequate checks and balances in credit process.
 Credit rationing contributing to deterioration of loan quality.
 Excessive reliance on collateral.
 Concentration on lending authority.
 Failure of control and audit the credit process effectively.

2.6.4.PRINCIPLES IN CREDIT RISK MANAGEMENT

A bank has to follow three key principles in credit risk management which are selection,
limitation and diversification.

1. Selection: Whom to lend. this is usually based terms of filling all the information
required in a printed loan purpose of loan, repayment and collateral. Information
on the organization on the business proprietorship, partnership, company and other
banking relationships would be required.
13
 2. Limitation: in view of up foreseen changes in the financial conditions of companies,
industries, geographical areas or whole countries, a system of limits for different
types could adopt credit limits in different ways and at different levels, the essential
requirement is to establish maximum amount that may be loaned to anyone
borrower or group of connected borrowers and to anyone industry. Loans may be
classified by size and limits put on large loans in terms of their proportion to total
spending.
3. Diversification: involves the spread of lending over different types of borrowers,
different economic sectors, and different geographical regions. To certain extent
credit limits which help avoid concentration of lending insure minimum
diversification. The spread of lending is likely to reduce serious credit problems, size
however confined an advantage in diversification because large banks can diversify
but industry as well as region large banks can diversify by industry as well as
region.

2.6.5.METHOD OF REDUCIN CREDIT RISK

Banks can reduce credit risk by:

 Rising credit standards to reject risky loans

 Obtain collateral and guarantees
 Ensure compliance with loan agreement
 Transfer credit risk by selling standardized loans
 Transfer risk of changing interest rates by holding infinancial futures, options or
swaps
 Make loans to a variety of firms whose returns are not perfectly positively
correlated (HR machiraju,2003)

2.7.CREDIT POLICY
Credit policy is a set of positions that include a firm’s credit period, credit standards,
collection procedures and discount offered.

i. Credit period which is the length of time given to pay for their obligations

14
 ii. Credit standards which refers to required financial strength of acceptable
borrowers
iii. Collection policy which is measured by its toughness or laxity in attempting to
collect on slow paying accounts. (Br, pham,Houston,2004)

2.7.1. CREDIT POLICY IN ETHIOPIA

Because the elaborate paper work, bureaucratic lending procedures and stringent
collateral requirements, the institutions do not deliver credit as and when needed. More
over them operate at high transaction costs.

During imperial regime (1974-1991) all financial institutions were nationalized and credit was mainly
channeled to public enterprises.The provision of credit was not based on economic rationality but the
discrimination against the private sector was not only in credit access but entirely on government
preference also in interest rate, which was for instance 9% for private sector as opposed to 6%for
public industrial enterprises since July 1986.

( Abraham,2002) noted that with the down fall of Derge, the private sector got equal access to credit
with other sectors, banks were also given autonomy to decide by themselves based on purely
commercial criteria and establishment of private banks and insurance companies was permitted. As a
result loan disbursed to the private sector, which was 49% in1992/93 rose considerably and reached
87.7% in 2000/01. In fact there is still unsatisfied demand for credit from this sector of economy due
to inability to meet banks leading requirements.

2.8.SETTING THE COLLECTION POLICY

Collection policy refers to the procedures the bank follows to collect past due credits. The
collection process can be expensive interns of both out of pocket expenditures and lost good
will borrowers dislike being turned over to a bank. However some firmness is needed to
prevent an undue lengthening of the collection period and to minimize out right losses. A
balance must be struck between the costs and benefits of different collection policies.
(Brigham and Huston, 2004)

2.8.1.THE NEED FOR CREDIT MANAGEMENT

Proper management of financial institution service operation means the quality of work or
the standard of the business or industry. But,failure to maintain the quality or if the quality
or loan is poor. Low loan performance could lead to the liquidity problem if some of the
loans are not maintaining repaid. Institution could able to repay their debts. Unless there is
some form of protection, depositors will be at risk and will be affected. Profitability is also

15
significantly affected as consequences. To minimize possible failure of the financial
institutions service operation clear working policies and procedures should be designed &
implemented accordingly. This policy and procedures are in targeting the client
management and supervision and follow up issues.

16
 CHAPTER THREE

3. METHODOLOGY OF THE STUDY

3.1 RESEARCH DESIGN

This study is conducted on credit collection management practice lion

international bank. The research is more of descriptive type of research design is
fall in use. That is descriptive research method is easy to describe what the
researcher can do.

The necessary data will be collected from both primary and secondary data

The primary source will be collected through questionnaire and interview from
employees . of lion international ban in Hawassa branch

3.3 DATA COLLECTION TECHNIQUE AND TOOLS

The data will be collected mainly from credit collection management department of
lion international bank. Necessarily primary data will be collected through interview and
questionnaire of lion international bank employees and secondary data will be collected
from internet, and relevant written documents

3.4 TARGET POPULATION

The study will be conducted with the contacting concerned bodies to get relevant data
from employees of lion international bank in hawassa branch. The total number of
selects will be 10 employees from the purposively the reason behind the selection of
only 10 employees from the 22 to solve the time and cost.

3.5 SAMPLE SIZE

17
 The impossible to collect equals information from all employees. Sampling is using small part
of large population to make conclusion about the whole population. So research will select 10
employees as a sample from 22 employees by establishing judgment sampling technique.
Because to save money and time constraint. .

3.6 SAMPLING METHOD AND TECHNIQUE

Sampling method that will be used for this study will be stratified and
sampling technique. This is because it permits the researcher to have complete freedom
to select individual who provid relivant information

3.7 DATA PROCESSING AND ANALYSIS

The data gather interview and questioner method and try to analysis descriptive
method that are percentage and appropriate explanation of the table.

18
 . CHAPTER FOUR

4. DATA ANALYSIS AND INTERPRETATION

4.1.14 ANALYSIS BASED ON PRIMARY DATA

.DATA ANALYSIS BASED ON QUESTIONER

As included in detail in the methodology part this paper contains both primary and
secondary data. But this section deals with the major results of the whole survey. The
primary data obtained from the respondents thoroughly summarized with help of
tables.

Table4.1: analyze the age structure of respondents

Age Response Respondents

In%
20-30 4 40%
30-40 6 60%
Over 40 - -
Total 10 100%
Source: own survey (2019)

As indicated in the above table 40% of respondents are at the age of 20-30 and 60% of
respondents are between the ages of 30-40. From the above table we can understand
that majority of respondents are between the age of 30-40

19
 Table4.2: To summarize sex structure of respondents:

Sex Response Respondents

In%
Female 4 40%
Male 6 60%
Total 10 100%
Source: own survey (2019)

According to the above table we can understand that from the total respondents 40% are
female and 60% are male. From this we can understand that majority of respondents are
male.

Table4.3: summarizing the educational level of respondents:

Qualification Response Respondents in %

Diploma 3 30%
BA degree 7 70%
MSc -
Total 10 100%
Source: own survey (2019)

According to the above table we understand that 70% of the respondents have BA
degree and 30% have diploma.

 Respondents who have diploma may not have enough knowledge about credit
collection management of the bank this shows they may not give accurate or
relevant data for the study.
 Respondents who have BA degree may have good knowledge about credit
collection management this is useful for collection process of the bank.

20
Table 4.4: summarizing work experience of employees

Work experience Frequency Respondents in%

Less than 2 year 5 23%
Between 2-4 year 8 36%
Between 4-6 year 7 32%
Above 6 year 2 9%
Total 22 100%
Source: own survey (2019)

From table 4 work experiences of employees23 % of the respondents has less than 2
year experience, 36% of respondents has between 2-4 year experiences and 32% of
respondents have 4-6 year experiences and 9% of respondents have above 6 year.
From this table we can understand majority of employees has between 2-4 year
work experiences.

Table4.5: summarizing the presence of loan in lion bank

Response Frequency Response in %

Yes 10 100%
No 0
Total 10 100%
Source: own survey (2019)

Employees were asked whether the bank gives loan service for the borrowers and
100% of respondents answered yes as we can see from the above table. According to
the above table we can understand that the bank generate revenue by granting
credit to borrowers.

21
Table4. 6: Summarizing the types of loan term mostly customer use.

Types of loan Response Response in

Term %
Short term 12 55%
Medium-term 6 27%
Long term 4 18%
Total 22 100%
Source: own survey (2019)

As shown from table 6 from the total respondents 55% answered that the loan terms
mostly used by customers is short term loan, 27% said the loan term used by
customers is medium term and 18% of the respondents answered that the loan term
used by the customers is long term.

Using short term loan is good for the borrowers because of low interest rate than
long term loan and it is also useful for the bank by increasing the liquidity of the
asset and it also decrease the risk of uncollectability 0f the loan from the borrowers.

From this data we can conclude that most of loan of the branch are classified under
short term loan. Which enable the branch to maintain liquidity and help the branch
to minimize risks associated with the advancement of loan. The second part of the
table presents the possible reasons behind the preference of short term loan by
customers. Here again all of the respondents select the interest rate associated with
the term of loan as the reason behind the preference of the term. It is known that
short term loan have low interest rate. This shows that customers of the branch are
sensitive to the interest rates associated with specific loans.

Table4.7: summarizing the existence of credit collection report.

22
 Response Frequency Response in%
Yes 10 100%
No 0
Total 10 100%
Source: own survey (2019)

Employees were asked whether the bank prepare credit collection report and 100%
of respondents answered yes as we can see from the above table. According to the
above table we can understand that the bank is prepare credit collection report.

Table4.8: who is the debtor contract first to request a loan?

Item Frequency Respondents in

Percentage %
Branch manager -
Loan officer 10 100%
Any employee -
Total 10 100%
Source: own survey (2019)

From the above table it can be observed that all of the respondents agreed that a
loan officer is the personnel that have to be contracted first in applying for a loan.
This shows that the company let customers to contract a loan officer firstly when
they apply for a loan. Loan officers are believed to have adequate knowledge
regarding a loan. This has an advantage for both the debtor and bank.

The debtor is benefited from contracting the loan officer in a way that she/he will
have a clear knowledge regarding the credit term and related issue.

The bank, by letting customers to contract a loan officer, will be benefited by

examining the credit worthiness of the debtor bay a loan professional.

23
Table4.9: does the bank asses borrowers past financial history credit worthiness and
perform in detail before extending the loan?

Response Frequency Respondents in%

Yes definitely 3 30%
Yes to some extent 5 50%
Not at all -
I am not quite aware of it 2 20%
Total 10 100%
Source: own survey (2019)

With regard to performance evaluation of the borrowers, 30%of the respondents

have agreed that the bank will assess borrowers past financial history, credit
worthiness, and perform a detail financial analysis strictly before lending the
loan.50% of them said that the bank will assess the customer’s financial status
moderately, but 20% of the respondents have no any idea about the matter. This
shows that the managers have no a diversified understanding about the policies and
the procedures of credit collection management system adopted in lion bank of
Hawassa branch.

Table4.10: when the borrower faces a certain problem and unable to pay the loan,
what mechanism do you apply in order the loan to be collected?

Item Response Respondents in%

Extension of the life of the loan 5 50%
Injection of additional loans 3 30%
Rearrangement of loans repayment 2 20%
structure
Total 10 100%
Source: own survey (2019)

Regarding the loan repayment techniques different opinions are observed. 50% of
respondents have believed that when the borrowers face a certain problem and unable to

24
pay the loan, the life time of the loan will be extended in order the customer to get time for
revival and pay the loan.30% of respondents have repaid that injection of additional loan
will be given so that the customer will make money and becomes in a better condition to
pay the loan and 20% of them said that rearrangement of loan repayment structure would
be established.

Table4.11: which kind of screening techniques that the bank uses to evaluate credit
worthiness of borrowers?

Item Response Respondents in%

Collateral -
Capital -
Condition -
Capacity -
Character -
All of the above 10 100%
10 100%
Source: own survey (2016)

As shown from table 11: 100% of respondents answered that the bank implements the 5 c s
to screen the debtor’s credit worthiness. So when the bank evaluate the credit worthiness of
the borrowers the branch asks the head office to send the engineers to evaluate the debtors
collateral as this time the borrowers intentionally misleading the engineers about their
collateral value so, the bank has to deal with this problem by using deep evaluation

techniques.

25
Table4.12: which type of loan disbursement is your bank use for borrowers?

Item Response Respondents in%

Monthly -
Quarterly -
Annually -
Semi-annually -
All of the above 10 100%
Total 10 100%
Source: own survey (2016)

The above table shows that 100% of respondents answered that the bank uses all types of
loan disbursement method. This implies that the bank use all types of loan disbursement
because it is depends on the borrower’s ability to convert the loan to the liquid assets and
the success of their business. A business like which engaged in petrol station has the
access to convert the liquid asset, in this situation the bank lend the loan for short because
this type of business has a capability to disburse the loan shortly.

Table4.13: does your bank evaluate collateral before granting a loan?

Response Frequency Response in%

Yes 10 100%
No 0
Total 10 100%
Source: own survey (2019)

According to the above table employees were asked whether the bank evaluate
collateral before granting a loan and 100% of respondents answered yes.

26
 This implies the bank uses qualified man power to estimate and evaluate the
customer’s collaterals whether the collateral fit the credit term or not. But in some
cases the debtors intentionally mislead the evaluators to get high amount of loan this
may the bank give the loan inappropriately.

Table4.14: does your bank permitting over draft for the customers?

Response Frequency Response in%

Yes 10 100%
No 0
Total 10 100%
Source: own survey (2019)

Employees were asked whether the bank permitting over draft for the customer and
100% of respondents answered yes as we can see from the above table. From the
above table we can understand that to permit over draft for customers are depends
on the type of business of the customers. For the company who have quick
transaction and for the company who have quick converting rate of loan in to liquid
assets, bank permits over dr for it’s this types customers.

Table4.15: how your bank set the same interest rate for different amount of loan?

Item Frequency Respondents in%

The bank set the same interest rate 6 60%

for all type of loan
The bank set different interest rate 4 40%
for all type of loan
Total 10 100%
Source: own survey (2019)

From the above table 60% of respondents have believed that the bank set the same interest
rate for all types of loan, and 40% of respondents have believed that the bank set different
interest rate for all types of loan. So the bank has to set flexible interest rate to in terms of
the loan amount.

27
4.1.2.DATA ANALYSIS BASED ON INTERVIEW

Interview was prepared, which enable the researchers to address the research
question more specifically or to concentrate more on the research objective.

1. What are the main credit collection processes of lion bank?

 Loan requested by customers.
 Provide a checklist of the required to be fulfilled
 Engineer and credit information enquires
 Business visit and prepare due diligence
 Loan recommendation
 Head office process
 Pre disbursement
 Post disbursement

This implies that the bank follows good and efficient procedures of credit collection process
to screen the credit worthiness.

2. What are the criteria’s that are used by the bank for granting loan?
 Identifying the business type.
 Identifying the purpose whether for existing business or new business.
 Location of the business.
 Whether the borrower have collateral as pledge for granting loan.
 Assess if the business is market oriented.
 Evaluating the credit worthiness of the borrowers.

This implies that the bank use effective and efficient criteria to evaluate the debtors if they
fit with bank credit policy and terms of loans.

28
 3. How the borrowers become default in repayment of loan?

Borrowers inability or unwilling to meet the obligation under the term and
condition of a credit agreement may be caused by;

 Borrowers using the loan for unrelated business function like

using the loans to the luxuries product for example buying the cars
which is not related to business function.
 Lack of experience of the borrowers to start the business.
 Lack of follow-up by the bank.
 Government policy.
 Failure to generate adequate cash flow.
 Unrealistically optimistic forecasts of a borrower’s revenue and
profit generation capability basis for the loan size and repayment
condition.
 Insufficient market assessment
 Borrowers business( technical, financial, marketing or managerial
skills)

This implies the bank does not follow up the debtors this may increase the chance of
uncollectability, so the bank has to follow up regularly to decrease the default rate of the
borrowers.

4. How does your bank deal with default customers?

 Lengthen the maturity date
 Take legal action

If the bank faces default customers firstly the bank addresses the customers to pay the
loan, if the borrowers unable to pay the bank will force to take legal action against the
debtors who cannot pay loan.

5. How you motivate your borrowers who pay earlier before the due date?

29
 The bank uses the following methods to motivate the debtors who pay early and on
the due date

 Decreasing the interest rate.

 Increasing the amount of loan to be lent to the borrower for next
time.

This implies bank uses few motivational techniques to motivate the debtors to pay early, so
this may discourage the debtors to pay early and May the bank loses its debtors to the
competitors.

6. What are the effects of non-performing loan on the bank financial position?
 The bank may be face cash shortage.
 It decreases interest rate which can be generate by lending the
loan returning.
 The bank will be more conservative to provide loan because of
this the bank losses income from interest.

So the bank has to regularly follow up the debtors to minimize the non-performing rate the
borrowers.

4.2. DATA ANALYSIS BASED ON SECONDARY DATA

1. Loan requested by new customer

New borrower came to our branch in order to get finance.

The first point we should understand the heartbeat of the customer;

What he need? Why he/she need? And when require it?

Firstly we analyzed what a customer need?

This refers that loan size, this means how much provide to a particular customer, and
credit term, this refers the bank properly evaluate the credit worthiness of the customer.

Secondly we analyzed why a customer need?

30
This specific question refers that the bank considers the debtor purpose of borrowing the
loan.

From this we can understand that the bank has criteria to provide a loan for the borrower.

Finally we analyzed when a customer need?

This refers the time when customer wants to borrow a loan; this means does the bank have
enough cash to lend the loan to the customers.

2. Analyzing the general eligibility criteria to screen out the customers.

 All customers applying for any type of loan fulfill the following eligibility
criteria.
 All persons engaged in lawful trading activities.
This refers the bank evaluating the customers by using
character customer screening method.
 The business credit applicant should present renewed trade
license.

This refers that the bank grant loan by checking whether the business has got eligible
license to take a loan from the bank.

 The applicant and/or any of its major

shareholders/subsidiaries must not have any non-
performing loans in any bank. From this we can
understand that the bank evaluating the ability of the
borrowers to pay the loan. This refers that the bank use
capacity screening technique properly to check the
borrower’s ability to pay the loan.
3. Analyzing Engineers and credit information enquires.
 We should request engineer from head office to estimate
the collaterals of the customer, and engineer estimation
report.
This will be requested by inter- memo telephone.

31
This shows us the bank effectively evaluates and estimate collaterals used as pledged by
using qualified man power.This also shows the engineers evaluate quality of the collateral,
the obsolescence and physical deterioration characteristics and the marketability of the
collateral but the collaterals is a second way out due to uncertainty of forecasting future
profitability and cash flow.

 We also request credit information of the customer from

head office by filling credit application form and check the
credit worthiness of the customers in banking industry.

From the above sentence we can understand that the bank crosses check the ability of the
borrowers to pay the loan with head office and weather they have good credit worthiness
or not.

4. Analyzing loan recommendation.

 This responsibility of the branch manager and/or customer-relation manager and/or
customer relationship office to recommended their own parts by filling and signing
on loan application form.

From this we can understand that the branch manager has responsibility to add its
recommendation on the approval form.

 After finishing all the necessary steps here above compiled all the documents and
send the file to the head office for further investigation and approval.
5. Analyzing pre-disbursement

What should be the ultimate to disburse the loan?

1st we should let know the applicant about the head office decision.

2nd if the applicant is willing to take the approved loan as per condition to put on loan
approval form, we inform the customer to come with original collateral documents in order
to register nearby municipality or appropriate government organ.

3rd be sure the collateral is/or have insurance coverage, if not we should issue request for
insurance policy.

32
 4th loan contact agreement will be signed with customer and his /her spouse.

5th deduct the deductible item like stamp duty, revenue stamp, estimation and inspection
fee, others fee.

6th after all the necessary prerequisites are fulfilled the loan will be disbursed as per the
condition put on the loan approval form.

This implies the bank follows good procedure to collect the loan which is given previously.

6. Analyzing the post-disbursement

 Regularly follow- up the end use of the loan.
 Regularly follow account operation of the customer.
 If there is a forecasted problem for the loan repayment loan
work out should be recommended for past loans.

33
 CHAPTER FIVE

5. CONCLUSION AND RECOMMENDATION

5.1.CONCLUSION
In general to conclude the study the credit collection management system of the bank is effective
as indicated by the study.

 Respondents with higher with higher educational background contribute a lot to

the effectiveness and efficiency to credit collection process.
 The credit collection reports prepared by the bank are useful to evaluate past
performances and plan future activities.
 The bank grants mostly short term credit and this is useful for the bank and
borrowers. Short term credit have lower interest rate than long term credits in
addition the bank reduces its un collectivity rate by granting short term loans.
 The collection managements of the bank is more effective when employees
with a higher level of experience are involved in the assessment of customers
credit worthiness.
 The processes of granting credit to customers have a big impact on the
collection of credit. The process used by lion bank for granting loans is
effective when compared to standards. The bank uses effective way granting
credit and this helped the bank to score a higher performance of loans. The
process in granting loans include the bank asks the head office to send
engineers to evaluate the quality, material, and marketability of the collateral.
 The collects its loans monthly, quarterly, semi-annually and annually. As the
bank collects its loan in shorter period the liquidity of the bank will increase
and the collected fund could be invested in another type of profit generating
assets.
 The bank uses qualified man power top estimate customers collateral whether it
feet’s the credit term or not.

34
Even if it is in the credit process the bank doesn’t regularly follow up the customers that are the
reason for customers being default in repaying the loan.

5.2. RECOMMENDATION
Managing of credit (loan) is the main role of any financial institutions (banks). Therefore lion
bank need to further develop workable and realistic strategies to further improve the credit
collection management.

Based on overall evaluation, observations and findings the following recommendations were
recommended in order to increase the workability of policies, strategies of the credit collection
management of the organization.

 The bank has to use the different method to motivate the borrowers who pay
early and on due date like granting cash discount.
 The bank should give consulting services to the borrowers to minimize
collectability risk of the loans.
 The bank should make deep screening method before granting the loans.
 The bank has to set different interest rate depends on the loan size of the
debtors.
 The bank should have to continue granting short term loans to minimize the
collectability risk.
 The bank should have to evaluate the collaterals properly and effectively.

35
Reference
 Bass,1991
 (Bass,1998),fundamental of risk 3rd
 B.M.Lall Nigam professor of commerce Delhi school of economics university of Delhi.
Banking law and practice, 5th edition.
 Conant 1899,Baltnsperger 1887
 Divid R.kamerchen distinguished professor department of economic university of
Athens, Georgia. Money and banking 8th edition 1984.
 DR.R.R Paul MA(economics and philosophy) PhD post graduate department of
economics, money banking and international trade
 Eugene brigham and Joel F.Houston university of Florida fundamental of financial
management, 2004, 10th edition.
 H.R. maharaja, financial economist.

Mark Green distinguish professor of risk and insurance and Robert

R.Dince professor of bank and finance university of Georgia, 1993pers

36
 APPENDIX
WACHEMO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

FOR PARTIAL FULFILMENT OF THE BACHELOR OF ARTS DEGREE IN

ACCOUNTING AND FINANCE

TO RESPONDENTS: The purpose of this survey is to assess the credit collection management on
lion bank of Ethiopia; Hawassa branch. However, the effect of this questionnaire study is highly
dependent upon your honest cooperation.

Therefore, I kindly request your kind cooperation in filling out the questionnaire. I confirm you
that all the data gathered will be held confidential.

Thanks for your participation.

Demographic characteristics of respondents

 1, age 21-30  31-40  over 40 

2, sex Male  Female

3, educational level of the respondents

Diploma  Ba degree 

37
 MSc

4, Work experience of employees

Less than 2 years  between2-4 years between 4-6 years  above 6 years


5, does the bank give the loan service for the borrowers?

Yes

No

6, which types of loan term mostly customers use?

Short term

Medium term

Long term

7, does the bank prepare credit collection report?

Yes

No

8, who is the debtors contact first to request a loan?

Branch manager

Loan officer

Any employee

9, does the bank asses borrowers past financial history credit worthiness and perform in detail
before extending the loan?

38
Yes definitely  not at all

Yes to some extent  I am not quite aware of it

10, when the borrowers face a certain problem andun able to pay the loan what mechanism do
you apply in order the loan to be collected?

Extension of the life of the loan

Injection of additional loans 

Rearrangement of loan repayment structure

11. Which kind of screening techniques that the bank uses to evaluate credit worthiness of
borrowers?

Collateral  condition  character

Capital  capacity  All of the above 

12. Which type of loan disbursement is your bank use for borrowers?

Monthly Quarterly  semi annually 

Annually  All of the above 

13. Does your bank evaluate collateral before granting a loan?

Yes No

14. Does the bank permitting over draft for the customers?

Yes  No

If your answer is yes what are the reason

_________________________________________________

15. How your bank set interest rate for different amount of loan?

39
The bank set the same interest rate for all types of loan 

The bank set different interest rate

Interview question

1. What are the main credit collection processes of lion bank?

2. What are the criteria’s that are used by the bank for granting loan?
3. How the borrowers become default in repayment of loan?
4. How does your bank deal with default customers?
5. How you motivate your borrowers who pay earlier before the due date?
6. What are the effects of non-performing loan on the bank financial position?

THANK YOU!!

40