Final Proposal
Final Proposal
Final Proposal
ID No UGR/6006/12
Submission date……………
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DECLARATION
I, Utban Ashab hereby declare that the project work entitled “Assessment of Credit Risk
Management systems and Practices- case of selected private banks.
In Addis Ababa Submitted by me for the award of degree Bachelor of Accounting and Finance.
Place: Addis Ababa Signature ______________________
Date: February 2023 Name: Utban Ashab
The these is prepared by Utban Ashab entitled “Assessment of Credit Risk Management Systems and
Practices in Private Commercial Banks of Ethiopia: The Case of Selected Private Banks” has been
submitted for examination with my approval as an Advisor.
Takele Fufa (PH.D)__________________ __________________ ____________
Advisor Name Signature Date
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Acknowledgment
First of all, I owe my deepest gratitude to the Almighty God for giving me the path, power, wisdom and
determination to finish this task successfully. I am also deeply appreciative of the guidance and support of
my advisor Dr Takele Fufa throughout this project.
I am especially grateful for the generous advice of my advisor throughout the thesis process.
I owe my parents immense thanks for their unconditional support and tireless efforts during my thesis
work and entire program.
I want to express my sincerest gratitude to all of the respondents who kindly filled out the questionnaire,
without whom this project would not have been possible. Finally, I would
like to acknowledge the many people who provided encouragement and support on my journey, even
though I may not have mentioned their names directly. Without them, achieving this dream would not
have been possible.
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Abstract
The primary aim of this research will be to investigate the credit risk management systems and practices
of private commercial banks in Ethiopia between 2013 and 2018. From 18 private commercial banks, the
four will be chosen based on two criteria: that they are operational during the study period, and that they
are included in the top 15 banks according to their size. The researcher will be selected banks such as
Berhan International Bank S.C, Bunna International Bank S.C, Debub Global Bank S.C and Enat Bank
S.C. . In this study, given the large number of branches nationwide it could potentially be difficult to
manage the research within the available timeframe and resources. As such, purposive sampling will be
used in order to select participants. The primary data for the study will be collected using questionnaires.
The questionnaires will be distributed to Bank Managers and Senior Officers involved in loan processing.
The data will be analyzed by using SPSS software version 21 and descriptive statistics. .
Keywords: Commercial banks, Credit risk, Managers, Credit risk Management, Assessing
CHAPTER I
INTRODUCTION
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Credit risk is an important component of financial systems and the banking sector in particular. There is a
need for well-established credit risk management frameworks in order to ensure the safety and soundness
of financial institutions, particularly in developing countries like Ethiopia. This paper will investigate the
current credit risk management practices in Ethiopian private commercial banks by conducting purposive
sampling of bank managers and senior officers. Primary data will be collected from these participants
through questionnaires and analyzed with descriptive statistics and SPSS software version 21. The results
from this study will be used to provide recommendations to improve the current risk management
environment in Ethiopia, as well as useful directions for future research initiatives
It is essential for banks to have a sound and comprehensive credit risk management system in order to
ensure the stability of the financial system. Ethiopian banks, especially private commercial banks, need to
enhance their credit risk management framework in light of the changing environment. New technologies,
competition, regulations and liberalization have resulted in an increase in the number and type of risks
faced by financial institutions. As banking services become more accessible, it is important for banks to
be able to effectively manage the risks they face. This research aims to examine the current credit risk
management practices in Ethiopian private commercial banks with the help of a purposive sample of
Bank Managers and Senior Officers. The results of this study will be used to provide recommendations to
improve the existing risk management frameworks and also to guide future research initiatives
Credit risk management is a critical component of the banking industry, and is of utmost importance in
developing countries like Ethiopia. Before 2010, there was inadequate attention given to the development
of modern risk management systems that comply with changing environment and global financial
standards. The Risk Management Guidelines published in that year paved the way for the continued
development of credit risk management practices. Banks must have a sound and effective risk
management system, as their funds are highly leveraged and at risk of public losses.
Practicing effective credit risk management is key to protecting consumers, investors and the banking
industry from financial losses and instability.
It can also help improve efficiency through enhancing competitive advantage, mobilizing and deploying
funds, an d optimizing risk-return trade-offs.
According to Poudel (2012), inadequate risk management leads to the accumulation of non-performing
loans, where generated profits are not only eroded through loan provisions, but also the soundness, safety
and stability of the bank is affected. However, effective credit risk management can improve credit
performance by establishing an appropriate credit risk setting, maintaining acceptable credit limits, and
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having a careful credit granting process with appropriate monitoring and control of the credit risk. Thus, it
is important to examine the level of credit risk management systems and practices of Ethiopian
commercial banks in order to develop policy measures to mitigate adverse consequences generated from
the credit function
The aim of this research is to explore the level of credit risk management system and practices among
Ethiopian commercial banks, assess the perception and awareness of risk management personnel, and
determine the types of risks and methods of risk identification through a descriptive survey research
approach.
Major private commercial institutions, many of which were foreign owned, included the Addis Ababa
Bank, the Banco di Napoli, the Banco di Roma. However, the banking business could not move further
because of the nationalization of private investments by the Socialist regime (the Dergue regime) that
came into power leaving only three government banks; the National Bank of Ethiopia, the Commercial
Bank of Ethiopia and agricultural and Industrial Development Bank.
This was reversed when the Socialist regime was overthrown in 1991. Following the overthrown of the
Dergue regime in 1991, the EPRDF declared a liberal economic system. In line with this, Monetary and
Banking proclamation of 1994 established the National Bank of Ethiopia (NBE) as a judicial entity,
separated from the government and outlined its main function.
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Monetary and Banking proclamation No.83/1994 and the Licensing and Supervision of Banking Business
No.84/1994 laid down the legal basis for investment in the banking sector (www.nbe.gov.com).After the
proclamation of 1994, the first private bank, Awash International Bank was established in 1994 by 486
shareholders paving a way to the establishment of related private banks such as Dashen Bank (1995),
Abyssinia Bank (1996), Wegagen Bank (1997),United Bank (1998), Nib International Bank (1999),
Cooperative Bank of Oromia (2004),Lion International Bank (2006), Oromia International bank (2008),
Semen Bank (2006),Bunna International Bank (2009), Berhan International Bank (2009), Enat Bank
(2011) , Debub Global Bank (2012) and others which are under establishment.
In reality, the credit portfolio not only constitutes the bank's asset structure, but is also a crucial factor of
the bank's success. Only proper credit assessment can bring to attention the likelihood of credit loss due to
genuine business components and suggests potential ways to mitigate such a precarious situation in order
to keep it in check (Rana Al Musharraf, 2013). Properly managing credit risk in financial organizations is
of the utmost importance for their survival and development. When it comes to banks, this issue of credit
risk management takes on even greater significance due to the higher degree of risks associated with
certain client characteristics, market conditions, and economic setting.
Credit assessment is an integral process in financial institutions that helps to minimize the risks associated
with lending large sums of money. Proper credit assessment helps bankers understand the
creditworthiness of their potential clients, as well as their ability to repay a loan on time. Having this
knowledge helps ensure that the loan is safe and profitable for the bank. To make sure that a loan
proposal is creditworthy, the lender must consider different aspects of the borrower's financial profile
such as income, assets and liabilities. Furthermore, the lender should also consider other relevant
information such as the company's industry, its past performance, current competition and a detailed
analysis of the loan's repayment terms. By carefully studying all these factors, lenders can ensure that
their loans are desirable and profitable for both their clients and for themselves.
This research will analyses the current credit risk management systems and practices in Ethiopian
commercial banks, and investigate their effectiveness in managing credit risk. The results of this study
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will provide insights into the level of credit risk management used by financial institutions in Ethiopia, as
well as ways to enhance their current approaches. Additionally, the analysis will also include an
assessment of the importance of credit assessment techniques used to identify the probability of credit
loss due to genuine business elements.
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properly assess loan applications before approval, as well as closely monitor granted loans to ensure they
do not become bad debts.
This study is important in order to help banks combat the present challenges concerning credit risk
management.
By providing banks with clear strategies on risk assessment and control, this study will be enables to
reduce the potential of loan losses and ensure a good credit management process.
This study will helps to reduce bad debts to a minimum by assessing the capacity of bank risk assessment
and credit control processes to provide careful analysis and monitoring of banks' credit administration. It
will be also make credit managers aware of the importance of effective risk assessment and control in
credit administration, as well as make important contributions to efficient and effective credit risk
management.
Based on this criterion, up to June, 2018, there were eighteen banks in Ethiopia, out of them four banks
will be selected for this study at head office level.
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CHAPTERII
2.1 REVIEW OF LITERATURE
The purpose of this chapter is to provide a brief review of the existing literature regarding credit risk
management the focus will be on the theories and empirical studies of credit risk management in
Ethiopia, and other countries with similar practices
This study is anchored in information asymmetry theory, as this theory is highly relevant to this
particular topic of exploration. According to this theory, both lenders and business owners should be
aware of the potential risks and returns associated with any potential investment projects for which the
funds are earmarked.
The primary objective of credit risk management is to minimize the effects of risks associated with the
investments made by the public (Brigham et al., 2016). Generally, loans are considered the primary and
most visible source of credit risk to banks. However, other sources of credit risk can be present
throughout various banking operations as well, including those on and off the balance sheet. In recent
years, commercial banks have been increasingly exposed to relatively high levels of credit risk (Olson
and Zoubi, 2017).
Presentation: The accuracy of the information gathered from the market and industry analysis will be
verified by consulting other sources. Credit committee approval: A copy of the annex and Loan Approval
Form (LAF) will be submitted to each member of the credit committee for review and approval or
rejection of the request.
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The legal department will be consulted before making any compromises with the customer. Any
amendments will be done in consultation with the legal department.
In order to address the above gaps, The Basel Committee on Banking Supervision (BCBS) will publish a
document entitled “credit risk management principles.”
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The principles of the Model of Credit Risk Management Practice (Basel, 2000) are as follows:
1. Establish, implement and maintain clear and effective policies and procedures for credit risk
management (CRM), setting out the credit risk appetite, setting an appropriate level of measurement,
methods for assessing the likelihood of default, etc.
2. Identify, monitor and manage changes in the credit risk of underlying exposures, identify and keep up-
to-date statistics on the various types of loans and other credit exposures of the institution.
3. Monitor and assess the performance of credit portfolios and monitor their impact on the institution's
overall financial performance.
4. Establish regular processes to review appropriate corrective actions when the portfolio deviates from
managed credit risk limits or other risk parameters adopted by the institution.
5. Establish, implement and maintain credit risk measurement systems and methods to closely monitor,
model and understand changing portfolio characteristics, including determining appropriate levels of
provisioning for each category of exposure.
6. Take into account the risks related to guarantees, collaterals as well as concentrations in terms of
geography (e.g., countrywide portfolios) or sector (e.g., retail banking).
7. Take into account any risk arising from business relationships with related entities, including complex
corporate structures where the relationship with a parent or other affiliates affects the credit exposure.
8. Ensure regular training programs for all staff involved in credit risk management activities in order to
maintain their knowledge up-to-date with regard to international best practices in CRM.
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Chapter three
3.1 Research methodology
In this chapter the researcher clearly and neatly describes the research design, population size
and sampling techniques, data collection instruments, variables and method data analysis, and
Reliability Measures.
For the purpose of the study, both primary and secondary data will be employed. Primary data will be
collected through questionnaires. The questionnaires will be distributed to respondents that involve
professional working in the banks such as department managers and senior officers working on loan
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processing (risk management staffs of head office practical oriented response such as credit manager,
credit director, credit analyst, recovery officers, credit follow up, risk and compliance managers and risk
experts will be the major respondents). In addition, interview will employ on banks professionals as
primary data sources to supplement the questionnaire. The secondary data will be collected from financial
statements, annual reports, NBE directives, and bulletins of the banks.
The data will be analyzed by using descriptive summaries, econometrics model and Cronbach’s alpha
with the help of Statistical Packag
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Cronbach’s alpha will employ to test the consistency of the questionnaire. CRMP, ACRE, SCGP,
CAMMP and ACOCR had high reliabilities, all Cronbach’s α =0.963. Yfield, (2009, P. 676) suggested
that Cronbach’s α value of 0 .7 to 0. 8 was acceptable and ensure the reliability of items while Pallant,
(2007,P. 292) suggested that Cronbach’s α value of above 0.8, was preferably to be considered reliable.
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