ASSESSMENT OF CREDIT RISK MANAGEMENT

PRACTICE IN THE CASE OF COOPERATIVE BANK

OF OROMIA ADAMA, ADAMA BRANCH

A Thesis report Submitted to the Department of Business Management in

Partial Fulfillment of the Requirements for the Award of Master’s Degree
of Business Administration (MBA)

BY DAGMAWIT ABEBE

RIFT VALLEY UNIVERSITY

FACULTY OF BUSINESS AND SOCIAL
SCIENCES DEPARTMENT OF BUSINESS
MANAGEMENT
POST GRADUATE PROGRAM

ADVISORY:-DAGNU LULU.(Dr.)

JULY,2022

ADAMA, ETHIOPIA
 DECLARATION
I declare that the thesis entitled ‘The Assessment of Credit Risk Management Practice:
The Case of Cooperative Bank of Oromia Adama Branch submitted by me under the
guidance of Dr. Dagnu Lulu for the award of Master’s Degree of Business Administration
(MBA) is original and genuine. It has not been submitted previously either in part or in full
to this University or any other University for any Degree or Diploma.

I also undertake that any quotation or paraphrase from the published or unpublished work of
another person has been duly acknowledged in the work which I present for examination.

Name :Dagimawit Abebe Tadese

Signature :

Place: Rift Valley University, Adama, Ethiopia

Date: 18/07/2022

i
 CERTIFICATE
This is to certify that the work incorporated in the thesis entitled “Assessment of Credit risk
Management Practice at cooperative bank of Oromia Adama, AdamaBranch” submitted
to Rift valley University, School of Graduate Studies department of business administration
in general management for the award Masters of Business Administration in general
management is a research work carried out by Dagmawit Abebe under my guidance and
supervision.It is fit for evaluation.

Approved by Dr. Dagnu Lulu

Signature :

Place

Date

ii
 BOARD OF EXAMINERS APPROVAL SHHET
As member of board of examiners, we assure that a study entitled with “Assessment of
Credit Risk Management Practice in the Case of Cooperative Bank of Oromia ,Adama
Branch and submitted in partial fulfillment of the requirements for the Degree of Master in
Business Administration complies with regulation of the university and meets the accepted
standards as to originality and quality concerns.

Approved by board of examiners

Name Signature Date

Advisor:

Internal Examiner:

External Examiner:

iii
 Acknowledgement
First and foremost, I would like to thank the Almighty God who gave me the courage
through his endless love and blessings that helped in accomplishment of the study. I would
like also to express deep gratitude to my instructor and Advisor Dr. Dagnu Lulu. For his
constructive comment and advice. I would like also to express my gratitude to my friends
and classmates. Finally, I would like to thank all people involved directly or indirectly for
the accomplishment my work.

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 TABLE OF CONTENTS
Contents Page

DECLARATION....................................................................................................................i
CERTIFICATE.....................................................................................................................ii
BOARD OF EXAMINERS APPROVAL SHHET............................................................iii
Acknowledgement.................................................................................................................iv
TABLE OF CONTENTS......................................................................................................v
LIST OF TABLES..............................................................................................................vii
List of Figure.......................................................................................................................vii
CHAPTER ONE....................................................................................................................1
1. INTRODUCTORY............................................................................................................1
1.1. Background of the study................................................................................................1
1.2. Statement of the problem..............................................................................................3
1.3. Research Questions........................................................................................................4
1.4. Objective of the study.....................................................................................................4
1.5. Significance of the Study................................................................................................5
1.6. Scope of the Study..........................................................................................................6
1.7. Definition of Key terms..................................................................................................6
1.8. Limitation of the study...................................................................................................7
1.9. Overview of Target organization..................................................................................7
1.10. Organization of the study............................................................................................7
1.11. Ethical Consideration...................................................................................................8
CHAPTER TWO.................................................................................................................9
2. LITERATURE REVIEW.................................................................................................9
2.1. Introduction....................................................................................................................9
2.2. Theoretical Review.........................................................................................................9
2.2.1 Definitions and Concepts of Credit Risk Management......................................10
2.2.2 Principles for the Assessment of Banks’ Management of Credit Risk..............11
2.2.3 Operating Credit risk granting process................................................................13
2.2.4. Credit Risk Management Process...........................................................................14
2.2.5. Initiation....................................................................................................................15
2.2.6. Documentation and Disbursement...........................................................................16
2.2.7. Credit Administration..............................................................................................16
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2.3. Empirical Review.........................................................................................................16
2.4. Summary and Knowledge Gap...................................................................................18
CHAPTER THREE............................................................................................................20
3. RESEARCH DESIGN AND METHODOLOGY.........................................................20
3.1. Introduction..................................................................................................................20
3.2. The Research Design and Approach..............................................................................20
3.3. Source of Data collection..............................................................................................20
3.4. Study Population..........................................................................................................21
3.5. Sampling Procedure and Sampling size.....................................................................21
3.6. Data gathering tools.....................................................................................................22
3.6.1. Primary Data.............................................................................................................22
3.6.1.1. Questionnaire..........................................................................................................22
3.6.2. Secondary data.........................................................................................................22
3.7. Data collection procedure............................................................................................22
3.8. Research Quality Assurance........................................................................................23
3.8.1. Validity.......................................................................................................................23
3.8.2. Reliability...................................................................................................................23
3.9. Data analysis method...................................................................................................23
CHAPTER FOUR...............................................................................................................24
4. DATA ANALYSIS AND DISCUSSION........................................................................24
4.1. Demographic Characteristics of Respondents................................................................24
CHAPTER FIVE.................................................................................................................39
5. Summary of Key Findings, Conclusion and Recommendation.............................39
5.1 Summary of Key Findings..............................................................................................39
5.2 Conclusion.......................................................................................................................40
5.3 Recommendation.............................................................................................................42
5.4 Recommendation for Further Studies..............................................................................43

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 LIST OF TABLES
Table 4.1 Gender of respondents............................................................................................24
Table 4.2 Age of the respondents..........................................................................................25
Table 4.3 Marital status of respondents..................................................................................25
Table 4.4 Position respondents...............................................................................................26
Table 4.5 Banking experience................................................................................................26
Table 4.6 Credit granting process..........................................................................................27
Table 4.7 Credit risk evaluation and monitoring process......................................................31
Table 4.8 Identification practice of credit risk management.................................................34
Table 4.8 Credit risk controlling practice..............................................................................36

List of Figure

Figure 3.5.1.Sources of samplingsize

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 ACRONYM
ACOCR Adequate control over credit risk
ACRE Appropriate credit risk environment
CRMP Credit risk management practice
CBO Cooperative bank of Oromia
SAMMP Credit administration, measurement and monitoring process
SCGP Sound credit granting process

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 ABSTRACT
Credit risk management is one of the most important tasks for the financial liquidity and
stability of banking sector in connection with increased sensitivity of banks to the credit
risks. This research asses the practice of credit risk management in CBO Therefore, the
main objective of undertaking this study is to assess the CRMP of CBO and to see the
possible problems that influence the credit risk management activity of the bank and to
suggest possible solution for those problems exhibited on credit risk management practice of
the bank. The study populations of 66 was from CBO employees who was directly and
indirectly involved in CRMP at branch for study was used all population. Primary data is
collected using questionnaire. Regarding to the nature of the study, the research design is
descriptive and quantitative study approach is adopted to assess CRMP of bank. In this
study, Stratified random sampling technique was used in order to select participants of the
study. For the purpose of this study, both primary and secondary data was used. Primary
data are collected through questionnaires distributed to respondents that involved
professional working in the banks such as Department Managers and Senior Officers
working on loan processing. The data are analyzed using descriptive research methods. This
study would assist in forwarding recommendations to improve the problems the present
credit risk management situation prevailing in the banking sector in Adama CBO Adama
Branch. The findings of the study show that almost all the results of both qualitative and
quantitative analysis results revealed that the performances of Cooperative banks of Oromia
(S.C.) are up to the mark when compared to the other banking business. Based on the
findings of the research conclusions were arrived at and valuable suggestions were also
given for better performances of the bank in future.
The bank should review and update the credit risk monitoring procedure consistently. This
is because regular reviewing and updating of credit monitoring procedure has assumed
greater significance in the effective management of credit risk and this would help the bank
to consider the new events on credit business operation by working with the latest credit
monitoring procedure on regular basis.

Key word: credit risk management, credit portfolio, NPL and CBO

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 CHAPTER ONE
1. INTRODUCTORY

1.1. Background of the study

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

credit risks can come from uncertainty in financial markets, project failures, legal
liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks
from an adversary The strategies to manage risk include transferring the risk to another
party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all
of the consequences of a particular risk(YuqiLi,2012).

In return for a promise of future payment by the other (the debtor or borrower) before
allowing credit facility a banker should be satisfied that the applicant qualifies the
following five essentials which may be termed as 5 Cs (Richard,2011) namely-
Character: borrowers integrity, honesty and intention to repay the loan money, Capacity:
borrower’s business ability, particularly profit making report, Capital: financial strength
to cover a business risk, Conditions: it is general business condition, Collateral:
borrower’s ability to produce additional securities. Kosmas N.(2018).
Effective Credit management practices help the banks to ensure selection of right type of
loan proposals/projects/ventures/enterprise and right type of borrower. For selecting the
borrower security should not the only thing to be relied upon. So responsibilities of the
bankers to investigate the client from different view point i.e. the strength and weakness
of the client so that the client was able to repay the bank loan as repayment schedule with
profit. To prevent future financial crises, it is absolutely necessary to manage credit so as
improve the borrowers‟ financial literacy, the lenders‟ process of transparency and to
better assess loan product affordability and suitability. Thus, the axle of this study is to
make an in depth assessment on the relationship between the theories, concepts and
models of credit management and what goes on practically in one of the reputed private
banks in Ethiopia. Cooperative bank of Oromia (S.C) was Establishment registered
1
 commercially on October29, 2004, in accordance with article 304 of Commercial Code of
Ethiopia. It was established in line with proclamation no. 84/1994 with authorized capital
of Birr 300 million. It started operation on 8 th March2005,withpaid-upshare
capitalofbirr112million.
According to poudel (2012) Poor risk management lead to the accumulation of
nonperforming loan under which the generated profit were not only eroded through loan
provision but also soundness, safety and stability of bank while effective credit risk
management improve credit performance through establishing appropriate credit risk
environment, maintaining credit limit at acceptable level, undertaking sound credit granting
process, proper monitoring and controlling credit risk.
Therefore it was important to examine level of credit risk management system and
practice of Cooperative bank of Oromia (S.C). to initiate top level management and
regulatory bodies to take policy measure toward maintaining adverse effect of their credit
function. The purpose of this research was to investigate the level of credit risk
management system and practice of Cooperative bank of Oromia (S.C) and assess the
perception and awareness of risk management staffs as well as to identify the types of
risks and risk identification method through descriptive survey research approach.
Thus, management of credit risk is very important and central to the health of a bank and
indeed the entire financial system. So that banks or financial institutions shall assess the
investments and loans that the company is committing to it. Based on this the credit risk
management must think long term and look critically at the soundness of each investment
and loan as the company's financial health depends on safe, profitable investments.
Moreover, these credit risk management not only look at the business's loans, they must also
review and determine the soundness of the credit the company is extending to customers.
(Krishna, R 2018).
Therefore, appropriate credit management practices help the banks to ensure selection of
right type of loan or proposals and right type of borrower. For selecting the borrower
security should not the only thing to be relied upon. So, responsibilities of the bankers to
investigate the client from different point of view. For instance, the strength and weakness of
the clients that the client was able to repay the bank loan as repayment schedule, loan
approval, monitoring, and recovery of non-performing loans. To prevent future financial
crises, it is absolutely necessary to manage credit so as improve the borrowers‟ financial
literacy, the lenders‟ process of transparency and to better assess loan product affordability

2
and suitability.(Krishna, R 2018).
Thus, the axle of this study is to make in-depth assessment on the relationship between the
theories, concepts and models of credit risk management and what goes on practically in one
of the reputed private banks in Ethiopia which is cooperative bank Oromia in Adama,
Adama branch.
1.2. Statement of the problem
The very nature of the banking business is so sensitive because more than 85% of their
liability is deposits mobilized from depositors (Saunders and Cornett, 2015). Banks use
these deposits to generate credit for their borrowers, which in fact is a revenue generating
activity for most banks. This credit creation process, if not managed properly, exposes the
banks to high default risk which might led to financial distress including bankruptcy. All
the same, beside other services, banks must create credit for their clients following prudent
credit management procedure to make some money, grow and survive in stiff competition
at the market place. Sound credit management is a prerequisite for a financial institution’s
stability and continuing profitability, while deteriorating credit quality is the most frequent
cause of poor financial performance and condition.

Cooperative bank of Oromia (S.C) is one of private banks in Ethiopia playing an important
role in country economy and social life. Among the various services provided by the bank,
lending has been the primary activity for over a decade. It advances a large sum of its
income to borrowers. It is equally true that bank loans, as they are profitable, equally risky.
Bank loans fluctuate and influenced by the changes in the economic policy and the
economy in general. It is very important for the bank to formulate and update their loan
policies in order to minimize risk associated with them. In light of this the practice of
credit management in Cooperative bank of Oromia (S.C) is being studied in this research.
(Grace, 2016).

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. Banks need to manage the
credit risk inherent in the entire portfolio as well as the risk in individual credits or
transactions (Basel, 2014.
Credit risk management is a systematic process that looks at an ideal and viable credit risk
environment, loan appraisal system, credit administration, loan monitoring and control, and
risk mitigation and management. According to (Richard , 2019) Hence, in the absence of
3
Credit Risk management, institutions will record higher rates of Non-performing loans or
defaulting clients. The high rates of Non-Performing loans usually arise due to inability of
clients to pay back their loans. Researches studies have shown that loan default have two
main effects on financial institutions: these effects are the limitation of institutions’ financial
performance and lending potentials (Karim etal. 2018).
Therefore, this study aims to fill those gaps the financial institutions have faced
difficulties over the years for a multitude of reasons, the major cause of serious banking
problems continues to be directly related to credit standards for borrowers and counter
parties, poor portfolio risk management, or a lack of attention to changes in economic or
other circumstances that can lead to a deterioration in the credit standing of a bank’s
counter parties by assessing the bank’s credit risk management practice by using the
above gaps the equipment through collecting data are primary and secondary data on
Cooperative bank of Oromia specifically in Adama Branch. Branch & selected branches
found in Adama city.
Also the researcher is interested to the research area in particular and to the contribution
and object of the bank in general in assessing the credit risk management performance
which is crucial to be studied in the prevailing stiff competition in line of the modern
financial measurements. To this end, the underlying motivation of the researcher is to fill
this gap on literature and to make an effort to bring empirical evidence by identifying
major factors affecting credit risk practice of private Cooperative bank of Oromia
specifically in Adama, Adama Branch. Thus, this study contributed to the limited
literature on credit risk management practice of banks and its contributions in identifying
major determinate factors on the finding.
1.3. Research Questions
This study was intended to answer the following questions
1. How is the credit granting process of cooperative bank of oromiain Adama, Adama
Branch? Supporting the credit management process?
2. How Credit risk Monitoring process Affect Credit risk management?
3. What are the factors that affect credit risk management practice of the Bank?
4. What is the credit risk controlling practice of the CBO Adama, Adama Branch.?
1.4. Objective of the study

In view of the stated problems the general and specific objectives of the study was stated
as follow.
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1.4.1. General Objective
General objective of the study is to assess the practice of credit management at Cooperative
bank of Oromia (S.C).

1.4.2. Specific objectives

1. To examine the current credit granting process supporting the credit risk
management process in CBO in Adama,Adama Branch..
2. To examine the effect of Credit risk Monitoring process of the bank’s credit risk
management practice
3. To identify specific factors affecting credit risk management practice of the Bank
4. To examine the credit risk controlling practice of the cooperative bank of
Oromia Adama, Adama Branch.
1.5. Significance of the Study
Bank lending is very crucial for it makes possible the financing of agricultural, industrial,
construction, and commercial activities of a country. The strength and soundness of the
banking system primarily depends upon health of the advances. Therefore the ability of
banks to formulate and adhere to policies and procedures that promote credit quality and
curtail nonperforming loans is the means to survive in the stiff competition.
In ability to create and build up quality loans and credit worthy customers leads to default
risk and bankruptcy as well as hampers economic growth of a country. Hence even though
this study is only limited to one Cooperative bank of Oromia (S.C) Adama branch because
of the below mentioned limitations it assumed to be significant in indicating best practice
and concepts for prudent lending to enhance the performance of credit management to all
managers and policy makers of the bank as well as to all financial institutions and banks.
Moreover, it may help as a benchmark for researchers who are interested in the area to
extend it further.
This study was provide adequate information to the regulatory bodies on the challenges rural
banks are exposed to when dealing with credit risk in Cooperative bank of Oromia (S.C)
This information will assist in improving existing policies which can eventually improve the
entire performance of the industry in the long term.
This study was giving the Government a form of intuition into the objective of strengthening
financial services. This needful information will put the Government in a position where it
5
will be able to know which policies should be improved to ensure the smooth running of
Cooperative bank of Oromia (S.C) in the country. This study was also providing essential
information to individuals who was want to borrow from Cooperative bank of Oromia (S.C).
Finally, it may serve as a benchmark for researchers to conduct further studies in this area.

1.6. Scope of the Study

It is known that Cooperative bank of Oromia (S.C) distributed throughout the country but it
is very difficult to cover all branches in Adama due to various reasons such as financial and
time constraint. But, there is no difference in credit risk management at head office and
Branches. Therefore, this study covered the assessment of credit risk management practice at
branch level.
The scope of the research covers on the credit risk management practice of Cooperative
bank of Oromia (S.C) Adama, Adama Branch. Based on this, it has dealt only with the credit
risk management identification, measurement, loan granting process, credit risk evaluation,
monitoring practice that are being employed by the bank to manage credit risk. The study
covered Cooperative bank of Oromia (S.C) Adama, Adama Branch. As a sample amount
other private banks due to the concern on the availability of data, time and budget.
The Subject Scope of The study focuses on the assessment of credit risk management
practice at Cooperative bank of Oromia (S.C) Adama, Adama Branch. and the data scope
was used Primary and secondary data include structured questionnaires and interview was as
secondary data are review of working policy and procedure, reports for the financial years
(June 30, 2020 June 30, 2021), Cooperative bank of Oromia (S.C) directives and other
related Publications.
1.7. Definition of Key terms
This part of the report defines and gives the meaning of words / terms and concepts used in
this study. It clarifies the main words / terms as well as relevant concepts as used in this
study.
Credit Risk: Credit risk arises from the possibility that borrowers, bond issuers, and counter
parties in derivatives transactions may default.
Liquidity Risk: define as the unexpected raise in withdrawals by depositors that may pursue
banks to liquidate their assets in the shortest time period.
Market Risk: This risk is linked to the change in assets value due to systematic factors. The
market risk in banks emerges from different sources including securities portfolios,
6
instruments and equities or in shape of interest rate or foreign exchange risk.
Operational Risk: the risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events.
Strategic Risk: is a function of how poorly a strategy will perform if the „wrong‟ scenario
occurs.
Reputational Risk: risk is associated with the trusts and beliefs of customers and other
stakeholders of the banking institutions.
1.8. Limitation of the study
In conducting this research, obtaining data through interview was a great challenge due to
the existing spread of COVID 19. Based on this most of an interview appointment with the
division manager of credit department of the bank was unsuccessful. Moreover, Current
studies focus on assessment of credit risk management practice of cooperative bank of
Oromia at branch level and lack detailed information on the overall credit management
practice of the bank because of the scope of the study.
1.9. Overview of Target organization
Cooperative Bank of Oromia is a financial institution that established for lending,
borrowing, issuing, exchanging and taking deposit. Lending is the principal business activity
for most commercial banks. The credit portfolio is typically the largest asset and the
predominate source of revenue. As such, it is one of the greatest sources of risk to a bank’s
safety and soundness. Cooperative Bank of Oromia is the financial intermediaries that the
average person interacts with most frequently. A person who needs a loan to buy a house or
a car usually obtains it from a local bank. Most Canadians keep a large proportion of their
financial wealth in banks in the form of chequing accounts, savings accounts, or other types
of bank deposits.
Because Cooperative Bank of Oromia \is the largest financial intermediaries in our
economy, they deserve the most careful study. However, banks are not the only important
financial institutions. Indeed, in recent years, other financial institutions such as insurance
companies, finance companies, pension funds, mutual funds, and investment banks have
been growing at the expense of banks, and so we need to study them as well.
1.10. Organization of the study
The Study is organized into five chapters. The first chapter introduces the background of the
study, statement of the problem, the research objectives and questions, significance of the
study, scope of the study and organization of the study. The second chapter presents
7
theoretical and empirical review of the related literatures. The third chapter deals with
methodology of the study. The fourth chapter is concerned with data analysis and
interpretation. The last chapter presents the conclusion and recommendations drawn from
findings of the data.

1.11. Ethical Consideration

Ethical considerations in research are a set of principles that guide your research designs and
practices. Researchers must always adhere to a certain code of conduct when collecting data
from people. During the course of administering the questionnaires, names and any
identifying remarks was not used. The confidentiality of the respondents is kept and any data
received for the study kept at the hands of the researcher and the advisor. The data's was
used based on the questionnaires and interview of respondents rather than using the
researcher opinion and input. The researcher was stay truth full to responses of the
respondents and free from any personal assessment. Results depicted were only from outputs
of truth full.

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 CHAPTER TWO
2. LITERATURE REVIEW
2.1. Introduction
This chapter presents what other scholars have written about the factors affecting credit risk
management practice of Cooperative bank of Oromia (S.C) Adama branch the variables and
methodology they used as well as their findings and recommendations. Therefore, in this
research study tried to indicate some of the theoretical and empirical related literature which
defined and elaborates the theories about each dependent and independent variables
including the measurements of banks credit risk management and their determinants various
authors. This chapter summarizes the information from the available literature in the same
field of study. It would review theories of credit risk management as well as empirical
studies on credit risk management in Ethiopia and in other countries.
2.2. Theoretical Review
This study anchors on information asymmetry theory, because the theory was very relevant
to this study. Information asymmetry theory elucidates on basic information to be known by
both lenders and business owners in terms of potential risks and returns associated with
investment projects for which the funds are earmarked. Richard (2012) note that perceived
information asymmetry poses two problems for the banks; moral hazard (monitoring
entrepreneurial behavior) and adverse selection (making errors in lending decisions). This
implies that before credit could be granted, the “5Cs” (character, capacity, capital, collateral
and conditions) must be adequately evaluated. This was because data needed to screen credit
applications and to monitor borrowers were not freely available to banks. Bankers face a
situation of information asymmetry when assessing lending applications. (Turnbull (2014) .
Edwards and Turnbull (2014) argue that information asymmetry arises when a borrower
who takes a loan usually had better information about the potential risks and returns
associated with investment projects for which the funds were earmarked. The banker on the
other hand does not have sufficient information concerning the entrepreneurs. In the
same vein, (as cited in Olalere and Ahmad, 2015) also note that information asymmetry was
the extents to which banks’ managers know more about the firm than investors as a group.

9
2.2.1 Definitions and Concepts of Credit Risk Management
The principal goal of credit risk management was to decrease the effects of risks, related to
an influence accepted by the public (Brigham et al., 2016). Usually, loans were the prime
and most apparent source of credit risk of banks. However, there were other sources of
credit risk which exist throughout the bank activities; including in the banking book and
trading book that could appear on and off the balance sheet. Nowadays, commercial banks
were increasingly prone to reasonably higher credit risk levels Olson and Zoubi (2017).
These financial mechanisms include foreign exchange transactions, interbank transactions,
bonds, trade financing, equities, swaps etc.In 2017, Brink (2017), Falkner (2017) and
(Harper et al. 2017) demonstrated that risks were several types of threats caused by humans,
technology, organizations, environment and politics. Conversely, risk management involves
all means available for person, staff, and organization to minimize or avoid a potential peril
McIlwraith (2016).
It was the duty of management to set up a credit supervision team to ensure that credit was
properly maintained and administered. Gibson (2014) re-counted that one of the principal
functions of an organization should be focused on risk management. Risk management
involves identification, measurement, aggregation, planning and management as well as
monitoring of the risk. Procedures for measuring a firm’s overall exposure to credit risk as
well as stringent internal rating system should be adequate (Kalunda et al., 2012).
Effective credit risk management involves establishing a suitable environment; operating
under a sound credit granting process; maintaining an appropriate credit administration that
involves monitoring process as well as satisfactory controls over credit risk Gaitho (2013).

Top management was mandated to ensure that appropriate and clear credit risk management
guidelines. They plainly outline the scope and allocation of the bank credit facilities and the
mode in which a credit portfolio was managed, i.e. how loans are initiated, evaluated,
supervise and collected. In view of this, the guidelines should be well communicated
throughout the organization; and that all and sundry involved in credit risk management was
obliged to understand them. This would enhance better application of those guidelines in the
interest of the banking organization. Effective system ensures that loan repayment by
borrowers was critical, thereby reducing the amount of loan losses to boost long-term
success of the bank. Screening borrowers was a strategic activity that has generally been
implemented. Gaitho (2013).

10
2.2.2 Principles for the Assessment of Banks’ Management of Credit Risk

A. Establishing an appropriate credit risk environment

Principle 1: The board of directors should have responsibility for approving and
periodically (at least annually) reviewing the credit risk strategy and significant credit risk
policies of the bank. The strategy should reflect the bank’s tolerance for risk and the level of
profitability the bank expects to achieve for incurring various credit risks
Principle 2: Senior management should have responsibility for implementing the credit risk
strategy approved by the board of directors and for developing policies and procedures for
identifying, measuring, monitoring and controlling credit risk. Such policies and procedures
should address credit risk in all of the bank’s activities and at both the individual credit and
portfolio levels (Basel, 2017).
Principle 3: Banks should identify and manage credit risk inherent in all products and
activities. Banks should ensure that the risks of products and activities new to them are
subject to adequate risk management procedures and controls before being introduced or
undertaken, and approved in advance by the board of directors or its appropriate committee.
B. Operating under a sound credit granting process
Principle4:Banks must operate within sound, well-defined credit-granting criteria. These
criteria should include a clear indication of the bank’s target market and a thorough
understanding of the borrower or counterpart, as well as the purpose and structure of the
credit, and its source of repayment

Principle 5: Banks should establish overall credit limits at the level of individual borrowers
and counter parties, and groups of connected counter parties that aggregate in a comparable
and meaningful manner different types of exposures, both in the banking and trading book
and on and off the balance sheet .
Principle 6: Banks should have a clearly-established process in place for approving new
credits as well as the amendment, renewal and re-financing of existing credits (Basel, 2017).
C. Maintaining an appropriate credit administration, measurement
and Monitoring process
Principle 7: All extensions of credit must be made on an arm’s-length basis. In particular,
credits to related companies and individuals must be authorized on an exception basis,
monitored with particular care and other appropriate steps taken to control or mitigate the

11
risks of non-arm’s length lending ).
Maintaining an Appropriate Credit Administration, Measurement and monitoring process
Principle 8: Banks should have in place a system for the ongoing administration of their
various credit risk-bearing portfolios
Principle 9: Banks must have in place a system for monitoring the condition of individual
credits, including determining the adequacy of provisions and reserves
Principle 10: Banks are encouraged to develop and utilize an internal risk rating
system in managing credit risk. The rating system should be consistent with the nature and
size
Principle 11: Banks must have information systems and analytical techniques that enable
management to measure the credit risk inherent in all on- and off-balance sheet activities.
The management information system should provide adequate information on the
composition of the credit portfolio, including identification of any concentrations of risk
Principle 12: Banks must have in place a system for monitoring the overall composition and
quality of the credit portfolio.
D. Ensuring adequate controls over credit risk
Principle 13: Banks should take into consideration potential future changes in economic
conditions when assessing individual credits and their credit portfolios, and should assess
their credit risk exposures under stressful conditions ensuring Adequate Controls over Credit
Risk
Principle 14: Banks must establish a system of independent, ongoing assessment of the
bank’s credit risk management processes and the results of such reviews should be
communicated directly to the board of directors and senior management
Principle 15: Banks must ensure that the credit-granting function is being properly managed
and that credit exposures are within levels consistent with prudential standards and internal
limits. Banks should establish and enforce internal controls and other practices to ensure that
exceptions to policies, procedures and limits are reported in a timely manner to the
appropriate level of management for action
Principle 16: Banks must have a system in place for early remedial action on deteriorating
credits, managing problem credits and similar workout situations
E. The role of supervisors
Principle 17: Supervisors should require that banks have an effective system in place to
identify measure, monitor and control credit risk as part of an overall approach to risk

12
management. Supervisors should conduct an independent evaluation of a bank’s strategies,
policies, procedures and practices related to the granting of credit and the ongoing
management of the portfolio. Supervisors should consider setting prudential limits to restrict
bank exposures to single borrowers or groups of connected counter parties.
Researcher tried to define credit risk management practice as the process of reviewing and
updating credit risk management documents and apply consistently in actual credit granting
process, credit administration and monitoring and risk controlling process with appropriate
credit risk environment, understanding and identification of risk so as to minimize the
adverse effect of risk taking activities 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 administration 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. Therefore, four explanatory variables (appropriate credit risk environment (ACRE),
sound credit granting process (SCGP), credit administration, measurement and monitoring
process (CAMMP) and adequate control over credit risk (ACOCR) are expected to have
positive effect on effectiveness of credit risk management practice (CRMP).
2.2.3 Operating Credit risk granting process
The Radd Moziblalon (2015) asserts that in order to maintain a sound credit risk portfolio, a
bank must have an established formal transaction evaluation and approval process for the
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 (Radd Moziblalon (2015)
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 Moziblalon (2015) assert that
banks have traditionally focused on the principles of five Cs to estimate borrowers’
creditworthiness. This model was developed in the 1970. These five C’s are:

13
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.
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.
2.2.4. Credit Risk Management Process
The process of management of credit risk in banking business tracks on the risk
identification, measurement, assessment, monitoring and control. It involves identification
of possible risk factors, evaluate their consequences, and monitor activities exposed to the
identified risk factors and institute control measures to prevent or reduce the unwanted
effects. Problem loans were at the end of the credit channel. Before a loan becomes bad, it
needs to be granted. Moreover, as we referred to so far, the poor quality of a loan was
sometimes due to factors not attributable to the lending bank such as adverse selection and
moral hazard (Stiglitz and Weiss, 2018) or any other external shock that may alter the
borrower’s ability to repay the loan. (Minsky, 2016 & 2018).
Nevertheless, there were cases where the way banks grant and monitor credits can be
responsible for the bad loan portfolio. In other terms, weak credit risk management systems
could also be sources of problem loans (Nishimura et al, 2015).
For these last reasons, it was essential to overview the credit risk management process of

14
banks in order to capture the framework of the bad loans management. Significant details
related to the credit management processes were revealed here. Banks credit management
processes can be summarized in three main stages. These stages were: credit initiation,
documentation and disbursement and credit administration.
2.2.5. Initiation
According to Edward (2016) the credit initiation was a process that starts from a market
analysis and ends at the credit application approval. The steps involved in credit initiation
processes were listed below: Surveys and industry studies: Loan officers/ Customer
relationship officers/branch managers scan the market and economic sectors to identify key
players and potential business for the Bank. In the same vein, industries with high potential
of growth that could be good business for the Bank are also listed with their expected risks.
Prospect lists: some prospects (companies and individual customers) identified as the main
role players were short listed in accordance with the industry studies and the minimum risk
criteria. This prospect list was ranked in order of preference. Customer solicitation: at that
stage, although the primary source of target was the prospect list, the initiation of a credit
comes either at the bank request in the frequent contact with existing customers or at the
clients request if they have a need for financing.
Negotiation: the Loan officer /relationship officer / branch manager scan identifies the
financing needs of the borrower and gathers background information such as the latest
financial statements, project details, projections over the loan life. This information will
allow the officer to check whether the risk is bearable by the bank and its compliance with
the bank's targets.
Presentation: the conformity of information given with the market and industry analysis is
the reliability of the information once again verified by consulting other sources.
Credit committee approval: a copy of that annex and loan approval form (LAF) was
submitted to each member of the credit committee. The members review and approve or
decide on the request.
Advice to customers: once the credit was approved, the customer was advised in writing
with details concerning the terms and conditions and with the statement that the credit could
be subject to review, modification or cancellation at the bank option or in line with the
decision.

15
2.2.6. Documentation and Disbursement
The documentation and disbursement refers to the compliance of documents provided with
the law applicable and the requirements of the bank's legal department. Documentation
provided must satisfy the bank's legal department and afford maximum protection to the
bank. The documentation was periodically reviewed to keep them in fine with ever-changing
legal systems and practices Edwared (2016).
The legal department was consulted before making any compromises with the customer.
Any amendments were done in consultancy with the legal department. Once the credit
application satisfies all these conditions, a thorough analysis was done and if the application
complies with the bank's conditions, instruction was given to the credit administration for
disbursement.
2.2.7. Credit Administration
The credit administration refers to the credit support, control systems and other practices
necessary for the effective monitoring of credit risks taken by the bank. Some of the
important points of the credit administration were: control of credit files, safekeeping of
credit and documentation files, follow-ups for expiration of essential documents like
insurance, control of credits and excesses over approved lines, monitoring of collateral
inspections, site visits and customer calls, monitoring of repayments under term credits
Edward (2016). Reporting: the portfolio is periodically reviewed to make sure that the
names tiered were still complying with the risk acceptance criteria. Edward (2016).
2.3. Empirical Review
There have large number of empirical studies in the area of safety and soundness specially in
the area of credit risk management with the pace of changing environment in Ethiopian
banking system while few academic and professional researches related to history and
performance of Ethiopian bank system were conducted. The following attempt was made to
summarize the main finding of some selected studies in the area of risk management in
commercial banks. (Al- Tamimi & Al-Mazrooei, 2017) carried out comparative study of
bank’s risk management between national and foreign banks in the United Arab of Emirates
through survey. The survey questionnaire mainly composed seven items clustered under risk
management practice (independent variable) and thirty three items under understanding risk
and risk management, (Al- Tamimi & Al- Mazrooei, 2017).
Risk identification, risk assessment and analysis, risk monitoring, and credit risk analysis
(independent variables). The regression result revealed that risk identification and risk
16
assessment and analysis had significant positive impact on risk management practice while
other variables had insignificant positive Impact. The researcher also found that risk
identification and risk assessment and analysis were the most influential variables for risk
management practice of nationally owned bank. It also further concluded that there was a
significant difference between nationally owned and foreign banks in the aspect of
understanding risk and risk management (URM), risk assessment and analysis (RAA) and
Monitoring and controlling aspects while did not with practice of risk identification (RI),risk
management practice and credit risk analysis. Generally reported as foreign bank were more
effective in risk management practice then nationally incorporated bank due to quality of
staffs and regulatory requirement.
(Nazir, Daniel & Nawaz, 2012) conducted research entitled ‘risk management practices: a
comparison of conventional and Islamic banks in Pakistan using the same model suggested
by (Al-Tamimi& Al-Mazrooei, 2017) and found positive relationship between dependent
variable and explanatory variables.
(Hussain& Al-Ajmi, 2012) also conducted research with the same instrument and found
similar relationship in Bahrain. The regression result further indicates that credit risk
analysis, risk monitoring and understanding of risk and risk management had the most
explanatory power of risk management practice in Pakistan.NBE conducted the first survey
on risk management practices of Ethiopian commercial banks by taking sample of nine
members of bank’s board of directors (National Bank of Ethiopia, 2015).
It was specially aimed to identify the status of risk management practice of commercial bank
and to improve its strength further through providing fruitful recommendation on weakness.
Inadequate risk management training, inefficient allocation of risk management budget, lack
of up to date and relevant economic and business data for decision making, lack of
documented risk management strategy and program, lack of reviewing risk management
document regularly, and poor internal communication and lack of comprehensive risk limits
system were identified as weakness of risk management system and practice of some
Ethiopian commercial banks while having qualified risk management staffs, existence of
policy and procedure of risk management, having committed BOD, awareness of risk in
banking operation, contingency plan for operational and credit risk were the major strength
of the banks. Richard et. al (2017).

17
Generally, the dominance of all those weaknesses over the strength witnesses the existence
of poor risk management system and practice in Ethiopian commercial banking industry.
Richard et. al (2017) conduct research on the credit risk management system of Tanzanian
commercial banks and found that checklist with the help of 5c (character, capacity, condition
, credit history, and collaterals) was used to assess borrower’s creditworthiness. Researcher
also found that the quantitative credit scoring model was not used as a result of poor record
keeping and lack of effective data base system in different sectors with in the country.
Researcher further noted the difficulty of using modern credit risk management model due
to lack of information and other financial infrastructure in under developed country. Richard
et. al (2017).
Even though there are different methods of risk identifications, Inspection by the bank’s risk
manager, audits or physical inspection, financial statement analysis and risk survey were the
most important risk identification methods of commercial banks in United Arab of Emirates
( Al-Tamimi & Al-Mazrooei, 2007).(Hussain& Al-Ajmi, 2012) also found similar result in
Bahrain.
The study of NBE (2018) identified and ranked three important type of risks in which credit
risk was ranked firstly and then followed by operational and liquidity risk. (Al-Tamimi &
Al- Mazrooei, 2007) found three important types of risk the bank faces in United Arab of
Emirates and ranked in descending order as foreign exchange risk ,credit risk and
operational risk while (Hussain & Al-Ajmi, 2012) ranked as credit risk, liquidity risk and
operational risk were the most important risk in Bahrain. Study of (Alam & Masukujjaman,
2011) also found that credit risk, market risk and operational risk were the major risks to the
banks of Bangladesh. It is possible to conclude from those finding that credit risk,
operational risk, liquidity and market risk were the major types of risks for most of
commercial banks. Therefore, banks should give more emphasis on such types of risks to
survive in banking segment.
2.4. Summary and Knowledge Gap
From the above theoretical as well as empirical review, risk identification, risk assessment
and analysis risk monitoring were the most influential variables for risk management of the
banking industry and identified and ranked three important types of risks. But the literature
did not consider effective loan repayment critically. Establishing an appropriate credit risk
environment, sound credit granting process, maintain appropriate credit administration and
adequate control overall credit risk. Gibson.d (2014).

18
In order to address the above gaps, The Basel Committee on Banking Supervision (BCBS)
(2020) published document entitled “credit risk management principles were used. It
encompasses four major activities of managing credit risk:

a. Establishing an appropriate credit risk environment

b. Operating under sound credit granting process

c. Maintain appropriate credit administration, measurement and

monitoring process and

d. Adequate control overall credit risk.

Well-conceived credit policy, organization of lending, establishing credit limits, credit

management information system, loan pricing, loan portfolio administration,
creditworthiness Analysis, problem loans recovery, loan monitoring, credit authorization
and credit scoring ((rating) were basic element of credit risk management system (Baxter ,
Panova & Platonov, (1998, p. 107-112).
Bagchi (2013) noted that risk identification, risk measurement, risk monitoring, risk control
and risk audit as well as credit risk management policies and credit rating system were the
major components of credit risk management system

19
 CHAPTER THREE
3. RESEARCH DESIGN AND METHODOLOGY
3.1. Introduction

The method was used in assembling data and information for this research is shown and
justified in this chapter. This stage is about how research was executed and how respondents
were approached, as well as how the researcher was complete. Therefore, in this section the
research identifies the procedures and techniques that were used in the collection, processing
and analysis of data. Specifically, the following subsections are included; research design,
data collection instruments, data collection procedures and finally data analysis.
3.2. The Research Design and Approach
Data was collected and analyzed on the basis of research design because it provides the
structure for such an assessment, Bryman and Bell (2020). This research is descriptive
research. Descriptive research is a type of research that is used to describe the characteristics
of a population. It collects data that are used to answer a wide range of what, when, and how
questions pertaining to a particular population or group; the research uses questionnaire as
data collection tool. This was exactly used to collect useful information for assessment of
credit management process at Cooperative bank of Oromia (S.C).In this work, the
respondents‟ opinions and experiences gathered from the questionnaire provided the needed
input to the data. These data are gathered from both primary and secondary sources. The
data are evaluated and added to the findings of the research. The survey is a quantitative one
as a result of that the research questions are intended to suit the quantitative analysis. Due to
that, a lot of the questions are close ended questions; however, few of the questions are open
ended questions while the interviews are all open-ended questions.
3.3. Source of Data collection
Primary data was gathered by questionnaires issued to bank employees such as directors,
managers, and officers who work on credit business operation and conducting an interview
with division manager of credit management department. This is to gather a broad range of
credit risk management baseline data. The reason for collecting data through questionnaires
is that it is a simple and cost-effective method of collecting data, especially when significant
amounts of data must was obtained from a big population.

20
3.4. Study Population

The population of this study were used the employees directly involved in credit processing
and administering at Cooperative bank of Oromia (S.C) Adama, Adama Branch.. This means
Department heads, division heads, Branch managers, Assistant branch managers, Loan
section heads, Loan officers, Loan supervisor, and Loan Committee all employees of
branches are included in the target group.
3.5. Sampling Procedure and Sampling size
The study was used probability sampling technique. From the given probability sampling
frame Stratified random sampling technique was and censes sampling technique applied.
Stratification is often employed in the preparation of sample designs because it generally
provides increased accuracy in sample estimates without leading to substantial increases in
costs. Though in order to select relevant respondents stratified random sampling is employed
thus the population is divided into sub groups or strata based on branches and head office
and samples was selected from each stratum.
The population of this study was used cooperative bank of oromia (S.C) Adama, Adama
Branch were 66. The next step is defining target population this is a step, as the sampling
frame would be drawn after the target respondents are defined. The target population of this
study were risk department, strategic department, marketing and communication department
these target groups were chosen based on the fact that they were direct relation to the title
and knowledgeable in that area. Cooperative bank of Oromia (S.C) Adama Branch. there are
16 employees in the risk department, 23 employees in the strategic department and 15
employees in the Communication department and 12 employees in the marketing
department after the population is divided into sub groups was used censes sampling
method. In census, whole group related to investigation is investigated and the information’s
are collected.
Figure 3.5.1 sources of sampling size
Employees in the risk department, 16
Employees in the strategic department 23
Employees in the Communication department 15
Employees in the marketing department 12
Total 66

This research is descriptive research. Descriptive research is a type of research that is used to
describe the characteristics of a population. To this end the minimum numbers of staffs

21
directly involved at a branch level are 66 employees in branch from these was select all
employees branch as a sample.
3.6. Data gathering tools

For the purpose of this study, both primary and secondary data was used. The questionnaires
were used to collect primary and secondary data. The questionnaire are conducted with the
management of the credit portfolio and management as the topic of the research relates
directly to them and the questionnaire are distributed to branches to loan offices and branch
assistant or managers, and to members of credit management & analysis department.
3.6.1. Primary Data
This source provides data which is original and might have not been used before. The
questionnaire and interviews was used as the principal source of data gathering.
3.6.1.1. Questionnaire
Questionnaire constitutes a very important instrument of data collection. With this study, the
questionnaire contained close ended questions as well as questions which open ended in
nature. The questions that are close ended offer the respondents the opportunity to choose
from answers provided whereas the open-ended questions allow the respondents to give their
answers. This technique helps to maintain the focus of the work on its primary objectives.
3.6.2. Secondary data

Secondary data was collected from annual report of the bank from 2020 to 2021, working
policy and procedure of the bank, 2020, related journal, NBE directives, management
directives of the bank issued at various times like Mgt. Directive No.002/10 on loan work
out procedure of the bank, Mgt. Directive No.005/20 credit information user guide line and
other relevant data to aid the researcher.
3.7. Data collection procedure
For the purpose of the study, both primary and secondary data was used. Primary data was
collected through questionnaires distributed to respondents that involve professional
working in the banks such as department managers and senior officers working on loan
processing (credit risk management staffs of head office practical oriented response such as
credit risk manager, credit risk follow up, risk and compliance managers and credit risk
experts are the major respondents). In addition, interviews are employed on banks
professionals as primary data sources to supplement the questionnaire. The secondary data
was collected from financial statements, annual reports, NBE directives, and bulletins of the
22
banks.
3.8. Research Quality Assurance
3.8.1. Validity

Validity refers to the credibility of the research. It is concerned with the findings use really
about what appears to be about. Validity defines as the extent of which data collection
methods are accurately measured and what they were intended to measure. To accomplish
the goals, the researcher developed survey questions based on a literature and empirical
study. As a result, the researcher proven that and reached at the confidence level same
answer would be availed to another independent research.
3.8.2. Reliability
Reliability refers to whether a measurement instrument is able to yield consistent results
each time it is applied (Saunders et al., 2017). It is the property of a measurement device that
causes it to yield similar outcome or results for similar inputs. This implies that responses to
a reliable survey were varying because respondents have different opinions, not because the
questionnaire items are confusing or ambiguous. The researcher started the data analysis by
examining their liability of the sample data.
Figure 3.8.2.reliability statics
Crombach’s Alpha No of items
.993 30
3.9. Data analysis method
Most of the data were more of qualitative in nature thus; they are summarized and presented
using descriptive statistical tools like percentages and frequency. Furthermore, tables and
figures are used to facilitate the analysis and to make it presentable for the readers. After the
respondents’ answers are analyzed on the respective table explanation regarding the practice
of credit management at cooperative bank of Oromia s.co is given based on the respondent’s
answer.

CHAPTER FOUR
23
 4. DATA ANALYSIS AND DISCUSSION
The chapter discusses the result of the empirical data collected. It will also define the
conclusions and also the recommendations, proffered for improvement of the credit risk
management activity of the CBE. The analysis part is done with two main parts in relation to
source, primary and secondary, used for the study. The primary data are analyzed using
frequency distribution tables and the secondary data are also descriptively analyzed using
different percent
4.1. Demographic Characteristics of Respondents
The demographic nature of the employee has a great contribution in the credit risk
management systems of loans and advance in understanding the credit management
strategies, policies and procedures as well as exercising and improving it when demanded.
Thus, in this work process the demographic characteristics of respondents like gender, age,
marital status, and educational level were assessed.
Table 4.1: Gender of respondents
Gender of respondents Cumulative Cumulative
Frequency Percent
Valid Male 41 62
Female 25 38
Total 66 100%
Source: Primary Data, 2022
The mix of gender of the employee in the loan area was, (41) 62 percent dominated by the
male and(25) 38 percent was female as it was shown in table 4.1. This was due to the
education and experiences required to work in the CRM area as loan officers or analysts was
a assigned to both male and female employees. Employees with high experience and
qualification were needed to work in the loan area, as they have to understand the
responsibility and accountability for prudent credit risk management and minimizing credit
risks to the required level.

Table 4.2: Age of the respondents

Cumulative cumulative

24
 Frequency Percent
Valid Less than 25 10 15
25-30 23 35
31-35 19 29
36-40 8 12
Above 40 6 9
Total 66 100
Source: Primary Data, 2022
The age of the employee showed as indicated in table 4.2, 15 percent were age less than 25.
35 percent were in the range of age between 25 to 30; 29 percent were in the range of age
between 31 to 35 ;12 percent were in the range of age between 36 to 40 and the remaining 9
percent were above 40 years age. This implies the banks majorities of work forces were in
their productive age and expected to work more to the best of their knowledge and
experience and thereby they could make their organization efficient and effective in the
credit risk management process.
Table 4.3: Marital status of respondents
Valid cumulative Cumulative
Frequency Percent
Married 31 47
Single 26 39
Divorced 9 14
Total 66 100%
Source: Primary Data, 2022
The findings depicted in table 4.3 above showed that majority of the respondents 47 percent
were get married, 39 percent were single and only 14 percent were divorced. As far as the
nature of banking industry was concerned, it was highly exposed to credit risk management
and this demands employees working there to be socially responsible to enable them to
concentrate and exert their maximum professional experience and qualification for the good
of the bank’s credit risk management practice, which leads to minimize credit risks.
Therefore, the implications of the findings were in consistent with this argument, as large
numbers of the employees working in credit processing area were married.
Table 4.4: Position respondents
Frequency Percent
Valid Top Management 10 15
Senior Management 7 11
Middle Management 13 20
Line Management 16 24
Other Clerical 20 30
Total 66 100%
Source: Primary Data, 2022

25
26
The table above describes that the managerial position of the respondents, was the
managerial position top management, Senior Management and Middle Management which
were 15 percent, 11 percent respectively. Such different managerial positions of the
respondent were important to suppose the research choose the right respondents to get
validity of information, all files are analyzed in their position. Other position were Middle
Management, Line Management and Other Clerical respondents which were 20 percent, 24
percent and 30 percent respectively .The last background information is current position
30 percent was of respondents are Other Clerical .
Table 4.5 banking experience
cumulative Cumulative
Frequency Percent
Valid Below 5 years 13 20
6- 10 years 25 38
11-15 years 18 27
Above 5 years 10 15
Total 66 100%
Source: Primary Data, 2022
The table above shows the percentage of the years of experience the respondents had
working within the bank. The researcher asked this question because I wanted to know how
experienced the respondents were in terms of banking sector. In the results, I notice that 20
percent ,38 percent ,27 percent and 15 percent which respectively Below 5 year, 6-10 year,
11-15 years and Above 5 years have experience working . Whereas, the respondents who
have more working experience in banking sector was the age between 6-10 years according
the respondents.

Credit granting process of the bank

In this section questions related to loan disbursement practice of the bank that mainly
prepared based liker scale are presented by table and analyzed by using descriptive statistics
such as percentage, frequency, mean and standard deviations (See table 4.6 below).
Table 4.6 Credit granting process
Factors 1 2 3 4 5 mean St.d
1.1 The bank perfectly analyzes Fer 5 7 31 15 8
the reputation of the customer
before granting the loan.
% 7 11 47 23 12 3.23 1.068

27
1.2 Marketability of collateral Fer 3 8 29 20 6
requirement is properly
evaluated and measured.
3.32 .995
% 4 12 44 30 10
1.3 Adequacy of collateral Fer o 5 30 25 6
requirement is properly
3.53 .808
evaluated and measured.
% 0 7 45 38 10
1.4 The bank conducts Fer 0 0 50 10 6
comprehensive financial 3.33 .641
analysis of the customers
before granting the loan.
% 0 0 75 15 10
1.5 Bank’s credit professionals Fer 25 30 5 6 0
always conduct a face to face
meeting to discuss the
1.88 .903
customer’s history and future
plans.
% 38 45 7 10 0
1.6 The bank has established Fer 0 0 15 35 16
credit limit for all types of 4.39 .839
credit services.
% 0 0 23 53 24
1.7 The entire economic factors Fer 0 0 30 20 16
will be analyzed before the 3.79 .814
loan is granted
% 0 0 45 30 24
1.8 Nature of the business is Fer 0 5 25 36 4.39 .839
properly analyzed before the
loan is granted
% 0 8 0 38 54
1.9 The bank diversifies its credit Fer 12 25 10 15 4 2.62 1.225
exposure to different industry
sectors
% 18 38 15 23 6
Aggregate 3.386 .9035
Source: Primary Data, 2022

28
On table4.6 item (1),7% ,11% 47%,and 23% of the participants strongly agreed, disagree,
Neutral, and agree respectively. That the bank perfectly analyzes the reputation of the
customer before granting the loan and 12% of them also strongly agree. As it is indicated
that most of the respondents replied as the bank analyzes the reputation of the customer
before granting the loan. This enables the bank to know or understand the background of its
customer.
For the question issued for the respondents whether marketability of collateral requirement
is properly evaluated and measured; on item table 4.6, item (2) 4% of the participants
strongly agreed, at the meantime 30% of the respondents agreed and 44% of them were
neutral and 12 % were disagreed. As it is showed that most of the respondents replied as the
bank evaluate and measure the marketability of collateral requirement before granting the
loan. This enables the bank easily to convert non-financial asset (collateral) to cash
On item (3) respondents were asked whether adequacy of collateral requirement is properly
evaluated and measured. 10 % of the participants strongly agreed with the question
presented to them where as 38% agreed and 45% neutral while 7 % of the respondents
disagreed and the remaining 0 % of the respondents are strongly disagree. As it is revealed
that most of the respondents replied as the bank evaluates and measures the adequacy of
collateral requirement before granting the loan. This enables the bank to hold adequate
collateral for the compensation for uncollectable account.
On item (4) of table 4.6, respondents were asked whether the bank conducts comprehensive
financial analysis of the customers before granting the loan. 10 % of the participants
strongly agreed, in addition to this 15% of the respondents agreed while 75% of them were
neutral. As it is indicated that almost all of the respondents replied as the bank conducts
comprehensive financial analysis of the customers before granting the loan. This enables the
bank to know or understand the financial capacity of its customer and the ability to repay the
loans.
As indicated on table 4.6 item (5) respondents were asked whether the Bank’s credit
professionals always conduct a face to face meeting to discuss the customer’s history and
future plans; 0 % of the participants strongly disagreed with the questions presented to them
while 45 % of the respondents disagreed, while 10% of them agreed and the remaining 7%
of their pendants are neutral. This implied that the banks credit professionals do not conduct
a face to face meeting to discuss the customer’s history and future plans. Due to this the
bank might be loose some relevant information that rose on the meeting to know about the

29
customers future plans and history.
On Item (6) of table 4.6 presented that 53% and 23 % of the participants strongly agreed
,Neutral the remaining 24 % of them agreed that the bank has established credit limit for all
types of credit services. As it is indicated that all of the respondents replied as the bank
establish credit limit for all types of credit services. This enables the bank to control the
credit level based on its risk level.
On table 4.6 item (7) being 45 % of them strongly agreed while 25% agreed and the
remaining 0 %. And 0 % of both disagreed strong and disagree respectively on the question
presented as the bank analysis the entire economic factors before the loan is granted. As it is
indicated that most of the respondents replied as the bank conducts economic factor analysis
before granting the loan. Due to this the bank knows or understands economic condition of
the environment to reduce the risk level which associated with the economy.
On item (8) respondents were asked whether nature of the business is properly analyzed
before the loan is granted. Based on this 54 % of the participants strongly agreed and 38 %
of the respondents also agreed and the remaining 8% of them are disagreeing. As it is
indicated that majority of the respondents replied as the bank conducts business analysis
before granting the loan. This enables the bank to reduce credit risk that associated with the
nature of the business

On item (9) respondents were asked whether the bank diversifies its credit exposure to
different geographical area. 6% of the participants strongly agreed with the question
presented to them additionally 23 %of the respondents agreed while 38 % of them
disagree,18 % of the respondents are strongly disagree and the remaining 15% of the
respondents are neutral. As it is indicated that most of the respondents replied as the bank
diversifies its credit exposure to different geographical area. This enables the bank to
minimize the risk level that associated with the specific geographical area
In general regarding the above assessment is important for any departments; the bank should
implement efficient management information system so as to improve the Credit granting
process of credit risk departments with the rest of branches, but as the average mean and SD
reflects 3.386 and .9035 respectively, reflects that there is still a need to improve for good
Credit granting process among branches, because of its great implication in meeting the
overall strategic objective of the bank. More over and as its supported on the literature and
stated above too, related studied also reflect similar findings but with higher mean value.
Table 4.7: Credit risk evaluation and monitoring process

30
 1= strongly disagree, 2= disagree, 3=Neutral, 4=Agree, and
5 = strongly agree
Factory 1 2 3 4 5 mean St.d
1 Credit monitoring procedure is fer 18 28 13 7 0 3.056 .970
regularly updated in our bank.
% 27 42 20 11 0

2 Credit monitoring procedure is fer 20 15 22 9 0 2.26 .997

regularly reviewed in our bank.
% 30 23 33 14
3 Credit file is regularly updated in fer 7 10 25 15 9 3.11 1.139
our banks.
% 10 15 38 23 14
4 The bank regularly reviews and fer 5 12 30 10 9 3.09 1.092
monitors the performance of credit
quality at portfolio level
% 7 18 45 15 13
5 The bank regularly reviews and fer 2 6 33 12 13 3.45 1.092
monitors the performance of
Credit risk quality at individual
level
% 3 9 50 18 20
6 The bank strictly monitors loan fer 4 6 3 15 38 4.17 1.235
terms and conditions that have
been stipulated at the time of loan
approval.
% 6 9 5 23 57
7 The bank uses a loan covenant fer 5 7 35 15 4 3.02 .886
checklist that routinely tracks its
customer’s adherence to
covenants.
% 7 11 53 23 6
8 The bank has properly applied its fer 4 8 33 13 8 3.14 3.95
own internal credit risk rating
system.
% 6 12 50 20 12
Aggregate 3.162 1.044

Source: Primary Data, 2022

On item (1) of table 4.6 describes that 27 % of the respondents strongly disagree 42% of
them also disagreed and the remaining 11% and 20% of them agreed and neutral that
credit monitoring procedure is regularly updated in the bank. As it is indicated that most of
the respondents replied as the bank does not regularly updated the monitoring procedure.
This leads the bank to follow and implement outdated credit monitoring procedure
On item (2) of table 4.7 about credit monitoring procedure is regularly reviewed in the bank;

31
30% of the respondents strongly disagree, 23% of them also disagreed, 33% were neutral
and the remaining 14 % of them agreed. AS it is indicated that most of the respondents
replied as the bank same amount does not regularly reviewed the monitoring procedure. Due
to this the bank cannot detect the problem that is associated with credit monitoring
procedure to take an immediate course of action.
On item (3) of table 4.7, respondents were requested as credit file is regularly updated in the
bank. 14 % of the participants strongly agreed with the questions presented for them
additionally 23% agreed and the remaining 38% of the respondents are neutral. As it is
indicated on the above figure, even if 10% and 15% of the respondents standing as strong
disagree and disagree respectively, we can confidently say that the bank updated the credit
file. This enables that the bank to have current information on the overall loan status.
On item (4) of table 4.7, respondents are requested whether the bank regularly reviews and
monitors the performance of credit quality at portfolio level. 13% and 45% of the
participants strongly agreed and neutral respectively, additionally 15 % of the respondents
agreed and the remaining 18 % of the respondents are disagreed. Even if 13% of the
respondents are disagreed on the issue, the majority of respondents replied as the bank
regularly reviews and monitors the performance of credit quality at portfolio level. This
enables that the bank to know the clients status on the ability to meet their commitments at
portfolio level.
On item (5) of table 4.7, respondents are requested whether the bank regularly reviews and
monitors the performance of credit quality at individual level. 20%,9% and 50% of the
participants strongly agreed, is agree and neutral respectively in addition to this 18% and
3% of the respondents agreed and strong disagree respectively . All respondents replied as
the bank regularly reviews and monitors the performance of credit quality at individual
level. This enables that the bank to know the clients status on the ability to meet their
commitments at individual level.
As indicated on table 4.7 item (6) respondents were requested about the bank strictly
monitors loan terms and conditions that have been stipulated at the time of loan approval;
57% of the respondents strongly agreed with this point, 23% agreed and the other 6% ,9%
and 5% of their respondents are strong disagreed, is agree and neutral respectively . As it is
showed that most of the respondents replied as the bank strictly monitors loan terms and
conditions that have been stipulated at the time of loan approval.
On item (7) of table 4.7, participants were requested whether the bank uses a loan covenant

32
checklist that routinely tracks its customer’s adherence to covenants. Based on this 6% of
the participants strongly agreed, 23% of the respondents also agreed, 11% of them are
disagreed and the remaining 53% of the respondents are neutral. As it is indicated that most
of the respondents replied as the bank uses a loan covenant checklist that routinely tracks its
customer’s adherence to covenants. This implied that the bank ensures the fulfillment of
client’s obligation and this enables the bank to take the required corrective action before the
loan is none performed.
Regarding the question presented whether the bank has properly applied its own internal risk
rating system on item (8) of table 4.7, 12% of the participants strongly agreed, additionally
20 %,6% and 12% of the respondents agreed, strong disagree , strong agree respectively and
the remain 50% of them were neutral. AS it is indicated here above most of the respondents
replied as the bank properly applied its own internal risk rating system. This enables that the
bank to acquire and maintain a relevant data and information regarding to loan defaults of
clients based on their rating classification as it helps to handle credit portfolio management
properly and to maintain a prior measure of expected defaults and amount of capital that
needed to manage the portfolio.
Generally, and as we have discussed in the literature part of the study and at the beginning of
this sub title, and previous researches too, Credit risk evaluation and monitoring departments
are the backbones of banking sectors, in that it helps to identify potential sick loans , to
conduct workout and rescheduling, to prevent from different credit risks. More over as
evidenced in the total aggregate mean and aggregate SD of 3.612 and 1.044 it reflects that
the bank has good credit controlling and monitoring practice that can mitigate different risks
arising during credit operation
Table 4.8: Identification practice of credit risk management
1= strongly disagree, 2= disagree 3=Neutral, 4=Agree, and
5= strongly agree
Factory 1 2 3 4 5 mean St.d
1 The bank identifies all of the fer 4 8 27 20 7 3.27 1.01
risks inherent with the credit 6
products and activities.
% 6 12 41 30 11

2 The bank quantifies all of the fer 0 4 15 25 22 3.98 .903

risks inherent with the credit
business at individual level
33
 % 0 6 23 38 33
3 The bank quantifies all of the fer 8 5 15 22 16 3.52 1.29
risks inherent with the credit 2
business at portfolio level
% 12 7 23 33 24
4 The bank measures the entire fer 9 14 23 12 8 2.80 1.30
unexpected loss of credit risk. 3
% 14 21 35 18 12
5 The bank measures the fer 5 10 25 15 11 3.24 1.20
maturity of all exposure risks 3
associated with the credit
business.
% 7 15 38 23 17
Aggregate 3.362 1.14
3
Source: Primary Data, 2022
As it can be seen from table 4.5, Item (1), respondents were asked whether the bank
identifies all of t he risks inherent with the credit products and activities. Based on this, 11%
of the respondents strongly agreed, 30% agreed, 41% are neutral and 12% disagreed. As it is
indicated that most of the respondents replied as the bank identifies all of the risks inherent
with the credit products and activities. Due to this the bank enables to know the nature and
types of credit related risks to manage properly. On table 4.5 item (2), respondents were
asked whether the bank quantifies all of the risks inherent with the credit business at
individual level. Based on this 33 % and 6%of the respondents‟ strongly agreed, disagree
and 38 % of the respondents‟ also agreed and 23 % are neutral. In this regard the bank
enables to know the amount of expected losses at individual level to manage properly.
On table 4.5 item (3) of table 4.5, 24 % respondents strongly agreed that the bank carried out
measurement of credit risks at portfolio level where as 33% agreed and 12% and 7% were
strongly agree and disagree respectively and the remaining 23 % were neutral. As it is
revealed that most of the respondents replied as the bank measure credit related risks at
portfolio level and this would help the bank to develop and maintain data regarding to
expected losses of credit risk at portfolio level to manage properly.
On table 4.5 item (4), respondents were asked whether the bank measures the entire
unexpected loss of credit risk. 14 % of the participants strongly disagreed; in addition to this
21% of the respondents disagreed while 35 % of the respondents are neutral and 12% and 18

34
35
% are agreed strongly agree respectively. As it is revealed that most of the respondents
replied as the bank measure unexpected loss of credit risk. This implied that the bank know
the amount of unexpected loss of credit risk which might be faced during its credit
operation.
Table 4.5 item (5), 17% of the participants strongly agreed, in addition to this 23% of the
respondents agreed, where as 38 % of 1.203 disagree and 7% of them strongly disagree. As
it is indicated that most of the respondents replied as the bank measures the maturity of all
exposure of credit risks. Based on this, the bank knows when exposure of credit risk is ended
and this enables the bank to develop adjusted repayment collection schedule.
Having said so, and as indicated in the literature part of this research, Identification practice
of credit risk management to follow the rules and regulations of National Bank of Ethiopian,
so that as the aggregate mean and aggregate standard deviation values 3.362 and 1.143
respectively, evidences united bank has a quality credit processing and appraisal practice in
respect to CBO requirements, so that this may benefit the bank to maintain lower NPL
percentage. More over previous researches state that some of the cooperate bank of oromia
are suffering with high aggregate mean percentage due to good Identification practice of
credit risk management .
Table 4.9 Credit risk controlling practice
Factory 1 2 3 4 5 Mean St.d

1 The bank gives adequate risk fer 4 8 27 17 10 3.33 1.08

management training for concerned 6
staffs.
% 6 12 41 26 15

2 The bank actively responds to new fer 0 0 37 20 9 3.58 .725

information in all aspect of credit
products and activities.
% 0 0 56 30 14
3 The bank constantly monitors the fer 0 0 34 17 15 3.73 .833
financial condition of counter parties
and action taken as required.
%
4 Credit policy is consistently applied in fer 0 8 22 11 25 3.79 1.08
all credit activities of the bank. 9
% 0 12 33 17 38
5 The bank maintains the actual credit fer 0 0 22 30 14 3.88 .734
risk profile at or under its credit risk
tolerance
% 0 0 33 45 21
36
6 Policy measures have been taken fer 0 0 37 17 12 3.62 .725
regularly to solve loan recovery
problem.
% 0 0 56 26 18
7 The bank constantly takes immediate fer 9 15 29 13 3.68 .931
corrective action for credit default sign.
% 14 22 44 20
8 Credit policy is regularly updated in fer 0 7 25 19 15 3.64 .955
our bank.
% 0 10 38 29 23
Aggregate 3.656 .884

Source: Primary Data, 2022

According to table 4.8 item (1), 15 %, 12%, 41% of the respondents strongly disagree,
disagree, and neutral respectively. 26 % of respondents agree and the remaining 10% of the
respondent is also strongly agreed with the above statement. The remaining respondents
being stand on strongly agree, and agree on the above statement; therefore it is possibly
confident to say that the bank is constantly giving adequate risk management training for
concerned staffs as required consequently it is possible. Hence the banks must give attention
to arrange short term or/and long-term training to update the employees understanding about
credit risk Management.

According to table 4.8 item (2), 30 % of the respondents agree the bank actively responds to
new information in all aspect of credit products and activities. 56% 14% of respondents
strongly agree and neutral respectively with the above statement. The remaining respondents
being stand on strongly disagree and disagree on the above statement; therefore it is
confident to say that the bank actively responds to new information in all aspect of credit
products and activities as required. This would help the management of the bank to make
updated and latest decision on credit business operation.

According to table 4.8 item (3), 23% of the respondents strongly agree the bank constantly
monitors the financial condition of the counter parties and action was taken as required.26%
of respondents agree and the remaining 51% neutral with the above statement. The
remaining respondents being stand on strongly disagree, and disagree on the above
statement, therefore it is confident to say that the bank is constantly monitors the financial
condition of Counter parties and action taken as required and this enables would help the
bank to understand the client’s and counter parties’ status on the ability to meet their

37
commitments
According to table 4.8 item (4), 38% of the respondents strongly agree the credit policy is
consistently applied in all credit activities of the bank. 17% of respondents agree and the
remaining 12% and 33% disagree neutral respectively with the above statement. The
remaining respondents being stand on strongly disagree, on the above statement; therefore it
is confident to say that the credit policy is consistently applied in all credit activities of the
bank as required. It implied that the bank enables to assure the credit business operation of
the bank is carried out in accordance with the standard of the bank.
According to table 4.8 item (5), 21% of the respondents strongly agree the bank has
maintained the actual credit risk profile at or below its risk tolerance, 45% of respondents
agree with the above statement and the remaining 33 % neutral with it. The remaining
respondents being stand on strongly disagree, disagree on the above statement, therefore it is
confident to say that the bank has keep its actual risk profile at or its risk tolerance as
required. This implied that the bank has performed in accordance with the standard which
is established to tolerate the credit risk.

According to table 4.8 item (6), 18%,56% of the respondents strongly agree and neutral
respectively there is a policy measures that have been taken regularly to solve loan recovery
problem of the bank. 26% of respondents agree with the above statement and the remaining
respondents being stand on strongly disagree, disagree on the above statement, therefore it is
confident to say regular policy measures have been taken to solve loan recovery problem of
the bank as required. This would help the bank to develop common awareness and
consistency of credit activities among the employees of the department. According to table
4.8 item (7), 20% of the respondents strongly agreed there is a constant and immediate
corrective action has been taken by the bank for credit default. 44 %,14% of respondents
agree and disagree with the above statement and the remaining 22% disagree with it. Even if
the remaining respondents being stand on neutral and disagree on the above statement, it is
confident to say banks has constantly takes immediate corrective action for credit default
sign that has been occurred in due course of time as required. This would help the bank to
solve credit related problem sometime.

According to table 4.8 item (8), 23% of the respondents strongly agreed there is a regularly
updated on Credit policy in the bank. 29% of respondents agree with the above statement

38
and the remaining 38 % neutral with it. Even if the remaining respondents being stand 10%
disagree and strongly disagree on the above statement, it is confident to there is a regularly
updated on the credit policy of the bank. This implied that it would help the bank to work
with latest credit policy and this also contribute a significant role to manage the credit
business operation of the bank.-
Generally, and as we have discussed in the literature part of the study and at the beginning of
this sub title, and previous researches too, Credit risk controlling practice departments are
the backbones of banking sectors, in that it helps to identify potential Credit risk controlling
, to conduct workout and rescheduling, to prevent from different credit risks controlling,
More over as evidenced in the total average aggregate mean and aggregate SD of 3.656 and
0.884 it reflects that the bank has good credit controlling and monitoring practice that can
mitigate different risks arising during credit operation.

39
 CHAPTER FIVE
5. Summary of Key Findings, Conclusion and Recommendation
In this chapter, the research has provided summary of key findings, conclusion and
recommendation drawn based on the result of the research that has been discussed and
analyzed in the previous chapter.
5.1 Summary of Key Findings
Among the main findings of the research that has been discussed on chapter four, the key
findings are summarized as follow: -

➢ The bank identifies credit granting process with aggregate mean and std value was
3.386 and .9035 respectively the credit products and activities and measure expected
loss of credit risks both at individual and portfolio level. This would help the bank to
develop and maintain the required data regarding to the nature, types and amount of
expected loss of credit risk to manage properly. The credit granting process of the
bank is in a good condition that the bank analyzed the credit worthiness of the
clients, the industry and economic condition thoroughly and properly before the loan
is granted. The bank also monitors and evaluates the credit quality both before and
after disbursement by making a regular review and monitor of the credit quality both
at individual and portfolio level.

➢ The major findings stated credit monitoring procedure, with aggregate mean and std
value was 3.162 and 1.044 respectively the bank’s credit professionals do not
conduct a face to face meeting to discuss the customer’s history and future plans.
Due to this the bank fails to know or understand the background of the customers.
The bank does not adequately measure unexpected loss of credit risk to monitoring.
Therefore, the bank does not know the amount of unexpected loss of credit risk

40
 which might be faced during its credit operation. As it is revealed on the finding of
the study, the credit monitoring procedure of the bank is not regularly reviewed and
updated. This leads the bank to follow and implement outdated credit monitoring
procedure. Moreover, there is lack of adequate risk management training for
concerned staffs as required and adequate number of staffs in credit management
department of the bank. Due to this, the bank fails to improve the understanding of
the concerned staffs and the quality credit business operation. In turn this would
hinder the credit risk management practice of the bank.

➢ Regarding to the Identification practice of credit risk management of with aggregate

mean and std value was 3.362 and 1.143 respectively the bank, the finding of the
research revealed that loan terms and conditions has been strictly practice of credit
risk, the bank uses a risk management that routinely tracks its customer’s adherence
to covenants and the bank regularly credit risk management of portfolio level. As far
as the bank is working to assure the quality of credit risk management. Operation;
the bank implemented its own internal risk practice or grading system to support the
loan processes by classifying borrowers based on their risk level. However, proper
reviewing and updating of credit risk management practice has greater significance
in the proper management of credit business operation yet the data obtained from the
respondents showed that the bank does not reviewed and updated the practice of
credit risk management. This would expose the bank to follow and implement
outdated credit monitoring procedure.

➢ The credit monitoring and controlling activity if with aggregate mean and std value
was 3.656 and .8847 respectively the bank is undergoing with less efficiency, but the
credit portfolio management department of the bank is performing good in following
and administering loans, conducting workout/rescheduling activities on those loans
tending to be non performing. As it has been reflected on the majority of the
respondents the credit controlling department of the bank conducts review of loan
files, but it’s less efficient, and it has to be organized with sufficient and capable
staffs, so as to prevent the bank from maintaining bad loan. Moreover, it reflects that
the controlling department is required to assess whether approved loans are utilized
for its target.

➢ Finally the bank is advised to review its credit risk management system, in order to

41
 make its Credit risk controlling practice reliable was the heights aggregate mean next
are Credit granting process 3.386 and 3.656 respectively.
5.2 Conclusion
Based on the finding of the research, it has been concluded that the employees of the bank
working in credit department are Bachelor degree and post graduate level. In addition, they
have also appropriate professional experience for the area. Followed by their education and
experience, it would help the bank to enhance its service delivery and become effective and
more competitive by minimizing the risk associated with the credit business operation.
The bank is currently working on sound credit granting process so that the bank conducts
comprehensive analysis such as analysis on customer reputation, financial analysis, business
analysis, industry analysis and economic analysis. This would help the bank to learn the
financial capacity of the clients by analyzing the financial reports to understand profitability,
cash flow, liquidity, and leverage of the company and to learn what the company does and
how it operates. Then examine how it fits into its industry and how it is affected by
economic conditions. Regarding to the credit monitoring and evaluation practice of the bank,
the finding of the research revealed that loan terms and conditions has been strictly
monitored, the bank uses a loan covenant checklist that routinely tracks its customer’s
adherence to covenants and the bank regularly reviews and monitors the performance of
credit quality both at individual and portfolio level. As far as the bank is working to assure
the quality of credit business operation; the bank implemented its own internal risk rating or
grading system to support the loan processes by classifying borrowers based on their risk
level. However, proper reviewing and updating of credit monitoring procedure has greater
significance in the proper management of credit business operation yet the data obtained
from the respondents showed that the bank does not reviewed and updated the credit
monitoring procedure regularly. This would expose the bank to follow and implement
outdated credit monitoring procedure.
The bank identifies all practice of credit risk management properly and measures the entire
expected loss of credit risk both at individual and portfolio level. This enables that the bank
to develop and maintain necessary data on the nature and type of credit risks management
and the amount of expected losses as it would help to manage credit risk in proper way and
to have earlier estimation of expected loss of defaults, expected contribution and capital
requirement to develop financial stability. However, there is lack of proper and adequate
measurement of unexpected loss of credit risk. Due to this the bank unable to develop and

42
 maintain necessary data regarding to the amount of unexpected losses and this leads the
bank to conduct wrong decision on loan management and it would be a cause for financial
distress since it has not adequate information on the amount of unexpected losses. All this
information is relevant to know the clients status on the ability to meet their commitments.
Adequacy, marketability and enforce ability of collateral requirement is also properly
evaluated and measured by the bank. This would help the bank to mitigate its risk on default
loan. Therefore, collateral requirements is one of the credit risk management tool that refers
to properly promised to the lender as compensation if the borrower defaults, it lesser the
lender’s losses in the case of a loan default and it may be seen as a strategic instrument to
control borrower incentives for repayment of the debt. In addition to this the bank diversifies
its credit exposure to different industry sectors and geographical area.
This enables the bank Credit risk controlling practice was minimize the risk level that related
with the specific type of industry and geographical area. Apart from this the bank’s credit
professionals do not conduct a face to face meeting to discuss the customer’s history and
future plans. Due to this the bank might be loose some relevant information that raised on
the meeting to know about the customers future plans and history.
5.3 Recommendation
The following are some of the suggestion that I would like recommend to cooperative bank
of oromia, Adama branch management and concerned parties

❖ The credit risk management granting team should always comprise adequate number of Tell trained,
skilled, and knowledgeable staff to improve on accuracy, reliability, efficiency and effectiveness of
required service to the customer lack of having trained and competent staff may lead the bank to
poor service quality, misconduct, customer complaints and employee disputes and it can may result
in adverse publicity. Hence the bank should give attention to hire new employees to adequately
staffed the credit management department and arrange short term or/and long-term training to update
and enhance the employees understanding about credit risk management.
❖ The cooperative bank of oromia (S.C) Adama, Adama branch should has review and updates
the credit risk monitoring procedure consistently. This is because regular reviewing and
updating of credit monitoring procedure has assumed greater significance in the effective
management of credit risk and this would help the selected bank to consider the new events
on credit business operation by working with the latest credit monitoring procedure on
regular basis.
❖ The overall assessment of the credit risk management practice of the Bank look as follows.

43
 The Bank should have adequate policies and procedure limits and graining criteria as well
as documented credit risk management guidelines. In addition the Bank should have also
established risk management Department, which is independently organized and accountable
to the Bank’ Board. Based on this principle CBO has developed a risk and compliance
management Guidelines enacted since 2019 While doing so the under mentioned results
have been obtained as a research findings.
❖ Ensuring adequate control over credit risk management, under this category the key issues
are the independent assessment of the credit risk management, and the availability of
internal control and remedial actions. Accordingly, the Bank have to established credit risk
management department and the independent review should been conducted regular.
5.4 Recommendation for Further Studies
From the above findings and conclusions the study makes the following recommendations.
First the study recommends that cooperative bank of oromia (S.C) Adama branch should
have flexible credit appraisal policy and procedure so that it would attract more
customers and the policy should help improve prudential oversight of asset quality of the
bank. In addition, as borrower selection is the key to successful lending, the bank should
focus on the selection of true borrower. But at the same time it must be taken into account
that right borrower selection does not mean that the bank have to adopt inflexible
lending policy but rather ensure that the seek to adopt knowing the customers so as to
ascertain the true purpose of the loan as this would ensure that care is taken so that
good borrowers are not discarded due to strict adherence to the lending policy and the debt
collection policies pursued by the bank must be regularly reviewed so that it will ensure
the credit advanced to customers are repaid on time and thus ensuring that loan repayment
is not adversely affected as a result of debt accumulating due to non-repayments.

44
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 APPENDIX 1
RIFT VALLEY UNIVERSITY
FACULTYOFBUSINESSANDSOCIALSCIENCES DEPARTMENT OF
BUSINESS MANAGEMENTPOST GRADUATE PROGRAM
QUESTIONNAIRE
Dear respondent,
This is Prepared to collect data from Credit risk management Department of Cooperative
bank of oromia Adama branch .This questionnaire prepared by Graduate masters student in
order to collect data for the research titled "ASSESSMENT OF CREDIT RISK
MANAGEMENT PRACTICE AT COOPERATIVE BANK OF OROMIA
ADAMABRANCH” A case study on cooperative bank oromia all information you give is
valuable for the academic purpose and kept confidential. The validity as of your response
will highly contributes for the success of this research paper.
Part I: General Background
1) Gender
1. Male
2. Female
2) Age
1. Less than 25
2. 25--30
3. 36-40
4. Above 40
3. Marital status of respondents
1. Married
2. Single
3. Divorced
3) Educational Background
1. Diploma
2. 1st degree
3. Masters
4. PhD and above Please specify
4) Position
1. Top Management
49
 2. Senior Management
3. Middle Management
4. Line Management
5. Other Clerical
5) How long have you been working in cooperative bank of oromia ?
1. Below five years
2. 6- 10 years
3. 11-15 years
4. Above 5 years
Part Two: - Information on Credit Risk Management granting process of the
Bank 1= strongly disagree, 2= disagree, 3=Neutral, 4=Agree,
and

5= strongly agree

1. Credit granting process

Factors 1 2 3 4 5
1 The bank perfectly analyzes the reputation of the customer
before granting the loan.
2 Marketability of collateral requirement is properly
evaluated and measured.
3 Adequacy of collateral requirement is properly evaluated
and measured.
4 The bank conducts comprehensive financial analysis of the
customers before granting the loan.
5 Banks credit professionals always conduct a face to face
meeting to discuss the customer’s history and future plans.
6 The bank has established credit limit for all types of credit
services.
7 The entire economic factors will be analyzed before the
loan is granted
8 Nature of the business is properly analyzed before the loan
is granted
9 The bank diversifies its credit exposure to different
industry sectors

2. Credit risk monitoring process

factory 1 2 3 4 5
50
1 Credit monitoring procedure is regularly updated in our
bank.
2 Credit monitoring procedure is regularly reviewed in our
bank
3 Credit file is regularly updated in our banks
4 The bank regularly reviews and monitors the performance
of credit quality at portfolio level
5 The bank regularly reviews and monitors the performance
of Credit risk quality at individual level
6 The bank strictly monitors loan terms and conditions that
have been stipulated at the time of loan approval.
7 The bank uses a loan covenant checklist that routinely
tracks its customer’s adherence to covenants.
8 The bank has properly applied its own internal credit risk
rating system.

3. Identification practice of credit risk management

Factors 1 2 3 4 5
1. The bank identifies all of the risks inherent with the credit
products and activities.
2. The bank quantifies all of the risks inherent with the credit
business at individual level
3. The bank quantifies all of the risks inherent with the credit
business at portfolio level
4. The bank measures the entire unexpected loss of credit
risk.
5. The bank measures the maturity of all exposure risks
associated with the credit business.

4. Credit risk controlling practice

Factors 1 2 3 4 5
1 The bank gives adequate risk management training for
concerned staffs.
2 The bank actively responds to new information in all aspect
of credit products and activities.
3 The bank constantly monitors the financial condition of
counter parties and action taken as required.
4 Credit policy is consistently applied in all credit activities of
the bank.
5 The bank maintains the actual credit risk profile at or under
51
 its credit risk tolerance
6 Policy measures have been taken regularly to solve loan
recovery problem.
7 The bank constantly takes immediate corrective action for
credit default sign.
8 Credit policy is regularly updated in our bank.

52