ADMAS UNIVERSITY

DEPARTMENT OF ACCOUNTING AND FINANCE

POSTGRADUATE PROGRAM

ASSESSMENT OF CREDIT RISK MANAGEMENT

PRACTICES: THE CASE OF DEVELOPMENT BANK OF
ETHIOPIA

By: HaymanotTadesse

June, 2023

Addis Ababa, Ethiopia

 ADMAS UNIVERSITY
DEPARTMENT OF ACCOUNTING AND FINANCE
POSTGRADUATE PROGRAM

ASSESSMENT OF CREDIT RISK MANAGEMENT

PRACTICES: THE CASE OF DEVELOPMENT BANK OF
ETHIOPIA
A Thesis Submitted to the School of Post Graduate Studies
Presented in Partial Fulfilment of the Requirements for the
Degree of Masters in Accounting and Finance

By: HaymanotTadesse
ID No. PGMGA1003/2021
Advisor: Shemelis Zewdie (PhD)

Addis Ababa, Ethiopia

July, 2023

II
 Declaration

I, Haymanot Tadesse, the undersigned, declare that this thesis entitled "Assessment of credit risk
management practice: the case of the Development Bank of Ethiopia" is my original work. I have
undertaken the research work independently with the guidance and support of the research supervisor.
This study has not been submitted for any degree or diploma program at this or any other institution,
and all sources of materials used for the thesis have been duly acknowledged.

_______________ _________________ ______________

Name of Student Signature Date

This is to certify that the thesis entitled Assessment of credit risk management practice: the case of
the Development Bank of Ethiopia" was submitted in partial fulfillment of the requirements for the
degree of Masters of Accounting and Financeof the Postgraduate Studies, Admas University, and is a
record of original research carried out by Haymanot Tadesse, PGMGA1003/2021, under my
supervision, and no part of the thesis has been submitted for any other degree or diploma. The
assistance and help received during the course of this investigation have been duly acknowledged.
Therefore, I recommend that it be accepted as fulfilling the thesis requirements.

Advisor: Shemelis Zewdie (PhD)

Signature: ___ ___

Date: 15/06/2023

Addis Ababa Ethiopia

III
 Certificate of Approval

This is to certify that the thesis prepared by Haymanot Tadesse, entitled "Assessment of credit risk
management practice: the case of the Development Bank of Ethiopia," and submitted in partial
fulfillment of the requirements for the degree of Masters of Accounting and Finance, complies with the
regulations of the university and meets the accepted standards with respect to originality and quality.

Signature of Board of Examiner`s:

____________________________ _______________ _______________

External examiner Signature

Dr Shewit Kinfe Abebe 22/07/2023

Internal examiner Signature Date

____________________________ _______________ _______________

Dean, SGS Signature Date

IV
 Acknowledgements:

Above all, I would like to thank and praise almighty God for keeping me healthy. Give me strength and
endurance from the beginning of this master's program to the finalization of this research project.

I would like to express my deepest gratitude to my advisor, Shemelis Zewdie (PhD), for his
understanding, encouragement, patience, and professional and constructive comments from the
beginning to the completion of this research paper.

I would also like to extend my gratitude to Special thanks go to the employees of Development Banks
Ethiopia who helped me to materialize the paper by filling the questionnaires patiently and responding
to interview questions who have provided me with relevant data for my study. Special thanks go to all
my parents, who have been the inspiration and motivational force throughout my entire academic life.
My special note of appreciation also extends to all my beloved friends for their constructive comments,
love, prayer, moral support, and encouragement for the finalization of this paper.

V
 List of abbreviation

DBE: Development Bank of Ethiopia

CRM: Credit Risk Management

RM: Risk Management

N: Number of Respondents

NBE: National Bank of Ethiopia

VI
Table ofContents
Declaration.....................................................................................................................................................................III
Certificate of Approval..................................................................................................................................................IV
Acknowledgements:.......................................................................................................................................................V
List of abbreviation........................................................................................................................................................VI
Abstract........................................................................................................................................................................XIII
CHAPTER ONE.............................................................................................................................................................1
1. INTRODUCTION..............................................................................................................................................1
1.1.Background of Study................................................................................................................................................1

1.2.Statement of the problem..........................................................................................................................................3

1.3.Basic Research Question...........................................................................................................................................5

1.4.Objectives of the study..............................................................................................................................................5

1.4.1.General Objective.......................................................................................................................................5

1.4.2.The specific objectives of the study............................................................................................................5

1.5.Significant of the study.............................................................................................................................................5

1.6.Scopes of the Study...................................................................................................................................................6

1.7.Limitation of the study..............................................................................................................................................6

1.8.Definition of Terms...................................................................................................................................................7

1.9.Organization of the Paper..........................................................................................................................................7

Chapter Two...................................................................................................................................................................8
2.Review of related literature..........................................................................................................................................8
2.1.Introduction...............................................................................................................................................................8

2.2.Basic concept and Definitions...................................................................................................................................8

VII
 2.2.1.Concepts of Credit risk................................................................................................................................8

2.2.2.The concept of Risk Management..............................................................................................................9

2.2.3.Definition of Credit Risk..............................................................................................................................9

2.2.4.Definition..................................................................................................................................................10

2.3.Theoretical literature view......................................................................................................................................11

2.3.1.Main Source of Credit Risk........................................................................................................................11

2.3.2.Types of Bank Risk....................................................................................................................................11

2.3.3.Risk Identification.....................................................................................................................................12

2.3.4.Risk Measurement....................................................................................................................................13

2.3.5.Risk Assessment........................................................................................................................................13

2.3.6.Risk Monitoring.........................................................................................................................................14

2.3.7.Risk Control...............................................................................................................................................14

2.3.8.Risk Treatment..........................................................................................................................................15

2.3.9.Risk Avoidance..........................................................................................................................................15

2.3.10.Risk reduction.........................................................................................................................................15

2.3.11.Risk Acceptance......................................................................................................................................15

2.3.12.Risk Transfer...........................................................................................................................................16

2.3.13.Implementation/Credit Risk Response...................................................................................................16

2.3.14.Evaluation...............................................................................................................................................17

2.3.15.Credit risk Management tool and technique..........................................................................................17

2.3.15.1.Credit Rating System and its Role........................................................................................................17

2.3.15.2.Expert Judgment..................................................................................................................................17

2.3.15.3.Rating with Models..............................................................................................................................18

2.3.15.4.Credit Analysis.....................................................................................................................................18

2.3.15.5.Credit Information...............................................................................................................................18

2.3.16.The “five C’s’’ of credit............................................................................................................................20

VIII
 2.3.17.Credit risk and financial distress.............................................................................................................20

2.3.18.Credit collection......................................................................................................................................21

2.4.Empirical Literature................................................................................................................................................22

2.5.Research Gap..........................................................................................................................................................24

2.6.CONCEPTUAL FRAMEWORK............................................................................................................................24

CHAPTER THREE......................................................................................................................................................26
3.RESEARCH METHODOLOGY...............................................................................................................................26
3.1.Description of the Study Area.................................................................................................................................26

3.2.Research approach..................................................................................................................................................26

3.3.Research design......................................................................................................................................................26

3.4.Target Population, Sample......................................................................................................................................27

3.5.Method and Instrument of Data Collection.............................................................................................................27

3.6.Data Analysis Method.............................................................................................................................................28

3.7.Reliability and Validity of the Data Gathering Instrument......................................................................................28

3.8.Ethical Consideration..............................................................................................................................................29

CHAPTER FOUR.........................................................................................................................................................30
4.DATA PRESENTATION, ANALYSIS AND DISCUSSIONS.................................................................................30
4.1.INTRODUCTION..................................................................................................................................................30

4.2.Demographic characteristics of the Respondent......................................................................................................31

4.3.Respondents Result on Credit risk management practice in DBE..........................................................................33

4.4.Risk Identification...................................................................................................................................................36

4.5.Risk Assessment and Analysis................................................................................................................................38

4.6.Risk Monitoring......................................................................................................................................................41

IX
4.7.Risk Evaluation.......................................................................................................................................................44

4.8.Credit Risk Assessment Monitoring Interval Used by DBE....................................................................................48

4.9.Techniques Used by DBE.......................................................................................................................................49

CHAPTER FIVE..........................................................................................................................................................51
5.SUMMARY, CONCLUSION AND RECOMMENDATION...................................................................................51
5.1.SUMMARY OF MAJ OUR FINDINGS................................................................................................................51

5.2.CONCLUSION.......................................................................................................................................................54

5.3.RECOMMENDATION..........................................................................................................................................55

5.4.Suggestions for Further Research............................................................................................................................57

REFERENCE............................................................................................................................................................... 58
Appendices................................................................................................................................................................... 61

X
List of Table
Table 3-1: Reliability Analysis................................................................................................................................29
Table 4-1: Gender of Respondent...........................................................................................................................31
Table 4-4: Over all banking service years in the DBE............................................................................................32
Table 4-6:Credit Risk Management Practice in DBE.............................................................................................33
Table 4-9: Risk Identification................................................................................................................................36
Table 4-10: Risk Assessment and Analysis............................................................................................................38
Table 4-11: Risk Monitoring...................................................................................................................................41
Table 4-12: Risk Evaluation....................................................................................................................................44
Table 4-8: Credit Risk Assessment Monitoring Interval.........................................................................................48
Table 4-7: Credit Risk Management Process and Techniques................................................................................49

XI
List of Figure

Figure 2.. Steps credit risk Management ……………………………………………………………………………………………………..16

Figures 2 -1Conceptual Framework…………………………………………………………………………………………………………………..25

Figure 4-9: interval of credit risk assessment and monitoring48

XII
 Abstract

The main objective of this study is to "assess the credit risk management practice in the Development
Bank of Ethiopia". To achieve this objective of risk identification, risk assessment, risk monitoring, and
risk evaluation are used to show the relationship with credit risk management, and the study also
critically assesses credit risk management in DBE, reviews the credit risk management process and
techniques of DBE, and explores the Simple descriptive statistics were applied to analyze the
respondent’s information. While collecting the requisite data, a five-point Liker scale, open-ended and
closed-ended questioners, and an interview have been used. From the analysis, it was found that the
respondent had well understood their responsibility for the credit risk management practices of the
bank. In addition, the result shows the Development Bank of Ethiopia develops action plans in order to
implement and manage credit risk if it happens, and risk management processes are well documented
and provide guidance to staff about the management of risk. As a conclusion, the researcher
recommended that the Development Bank of Ethiopia use different techniques to reduce risk, such as
expert judgment, risk pricing with models, and credit risk measurement analytics. This will enable them
to consistently evaluate transactions across all asset classes by having accurate credit information.

Key words: Development Bank of Ethiopia, Credit Risk Management, and Credit risk management
practice.

XIII
 CHAPTER ONE

1. INTRODUCTION

This chapter presents the background of the study. It consists of: introductory paragraphs that
deal with: general points related to the research topic and background information about the
organization covered in this particular study; a statement of the problem; general and specific
objectives; research questions; and the significance, scope, limitation, and organization of the
study.

1.1. Background of Study

A financial institution is the support of the financial sector of the economy; they provide
financing to different groups and different sectors in the economy, namely, contractors, real
estate builders, traders, households, and manufacturers. These credits will be used to reinvest
in businesses for which the owners expect to earn a return. At the same time, lenders or
financial intermediaries provide credit to earn a return when these companies borrow. This
process of extending credit has a multiplier effect on the global money supply, so this is why
credit is a powerful driver of our backward economy. This transformation from the supply side
to the demand side is not without risk (Yaw, 2015).

Credit risk is by far the most significant risk faced by banks, and the success of their business
depends on accurate measurement and efficient management of this risk to a greater extent
than any other risk. Increases in credit risk will raise the marginal cost of debt and equity,
which in turn increases the cost of funds for the bank (Basel Committee, 2011).

Credit creation is the main income-generating activity for banks. But this activity involves
huge risks for both the lender and the borrower. The risk of a trading partner not fulfilling his
or her obligation as per the contract on the due date or anytime thereafter can greatly
jeopardize the smooth functioning of the bank’s business. On the other hand, a bank with a
high credit risk has a high bankruptcy risk that puts the depositors in jeopardy. To maintain an

1
adequate profit level in this highly competitive environment, banks have tended to take
excessive risks. However, it exposes the banks to credit risk. The higher the bank's exposure to
credit risk, the higher its tendency to experience financial crises, and vice versa (Cebenoyan,
2004). The Basel Committee on Banking Supervision (2003) asserts that loans are the largest
and most obvious source of credit risk.

Credit risk management is very important to banks as it is an integral part of the loan process.
It maximizes bank risk and the adjusted risk rate of return by maintaining credit risk exposure
with a view to shielding the bank from the adverse effects of credit risk. Banks are investing a
lot of funds in credit risk (Tibebu, 2011).

In addition, Rana’s (2013) bank is one of the financial institutions, and Banks play an
important function in the economy of any country. They are the main intermediaries between
those with excess money and those individuals and businesses with viable projects that require
money for their investment. Overall, they have the functions of lending money, depositing
others’ money, transferring money locally or globally, and working as paying agents. Hence,
credit is the main source of income for the banking industry. If we look at the income
statement or the asset composition of many commercial Banks, the greater share comes from
credit activities, likewise for a development bank. However, this operation involves huge risks
for both the lender and the borrower. This risk occurs when a trading partner fails to fulfill his
or her contractual obligations on the due date or at any time thereafter, which is caused by the
trading partner's inability or results from the bank's poor credit management practices. This
can indeed greatly jeopardize the smooth functioning of any bank’s business operations.
Among the risks that Banks face, credit risk is of great concern to most bank authorities and
banking regulators, including United Bank, because credit risk is a risk that can easily and
most likely prompt bank failure (Rana, 2013).

The main use of credit risk management is a structured approach to managing uncertainties
through risk assessment, developing strategies to manage it, and mitigation of risk using
managerial resources. The strategies include transferring to another party, avoiding the risk,
reducing the negative effects of the risk, and accepting some or all of the consequences of a
particular risk (Greuning & Iqbal, 2007).

2
The essential objective of credit management ca\n be pronounced as the protection of the
client's risk and the advancement of operational money flow. Nevertheless, effectiveness in
performing each step of the credit process using different parameters has a significant effect
on the performance of its management. The study evaluates the credit risk management
practice in DBE.

Ethiopia Development Bank of Ethiopia (DBE) is a governmental institution that collects

money from a limited number of customers and borrows funds from the government. Most
funds are used for investment rather than commercial purposes, and there is no public service
for any clients, so the funds are exclusively used for agricultural, investment, and import-
export purposes

1.2. Statement of the problem

In its simplest form, credit risk management involves the identification, evaluation, and
management of a company's exposures to loss. In other words, credit risk management
attempts to mitigate the occurrence of losses while initiating advance planning to assure that
adequate funds will be available to cover those losses that occur (Yong, 2003).

Financial institutions have faced difficulties over the years for a multitude of reasons, but the
major cause of serious banking problems continues to be directly related to credit standards for
borrowers and counterparties, 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 counterparties (Cebenoyan, 2004).

Credit risk management practices are an issue of concern in financial institutions today, and
there is a need to develop improved processes and systems to deliver better visibility into
future performance. There have been controversies among researchers about the effect of
credit risk management techniques adopted by various institutions. According to FikaduZerga
(2016), it is important for the profitability of the bank. The bank’s credit risk policy and
strategy are not renewed on time; there's no procedure in place to detect criminally motivated
borrowers; the bank's internal risk rating system isn't applied to the entire portfolio; and the
3
existence of collateral is not checked on a regular basis. The bank should regularly review its
credit risk management strategy and policy, implement procedures to identify borrowers
linked to crime, and change its management information system to provide enough data for
decision-makers.

Yalemzewd (2013) assessed the credit management practices of Bunna International Bank and
analyzed the processes of accessing credit, credit control, and credit collection strategies
against non-performing loans by the bank.

The study's findings are intended to evaluate credit risk management tools and techniques used
in banking and whether the current performance of the bank is supported by the appropriate
loan risk. Anti-debt The bank concludes that the loan policy is anti-debt. They are exposed,
and the bank concludes that it has a good credit system and appropriate loan risk assessment
tools. and Tibebu (2011) assesses the credit risk management practice of Nib International
Bank S.C. and finds that the risk that emanates from credit is due to the high degree of credit
concentration in a few sectors and borrowers, and Girma (2010), in his study of tools used in
credit management at Wegagen Bank, only focuses on the tools used by the bank to manage
risk. However, most of the studies address factors affecting the credit risk management
practices of private banks.

Therefore, the researcher is motivated to conduct this research to ascertain the overall risk
management practices of the Development Bank of Ethiopia. Moreover, the majority of
previous studies conducted in Ethiopia focused only on credit risk management factors;
however, this research incorporates maajor risks in the bank to provide a better picture of risk
management practice in the bank. To this end, this study examined the risk management
practice of the Development Bank of Ethiopia, focusing on risk identification, measurement,
monitoring, and evaluation of the major risks. The main purpose of the study is to assess a
comprehensive approach towards identifying credit risk measurement, monitoring, and
evaluation practices.

To this end, the underlying motivation of the researcher is to fill this gap in the literature and
to make an effort to provide empirical evidence by identifying major credit risk management
practices of the Development Bank of Ethiopia. This study contributed to the limited literature

4
on the credit risk management practice of banks and its contributions in identifying major
determinants of the findings.

1.3. Basic Research Question

The research conduct to answer the following research questions

1.What is the practice of Credit risk management in Development Bank of Ethiopia (DBE)?

2. What is the risk identification practice in DBE?

3. What is the risk assessment practice in DBE?

4. What is the risk monitoring practice in DBE?

5. What is the risk Evaluation practice in DBE?

1.4. Objectives of the study

1.4.1. General Objective

The general objective of the study is to assess the credit risk management practices of the
Development Bank of Ethiopia.

1.4.2. The specific objectives of the study

1. To assess the practice of Credit risk management in Development Bank of Ethiopia

(DBE)

2. To assess risk identification practice in (DBE).

3. To assess the risk assessment practice in (DBE).

4. To assess the risk monitoring practice in (DBE).

5. To assess the risk Evaluation practice in (DBE).

1.5. Significant of the study

5
The study analyzed credit risk management practices in the development bank of Ethiopia.
And for the bank to identify the focus area in the course of its credit risk management and for
stakeholders to know in detail about the bank's healthy credit risk management practice
because the bank's potential to maintain its credit risk gives them loyalty and confidence to
work with the bank with a different commitment, Secondly, it is significant for the researcher
in that it gives the researcher a detailed understanding of the practice and management of
credit. And credit risk management practices. Thirdly, the significance of the study lies in
identifying possible gaps in DBE credit risk management practices and tools and suggesting
possible remedies. Finally, the study is more important for other Ethiopian bank policymakers
since it provides empirical data that can be used to improve or formulate policy environments
for credit risk management practices. The findings will inform future research in the field of
credit risk management.

1.6. Scopes of the Study

The scope of this study focused on the geographical, methodological, and conceptual
delimitation of credit risk management in the Development Bank of Ethiopia, which is found
in Addis Ababa. The research deals with credit assessment, measurement, and monitoring;
evaluation management practices; the culture of credit risk management in the DBE; and
policies and procedures that are being employed by the bank to manage such credit risk at the
head office level. Methodological methods were used. Primary data included structured
questionnaires and interviews, and to gather the necessary data, structured questions,
interviews, and simple descriptive statistics were used. Conceptually, credit risk management
practice at the Development Bank of Ethiopia was assessed within the variables of the bank's
conformity to its credit policies and procedures in processing loan applications, the bank's
relationship to creating credit and collecting its loans on their due dates, and the bank's
advance evaluation system.

1.7. Limitation of the study

Since the research topic involves a sensitive issue (credit), there was a limitation in getting
information that is confidential to the bank. Additionally, time and budget are also major
constraints. So as a result, all the existing problems regarding risk management in banks

6
cannot be covered. Because of the existing limitations, the research was limited to only
covering the credit risk management practices of one bank in Ethiopia, which is the
Development Bank of Ethiopia.

1.8. Organization of the Paper

This paper has five chapters. The first chapter addresses the introduction and background of the
study, the statement of the problem, the basic research questions, the objectives of the study,
which are general and specific objectives, the definition of terms, the significance of the study,
and the scope of the study. The second chapter presents a literature review that takes into account
the theoretical framework, empirical reviews, and conceptual framework. The third chapter
involves the methods of the study required to describe the type and design of the research, the
sources of data, the data collection tools and instruments, and the procedures of data collection,
as well as the methods of data analysis that were used. Chapter Four is Results and Discussion
against the Literature Facts, Findings of Analysis, and identification of Possible Gaps. Finally,
the fifth chapter comes up with a conclusion and recommendation.

7
 Chapter Two

2. Review of related literature

2.1. Introduction

This chapter covers the explanation of the concepts and definitions, the theoretical literature
reviews empirical, the research gab, and finally the conceptual framework, all developed in a
manner so as to give an insight and deep understanding about the credit risk management
practice in banking business. It starts with a review of the risk management (RM) concept.
Then the RM concepts or practices are analyzed. After that, the literature focuses on credit risk
and its variables, which affect or influence credit risk management. It also helps the reader
identify or gain an understanding of existing ideas about the subject, concepts, and theories
that are relevant to the Development Bank of Ethiopia’s practice.

2.2. Basic concept and Definitions

2.2.1. Concepts of Credit risk

According to Encarta (2009), credit is defined as an arrangement to receive goods from a shop
or money from a bank and pay for them later. Colquitt (2007) defines credit as the use or
possession of goods or services without immediate payment that helps the borrower bridge the
gap between production and sales of the goods and facilitates exchange in the economy. Risk
is the possibility that something unpleasant or dangerous might happen. Credit risk, on the
other hand Basel (2000) defined credit risk simply as the possibility that a bank borrower or
counterparty fails to meet its obligations in accordance with agreed terms.

8
 2.2.2. The concept of Risk Management

Management, in its simplest and best understood definition, can be defined as the act of
planning, directing, controlling, monitoring, and testing for desired results to be obtained. Or it
is simply the act, manner, or practice of managing; handling, supervision, or control (answer
com, 2010). Risk, on the other hand, can be defined as the possibility that something
unpleasant or dangerous might happen (Macmillan Dictionary, 2002). Furthermore, according
to the International Organization for Standardization (ISO), "risk management is a central part
of any organization’s strategic management; it is the process whereby organizations
methodically address the risks attaching to their activities with the goal of achieving sustained
benefit within each activity and across the portfolio of all actives (IRM, 2002). The key
phrases in the sentences above are in bold. That is, risk management is also a process, and its
primary mission is to bring benefits to companies and make them sustainable. And it is also at
the heart of any firm’s strategy. When companies indulge in business, it is obvious that they
will be exposed to one type of risk or another, which in most cases is uncertainty, although at
times it can be certain that it will occur. Banks are one of those businesses whose risk is very
certain because they don’t function in isolation given the dynamic environment in which they
operate, the increasing regulatory requirements under which they operate, diversification, and
the competitive environment in which they find themselves (Williams et al. 2006).

2.2.3. Definition of Credit Risk

Credit risk is most simply defined as the potential that a bank borrower or counterparty will
fail to meet its obligations in accordance with agreed terms. 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 (Yuqi Li, 2006). Banks need to manage the credit risk
inherent in the entire portfolio as well as the risk of individual credits or transactions. Banks
should also consider the relationships between credit risk and other risks. The effective
management of credit risk is a critical component of a comprehensive approach to risk
management and essential to the long-term success of any banking organization (Edward,
2006).

9
Credit risk, as defined by the Basel Committee on Banking Supervision (2003), is also the
possibility of losing the outstanding loan partially or totally due to credit events (default risk).
It can also be defined as the potential that a contractual party will fail to meet its obligations in
accordance with the agreed terms.

Credit risk is also variously referred to as default risk, performance risk, or counterparty risk.
A bank exists not only to accept deposits but also to grant credit facilities, so it is inevitably
exposed to credit risk. Credit risk is by far the most significant risk faced by banks, and the
success of their business depends on accurate measurement and efficient management of this
risk to a greater extent than any other risk (Cebenoyan, 2004).

According to Davide&Thangavel (2008), credit risk is the degree of value fluctuations in debt
instruments and derivatives due to changes in the underlying credit quality of borrowers and
counterparties. Koehn &Santomero (2006) define credit risk as losses from the refusal or
inability of credit customers to pay what is owed in full and on time. Credit risk is the
exposure faced by banks when a borrower (customer) defaults on honoring debt obligations on
the due date or at maturity. This risk, interchangeably called "counterparty risk," is capable of
putting the bank in distress if not adequately managed. Credit risk management maximizes the
bank’s risk-adjusted rate of return by maintaining credit risk exposure within an acceptable
limit in order to provide a framework for understanding the impact of credit risk management
on the bank's profitability (Edwad, 2006).

2.2.4. Definition

The word 'credit' was derived from the Latin word 'credo," which means 'I believe' or 'I trust."
This refers to a trust in another person, according to Nwanyanwu (2010). The term credit
implies restoring faith or trust in another. In other words, the meaning of credit can be defined
as a contractual deal in which a borrower now receives some value and agrees to repay the
lender at some later date (Elijah, 2019). Credit or loans, as defined by the National Bank of
Ethiopia, are any financial assets of a development finance institution arising from a direct or
indirect advance of funds (i.e., unplanned overdraws, loan syndication involvement, the
acquisition of loans from another lender, etc.) or a pledge by a development finance institution
to advance funds to a person who is bound by the person's obligation to repay the funds, either

10
on a specified date or on demand, usually with interest (NBE, 2012). Risk is one of the most
important indicators of a bank’s performance, among many other factors that can be related to
the assessment of financial institutions (Pastor, 1999).

2.3. Theoretical literature view

2.3.1. Main Source of Credit Risk

The main sources of credit risk include limited institutional capacity, inappropriate credit
policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity
levels, direct lending, massive licensing of banks, poor loan underwriting, laxity in credit
assessment, poor lending practices, government interference, and inadequate supervision by
the central bank (Davide and Thangavel, 2008). Credit risk is critical since the default of a
small number of important customers can cause large losses, which can lead to insolvency
(Basel Commute, 2003). An increase in bank credit risk gradually leads to liquidity and
solvency problems. Credit risk may increase if the bank lends to borrowers it does not have
adequate knowledge of Richard (2011) states that the most obvious characteristic of failed
banks is poor operating efficiency.

Cebenoyan (2004) suggests that bank risk-taking has pervasive effects on bank profits and
safety. Edward (2006) asserts that the profitability of a bank depends on its ability to foresee,
avoid, and monitor risks, making it possible to cover losses brought about by such risks. This
has the net effect of increasing the ratio of substandard credits in the bank’s credit portfolio
and decreasing the bank’s profitability risk, operation risk, lack of supervision, and portfolio
risk. These signify the role of credit risk management, and therefore they form the basis of the
present research analysis

2.3.2. Types of Bank Risk

The core business of Banking Industry is to mobilize deposit for reselling or investment
purpose. Banks need to take to maintain their margin and fulfill their role in the economy. But
taking excessive risk is likely to run in to difficulty and eventually fail to fulfill its obligations

11
and becomes insolvent (Gustel&Baesen, 2009). According to Crouhy,Galai& Mark (2009) in
the global banking industry there are three broad risk types as presented below.

Credit Risk: - Credit risk is the biggest risk in the financial market following a change in the
factors that drive the credit quality of an asset. Some of these are; adverse effects arising from
credit grade migration, the dynamics of recovery rate and default.

Market Risk: - these are risk losses arising from changes in market factors like interest rates,
foreign exchange rates, or equity and commodity price factors.

Operational Risk: - refers to financial risk as a result of lots of potential operational

breakdowns in terms of people risk, process risks and technology risks. For instance, frauds,
inadequate computer systems, control failures, operation failures, or natural disasters etc.

2.3.3. Risk Identification

RM cannot be implemented when first of all the risk has not been identified. This means if
there is no risk identified, there is thus no need for risk management. This identification I done
by using different techniques depending on the company in question to ascertain all forms of
threats it can be faced with both present and future. So risk identification is the first stage of
the RM process which develops the basis for the next stages. If success is not attained at this
stage, then the risk will be non-manageable. This means that the company will not account for
the risk and will not take any action related to it and the consequences could be much
unexpected (Techankova 2002). That is why risks related to gains and losses must be
identified. The inability to identify the risks of one is as in the bank is appropriate as to
identify the other. Risk identification thus involves a comprehensive analysis of all present and
future risks in the business operations, asset management and support services (Keith,
1998).during the process of risk identification, the bank able to study its activities and the
places where its resources are exposed to risk. This will help it especially when it has to carry
out a future duty, in terms of developing and implementing new programs for risk control.
Although all banks may be conscious of being faced with the same type of risks, the risk
identification techniques for each of them can be different. It is always important for managers
to identify all the possible risks they can be faced with because any neglected risk can have
very negative consequences on the whole system. Given the importance of risk identification

12
in the risk management process, managers don’t have to focus their attention on what can be
insured or mitigated but should start with the following questions as put forward by
(Tchankova, 2002). How can the organizational resources be threatened, what adverse effect
can prevent the organization from achieving its goals, and what favorable possibility can be
revealed? Starting the identification at this point will give a good kick-off for implementation
and no barriers to the type of risks that will be identified.

2.3.4. Risk Measurement

Risk measurement comes in after the identification phase to give an understanding of the
nature and level/extent of the risk so that it can be managed in an appropriate manner. This is
because without risk measurement the intensity of effect or consequences which can result
from the identified risk if neglected cannot really be analyzed. A good risk measurement will
determine the risk management techniques that have to be put in place to manage the said risk.
This will go along to bring out the extent and cost associated with the risk should it occur and
the company in question then uses the known results to see how much value is at stake or cost
is associated.

A good risk measurement and understanding is thus vital for the bank so that it will not only
settle on the risk considerably but will also improve on her performance drastically so as to
improve safely and profitably. This will also help to determine how much effort has to be put
in place or the degree of seriousness on how to manage the risk. For competitive and
regulatory reasons, it is necessary for all banks to have a sound risk measurement framework.
Risk measurement simply put, is the evaluation of the outcome of risk using a set of risk
factors which can be observed and measured. A risk factor is something that is likely to
increase the chances that a particular event will occur. To measure the different types of risks,
different techniques ranging from traditional simple to sophisticated ones are being used.
Some include, Value at Risk (VAR), duration analysis, sensitivity analysis, stress testing and
scenario analysis. Even though all banks may be faced with the same type of risk each may
use different risk measurement techniques depending on their individual choices.

13
2.3.5. Risk Assessment

The risk assessment task is to understand what is at risk and what events could potentially
cause harm or benefits. The risk is being assessed in terms of the severity of the impact,
likelihood of occurring and control ability (Gray & Larson, 2006). When this is done, it helps
the bank to know the chances that the risk might occur, and if it occurs, the impact it can have
on the bank and how they can possibly control it. Risk assessment is done by prioritizing the
risk either by using risk analysis or risk evaluation (Williams et al.., 2006). This risk analysis
is based on the likelihood and consequences.

Likelihood depends on the probability that the risk will occur and how frequently it will take
place while consequences on the other hand can be measured by looking at the effects on
results or on the enablers of results (Williams et al, 2006). Knowing the frequency of
occurrence of the risk and the effect it will have should it occur, gives the bank the base to
know how important the risk is risk evaluation is then carried out when a good risk analysis
has been undertaken. An evaluation is done against an appropriate risk-acceptance criterion to
give a ranking (Williams et al, 2006). For example, low (tolerable), Medium (low as
reasonably practical) and High (intolerable) this ranking then determines the decision or stand
point of the bank but what should be noted it that a decision depends on each bank
independently.

2.3.6. Risk Monitoring

A plan is always made for the activities that are used to manage risk. To be sure that the
activities attain the desired goal of the business, monitoring is very important so that the
results gotten are in line with the set down goals. If it is noticed that the results are going
contrary, readjustment should be done immediately. Risk monitoring is very important and it
goes hand in hand with risk control. Risks in banks need to be monitored just like any project
in progress. The risk manager needs to constantly do assessment and make updates where
there is need so as to be sure to handle any unforeseen risks at the right time before it is too
late (Gray & Larson, 2006). This is because any neglected or minimized risk can have very
long term big and negative consequences since the banking activities are so interrelated.

14
2.3.7. Risk Control

Risk control involves using physical measures, techniques, tools and or training staff to avoid
reduce, prevent or eliminate the perceived threat or its financial consequences and other
undesirable results of risks (Keith, 1998). Naturally, risk cannot be avoided or eliminated so
the only option is to control it. Banks like other organizations have different ways of
approaching risks and the amount of risks each is ready to accept differs. Some will decide
either to prevent the risk or to allow it happen and then start looking for measures to tackle it,
while others will decide whether to transfer or insure it. There may also be a wide gap between
the level of control possible and the level of control practiced. Risk tolerance is another
domain in which banks may vary; some may be risk averse while others will be prepared to
run calculated risks. This means the amount of risk that one bank may accept to tolerate differs
from that of another bank. So, it is very important that all the aforementioned points be
considered when assessing risk control (Keith, 1998).

2.3.8. Risk Treatment

Once the risk is identified and measured about its cost, benefit and multiple impacts, it can be
related in the following ways

2.3.9. Risk Avoidance

Avoiding a risk means deliberately taking another course of action so that it cannot arise in the
circumstance for that credit facility. The ultimate form of credit risk avoidance is not to
precede the credit facility at all. This means that it is not advisable to invest in products that
are too risky without understanding all the risks and its consequences.

Risk avoidance as a credit risk treatment doesn’t mean avoiding all risk; rather it is about
strategically selecting the good complements and not to invest in counterparts with too high
default, loss or exposure risk. Therefore, it is important to come up with in a decision to invest
only small proportions in corresponding facilities and limits on risky investment.

15
2.3.10. Risk reduction

For anyone involved credit processing with professional interest in risk management; reducing
risk in some way is probably the most important concern. Examining the credit risk from all
perspectives may reduce the probability of occurrence, the impact consequences and the
duration of credit risk exposure. For instance, one may require collateral or guarantee that can
be sold and claimed in case of default respectively so that the bank risk may reduce.

2.3.11. Risk Acceptance

Banks may accept credit risk by developing appropriate strategy if its impact on its wellbeing
to be sustainable and profitable is not affected. It is advisable to accept risks when it is well
diversified investment are made in various sectors and cost or opportunity cost of ignoring is
greater than accepting.

2.3.12. Risk Transfer

It is about transferring the risk of the due to giving loan to other stakeholder. It may be a third
party risk transfer to the situation, thereby involving another stakeholder the credit facility
processes. The transfer may be another bank, insurance or any other company as stipulated in
the credit processing policy and directive of the governing bank. Finally using a combination
of the above as appropriate is also possible.

Figure 2.2. Steps credit risk Management

16
Source: Ir. Tony Van Gestel and Bart Baesens, 2009

2.3.13. Implementation/Credit Risk Response

Once risk is identified, measured and treatment options are selected the next step is to
implement all this risk management strategy as appropriate. People, statistical models and IT
infrastructure evaluate the risk of existing and new credit facilities. Guidelines for the risk
treatment define in which counterparts one invests and in which one does not; which exposure
limits are used for the riskiest products; whether collateral for specific loans is mandatory or
whether one buys protection from a financial guarantor. The risks of the bank are continuously
reported and monitored. The implementation is supervised by senior management

2.3.14. Evaluation

The effectiveness of the risk management strategy is evaluated frequently. One verifies
whether the resulting risk taking remains in line with the strategy and applies corrections
where necessary. This involves evaluation of the relevant risk drivers; the measurement
process is evaluated, back testing procedures, the result of the risk treatment plans and the
actual implementation

2.3.15. Credit risk Management tool and technique

2.3.15.1. Credit Rating System and its Role

Credit rating systems are at the heart of credit risk management in that they provide a road
map to the entire credit process. Depending on the type of credit risk architecture that a lender
has, the credit rating system can be used in the enterprise risk management process whereby it
is incorporated into technology platforms that capture a mass of data across various business
and operating departments. In order to optimize the credit quality, credit rating system is the
basis from which risk measurement analytics are used to consistently evaluate transactions
across all asset classes by having standardized credit information (Colquitt, 2007).

17
2.3.15.2. Expert Judgment

Once a bank collect mass of credit information across all of the business and operating
department, the credit risk architecture act as the engine room for all of the conceptual
methodologies that are required to evaluate credit risk. This rating is arrived at by gathering
the borrower‘s financial and non-financial information an allocating a grad equivalent to the
banks rating standard and criteria, which are subsequently weighted to derive financial grade.
Therefore, rather than simply making a decision by having such information credit specialists
will weigh all of short and long term factors that may influence borrowers credit quality
trough out the duration of the credit facility. This is because default cannot be determined by
solely relying on corresponding model weights rather it require independent judgment and
knowledge (Colquitt, 2007).

2.3.15.3. Rating with Models

Credit rating model is about using a combination of numeric inputs relative to varying
borrower factors and characteristics. Some of the common types of statistical credit risk
models that are used to assess risk are scoring model, regression models, log it, or discriminate
models as well as structural and economic models. These models are configured according to
the variables and assumptions that credit specialists perceive as likelihood of default to which
they apply mathematical equations that define default risk (Colquitt, 2007).

2.3.15.4. Credit Analysis

Credit analysis is the primary method in reducing the credit risk on a loan request. This
includes determining the financial strength of the borrowers, estimating the probability of
default and reducing the risk of non-repayment to an acceptable level. In general, credit
evaluations are based on the loan officer's subjective assessment (or judgmental assessment
technique). Once a customer requests a loan, bank officers analyze all available information to
determine whether the loan meets the bank’s risk-return objectives. Credit analysis is
essentially default risk analysis, in which a loan officer attempts to evaluate a borrower’s
ability and willingness to repay.

18
2.3.15.5. Credit Information

Adequate and timely information that enables a satisfactory assessment of the credit
worthiness of borrowers applying for a bank loan is crucial for making prudent lending
decisions. Prudent lending decisions made on the basis of adequate information on the
creditworthiness of borrowers are one of the principal factors in ensuring the financial
soundness of banks. But, there has been serious difficulty in Ethiopia of getting accurate and
timely information on prospective borrowers that facilitates the making of such prudent
lending decisions. One of the means for alleviating this difficulty of getting accurate and
timely information on prospective borrowers is the establishment of a Credit Information
Center (CIC) where relevant information on borrowers is assumed to be pooled and made
available to lending banks. According to article 36 of the Licensing and Supervision of
Banking Business Proclamation No. 84/1994, the National Bank Ethiopia (NBE) has issued
these directives to establish such a Credit Information Center (CIC). Though there are still
serious limitations in the accuracy of the credit information extracted the summary of the
directive is as follows:

Banks shall provide, alter and update credit information on each and every one of their
borrowers using online system.

Upon written request by banks, the Supervision Department of the NBE shall provide to the
requesting bank, in writing, all credit information available in the Central Database on a
prospective borrower within three working days from the date of receipt of the request.

The role of the NBE shall be restricted to administering the Credit Information Sharing
system, providing in writing credit information on borrowers available at the Credit
Information Center to banks, ensuring that access to the online system to update or alter credit
information is given only to authorized persons, and ensuring that the system is operating
smoothly and reliably.

The NBE shall not be responsible for any damages, claims, or liabilities that may arise as a
result of inaccurate, misleading, or incomplete credit information on borrowers supplied to the
Credit Information Center by individual banks and shared, through the NBE, with other banks.

Each bank shall provide, electronically, the initial credit and other related information to the
Credit Information Center on each and every one of its borrower.
19
Each bank shall be fully responsible for providing accurate, complete and timely credit
information to the Credit Information Center. In cases where errors have been made, such
errors shall be corrected promptly by the concerned bank.

Each bank shall be fully responsible for any damages, claims or liabilities that may arise as a
result of providing inaccurate, misleading or incomplete credit information to the Credit
Information Center or failure to provide, inadvertently or otherwise, information to the Center
that should have been provided in line with these directives.

Each bank shall use the credit information on borrowers obtained from the Central Database
of the Credit Information Center only for making a lending decision. Such information shall
be treated with the utmost confidentiality and shall not be disclosed to any third party or used
for any other purpose.

Each bank shall be fully responsible for any damages, claims, or liabilities that may arise as
a result of the disclosure of credit information on borrowers obtained from the Credit
Information Center to third parties or the use of that information for purposes other than
making a lending decision.

2.3.16. The “five C’s’’ of credit

Each bank has its analytical tools which it uses to minimize losses of money when giving out
loans to customers. The bank always find itself in a situation where they can give a loan to
customer who will not be able to pay back or refuse to give to a customer who is good and has
the potential of meeting up with the repayment. To go about a good analysis of potential
creditors, the five Cs of a credit have been introduced as a guide for bankers of what criteria to
use. This includes the gathering of both quantitative and qualitative information to assist the
bankers in their screening process of bad and potential creditors. This information is gotten
using the five Cs of credit as the standards tools. The five Cs include; character, capacity,
capital, Conditions and collateral (Dev, 2009). The character of a company refers to the
distinct capabilities about the company which the lenders see that inspires them with
confidence that the loan will be repaid. This includes things like business plan, Cash flow,
history management, etc.

20
The capacity of the company incorporated words like sufficiency, adequacy and perseverance.
This means what the company as a customer has as assets and the value of those assets which
shows that it can be able to repay its loans. Capital of the company means how much adequate
funds she has to make her business operate efficiently in generating cash flow and efficiently
within its competitive business environment. The condition of the company describes the
economic and environmental influences on the company’s financial condition and
performance. Lastly, collateral refers to what the company is able to present to the lender
which serve as the final source of repayment and protection against loan loss.

2.3.17. Credit risk and financial distress

One of the bank’s main reasons of fighting for a good credit risk management is to avoid
financial distress. The financial viability of a bank is very important for its success. Managers
are more and more being obliged to meet up with the financial obligation and expectations,
manage risk and increase shareholder’s values. This is very important because given the
function carried out by banks of being an intermediary between lenders and borrowers, a lack
or shortage in liquidity can lead to adverse effects on it not being able to meet up with the
demand of its customers. This can lead to an effect called financial distress. Financial distress
is when the obligations to creditors are not meet or are meet with difficulty (Arnold, 2008).
Financial distress arises when a bank starts experiencing financial problems that may force it
to close, merge with another banks, declare bankruptcy, eliminate services, or take actions that
have adverse effects on the financial services delivery system of a region (Trussel&
Patrick,2009).

2.3.18. Credit collection

There is no guarantee that when a bank has a good credit policy, its credit activity cannot
encounter problem. There are probable some borrowers who will pass the due date and some
may be delinquent. Credit collection procedures have to be implemented on how to collect the
Loans. It will become a problem if the credit collection procedures were not well formulated,
or if the implementation is not well carried out, or if the credit policy was not followed. This is
because if the borrower repays late or defaults payment, the bank will obviously look for other
means to meet up with this financial loophole. This can result to increased debts, which can

21
lead to higher interest payments, reduced profits, reduced borrowing capacity, increased
equity, reduced shareholders value, reduced future capital investments, limiting the bank’s
long term business performance, or an increase in the length (thus amount) of trade credit
taken from suppliers (Maness & Zietlow,2005 p.206). So it is a very important duty of the
bank to accelerate its loan collection so as to avoid the above mentioned consequences.

Even though the bank has to collect it loans, while collecting or using efforts to collect them, it
has to make sure that it collects the amount owed as close to the credit terms as possible but
must always try to preserve customer’s goodwill when doing so (Maness &Zietlow, 2005)
This is because some customers may fail to pay back their loans as a result of the fact that they
may be experiencing temporary problems. If the bank’s personal efforts to collect these loans
fail, they can then introduce a collection agency.

2.4. Empirical Literature

Risk identification is vital for effective risk management. In order to manage credit bank risks
effectively, management of bank have to know what risks face the bank. The important thing
during risk identification is not to miss any risks out. There are a number of different
techniques that can be used in risk identification The first step in organizing the
implementation of the risk management function is to establish the crucial observation areas
inside and outside the corporation (Edward, 2006). Then, the departments and the employees
must be assigned with responsibilities to identify specific risks.

For instance, interest rate risks or foreign exchange risks are the main domain of the financial
department. In relation to commercial banks‟ practice of risk management, as study by
Machiraju, (2003), found that the UAE commercial banks were mainly facing credit risk. The
study also found that inspection by branch managers and financial statement analysis are the
main methods used in risk identification. The main techniques used in risk management are
establishing standards, credit score, credit worthiness analysis, risk rating and collateral. The
recent study by Richard (2012) was conducted on banks‟ risk management of Kenya national
and foreign banks. Their findings reveal that the three most important types of risks
encountered by Kenya’s commercial banks are foreign exchange risk, followed by credit risk,
then operating risk. Yang Wang, (2013) find out that the key principles in credit risk
management are establishment of a clear structure, allocation of responsibility and

22
accountability, processes have to be prioritized and d0isciplined, responsibilities should be
clearly communicated and accountability assigned on his research title Credit Risk
Management in Rural Commercial Banks in China. Afroz (2013), attempted to specify and
evaluate the necessity of credit portfolio management for Bangladesh Kirishi Bank in his
paper, as well as characterize the bank's current credit management strategy and offer
suggestions. The study used descriptive data analysis methodologies and primary and
secondary data sources. The research discovered that the bank’s function framework is unclear
grow business financing is risky for the bank, very few activities on L/C and other purchase
type financing have been conducted, and the bank's poverty alleviation credit program is
successful but only accounts for a small portion of the total portfolio.

Tesfaye (2012) study factors influencing the level of credit risk in the Ethiopian commercial
banks. The study finds out that quantity of risk and quality of risk management related
variables has got much influence on the credit risk level of banks.

Nevertheless, risk direction related measures, which are mostly external focus, have limited
influence on credit risk. More specifically the variation in the effect of stock and flow
measures entails banks to further enhance mostly two of Basel principles: operating under a
sound credit granting process and maintaining an appropriate credit, administration,
measurement and monitoring process. Biruk (2015), it will be a major topic of discussion
among financial institutions, because of apprehensions about the borrower's business. The goal
of this research is to assess. What are the Instruments and approaches used in banking to
manage credit risk the bank's present success is bolstered by proper lending risk, Policy,
practice, and strategy in management the research is descriptive in nature, to fulfill the study's
goal the Department of Research used a numerical study method, collecting both primary
(questionnaire) and secondary data. There were 106samples included in the study, all of which
were deemed reliable and accurate by the study's headquarters and district headquarters.
Descriptive statistics were used to analyze the data.

Tibebu (2011), his study aims at assessing the credit risk management and profitability of
commercial banks in Ethiopia with the primary objectives of examining the credit risk
management and profitability of commercial banks in Ethiopia. In this study both primary and

23
secondary sources of data were used and the researcher used open and close ended
questionnaires to collect data from the employees of the branch.

Literature review more concerning the system of credit risk management and profitability its
benefit and efficiency of the bank. It argues that credit risk management has significant impact
on profitability of banks of our country.

2.5. Research Gap

As motioned in the above, most of the research is conducted on the relationship between profit
and the challenges of credit risk management and the national banks of Ethiopia, but This
paper assesses the extent and levels of strategic attention and consideration given to credit risk
management from scratch in order to identify measurement, monitor, assess and control credit
risk. It also looks at the steps in the risk management process (identification, measurements,
assessments, monitoring, and evaluating) and the specific considerations of the human aspects
in the involvement of credit-related works and the tools and techniques employed to mitigate
credit risk. This gap and the above-mentioned problems motivated the researcher to assess the
credit risk management practices of the development banks of Ethiopia.

24
 CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. Description of the Study Area

This chapter presents the research design and methods used to conduct the thesis. It has five
sections that discuss the research approach, design, population and sample techniques, data
type and sources, methods of data collection, and data analysis methods. The reasons behind
their application are discussed in detail.

3.2. Research approach

A qualitative research approach was used to analyze the collected information. Qualitative
research is concerned with qualitative phenomena. This approach is preferable when the
researcher wants to investigate and analyze human behavior, opinions, expectations, and
attitudes about the study area through a deep study. According to Yalemzewd (2004),
qualitative research is important when the researchers have little knowledge about the area of
investigation and is not intended to test a predetermined theory or hypothesis. It is also
important for developing theories.

3.3. Research design

The descriptive research design was applied. According to Orodho (2003), descriptive survey
is a method of collecting information by interviewing and administering the questionnaire to a
sample of individuals. A descriptive survey method was used because the variables are
quantitative in nature. It will also answer practical questions by providing a relatively
immediate solution related to credit risk management. Besides, the study tries to describe the
variables by using primary data. The primary data was collected by distributing the
questionnaires to credit administration and appraisal departments, consumer loan risk
management departments, and loan recovery departments. Thus, this study is mainly based on
primary data that was obtained through questionnaires from the technical staff of the
Development bank of Ethiopia

25
3.4. Target Population, Sample

The population of the study is limited to employees of DBE head office in the credit
department who work directly with credit risk management in theorganization. It comprised
all staff and management personnel who used credit risk management in DBE's Addis Ababa
headquarters. The sample was obtained using the all-population Therefore, the sample size of
the population was 73 (seventy-three). The employees, all of whom weretaken as samples for
this study, Since credit risk management, byits nature, requires detailed knowledge and skill, it
is necessary for the researcher to deal with those who are convenient and are subjected to
credit risk management so as to get the necessary information for the study. The Census
sampling techniques allow for generalization to take place.

3.5. Method and Instrument of Data Collection

In this study, the researcher used primary sources of data supplemented with secondary
sources of data. The primary data was collected through a questionnaire and interview, while
secondary data collected from different books, journals, unpublished theses, websites, and
annual reports, policies, and procedures of the bank. The structured questionnaire was
constructed in four categories in order to describe the background information, strategic
attention, and consideration given to the credit risk management practice inDBE, .and to
review the credit risk management processand techniques in DBE, the questionnaire is open-
ended.

The open-ended question offers the respondents the opportunity to freely express themselves
on the issues under consideration, while the close-ended question restricts the respondents to
the options provided.

3.6. Data Analysis Method

The data collected in this research was analyzed using simple descriptive statistics. The main
reason behind the use of the descriptive method of analysis is to describe the characteristics of
the study related to credit risk management practices. Accordingly, percentages, tables,
diagrams, and charts were used to elaborate on the results in detail. Furthermore, the data
collected through interviews has been discussed in detail.

26
3.7. Reliability and Validity of the Data Gathering Instrument

The content validity of the structured questionnaire was checked and comments incorporated
by providing the instrument to professionals who are working in the corporation and the
research advisor. In the process, the questionnaire was modified by the advisor and by the
professionals. In addition, the content validity was checked by ensuring that the data collection
instruments were designed very carefully to include all the necessary questions related to
answering the problem statement.

The Cronbach‘s alpha coefficient test was conducted to measure internal consistency and
reliability. Before distributing the questionnaire to the selected respondents, a pilot-test
exercise was conducted. It was also tested using Cronbach‘s alpha and on 10 individuals who
were selected at random in order to check the internal reliability of the questionnaire.
Accordingly, the reliability of the instrument was measured using Cronbach`s alpha and
calculated using statistical software, SPSS version 23. In theory, reliability can range from 0 to
1.00, but the reliability of measures of human traits and behaviors never quite reaches 1.00.
Some very good achievement tests may reach.98, but probably not any higher, than that. In
this regard, the result of Cronbach`s alpha was highly reliable, which is 0.859, as shown in the
table below.

27
Table 3-1: Reliability Analysis

Variables Cronbach's Alpha N of Items

Credit risk management .729 4

Risk Identification .706 5

Risk Assessment and Analysis .715 4

Risk Monitoring .700 5

Risk Evaluation .849 4

Source: SPSS QuestionnaireResults, 2023

3.8. Ethical Consideration

Research ethics refers to the type of agreement that the researcher enters into with the
researchers’ participants. Ethical considerations play a role in all research studies and all
researchers must be aware of and attend to the ethical considerations related to their studies.
Therefore, the researcher communicate with different respondents are legally and smoothly.
The purpose of the study will mark clear and understandable for all participants. Any
communication with the concern bodies will be accomplished at their voluntarily agreement
without harming and threatening the personal and institutional well-being.

28
 CHAPTER FOUR

4. DATA PRESENTATION, ANALYSIS AND DISCUSSIONS

4.1. INTRODUCTION

This chapter presents the analyzed results and interpreted discussions of the data obtained
from the primary data. The primary data was obtained from the questioners and interviews,
which are designed to collect the necessary data to answer the research questions. The
questionnaire was distributed to 73 employees of the bank's credit department. However,
seven respondents did not return the questionnaire. Thus, 66 questionnaires were finally used,
which is about 84% of the total distributed questionnaires. The secondary data was obtained
from annual reports in order to show the credit policy and procedures and know the extent of
their implementation. Hence, all data collected from primary as data as secondary sources was
analyzed.

In this chapter, the statistical analysis has been made by the researcher to present information
about respondents and the results obtained. A survey has been carried out using the attached
questionnaire with the goal of assessing credit risk management practice at the Development
bank of Ethiopia. Questionnaires were distributed to employees who are directly related to
credit risk management experts, managers, and directors. Among them, sixty-six (66%) have
responded. These questionnaires are related to risk management practice in developing bank
of Ethiopia.

The first part covers the analysis of the respondent‘s general information. The second parts
discuss the results of questions designed to assess the attention and consideration given to
investigate this research question, the researcher designed four research questions. The
questions were based on a five-point Like scale. The respondents were asked to tick on a scale
stated from "strongly disagree" up to "strongly agree" the extent to which they agree with the
statements given, indicating the degree of their understanding and the extent to which they are
aware of the risks that are associated with their actions.

29
The third part covers the results of questions designed to assess the credit risk management
process and technique in DBE. The researcher designed closed-ended and open-ended
qualitative questions to obtain more details from the employees about the techniques used by
the Development Bank of Ethiopia, and five scales, like scale grinding, were used to assess the
credit risk management process.

4.2. Demographic characteristics of the Respondent

The first section of the questionnaire consisted of questions about the demographic
information of the respondents. It covered gender, age, educational level, work experience,
specialization, and current position in the bank. The following tables show the demographic
characteristics of the respondents: In general, this means that the bank has human resources
that can work energetically and competitively while also understanding the bank's mission and
goals. The financial industry is sensitive and risky by nature, necessitating the use of
experienced and professional human resources who can be responsible, trustworthy, and loyal
for prudent financial management.

Table 4-2: Gender of Respondent

Gender Frequency Percent Valid Percent

Valid male 45 68.2 68.2

Female 21 31.8 31.8

Total 66 100.0 100.0

Age Frequency Percent Valid Percent

25-30 years 16 24.2 24.2

31-35 years
Valid 26
39.4 39.4

36-40 years 20 30.3 30.3

Above 40 4 6.1 6.1

Total 66 100.0 100.0

30
 Educational level Frequency Percent Valid Percent

First-degree
25 37.9 37.9

Valid
Second Degree
MA MSC 41 62.1 62.1
MED)

Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

As it can be clearly seen from table 1, majority of the respondents that is (68.20%) are male
while (31.80%) are female workers. Generally, this reveals that the majority of worker in credit
department of the bank were male. It can be concluding that the participation of females was low
in working in credit department from the bank as compared to males which further indicates from
this analysis; one could conclude that males are a majority respondents or participants for this
study.

From the above, the analysis shows out about (24.2%) of respondents were categorized under the
group 25-30 years. (39.40%) of respondents were categorized under the age group of 31-35years
and (30.30%) were under the age group 36-40 the remaining of respondents are found with the
age group of above 40 years. Generally, it indicates that the respondents were grouped in a
productive age. The analysis shows out of the total respondents (62.90%) have second degree
holder and the remaining (37.10%) have first degree holder. It is clear that having a
professional staff helps the bank to provide credit products beneficial to both parties. Because
it is through education one can develop critical thinking in a complex situation to make sound
decision. It is possible to say that, the bank has well enough educated staffs.

Table 4-2: Over all banking service years in the DBE

31
Over all banking service years in the
DBE Frequency Percent Valid Percent

Valid 5 years 10 15.2 15.2

Over 5- 10 years 46 69.7 69.7

Over 10 years 10 15.2 15.2

Total 66 100.0 100.0

Work Experience in credit field Frequency Percent Valid Percent

Valid 1-5 years 23 34.8 34.8

Over 5-10 years 37 56.1 56.1

Over 10 years 6 9.1 9.1

Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

As presented in the above table, the majority of the respondents (69.7%) have been working
for the organization for over 5–10 years and (15.2%) of them have been working for the
organization for over 10 years. In general, almost more than half of the respondents have been
working for more than 5 years in DBE. It implies that most of the staff had acquired enough
experience in the banking industry to perform risk management activities.

As clearly shown above, out of the total respondents, 23 of them have credit experience of 1–5
years sharing (34.8%), and 37 of them have credit experience of 5–10 years sharing (56.1%).
And six of them have credit experience of over 10 years (9.1%). From this figure, it is possible
to say that the bank has experienced staff that can minimize credit risk due to the fact that
having enough experience is important in every aspect of doing things to the optimum level by
minimizing cost, time, and credit risk for this discussion case, resulting in healthy credit
products.

32
4.3. Respondents Result on Credit risk management practice in DBE

Table 4-3: Credit Risk Management Practice in DBE

Accountability and responsibility of risk

management is clearly set out and well Frequency Percent Valid Percent
understood

Valid Neutral 17 25.8 25.8

Agree 44 66.7 66.7

Strongly Agree 5 7.6 7.6

Total 66 100.0 100.0

There is no budget request without a plan

it is important to continuously review and Frequency Percent Valid Percent
update risk management techniques

Valid Disagree 25 37.9 37.9

Neutral 11 16.7 16.7

Agree 26 39.4 39.4

Strongly Agree 4 6.1 6.1

Total 66 100.0 100.0

DBE takes significant steps to keep up to

date with current risk managements trends Frequency Percent Valid Percent

Valid Disagree 15 22.7 22.7

Neutral 12 18.2 18.2

Agree 34 51.5 51.5

Strongly Agree 5 7.6 7.6

Total 66 100.0 100.0

Over all the credit risk management

33
practice of each and every performance in Frequency Percent Valid Percent
DBE is good

Valid Disagree 17 25.8 25.8

Neutral 11 16.7 16.7

Agree 33 50.0 50.0

Strongly Agree 5 7.6 7.6

Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

From the above analysis, the question related to the accountability and responsibility of risk
management is clearly set out and well understood. For this question, (66.7%) of the total
respondents selected the option "agree," and (7.6%) of them selected strongly agree. This
indicates that (74.3%) of the total respondents accepted the question under investigation. The
remaining selections were neutral and (25.8%) from the given alternative. From this analysis,
the researcher can say that the credit had well understood their responsibility for the credit risk
management practices of the bank or the respondents and for developing policies and
procedures for identifying, measuring, monitoring, and controlling credit risk in order to
address credit risk in the bank activities and at both the individual credit and portfolio levels.

Secondly, the researcher tried to investigate the statement that it is important to continuously
review and update risk management techniques. Surprisingly, (45.5%) of the respondents said
"agree and "strongly agree. This shows that in order to establish an appropriate credit risk
management environment, continuously reviewing and updating risk management techniques
is mandatory.

In connection to the third question, the researcher tried to investigate: "DBE takes significant
steps to keep up with current risk management trends. For this statement, (51.5%) of the
respondents selected the option "agree," and (7.6%) of the total respondents selected "strongly
agree. This shows that (59.1%) of the total respondents agreed with the questions under
investigation, and the remaining (18.8%) of the respondents were neutral. From this analysis,
the researcher can say the Development Bank of Ethiopia has achieved significant steps by
creating a credit risk management environment that is up-to-date.
34
The last statement is: "Overall, the credit risk management practice of each and every
performer in DBE is good. For this statement, (50%) of respondents agreed, and (7.6%) of
them agreed strongly. The remaining (25.8%) of the respondents said they disagreed.

4.4. Risk Identification

Table 4-4: Risk Identification

DBE identifies and prioritizes its main

credit risk Frequency Percent Valid Percent

Valid Disagree 2 3.0 3.0

Neutral 18 27.3 27.3

Agree 37 56.1 56.1

Strongly Agree 9 13.6 13.6

Total 66 100.0 100.0

DBE registers the identified risk for

further assessment Frequency Percent Valid Percent

Valid Disagree 6 9.1 9.1

Neutral 5 7.6 7.6

Agree 46 69.7 69.7

Strongly Agree 9 13.6 13.6

Total 66 100.0 100.0

DBE involves different professionals to

identify credit risk Frequency Percent Valid Percent

Valid Strongly Disagree 4 6.1 6.1

Disagree 16 24.2 24.2

Neutral 10 15.2 15.2

Agree 31 47.0 47.0

35
 Strongly Agree 5 7.6 7.6

Total 66 100.0 100.0

DEB gives due consideration to formal

brainstorming credit risk identification Frequency Percent Valid Percent

Valid Strongly Disagree 3 4.5 4.5

Disagree 16 24.2 24.2

Neutral 13 19.7 19.7

Agree 33 50.0 50.0

Strongly Agree
1 1.5

Total 66 100.0 100.0

DEB give due attention to the quality of

documents submitted by borrowers with Frequency Percent Valid Percent
respect to the business

Valid Disagree 3 4.5 4.5

Neutral 17 25.8 25.8

Agree 33 50.0 50.0

Strongly Agree 13 19.7 19.7

Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

From the above table, the researcher tried to assess the risk identification practice through five
questions under investigation. The first query is "DBE identifies and prioritizes its main credit
risk. For this statement, out of the total respondents, (56.1%) selected option "agree" and

36
(13.6%) selected "strongly agree," which is equivalent to the sum of (69.7%). The second
query is "DEB registers the identified risk for further assessment. For this statement, out of the
total respondents, (69.7%) selected option "agree" and (15.2%) selected "strongly agree,"
which is equivalent to the sum of (83.3%). The third query is "DEB involves different
professionals to identify credit risk for this statement." Out of the total respondents (47%) who
selected the option "agree"(7.6%) selected "strongly agreed," which is equivalent to the sum of
(54.6%). and (24.2%) of the respondents were selected as "disagree" and (6.1%) "Strongly
agree”.

The Fourth query is "DEB gives due consideration to formal brainstorming credit risk
identification for this statement." Out of the total respondents, (50%) of selected option
"agree" and (1.5%) selected "strongly agree," which is equivalent to the sum of (51.5%). On
the other hand, (19.7%) of the respondents selected option "neutral" and (24.2%) selected
"disagree," showing the lowest percentage as compared to respondents who accepted. The last
request is that DBE give due attention to the quality of documents submitted by borrowers
with respect to the business. For this statement out of the total respondents, (50%) selected
option "agree" and (19.7%) selected "strongly agree," which is equivalent to the sum of
(69.7%) and (25.8%) of the total respondents selecting option neutral. Based on the figures
analyzed above, the researcher understands that the Development Bank of Ethiopia identifies
possible risks in order to grant credit products with defined parameters and scope. In doing so,
the bank engages professionals and brainstorms.

In addition, the identified risks were registered for further analysis, which also helps the
performers anticipate events and handle their occurrences and bad consequences. This step
will help the Development Bank of Ethiopia achieve the objectives of the loan and improve
the financial performance of the bank at large.

4.5. Risk Assessment and Analysis

Table 4-5: Risk Assessment and Analysis

DBE uses numerical methods to assess

37
credit risks Frequency Percent Valid Percent

Valid Disagree 7 10.6 10.6

Neutral 8 12.1 12.1

Agree 44 66.7 66.7

Strongly Agree 7 10.6 10.6

Total 66 100.0 100.0

DBE effectively assesses the like hood of

different risks occurring Frequency Percent Valid Percent

Valid Disagree 13 19.7 19.7

Neutral 9 13.6 13.6

Agree 40 60.6 60.6

Strongly Agree 4 6.1 6.1

Total 66 100.0 100.0

DBE develops action plans for

implementing decisions and management Frequency Percent Valid Percent
plans for identified risks

Valid Disagree 25 37.9 37.9

Neutral 10 15.2 15.2

Agree 30 45.5 45.5

Strongly Agree 1 1.5 1.5

Total 66 100.0 100.0

DBE risk management processes are well

documented and provide guidance to staff Frequency Percent Valid Percent
about the management of risk

Valid Disagree 6 9.1 9.1

38
 Neutral 11 16.7 16.7

Agree 40 60.6 60.6

Strongly Agree 9 13.6 13.6

Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

Risk assessment and analysis comes in after the identification of possible credit risks to give
an understanding of the nature and level/extent of the risk so that it can be managed in an
appropriate manner. This is because without risk measurement the intensity of effect or
consequences which can result from the identified risk if neglected cannot really be analyzed.
To assess risk measurement practice of Development Bank of Ethiopia the researcher places
four questions and summarized as follow.

The first question is: "DEB uses numerical methods to assess credit risks. For this statement,
(66.7%) of the total respondents agree, and (10.6%) strongly agree, which is equivalent to
(77.3%) for the given statement. These figures show that the Development Bank of Ethiopia
uses different quantitative methods of measurement, such as sensitivity analysis, stress testing,
scenario analysis, and others, to come up with effective decisions.

The second statement is "DBE effectively assesses the likelihood of different risks occurring.
For this statement, (60.6%) of the respondents agreed, and (6.1%) strongly agreed. The sum of
the respondents who agreed was (66.7%) while the remaining (13.6%) were neutral and
(19.7%) were disagreed. Generally speaking, the Development Bank of Ethiopia has been
assessing the possible occurrence of credit risks by using qualitative and quantitative methods.

The third statement is "DEB develops action plans for implementing decisions and
management plans for identified risks. For this statement, (45.5%) of the respondents agreed,
and (1.5%) strongly agreed. The sum of the respondents who agreed was (47%), while the
remaining (15.2%) were neutral and (37.9%) disagreed. From these figures, after an
assessment of the possible occurrences of credit risks by using qualitative and quantitative
methods, the DBE develops action plans in order to implement and manage credit risk if it
happens. This is an important quality of the bank to have competitive advantages or achieve
strategies of being the leader.

39
In connection to the above three questions, the last statement is: "DEB risk management
processes are well documented and provide guidance to staff about the management of risk.
For this statement, (60.6%) of respondents agreed, and (13.6%) of them agreed strongly. The
remaining (16.7%) of the respondents were neutral, and (9.1%) of the respondents disagreed.

As a conclusion, good risk measurement determines the risk management techniques that have
to be put in place to manage the possible risks. This will go along to bring out the extent and
cost associated with the risk should it occur, and if the company in question then uses the
known results to see how much value is at stake or cost is associated, then appropriate
decisions will be made and documented as a reference document throughout its
implementation or decision-making process for credit performers.

4.6. Risk Monitoring

Table 4-6: Risk Monitoring

DBE response to risk includes action

plans in implementing decisions about Frequency Percent Valid Percent
identified risk

Valid Strongly Disagree 2 3.0 3.0

Disagree 19 28.8 28.8

Neutral 8 12.1 12.1

Agree 37 56.1 56.1

Total 66 100.0 100.0

Monitoring the effectiveness of risk

management is an integral part of routine Frequency Percent Valid Percent
management reporting

Valid Strongly Disagree 1 1.5 1.5

Disagree 3 4.5 4.5

Neutral 15 22.7 22.7

40
 Agree 44 66.7 66.7

Strongly Agree 3 4.5 4.5

Total 66 100.0 100.0

DBE do strict follow up about repayment

of the loan Frequency Percent Valid Percent

Valid Disagree 4 6.1 6.1

Neutral 5 7.6 7.6

Agree 49 74.2 74.2

Strongly Agree 8 12.1 12.1

Total 66 100.0 100.0

DBE monitors the allocation of the loan to

the intended purpose and its progress Frequency Percent Valid Percent

Valid Disagree 3 4.5 4.5

Neutral 8 12.1 12.1

Agree 45 68.2 68.2

Strongly Agree 10 15.2 15.2

Total 66 100.0 100.0

Monitoring results communicated to

credit performers for further actions Frequency Percent Valid Percent

Valid Disagree 4 6.1 6.1

Neutral 12 18.2 18.2

Agree 48 72.7 72.7

Strongly Agree 2 3.0 3.0

41
 Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

In any situation involving any project, monitoring the status of the project has very important
functions. Monitoring helps performers conform to the implementation of the approved plans;
in this research case, policies and procedures are NBE directives. To assess the monitoring
practice of DBE, the researcher developed five questions, and the results are presented below.

The first statement was "DEB response to risk includes action plans in implementing decisions
about identified risks." For this tribute, (56.1%) of the respondents agreed (3%) strongly
agreed, accounting for the sum of (59.1%) the remaining (12.1%) said neutral, and (28.8%)
disagreed.

The second statement says, "Monitoring the effectiveness of risk management is an integral
part of routine management reporting. The majority of the respondents (68.2%) agreed, and
the remaining respondents (22.7%) said neutrally that monitoring is an integral part of the
credit risk management process. A few of them (4.5%) disagreed.

The third statement says "DBE does strict follow-up about repayment of the loan. (74.2%)
agreed, and (12.1%) strongly agreed. Here, (86.3%) of the respondents confirmed that strict
follow-up existed in DBE. The fourth statement was, "DBE monitors the allocation of the loan
to the intended purpose and its progress. For this query, also (68.2%) said they agreed, and
(15.2%), said they strongly agreed, which is equivalent to (83.4%), DBE monitors the
allocation of loans for targeted objectives through different steps or durations.

To assess the communication of monitored results, the researcher requested the respondents
by the statement "Monitoring results communicated to credit performers for further actions.
For this last question request, (72.7%) of the respondents agreed, and (3%) strongly agreed.
These figures show that (75.7%) of respondents agreed with the existence of monitoring
results for credit performers, while the remaining (18.2%) were neutral and few of them
(6.1%) disagreed. Communication of results is absolutely important to come up with proactive
decisions, especially in preventing credit risks before they have bad consequences. Therefore,

42
DBE should give due consideration to communication throughout the process of granting
credit products up to settlement.

The last general statement says, "From all of this analysis, monitoring activities as an integral
part of the credit process in monitoring the existence of a response plan and implementation in
case of credit risk probabilities, follow-up of the loan status, and communicating results in
time for an appropriate decision should help DBE not only minimize credit risk but also
sustain itself in the banking industry and achieve its vision in general.

4.7. Risk Evaluation

Table 4-7: Risk Evaluation

DBE emphasize on continuous review and

evaluation of the techniques used in risk Frequency Percent Valid Percent
management

Valid Disagree 7 10.6 10.6

Neutral 9 13.6 13.6

Agree 42 63.6 63.6

Strongly Agree 8 12.1 12.1

Total 66 100.0 100.0

DBE is able to accurately evaluate the

costs and benefits of taking risks Frequency Percent Valid Percent

Valid Disagree 19 28.8 28.8

Neutral 5 7.6 7.6

Agree 33 50.0 50.0

Strongly Agree 9 13.6 13.6

Total 66 100.0 100.0

DBE do strict follow up about repayment

of the loan

43
 Frequency Percent Valid Percent

Valid Disagree 4 6.1 6.1

Neutral 4 6.1 6.1

Agree 50 75.8 75.8

Strongly Agree 8 12.1 12.1

Total 66 100.0 100.0

DBE is able to accurately evaluate and

prioritize different risk treatments Frequency Percent Valid Percent

Valid Disagree 9 13.6 13.6

Neutral 12 18.2 18.2

Agree 36 54.5 54.5

Strongly Agree 9 13.6 13.6

Total 66 100.0 100.0

DBE response to risk includes an

evaluation of the effectiveness of the Frequency Percent Valid Percent
existing controls and risk management
responses

Valid Disagree 6 9.1 9.1

Neutral 10 15.2 15.2

Agree 39 59.1 59.1

Strongly Agree 11 16.7 16.7

Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

Evaluation of the work done or on processes is also important in the credit risk management
process to have lessons to improve or change the strategy of credit risk management practice

44
for effectiveness. Like the other processes, the researcher puts forth four statements to exploit
the respondent‘s idea, which have been analyzed as follows:

The first statement was: "DBE emphasizes continuous review and evaluation of the techniques
used in risk management. For this statement, (63.6%) of respondents agreed, and (12.1%) of
them agreed strongly. The remaining (13.6%) of the respondents were neutral, and (10.6%) of
the respondents disagreed.

The second statement is that DEB is able to accurately evaluate the costs and benefits of
taking risks. For this statement, (50%) of respondents agreed, and (13.6%) of them agreed
strongly. The remaining (7.6%) of the respondents were neutral, and (28.8%) of the
respondents disagreed.

The third statement is "DEB is able to accurately evaluate and prioritize different risk
treatments. For this statement, (54.5%) of respondents agreed, and (13.6%) of them agreed
strongly. The remaining (18.2%) of the respondents were neutral and (13.6%) of the
respondent’s disagreed.

The last statement is "DEB response to risk includes an evaluation of the effectiveness of the
existing controls and a risk management response. For this statement, (59.1%) of respondents
agreed, and (16.7%) of them agreed strongly. The remaining (15.2%) of the respondents were
neutral, and (9.1%) of the respondents disagreed. From these figures obtained in the above
four statements, the researcher observed that although those respondents who selected agree
and strongly agree are the majority in summation, those respondents who selected undecided
and disagree are also significant as compared to the other processes from identification up to
monitoring. Here, the researcher recommends that DBE inculcate and improve evaluation as a
basic process in its credit risk management process; the effectiveness of the risk management
strategy should be evaluated frequently, verify whether the resulting risk taking remains in line
with the strategy, and apply corrections where necessary. This also involves the evaluation of
the relevant risk drivers, the measurement process, back-testing procedures, the result of the
risk treatment plans, and the actual implementation as reviewed in the literature part.

According to the interview, the bank must apply a variety of approaches in order to manage
their loan and reduce risk.

45
In terms of DBE can protect credit risks, which are determined by a borrower’s capacity to
repay the amount borrowed. Before issuing a consumer loan, a bank or alternative lender will
examinethe individual’s credit risk based on the five C's: credit history, ability to repay,
capital, and lastly, the entire loan’s conditions and collateral. It depends on whether you are
considering the credit risk of a bond, a personal loan, or a business loan. For the personal loan,
DBE will gather information and chalk out his credit worthiness; therefore, they use the
traditional ‘5 C's" of credit: capital, character, Condition, capacity, and collateral. When we
say "character," we are assessing it by using the credit history of the individual. Capacity
assessment by income and expense Collateral is assessed by assessors and may be pledged
against the loan. For home mortgages or auto loans, the collateral is for the house or vehicle.
For unsecured personal loans like credit cards, there is no collateral.

46
4.8. Credit Risk Assessment Monitoring Interval Used by DBE

Table 4-8: Credit Risk Assessment Monitoring Interval

At what interval the credit risk

assessment and monitoring is done in
the bank Frequency Percent Valid Percent

Valid Monthly 6 9.1 9.1

Quarterly 20 30.3 30.3

Annually 40 60.6 60.6

Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

In addition to the discussion above, the researcher has been interested in knowing: "At what
interval is the credit risk assessment and monitoring done in the bank?" For this question,
(60.6%) of respondents indicated the interval of risk assessment and monitoring is done
annually, (30.3%) quarterly, and (9.1%) monthly. This shows DBE should conduct frequent
credit risk assessments and monitoring as needed so as to manage credit risk proactively. For a
clear observation of the respondent’s view in the pie chart, it looks like the figure below.

Figure 4-9: interval of credit risk assessment and monitoring

47
 9%

30%
60%

4.9. Techniques Used by DBE

Table 4-9: Credit risk management practice and technique.

Which techniques/instrument dose DBE use for Frequency Percent Valid Percent
Credit risk management in the bank

Valid Risk Ratings /grading 46 69.7 69.7

Rating with Models 1 1.5 1.5

Combination of the above 19 28.8 28.8

Total 66 100.0 100.0

Source: SPSS QuestionnaireResults, 2023

From table above the researcher understands Development Bank of Ethiopia uses the
following techniques per respondent’s data analysis, first rank is Risk rating or grading,
second combination of the listed techniques, third Rating with models. The result shows even
48
if Risk rating or grading is mostly used, DBE uses different techniques in combination. The
implication of this finding is that in order to optimize the credit quality, the use of different
technique is the basis from which credit risk measurement analytics are used to consistently
evaluate transactions across all asset classes by having accurate credit information.

49
 CHAPTER FIVE

5. SUMMARY, CONCLUSION AND RECOMMENDATION

The objective of the study was to assess credit risk management practices in the Development
Bank of Ethiopia. These were risk identification, risk assessment, risk analysis, risk
monitoring, and risk evaluation. And then, to locate the main problem areas that seek
improvement in doing this, several relevant pieces of literature were reviewed and primary
data were collected. From a sample of sixty-six (66) DBE staff who are directly working in
credit risk management through questioning and interviews for managers. Therefore, this
chapter presents a summary of findings, conclusions, and recommendations based on the data
analysis results forwarded by the researcher in order to improve the assessment of credit risk
management practices in the development bank of Ethiopia.

5.1. SUMMARY OF MAJ OUR FINDINGS

This study was aimed at investigating the assessment of credit risk management in the
Development Bank of Ethiopia. As discussed in the chapter one introduction, this research
aimed to assess credit risk management practices in DBE. During the investigation, the
researcher used descriptive statistics, and based on the findings, the following major
conclusions were drawn from the study. The descriptive results of the background information
of respondents indicate that the majority of the total respondents have a second degree or
higher with more than five years of work experience. Therefore, the level of education and
service year of respondents are appropriate, and they are experienced in credit risk
management.

Credit risk management practice in DEB

The followings are the findings in credit risk management

 In order to establish an appropriate credit risk management environment, continuously

reviewing and updating risk management techniques is mandatory.

50
  Development bank of Ethiopia achieves in significant steps by creating credit risk
management environment up to date.

 The credit risk management practice over all of each and every performance in
Development Bank of Ethiopian is very good

 Development Bank of Ethiopia uses different quantitative and qualitative method of

measurements to assess the possible occurrences credit risks. After assessment of the
possible occurrences credit risks by using qualitative and quantitative methods.

 Development Bank of Ethiopia develops action plans in order to implement and manage
credit risk if it happens. Finally, risk management processes are well documented and
provide guidance to staff about the management of risk.

Risk identification

The following are the finding around risk identification

 Development Bank of Ethiopia identifies possible risks in order to grant credit

products with defined parameters and scope. In doing so the bank participates
professionals and brainstorming on possible risks. In addition, the identified risk was
registered for further analysis and also helps the performers to anticipate events and
handle before its occurrences and bad consequences. This step will help Development
Bank of Ethiopia to achieve the objective of the loan and financial performance of the
bank at large

Risk Assessment and Analysis

The following are the finding around risk assessment and analysis

 Development Bank of Ethiopia uses different quantitative methods of measurement,

such as sensitivity analysis, stress testing, scenario analysis, and others, to come up
with effective decisions.

51
  The Development Bank of Ethiopia has been assessing the possible occurrence of
credit risks by using qualitative and quantitative methods.

 The assessment of the possible occurrences of credit risks by using qualitative and
quantitative methods, the Development Bank of Ethiopia develops action plans in
order to implement and manage credit risk if it happens. This is an important quality
of the bank to have competitive advantages or achieve strategies of being the leader.

Risk monitoring

The following are the finding around risk monitoring

 DBE makes monitoring activities as integral part of credit process in monitoring the
existence of response plan and implementation in case of credit risk probabilities, follow
up of the loan status and communicating results in time for appropriate decision should
help DBE not only minimize credit risk but also to sustain in the banking industry and
achieve its vision in general

Risk Evaluation

The following are the finding around risk evaluation

 DBE inculcate and improve evaluation as a basic process in its credit risk management
process; the effectiveness of the risk management strategy should be evaluated
frequently, verify whether the resulting risk taking remains in line with the strategy, and
apply corrections where necessary. This also involves the evaluation of the relevant risk
drivers, the measurement process, back-testing procedures, the result of the risk
treatment plans, and the actual implementation as reviewed in the literature part.
 Development Bank of Ethiopia only used Risk rating or grading techniques for credit
risk management
 The interval of assessment about credit risk was not made frequently.
 The finding shows Development Bank of Ethiopia didn’t give consideration for
evaluation like the other credit risk management processes.
 The bank uses different credit risk management tools, techniques and assessment model

52
 to manage its credit risk, and that this has one main objective, i.e. to reduce the amount
of loan default which is the principal cause of bank failures.
 The bank hascreditmanagementpolicies,strategiesandguidelinesthat guidethecredit risk
management process.

5.2. CONCLUSION

According to the uncertainty of conditions, the financial industry is facing a large number of
risks. For this reason, financial industries like banks emphasize risk management. Moreover,
effective risk management is so important that it can increase project success.

 Development Bank of Ethiopia is responsible for credit risk management practices and
developing policies and procedures to identify, measure, monitor, and control credit
risk. To establish an appropriate credit risk management environment, continuously
reviewing and updating risk management techniques is necessary. The bank uses
quantitative and qualitative methods to assess credit risks and develops action plans to
implement and manage credit risk. Risk management processes are well documented
and provide guidance to staff about the management of risk.
 Development Bank of Ethiopia identifies potential risks to grant credit products with
defined parameters and scope. Risks are registered for further analysis and help
performers anticipate events and handle them before their occurrences. This helps the
bank achieve its loan and financial performance objectives.

 The Development Bank of Ethiopia uses quantitative methods such as sensitivity

analysis, stress testing, and scenario analysis to assess credit risks and develop action
plans to implement and manage them. This is an important quality to have competitive
advantages or achieve strategies of being the leader.

 DBE makes monitoring activities an integral part of the credit process to minimize
credit risk, follow up loan status, and communicate results in time. This helps DBE
sustain in the banking industry and achieve its vision.

53
  The Development Bank of Ethiopia understood their accountability and responsibility
for risk management and continuously reviewed and updated the risk management
techniques, implementing credit risk management practices.
 Development Bank of Ethiopia (DBE) has implemented a credit risk management
process that includes evaluation as a basic process. This includes the evaluation of the
relevant risk drivers, the measurement process, back-testing procedures, the result of
the risk treatment plans, and the actual implementation. However, DBE only used risk
rating or grading techniques for credit risk management, and the interval of assessment
was not made frequently. The bank uses different credit risk management tools,
techniques, and assessment models to manage its credit risk, with one main objective
being to reduce loan default.

5.3. RECOMMENDATION

Basedonthefindingstheresearcherwouldrecommendthatthebankscouldestablishacreditriskma
nagementteamthatshouldberesponsibleforthefollowingactionsthatwillhelpin minimizing
creditrisk.

 So as to manage credit risk proactively Development Bank of Ethiopia should make

frequent credit risk assessment and monitoring as needed.

 DBE shouldconsiderthe interval of credit risk assessment made frequently

 The Development Bank of Ethiopia should improve evaluation as a key process in its
credit risk management process, verifying the effectiveness of the risk management
strategy and applying corrections where necessary.

 DBE should consider communication throughout the process of granting credit products
to prevent credit risks before they have a negative effect. This is important to prevent
bad consequences from credit risks.

 DBE should consider communication throughout the process of granting credit products
to prevent credit risks before they have a negative effect. This is important to prevent
bad consequences from credit risks.

54
 The bank should regularly monitor the use of the loan in accordance with the terms of
the loan agreement with the Regulator. They should also keep up with the NBE
regulation in credit risk management practice and try to find solutions to existing
challenges.

 The Development Bank of Ethiopia should use different techniques to reduce risk, such
as expert judgment, risk pricing rating with model, and credit risk measurement
analytics. This will enable them to consistently evaluate transactions across all asset
classes by having accurate credit information.

 Banks face natural and environmental obstacles, which can have an impact on single
repayment. To manage this risk, the bank should employ portfolio risk management,
where the bank allocates funds based on the risk and releases funds to the other project if
one fails.
 The development of results for the concerned credit performers is important to come up
with proactive decisions, especially in preventing credit risks before they have bad
consequences. Therefore, DBE should give due consideration to communication
throughout the process of granting credit products up to settlement.

 The Development Bank of Ethiopia should inculcate and improve evaluation as a basic
process in its credit risk management process; the effectiveness of the risk management
strategy should be evaluated frequently; verify whether the resulting risk taking remains
in line with the strategy; and apply corrections where necessary.

55
5.4. Suggestions for Further Research

This study has been conduct under the title of credit risk management
practicesinDevelopment Bank of Ethiopia. Since Credit risk is by far the most significant risk
faced by banks, and the success of their business highly depends on accurate measurement
and efficient management of this risk to a greater extent than any other risk.A bank exists not
only to accept deposits but also to grant credit facilities, so it is inevitably exposed to credit
risk. Because of this and other reasons, credit risk is highly sensitive and variousresearches
need to be conduct on subject matter on timely bases.

At the time of conducting this research, there was a limitation in gathering information due to
a confidentiality issueof bank. This may not represent the situation of credit risk management
practices.The researcher alsofinds out when conducting the study, most of chosen
methodology was descriptive study design. So, findings are restricted by limitations of the
chosen methodology. Future research of explanatory and conformity nature is needed to
develop further findings. Finally, the study was limited to these variables and it is
recommended for future research to include many other factors about credit risk management

56
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58
Appendices

Dear Respondent

This questionnaire is designed to gather valuable information regarding the Credit Risk
management practice in Development Bank of Ethiopia for partial fulfillment of the
requirements for Masters Degree in Accounting and Finance. The data collected is used only
for academic purpose. Thus, your ideas and comments are highly honored and kept
confidential. Writing your name is not required and please put your choice as per the
instruction. You are also kindly requested to write your opinion on the space provided for the
questions that demands your additional view.

Instractions

 Writing your name is not required

 Please put your choice as per the instruction.
 You are also kindly requested to write your opinion on the space provided for the
questions that demands your additional view.

Part I: Demographic information of respondents

1. Gender:

1. Male  2. Female 

2. Age

1. 25-30 years 2. 31-35 years

59
3.36-40 years 4. Above 40

3. Educational level:

1 □ Diploma

2□ First Degree (B.A Part one. General back ground information, BSc)

3□ Second Degree (MA, MSC, MED) 4 other, please specify--------------------------

4 Over all banking service years in the DBE

1 □ Under 1 year 2 □ 5 years

3 □Over 5 – 10 years 4 □Over 10 years

5. Your experience in credit field is:

1.□under 1 year 2.□1 – 5 years

3.□ Over 5 – 10 years 4. □Over 10 years

Part II: Questions related to credit risk management practice in DBE.

Instruction: Please rank the extent to which you agree with the following statements.

1 = Strongly Disagree, 2 = Disagree 3 = Neutral, 4 = Agree and 5= Strongly Agree

Question
Disagree,

No.
Disagree

Strongly
Strongly

Neutral

Agree
Agree

Accountability and responsibility of risk

1
management is clearly set out and well
understood

There is no budget request without a plan It is

2
important to continuously review and update
risk management techniques

60
 Question

Disagree,
No.

Disagree

Strongly
Strongly

Neutral

Agree
Agree
DBE takes significant steps to keep up to date
3
with current risk managements trends

Overall, the credit risk management practice

4
of each and every performer in DBE is good

Part III: statements designed to assess the credit risk management process and
techniques of DBE.

6 Which techniques/instrument, does DBE use for Credit risk Management in the bank?

1. □Expert judgment 2. □Risk Ratings/grading

3.□Risk Pricing 4. □Rating with Models

5.□Combination of the above 6. Any other, please specify ……………………………

7 At what interval the Credit Risk assessment and monitoring is done in the bank?

1.□Monthly2. □Quarterly

3.□ Bi – annually 4.□ Annually5.□More than yearly

Question
Disagree
Strongly

Strongly

No
Neutral

Agree

Risk Identification

DBE identifies and prioritizes its main credit

5
risk

61
 Question

Disagree
Strongly

Strongly
No

Neutral

Agree
.

DBE registers the identified risk for further

6
assessment

DBE involves different professionals to identify

7
credit risk

DBE gives due consideration to formal

8
brainstorming credit risk identification

9 DBE gives due attention to the quality of

documents submitted by borrowers with respect
to the business.

Risk Assessment and Analysis

DBE uses numerical methods to assess credit

10
risks

DBE effectively assesses the likelihood of

11
different risks occurring

DBE develops action plans for implementing

12
decisions and management plans for identified
risks

DBE risk management processes are well

13
documented and provide guidance to staff about
the management of risk

Risk Monitoring

DBE response to risk includes action plans in

14

62
 Question

Disagree
Strongly

Strongly
No

Neutral

Agree
.

implementing decisions about identified risk

Monitoring the effectiveness of risk

15
management is an integral part of routine
management reporting

DBE do strict follow up about repayment of the

16
loan

DBE monitors the allocation of the loan to the

17
intended purpose and its progress

Monitoring results communicated to credit

18
performers for further actions

Risk Evaluation

DBE emphasize on continuous review and

19
evaluation of the techniques used in risk
management

DBE is able to accurately evaluate the costs and

20
benefits of taking risks

DBE is able to accurately evaluate and

21
prioritize different risk treatments

DBEresponse to risk includes an evaluation of

22
the

effectiveness of the existing controls and risk

management

responses

63
8 Any comment on credit risk identification, measurement, monitoring and controlling
techniquesof,ifany,please?
……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
………………………………………

Interview questions to managers

1. How do explain Development Bank of Ethiopia?

2. Do you believe DBE use different risk management techniques to manage credit risk?

3. Do you believe that DBE follow the path of credit risk management (Identification,
measure, develop action plan for treatment, implement, monitor & control throughout the
process) and document for lesson drawn to correct problems?

4. Do you believe DBE has efficient communication system as the case happens on time for
proactive decision in managing credit risk?

64
65