KOTEBE METROPOLITAN UNIVERSITY

FUCULTY OF BUSSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESSMENT OF LOAN RECOVERY PERFORMANCE OF

COMMERCIAL BANK OF ETHIOPIA (CASE STUDY IN KOTEBE
BRANCH)
A SENIOR RESEARCH PAPER SUBMITTED TO THE DEPARTMENT
OF ACCOUNTING AND FINANCE FOR PARTIAL FUILFILLEMNT OF
THE REQUIREMENT FOR BACHELOR OF ART (BA) DEGREE IN
ACCOUNTING AND FINANCE

BY:-ABEBAW AYALEW

ADVISOR:-Dr.ABEBE B.

JANUARY, 2021
ADDIS ABABA, ETHIOPIA
 ABSTRACT

The purpose of this study was to assess the loan recovery performance of commercial bank of
Ethiopia, kotebe branch. The study used Semi-structured questionnaires and interviews to,
collect primary data. The collected data were analysed using table and percentage. The
findings indicate that the manufacturing sector has a better performance in loan repayment
performance even if its rate is under average. The paper has been included introduction,
statement of problem, objective of the study, significance of the study, scope and limitation of
the study, literature review and research design and recommendation.

The research finally recommends that adequate screening of project proposals, upgrading
knowledge of the staff, adequate screening background of the applicants, updating loan
processing formats and setting a condition to enforce the clients should be safe for effective
loan recovery.

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 ACKNOWLEDGEMENTS

First and for most, I would like to thank my advisor Instructor Doctor Abebe B. for his
continuous assistance advice and help throughout the study. Especially he has shared all the
time pressures and burdens with me in correcting and forwarding his professional comments
with in a very short period of time. Last, but not least, I would like to express my heartfelt
gratitude to the extent possible to my parents for their continuous financial and moral support
throughout my university staying and throughout my faculty studies.

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Table of Contents
ABSTRACT.............................................................................................................................................i
ACKNOWLEDGEMENTS.....................................................................................................................ii
CHAPTER ONE....................................................................................................................................1
INTRODUCTION...............................................................................................................................1
1.1 Background of the study..........................................................................................................1
1.2 Background of the organization...............................................................................................4
1.3 Statement of the problem.........................................................................................................5
1.4. Research Questions of the Study.............................................................................................7
1.5. Objective of the study...................................................................................................................7
1.5.2 .Specific objectives...............................................................................................................7
1.6 Significance of the study..........................................................................................................7
1.7.Scope of the study....................................................................................................................7
1.8. Limitation of the study.................................................................................................................8
1.9. Organization of the paper........................................................................................................8
CHAPTER TWO....................................................................................................................................9
LITERATURE REVIEW.........................................................................................................................9
2.1 Definitions of Loan...................................................................................................................9
2.2. Guiding Principles of Loan Repayment................................................................................. 9
2.3. Criteria for Successful Loan Repayment..............................................................................10
2.4. Repayment Capacity of Borrowers.......................................................................................13
2.5 .Means of Strengthening Repayment Capacity......................................................................13
2.6. Reasons for loan Delinquency..............................................................................................13
2.7. Repayment Plan....................................................................................................................14
2.8. The nature and role of credit market.....................................................................................14
2.9. Economic benefits................................................................................................................15
2.10. Credit management policies................................................................................................17
2.11. Theoretical arguments on loan default problem…………………………………………….…………………18
CHAPTER THREE..........................................................................................................................21
RESEARCH METHODOLOGY......................................................................................................21
3.1 Research design.....................................................................................................................21
3.2. Research Approach................................................................................................................21
3.3. Data type and sources...........................................................................................................21
3.4. Population of the Study.........................................................................................................21

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 3.5. Sampling procedure..............................................................................................................22
3.6. Methods of data processing and analysis..............................................................................22
3.7.Ethical consideration..............................................................................................................22
CHAPTER FOUR................................................................................................................................23
DATA ANALYSIS, INTERPRETATION AND DISCUSSION.....................................................23
4.1. Introduction.....................................................................................................................23
4.2. Demographic Information.........................................................................................................23
4.3. The efficient commercial bank of Ethiopia Kotebe branch in collecting its loan...................28
4.4. The sector the bank is more flexible to give loans.................................................................28
4.5. Kinds of collaterals the bank mostly use for loan................................................................29
4.6. The strategies the bank use to assess the back ground of the borrowers before they give the loan.
.............................................................................................................................................................29
4.7 The upper limit amount of loans the bank give for their customers...............................................29
4.8. Past experience of respondents on male and female customers that take big mount of loan and
active in returning loans......................................................................................................................29
4.9. The factors that contribute for non-repayment of loans in commercial bank of Ethiopia Kotebe
branch..................................................................................................................................................30
CHAPTER FIVE..................................................................................................................................31
CONCLUSION AND RECOMANDATION..........................................................................................31
5.1. CONCLUSION.............................................................................................................................31
5.2. RECOMMENDATION..................................................................................................................33
References.........................................................................................................................................34
APPENDIX............................................................................................................................................35

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 CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Financial exclusion is considered as one of the major constraints in poverty reduction.
In recent years, most of nations, especially: developing and underdeveloped country
have been working to achieve the goal of poverty reduction through a number of
contextual policies. . Among the policies and strategies adopted by the government,
civil service reform program, (CSRP) is advised to investigate and examine the status
and competence of public institutions. The program ascertains programs universally,
civil service reform in general and financial sector reform program. In particular it’s
believed to process a good opportunity for smooth credit operations of commercial
bank of Ethiopia, Kotebe branch (Abu-Bakr, 2010).credit among others has been
taken as an important tool by most of developing and under developed countries
including Ethiopia to tackle poverty. Loan is an indispensable lubricant and a tool of
convenience for the economic progress of a country. (M. Zeller, R.L. Merye, 2002)

Credit has been recognized as one of the important financial services that contribute
to the success of a business venture. This success enters to contribute the major
economic development of the country .However, the existence of credit facility alone
does not necessarily result in supporting economic development unless otherwise. It is
accompanied by efficient and effective utilization as well as timely repayment of
credit funds. According to Oyatoya, 1983, a loan has to be repaid on time if the
objective of making loan able funds available to those who want them for productive
proposes on continues base is to be met.

Repayment performance is a critical feature of credit. When repayment was not made
at the proper time schedules, it effect the effort of lending performance .In any
lending institution, the consequence of this failure contributes to the increasing of
provision for bad and doubtful debt expense that reduces profits for the period in
which it was made .If the period result is a loss, the capital of the lender will reduce
by the amount of loss. Reduction of capital may affect the institution’s new fund
mobilization activities for fresh lending due to doubt on the capability of the
institution to stay in the market.
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Ability to recycle funds constitutes the corner stone of banking sector, if loans are not
repaid over the schedule time, chronic over dues become irrecoverable in course of
time .The net worth of lending institution will be eroded and will have serious impact
on the volume of lending. The high incidence of over dues affects the overall liquidity
and solvency of credit institution and impairs their capacity to undertake fresh lending
(Kumaricgita.1988)

Banks have to recovery the principal amount in order to ensure safety of depository’s’
fund and avoid capital erosion. Bank lending therefore has to consider interest
income. Cost of funds, statutory requirements, depository’s need and risks associated
with loan proposals. For these reasons banks have over time developed credit policies
and procedures which stipulate the lending processes. Bank lending is also based on
established international standards. However, banks have continued to face on
average between term loan (short .medium and long term loan): granted for working
capital and or project finance and construction of residential or commercial that to be
repaid within a specific period of time with interest.

Lending represents the heart of the commercial bank of Ethiopia and one of the core
processes in the construction and business bank (CBB) too. Loan are the dominate
asset of most banks and represent 50-75 percent of the total amount at most share of
operating income and represent the banks greater risk exposure (Mac Donald and
Kocch, 2006).The loans granted to various sector and individual borrower must be
recovered in full at various repayment period (schedule) based on their monthly
income, age type and nature of business that the loan are taken.

Commercial banks are the dominant financial institutions in most economies

(Rose.1997).Greuning and Bratanovic (2003), argue that commercial banks play a
critical role to emerging economies where most borrowers have no access to capital
markets .Well functioning commercial banks accelerate economic growth, while
poorly functioning commercial banks are an impediment to economic progress and
aggravate poverty (Barth et, al, 2001: Khan and senhadji, 2001, as cited in Richard,
2011).

Loan is an arrangement in which lender gives money or property to a borrower and

the borrower agrees to return the property or repay the money, usually along with
interest, at some future points in time, usually there is a predetermined time for

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repaying a loan, and generally the lender has to bear the risk that the borrower may
not repay a loan (through modern capital markets have developed many ways of
meaning this risk). Furthermore loan is also defined as an amount of money advanced
to a borrower to be rapid at a later date, usually with interest. Legally a loan is a
contract between a buyer (a borrower) and a seller (a lender enforceable under the
uniform commercial code most status. The term and conditions for repayment of a
loan including the finance charge or interest rate are specified in a loan agreement. A
loan may be payable on demand (a demand loan) in equal monthly instalments (an
instalments a loan). (wiki. answers.com).

Credit is borrowed money that you can use to purchase goods and services when you
need them. You get credit from a credit grantor, whom you agree to pay back the
amount you spent, plus applicable finance charges, at an agreed-upon time. Credit can
therefore be defined as transaction between two parties in which the creditor or lender
supplies money, goods and service or securities in return for promised future payment
by the debtor or borrower according to (Onyeeagocha, 2001); there are four types of
credit: revolving credit, Charge credit, and Service Credit and Installment credit.(CBB
credit procedure, 2012).

Banks play a very important role in the economic development of every nation. They
have control over a large part of the supply of money circulation and stimulus for the
economic progress of a country. The financial sectors contribution to growth lies in
the central role, they play in mobilizing savings and allocating the resources
efficiently to the most product uses and investment. (Daniel T, 2010).

The lending function is considered by the commercial bank of Ethiopia as one of the
most important function for the utilization of funds. Since, banks earn their highest
gross profits from loans; the administration of loan portfolios seriously affects the
profitability of banks. Indeed, large number of non-performing loans is the main cause
of bank failure. Banks are learning to review their risk portfolios using the criteria laid
down by Basel. Basel’s goal is to encourage bankers on improving their risk
management capability, including how the institutions price products, reserve for loss,
and control their operations (Rehm, 2002).

When we think about Bank’s role, their financial health is the most important factor
and it requires decisions about what to do with non- performing loans. The solidity of

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bank’s portfolio depends on the health of its borrowers. The numerous and varied
risks in lending stem from the many factors that can lead to the non-payment of
obligations when they come due. Losses sometimes result from “acts of GOD” such
as storms, droughts, fires, earth quake and floods. Changes in consumer demand or in
the technology of an industry may affect drastically the fortunes of a business firm
and place ounces profitable borrowers in a loss position. A prolonged strike
competitive price cutting, or loss of key management personnel can seriously impair
borrower’s ability to take loan payment. In many countries, failed business enterprises
bring down the banking system. Among other things a sound financial system
requires minimum level of non- performing loans which in turn facilitate the
economic development of one country. Nonperforming loans have been a hindrance
to economic stability and growth of the economies (beck, 2001, sited in Joseph et. al,
2004).The researcher will deal with how commercial bank of Ethiopia Kotebe branch
assess loan recover performance and to solve problem related to loan repayment that
is screened out in the bank, like discriminatory practice disjunctive structure and the
like, (L Cardy).

1.2 Background of the organization

The commercial bank of Ethiopia (s.c) was incorporated as share company on
December 16,1963 proclamation number 207/1955 of October 1963 to take over the
commercial banking activity of the former state bank of Ethiopia under this name, it
began operation on January 1,1964 with capital of Ethiopia 20,0000,0000 and served
for about 16 years. The bank was wholly owned by the state and operated as an
autonomous institution under the commercial code of Ethiopia.
The commercial bank of Ethiopia Share Company and Addis bank had identical
objectives, power and duties. Hence, it was necessary to merge them, in order to
eliminate the duplication of efforts and bring them under centralized banking
structure. Consequently, the present day commercial bank of Ethiopia was established
under the proclamation number 184 of august 2, 1980.
According to this proclamation, the main objective of commercial bank is as follows;
1. To extend commercial banking service throughout the country.
2. To encourage the mobilization of saving by making the people aware of the use of
banking.

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3. They extend loan, credit and all other banking activities to any person for specific
purpose and periods.
4. To spread widely banking habit among the people.(www.CBE.com)
The commercial bank of Ethiopia is pioneer to introduce modern banking to the
country. It is the first bank in Ethiopia to introduce ATM service for local users.
Currently commercial bank of Ethiopia has more than 22 million account holders
and the number of Mobile and Internet Banking users also reached more than 2.5
million as of June 30th 2019. Active ATM card holders reached more than 8 million
and it has more than 1456 branch stretched across the country. Commercial bank of
Ethiopia kotebe branch is one of its branches found in Addis Ababa under yeka sub
city.

1.3 Statement of the problem

Financial intermediaries include depository institutions (commercial banks, saving &
loan associations, savings banks & credit unions, insurance companies, pension funds
and finance companies). These intermediaries obtain funds by issuing financial claims
against themselves to market participants, then investing those funds. The investment
made by financial intermediaries can be in the form of loans and/or in securities
(Brick, John R.1984).

Credit is one of the core services that the Commercial bank of Ethiopia (CBE) renders
to its customers. The bank offer a wide-range of credit products in terms of facilities
and loans supposed to fit with the existing or future demands of the economy. Though
the underlying objective of the bank is on the provision of consultancy service to its
clients in the area of construction and business sector, the bank provides loan to
clients so as to maximize its profit and to contribute its share to the growth of national
economy (CBB credit procedure, 2012).

Commercial Banks were so named because they specialize in credit to commercial

and industrial businesses. Commercial banks are owned by private investors, called
stockholders or by companies called bank holding companies (Encyclopedia Deluxe,
2004).

The term credit may be explained as the provision of financial accommodation to a

person, in return for a promise to repay it at some future date. Credit may be extended

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as a cash loan, or through the medium of deferred payment for the supply of goods
and services. (John P.Bonin and YipingHuang, 2001).

If there would be low repayment performance for a continuous period, it jeopardizes

the financial position of the lending institution, it undermines public confidence in
formal financial market and causes savers to withdraw their funds, and it increases
staff turnover due to doubt on the capacity of the institution. If bank neglects to do so
or the recovery process is unduly protracted, the impact on it may be severe. The bank
may end up with a large loan portfolio in arrears, which in turn would affect the
bank's capital ratios. In such circumstances, the bank may find itself having to offer
higher than average deposit rates to attract more capital. Inevitably, these higher rates
will be reflected in the bank's lending rate. Higher lending rates may in return
adversely affect the average quality of future lending, forcing the bank to lend high-
risk borrowers. If the bank is to lend to the more creditworthy borrowers, it may be
forced to cut margins to levels, which would be insufficient to generate profits
(Brown Bridge 1998).

Loan collection is one of the essential activities of the bank. This basic to function to
some extent was not given the necessary attention due to the overall absence of
accountability with in the commercial bank of Ethiopia Kotebe branch.

But default may occur on the side of the client due to various reasons if there is high
incidence in the deficit of client, this leads to the bank to be insolvent and weak in its
financial position. Finally this solution would hinder the investment program as well
as economy as a whole. Proctor, T. (2003) “

Problem associated with project appraisal, lack of applicant screening criteria,

problems associated with collateral and follow up have been found as major factors
that affect the loan repayment performance of commercial bank of Ethiopia, Kotebe
branch. So far this research tries to assess the loan recovery performance in
commercial bank of Ethiopia, kotebe branch.

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1.4. Research Questions of the Study
By investigating loan recovery performance of Commercial bank of Ethiopia in
Kotebe branch, the study would addressed the following research questions:

 Is commercial bank of Ethiopia, kotebe branch efficient in collecting its loan?

 What is the reason for the defaults of banks?
 What are the factors that contribute for non-repayment of loans in commercial
bank of Ethiopia, kotebe branch?

1.5. Objective of the study

1.5.1. General objective

The main object of the study would be to assess the loan repayments performance of
the commercial bank of Ethiopia, Kotebe branch.

1.5.2 .Specific objectives

To achieve main objective the following specific once have been addressed

 To assess whether the bank is collecting its loan efficiently.

 To examine loan recovery performance from different sectors.
 To realize the factor that contributes for non-repayment of loans in
commercial bank of Ethiopia, kotebe branch.

1.6 Significance of the study

The finding of the study is important to the bank as a whole particularly kotebe
branch in the assessment of loan procedures at the bank , the credit worthiness of
borrowers and other interested parties about the performance of loan recovery in the
bank. Beside, this study is initiating other researchers to perform a better and in-depth
study in this topic.

1.7. Scope of the study

The study deals with the general analysis assessment of loan recovery performance of
commercial bank of Ethiopia, Kotebe branch that data to be analyzed is gather from
total population of Commercial bank of Ethiopia Kotebe branch.

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1.8. Limitation of the study
The study was expected to face some problems while conducting the study such as
time constraint, shortage of resources and primary data

1.9. Organization of the paper

The study would be organized in five chapters. First chapter that is the introduction
part deals with the background of the study, background of the organization, objective
of the study, significance of the study, scope of the study and organization of the
paper (study).

The second chapter deals with related literature review and the third chapter is about
methodology of the study. Fourth chapter deals with data analysis and interpretation
and finally the fifth chapter is about conclusion and recommendation is presented.

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 CHAPTER TWO

LITERATURE REVIEW
2.1. Definitions of Loan
Is an arrangement in which lender gives money or property to a borrower and the
borrower agrees to return the property or repay the money, usually along with interest,
at some future points in time, usually there is a predetermined time for repaying a loan
and generally the lender has to bear the risk that the borrower may not repay a loan
(through modern capital markets have developed many ways of meaning this risk)

An amount of money advanced to a borrower to be repaid at a later date, usually with

interest. Legally a loan is a contract between a buyer (a borrower) and a seller (a
lender enforceable under the uniform commercial code most status. The term and
conditions for repayment for a loan including the finance charge or interest rate at
specified in a loan agreement

2.2. Guiding Principles of Loan Repayment

The repayment period of loans is determined on the basis of the liquidity position of
each borrower and the economic life of the investment. Repayment schedules must be
made flexible so that it should be adjusted to borrower’s cash flow pattern. In addition
to this credit policy instruments, some relevant lending principles are used by banks
as their guiding principles (Zena 2009). These include; borrowers perceived need,
competence or repayment capacity and personal character.

(a) Borrower’s Perceived Need

Borrowers have to be given an opportunity to borrow for their perceived needs
because loans are more valuable when they meet borrower’s need. The credit delivery
system can focus on the needy part of households through establishing clear criteria
for eligibility.

(b) Competence
Borrower’s competence refers to the repayment capacity which largely depends on
the profitability of the use of credit. This is most helpful tool for estimating the
potential credit worthiness of borrowers. In order to assess the borrower’s capability

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in terms of repayment capacity, lenders will assess the borrower’s past personal and
profit record, past prosperity, etc.

(c) Borrower’s Personal Character

Lenders need to know personal reputation of the borrower and his attitude to the
financial obligations. Lenders should always relate credit with good personal qualities
of the borrower including;

a) Integrity

b) Honesty

c) Responsibility

d) Dependability

e) Sincerity of the borrower.

2.3. Criteria for Successful Loan Repayment

According to William (2007), there are certain criteria that most lenders require the
business owner to meet in order to successfully acquire the funds needed for the
business. These hurdles or requirements are generally categorized as: Good Credit,
Equity, Experience, Business Plan, and Collateral. These five guidelines of successful
borrowing are reviewed as follows;

1. Good Credit – this deals with the requirement that one must have a credit history
which is not only good, but more to the outstanding side of the scale. The reason for
this lender requirement according to the writer is that, every day any are coming to
banks and lenders applying for loans for a variety of reasons. The funds do not belong
to the loan officer, but rather they belong to the institution’s depositors and investors.
The loan officer and the lending institution's management have an obligation to
manage these monetary assets to the positive benefit of the owners, namely the
depositors and investors of the bank. Therefore, loans must be made only to those
who present the least risk of failure to repay. Past repayment history (i.e. good credit)
is the first and probably the most important requirement for a successful loan.

2. Equity- Equity in borrowing can be thought of as similar to a down payment. The

lender wants the borrower to have a financial commitment to the venture for which

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the loan is requested. The writer say’s that the borrower has to have some “skin” in
this business “game” to insure his or her best efforts toward success and timely
repayment of the borrowed funds. This is to say, that even if all the other four criteria
for successful borrowing; credit, experience, business plan, and collateral are met; the
bank usually will not lend 100 percent of the funds requested. The numeric value
often placed on required Equity is in the range of 10 to 20 percent of the needed
funds.

3. Experience-According to William (2007), no rational lender wants to or will turn

over monies to a borrower to manage and expend in a business or venture in which
the person has no or very limited experience. This criterion for successful borrowing
should be easy to see from both the lender and borrower’s point of view. Lenders
need to be more certain that the person or persons borrowing the funds have the
experience and expertise to manage the money and that day to day the business is
conducted in a prudent manner. This is needed to insure positive results from the
business and further insure that the lender will be repaid with interest and in a timely
manner. Here again the question relates to risk. The more experience and talent the
borrower has shown in the past, the lower the risk in lending from the bank’s point of
view. The minimum numeric value often expected here is that the borrower should
have at least three years of experience in the management of the type of business in
whose name he or she is borrowing the funds. This experience can be as an owner
and/or management experience. It could also be experience as an employee in a
similar type business.

4. Business Plan- The fourth requirement of the bank or lender is a well thought out,
researched and constructed business plan. This is a document that:

a) Will introduce the business in a clear and complete manner;

b) Describes the business ,the potential market for the goods and service to be
offered , the existing competition ,states who will be employed ,who will lead and
manage and how the borrowed funds will be expended;

c) The good business plan will have pro-forma (estimated) financial documents.
These are the cash flow statement, income statement, and balance sheet. Cash Flow
shows the cash revenue coming into the business and the funds sent out in paid

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expenses as the business operates from period to period. The net result is either
negative or positive on a month to month basis. Here the lender is looking for positive
cash flow at least enough to make the loan repayment. The Income Statement is a
listing of the total revenue of the business over the past year and a summarized listing
of all the expenses of the business. These two values, one positive and one negative,
when combined give the net income of the business operations for the period being
reported.

The Balance Sheet can be thought of as an instant photograph of the financial “health’
of the business at an instant in time, normally at the end of the year. The balance sheet
displays the assets (positive values of the things that the business owns) and the
liabilities (the negative obligations that the business owes and is obligated to pay in
the short or long run). Liabilities combined with the owner’s or shareholder’s equity
(value of the ownership) will equal (balance) the value of the assets.

Finally, the good business plan has to have a section of supporting document. These
will add validity to all that has been included in the previous sections. This section
should include such documents as the Resume(s) Credit Report, Net-Worth Statement
of the borrower(s), and any other reasonable support to verify the facts and estimates
on which the plan is based. The well-constructed, thought out and documented
Business Plan is essential to successful business borrowing. It is also used as a guide
of the business progress or lack of it to the owner(s).It can also be used as an aid in
soliciting partners and or other investors in the business.

5. Collateral- Finally according to the writer, after a borrower have shown good
credit, put in equity cash or goods, shown he/she have experience in the business and
produced a positive cash flow business plan. The lender would be willing to open the
vaults and ask the borrower to come in and select all the cash he/ she desire. However,
there is one last hurdle that the borrower must clear to reach loan success. This final
criterion is collateral. Collateral according to William (2007) is any asset of value that
can be pledged by the borrower(s) as security that the loan will be re-paid in full and
with interest. Collateral requirements in the process of borrowing for a business can
range up to and above 100 percent of the loan principal. This percentage depends
again on the amount of risk that the lender calculates that his institution is exposed
from this particular loan and the accumulation of all loans currently in process.

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Collateral assets can be in the form of real property owned, inventory of the business,
cash savings or deposits, stocks /bonds equity in home equipment and like assets both
tangible and non-tangible. The value to be placed on a collateral asset in the securing
of a business loan is usually estimated or appraised by the lending institute.

2.4. Repayment Capacity of Borrowers

Van (2002) explains that, capacity refers to the ability of the borrower to repay the
loan. Investment credit which will yield sufficient profit will enable the borrower to
repay the loan. Net income – family living expenses = Surplus. The surplus is used to
repay the credit. Most borrowers can easily repay the principal and interest. However,
some of them find it hard to repay the principal. Cash flow budgeting technique is
used to assess repayment capacity. Good financial management improves repayment
capacity and the profitable use of credit. The following will help borrowers to
improve their repayment capacity.

(i) Extending repayment time-long repayment period

(ii) Planning repayments to coincide with income
(iii) Planning and running to minimize overhead costs
(iv) Stressing enterprises with higher and quicker income-related to this is
maximum use of self-liquidating loans.

2.5 .Means of Strengthening Repayment Capacity

Lyne and Ortmann (1992) identify some factors that strengthen the repayment
capacity of farmer borrowers. These include;

a) Building more owners’ equity or net worth

b) Use more of self-liquidating loans

c) Organize or operate farm business for more income select enterprises capable of
increasing income.

d) Planning the repayment schedule for farmers – harvest time and repayment of loans
should be linked.

2.6. Reasons for loan Delinquency

Loan delinquency refers to failure of borrowers to repay their debts on time or to
repay them at all. Loan delinquency is a serious problem of rural credit programs
because it results in a waste of manpower, high administration costs and slow
turnover of resources. The main reasons for loan delinquency are;

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a) Failure to use borrowed funds for productive purposes.

b) Crop failure, natural disasters of various kinds and changes in economic conditions
followed by a drop in farm prices.

c) Unrealistic project appraisal studies

d) Willful default or refusal to repay -which is not good character (Okorie 2004).

2.7. Repayment Plan

According to Vogel (1998) there are various kinds of repayment plans, these include;

a) Lump sum payment plan – pay at the maturity at one time.

b) Amortized even payment plan – equal installments paid by stage.

c) Amortized decreasing payment plan- installment is decreasing from time to time

because income is higher at the beginning.

d) Quasi-variable payment plan – the installment payments are variable depending on

the variability of income.

e) Reserve payment plan - the borrower is allowed to pay over and above the given
installment. The payment will be adjusted in such a way that the remaining balance
will be brought to the next time.

f) Flexible payment plan - there is no restriction to pay a specified amount within a

limited time until the loan is due-any time until the due date.

2.8. The nature and role of credit market

Credit is the device for facilitating transfer of purchasing power from one individual
or organization to another. It indicates the credit provides the basis for increased
production efficiency through specialization of functions thus bringing together in a
more productive union, the skilled labor force with small financial resolves and
through who have substantial resource but luck of entrepreneurial abilities (oyatoye,
1983).

There are two important respects that a credit market differs from standard market for
goods and services. First standard markets, which are focus of classical competitive
theory, involve number agents who are buying and selling a homogenous commodity
Secondly in standard market, the delivery of a commodity by a seller and payment for
the commodity a buyer occur simultaneously. In contrast credit received today by an
individual of a firm in exchange for promise of payment in the future. A loan is a type

14
of debt. Like all debts, a loan involves the real allocation of money over a period of
time between the borrower and lender. This money is paid either in full or regular
installment (with interest of course). Acting as a provider of loans is one of the
principal task for financial institutions such as a bank. For banks, loans are generally
found by deposits. That is banks how usually learn. Their deposits are loaned out and
when the borrowers pay with interest earning for the bank. A mortgage is a very
common type of debt used by many individuals to purchase housing. In arrangement,
the money is used to purchase the property. The bank, however, is given the title to
the house until the house and sells it, to get their money (ibid)

2.9. Economic benefits

Recovery should be made at the time when the borrower is most likely to have
money. According to (Charlesmensah, 1999) credit can generate accelerate economic
growth only when the amounts taken are rap it in time. The problem of accumulated
over due and arrears of interest amount need to be solved immediately and once for
all. The accumulated over due have passed many problems and if not solved it would
continue to oppose problems in to the issuance of future loans. He also revealed that
the regional rural banks, being an organization for development, provide cheap credit
to the deserving target group with objective that the loan less who shall repay the loan
in easy installments in accordance with phased repayment schedule.

“There are two problems that are major causes of poor loan recovery; credit project
design problems and credit project implementation problems. Credit project design
problems included debt versus equity realism versus aspiration (how realistic the
projection of the product designer is), expected value versus dispersion(details
consideration of the variety of results which occur in the field), book keeping
convenience versus borrower cash flow pattern, collection mechanism, institutional
scope or range of service offered and interest rate credit project implementation
problem included low services levels, coordination access(i.e. information problem
and luck of decision making experience in the lending to specific target groups) and
financial recording. Strong recovery of loan plays a very important role in the entire
economy and builds confidences of general public in the soundness of the banking
system. It also reduces the cost of credit operation appreciable by avoiding litigation.
It also improves the efficiency of the operation staff and helps them to devote more
for development work rather than keeping themselves busy in recovering loans”(ibid).

15
2.9.1. The importance of qualification recovery performance
Discussion of recovery performance are vital because most attempts at its
qualification different banks experienced with the qualification of loan recoveries
performance for the purpose of monitoring the collection of institutions. Commercial
banks of Ethiopia experience their own loan recovery performance qualification
method records must be timely and clearly kept disclosure in report should not be
selective and sanitized (to Jacob Garon 1997).

“Mathematical problems usually associated with measures of re payment

performance. For example a popular repayment ratio divides the amount collected
during a given period by the sum of amounts falling due during the period plus
amount over do at the beginning of the period (called demand in south Asia
countries). This ratio continually declines as bad debits accumulated. It declines even
though there is no change in the collection of amounts failing due each year.
Accommodation of amounts that likely even to be collected eventually dominates.

The effect can be managed by writing of amounts that unlikely to be recovered,

writing off removes such amounts from the denominator, raising the arrears would
display no overdue carried from one year to the next and demand equals to amounts
reflective of actual performance, providing transparency, which is most endeavors
help to finish collectives for remedial action and strategic reconsideration. But
according to Jacob developing countries financial institution supported by donor are
generally very reluctant to write off bad and doubtful debts (Ibid) This reluctant has
several sources:

 Instructions given by central bank of financial ministry possible to make it

difficult to bankers to reduce their profits and hence their tax liabilities.
 Statutory limitations on state owned lenders that interpret write offs as a use of
public fund which only parliaments has the authority to approve.
 Lenders internal rules that prohibits writing off amount in litigation and legal
systems that take a very long time to deliver judgments.
 The mistake belief that writing off or even making a provisions against
doubtful loans, accounting procedures that help to keep accounting values
consistence with the actual value of a loan portfolio that means no further
efforts is to be made in collecting written off loans. This relevant confuse good

16
 accounting practices with the demonstrative or strategic decisions to continue
to press defaulter for payment.
 The fear that the public knowledge of write offs will only encourage
borrowers not repay.
 Incentives to pretend that the portfolio is healthy when in fact it is
deteriorating.
 The use of demand in the denominator challenges the validity of simply,
comparing collection with amounts taking due, because it is distorted by the
burden of arrears. An alternative would be to include separate calculation of
collection of overdue amount with the arrears on the book at the close of the
reporting period (Ibid).

2.10. Credit management policies

In the past decades there have been major advance in theoretical understanding of the
workings of credit market. These advances have evolved from a paradigm that
emphasis the problem of imperfect information and imperfect enforcement (Hoff and
stiglitz, 1990). They pointed out the borrowers and lenders may have differential
access to information concerning projects risk, they may form different appraisal of
the risk. What is clearly observed in credit market is asymmetric information where
the borrowers knows the expected return and risk of his project, whereas the lender
knows only the expected return and risk of the average project in the economy.

Lending institutions are face with for major problems in the course of undertaking
credit activity:

a) To ascertain what kind of risk the potential borrower is (adverse selection).

b) To make sure the borrower will utilize the loan properly once made, so that he
will be able to repay it (moral hazard).
c) To learn how the project will really did in case the borrower declares his
inability to repay and
d) To find methods to force the borrowers to repay the loan if the borrower is
reluctant to do so (enforcement) (Ghatak and guinnane, 1999).
The problem of imperfect information and enforcement leads to inefficiency of credit
market which in turn leads to default. Through credit assessment that takes into
account to a borrowers character, collateral, capacity, capital and condition (what is

17
normally referred to in the banking circles as the 5C,s) should be conducted if they are
minimize credit risk Charles Mensah(1999) stressed the importance of credit
management as follows:

Credit management process deserves special emphasis because proper credit

management greatly influences the success or failure of financial institutions. An
understanding of a bank’s credit risk management process provides a leading
indicator of a quality of a bank’s loan portfolio. The key elements of effective credit
management therefore as well developed credit policies and procedures: strong
portfolio management; effective credit controls are the most crucial of all a well-
trained stuff that is qualified to implement the system. Financial institutions must
maintain basic credit standards if they are to function well and make credit available
to investors. These standards include a thorough knowledge of the borrowers business
by the officer in the charge: reasonable debt equity ratio marketability and viability of
the investment project and other technical capabilities. Credit risk evaluation is a
complex process, which implies a careful analysis of information regarding the
borrower in order to estimate the probability that the loan will be regularly repaid
(Vigano, 1993).

2.11. Theoretical arguments on loan default problem

Credit markets may be either of formal or informal ones. When we think of small
businesses in LDCs, the major source of finance so far is informal sector. The
probability of default of small scale enterprise credit from informal market is low
because informal financial markets are much closer to their clients, and through
gossip and daily contact they are much more aware of their activities than a formal
banker would ever be, thus they know the risks they are exposed to. On the other
hand, small-scale credit scheme from formal financial market has experienced a high
rate of default in many developing countries. Banks in these countries hold a truly
alarming volume of non- performing loans (Fry 1995). Fry listed Brazil, Cote d
Ivoire, Mali, Benin, Liberia , India, Nigeria, Malawi, and Peru as countries in which
there are wide spread payment delays.

There are several factors that have been attributed to a high scale default rates in small
credit. On the other hand there are those who argue that characteristics of small-scale

18
enterprise make the cost of administering credit very high compared to the return of
loans. Small scale enterprise possesses shallow management often with little
experience and training; they are usually undiversified, one product firms, they are
sometimes new businesses, with little track record, and poor financial recording; they
may have a new unproven product; they have little to offer by way of security lenders;
they may be reluctant to raise outside equity capital for reasons of expense loss of
control and increased disclosure requirements. These characteristics of small scale
enterprises provide little incentive for any aggressive loan recovery mechanisms
(Pischke, 1980; Beker and Dia, 1987; Kitchen, 1989; Okorie and Iheanacho, 1992) on
the other hand there are those who argue that the failure of lending agencies in
playing their roles in loan disbursement and recovery process is a major contribution
to loan default (Okorie and Iheancho, 1992; Vigano, 1993; Frey, 1995).

They contend their views that determine credit worthiness requires investment of
time and resources to evaluate firm specific and industry wide variable, structural or
cyclical, by analysis with specific professional skills. A mistake on the evaluation of
the borrower’s characteristics or the introduction of inappropriate loan conditions may
increase the total risk of the transaction (Vigano 1993). A non-economic obstacle
relating to the failure of banks lies in the risk adverse attitude of loan officers
(Kitchen, 1989). He revealed that financial reoperation and credit rationing encourage
unprofessional lending practices such as collusion and corruption. He has found that
unprofessional practices lead to high default rates, thereby increased risk. Taking care
of this issue is more important in commercial banks where accountability of loan
officers is often a problem.

Fry (1995) listed bank lending criteria in east Africa in order of importance to show
the method of credit analysis is week; first, the securities offered, second, any other
additional securities, third how short the period to maturity is, fourth the commission
to receive in connection with the granting of credit, fifth the standing of the would be
borrower, sixth the amount and seventh the project. Still others argue that the political
frame work which affects credit systems from the designing stage to the recovery
stage is central to the explanation of the poor performance of small-scale credit
systems (Fry, 1995).

19
In some cases when government is involved in credit programs, recipients often fail to
distinguish loans from grants. Morris (1985) as cited by Fry (1995) found out that the
primary causes of high arrears in India, for example, is the rapid expansion of lending
in response to government pressure to achieve mandated credit disbursement targets.
He listed the following causes as causes of loan default:

A) Failure to tie lending to productive investment

B) Neglect of marketing and linking credit recovery to the sale of product:
C) Defective loan policies
D) Misapplication of loans
E) Ineffective supervision
F) Indifference of bank management
G) Lack of responsibility and discipline on the part of borrowers.
Different authors recommend tackling the problems raised on the side of borrowers,
lending institutions and government as solution to the default problem attribute to
small scale enterprises in developing countries (Pischke 1980;Stiglitz and
Weiss,1981; Kitchen,1989; Okorie and Theanacho 1992, Fry, 1995; Chirwa, 1997)

The credit policy of organization may be strict or lenient depending on the manager’s
regulation of variables that come with credit policy .There are three main variables
(elements of credit policy) namely: credit term credit standards and credit procedures
(Hulme’s, 1992).Managers use these variables to evaluate client’s credit worthiness,
repayment period and interest of loan collection methods and procedures to take in
case of loan default .A strict credit policy gives credit to customers on a highly
selective basis. Only customers who have proven creditworthiness and strong
financial base are given loans, the main target of a stringent credit policy is to
minimize the cost of collection, bad debts and unnecessary legal costs (pandey, 2001).
A lenient credit policy on the other hand gives credit to customers on very liberal, lax
terms and standards. The main purpose of a lenient credit policy is to increase gains
through extending more credits to increase gains through extending more credit to
customers (Kakuru 1998 and pandey 2001).

20
 CHAPTER THREE

RESEARCH METHODOLOGY
3.1 Research design
The main objective of the research is to assess the loan recovery performance of
commercial bank of Ethiopia, Kotebe branch. This study would be used descriptive
research method .The major purpose of descriptive research is to describe the state of
affairs/situation as it exists. Source :( Flyvbjerg, 2006). It gives a basic description of
statistical unit under investigation this descriptive type of research method would be
employing by the researcher

3.2. Research Approach

Mixed research approach is more specific in that it includes the mixing of qualitative
and quantitative research approach, method and methodologies a research study or set
of related studies. One could argue the mixed methods research is special cause of
multi method research. But, the field of mixed method has only been widely accepted
for the last decade, though researchers have long been using multiple methods, just
not calling them. Mixed Methodology research approach takes advantage of using
multiple ways to explore research problem.

3.3. Data type and sources

To gather information about this research the researcher would be use primary data
sources. The primary data is collected directly from first-hand experience and the data
is derived from a used Semi-structured questionnaires and interviews or
experimentation distribute to loan repayment performance of commercial bank of
Ethiopia Kotebe branch.

3.4. Population of the Study

The study population comprises employees of Commercial Bank of Ethiopia, Kotebe
branch. The Kotebe branch would select because of proximity and convince in terms
of data accessibility to the researcher. As interviewed and got from the manager of
Commercial Bank of Ethiopia, Kotebe branch the branch has 32 employees.

21
3.5. Sampling procedure
Since the total population of Commercial bank of Ethiopia Kotebe branch is only 32
the researcher would employ census sampling method. Census sampling method
would has the advantages like provides a true measure of the population (no sampling
error), benchmark data may be obtained for future studies, detailed information about
small sub-groups within the population is more likely to be available Polit and
Bungler (1999)

3.6. Methods of data processing and analysis

After the data was collected from the intended sources the next assignment was
processing and analysis, data processing is an activity which involves editing and
classifying data to make it suitable for future analysis. To start the data process the
data has been edited for completeness legibility and consistency and making the data
ready for analysis. Next to data processing the data analysis which is further
transformation of processed data to look for possible patterns and relationship among
data groups. Once the analysis process was accomplished interpretation of the data
has followed. It refers to make pertinent inferences and drawing conclusions
concerning the meaning and implication of research investigation care was taken to
avoid broad generalization that makes it not steady (Kerlinger, 1986). The researcher
has used tabulation and percentages for presentation.

3.7. Ethical consideration

In relation to the research work, the commercial bank of Ethiopia Kotebe branch was
asked its consent with a supporting letter issued by Kotebe Metropolitan University.
Respondents would be informed the purpose of the research and then asked them to
give their opinion voluntarily with a privilege not to write their name. The gathered
information from respondents kept confidentially

22
 CHAPTER FOUR

DATA ANALYSIS, INTERPRETATION AND DISCUSSION

4.1. Introduction
This chapter contains analysis and interpretation of data collected on the loan
recovery performance of commercial bank of Ethiopia Kotebe branch in the period of
four years, from 2009-2013E.C

The results are described to reflect the objective of the study: the analysis is done in
relation to the one source of data used for this study that is primary data are analysed
using table and percentage and an interview questions which conducted on
commercial bank of Ethiopia Kotebe branch client’s relation department on loan
recovery performance of the bank

4.2. Demographic Information

4.2.1Frequency distribution of respondents by sex

The respondents were asked to indicate their sex in order to make the study gender
sensitive. Their response is indicated in table below.

Table4.1 Frequency distribution of respondents by sex

Sex Frequency Percentage

Male 22 68.75
Female 10 31.25
Total 32 100

Source: primary Data

According to the above table 69% of the respondents are male and the remaining 31%
are females. This data of sex composition indicates there is good proportionate
employee’s participation on female in this research that helps the researcher to collect
opinion from sexes.

4.2.2. Frequency distribution of marital status

The respondents were asked to indicate their marital status in order to make the study
married sensitive. Their response is indicated in table below

23
Table 4.2 Frequency distribution of respondents by Education

Qualification Frequency Percentage

20 62
Married
12 38
Single
32 100
Total

Source: primary Data

According to the above table 62% of the respondents are married and the remaining
38% are single. Importance of knowing the marital status of respondents for the bank
helps to protect itself from law suit by other by other spouse on common property, to
avoid seizer of the project due to dispute of the couples and to attract the family’s
attention to business success or to create responsibility, accountability and
belongingness the family member to their business.

4.2.3. Frequency distribution of respondents by Education

In order to be sure of the quality of the information given, the respondent were
requested to give their level of education and the response is presented below.

Table 4.2 Frequency distribution of respondents by Education

Qualification Frequency Percentage

Degree 18 56
Diploma 14 44
Total 32 100
Source: primary Data

Finding in the table indicate that a small number of respondents were highly educated
.This is shown by the majority 56% of respondents were degree holders, the 44% of
the respondents were diploma holders and none of the respondents were post graduate
degree holders. By the virtue of their education structures, the studies might assume
that they know the organization performance and the hindrance to effective
performance. This shows that the majority of respondent were graduates and the
responses given are relevant.

As educational level increases the skill to manage and understand the business also
increases accelerating productivity and this protects loan clients from financial
distress.

24
4.2.4. Respondents with period of work for credit related
As a precondition to assess the reliability of the data collected, the respondents were
requested to indicate. Their response was as given below

Table 4.3 Respondents with period of work for credit related

Year of work Experience Frequency Percentage

Less than 1 Year 2 6
1-5 Years 30 94
Total 32 100
Source: primary Data

From the analysis in the table above, 94% of the respondents have served between 1-5
years in credit area and were as 6% of the respondents have served less than one year.
This is a confirmation that most of respondents have been in this sector for medium
period, hence have medium experience in credit area. This is due to the recently
establishment of the branch.

4.2.5. Respondents with value of the credit policy of CBE

The first objective of the study was to examine the credit police of CBE. Banks have
their own policy and procedure that govern the employee to provide service according
to policy. In the way of answering the first objective the respondents were asked to
confirm whether the credit police of CBE are flexible or not. The respondent’s
‟replies were as given below.

Table 4.4 Respondents with the credit policies of the bank.

Answer Frequency Percentage

Somehow Flexible 23 72
Somehow Rigid 5 16
Rigid 4 12
Total 32 100
Source: Primary Data

From the analysis of the above table,4 of respondents are reply on the policy of
CBE.72% reply that the CBE policy is “somehow flexible”,16% of respondents give
answers CBE policy is” Somehow Rigid” .As the collected data shows, a total of 88%
respondents choose The policy of CBE is under somehow flexible and somehow rigid
category.

25
In compliance to the policy of the regulating body, all banks formulate their own
credit policies and procedures which assist to provide different types of credit within
each credit policy to their loan customer’s .Therefore, knowing the outlook of loan
clients for each bank is very important in reshaping its credit policy and procedures

4.2.6. Types of collaterals frequently used in CBE to give term loans

There are various types of collateral that CBE used to give a loan for the applicants.
The following collateral is those that the study identified as summarized below.

Table 4.5 respondents showing types of collateral used by CBE

List of collateral Frequency Percentage

Building 24 75
Vehicles 3 9
Machinery 5 16
Total 32 100
Source: Primary Data

As part of its loan police, CBE demands collateral to serve as security against loan
extended to its clients. The form of collateral usually demanded by the bank most
respondents (75%) of respondents are reply on the building collateral in CBE , and
9% of the respondents are reply for the bank used vehicles as collateral on the other
hand 16% of the respondents also are answer the bank used machineries, in addition
to this no of respondents also are reply the bank also used personal and cash guarantee
as collaterals the bank used personal Guaranty collateral for the requirements to give
export facility loan.

4.2.7. Respondents with strong collateral secures loan repayment

The bank procedures believed that strong collateral secures loan repayment .The
following table summarized the ideas of respondents

Table 4.6 Respondents with strong collateral secures loan repayment

Answer Frequency Percentage

Yes 25 78
NO 7 22
Total 32 100
Source: primary Data

From the above table 78% of respondent reply that strong collateral secures loan
repayment and the reset 22% of respondent reply not believed that strong collateral

26
secures loan repayment .security is taken to mitigate the banks risk in the event of
default and is considered a secondary source of repayment (Koch &MacDonald,
2003). According to Delucia and peters (1998), in the banking environment, security
is required among others to ensure the full commitment of the borrower to provide
protection should the borrower deviate from the planned course of action outlined at
the time credit is extended and to provide insurance should the borrower default.
From the above table of respondents, the studs understand the banks are more
emphasized on collateral in addition to financial worseness

4.2.8. The bank Give loan Advisory service to credit customer

The bank may provide advisory service to creditor customer. The following table
summarize whether the bank provide these service or not.

Table 4.7Respondents that the Bank Give loan Advisory service to credit customer

Answer Frequency Percentage

Yes 5 16
Yes but not enough 25 78
NO 2 6
Total 32 100
Source: primary Data

According to the table above, it was used a yes/no or enough question to ask the
respondents whether they provide any advisory service to their loan customers or not.
The result show that 78% of respondents reply the existence of loan advisory service
but not satisfied and 16 % of respondents are satisfied with the advisory service of the
bank, on the other hand 6% or respondents are replay that the bank is not give
advisory service at all in CBE. From the result the study’s concludes that there is no
full-fledged and well organized provisioning of advisory service to credit customer
before and after granting credit has significant importance in the effectiveness of loan
recovery performance of the bank.

4.2.9. The bank have used modern technology to credit follow-up

The bank have modern technology (software) support in the credit follow up is the
one instrument that the bank used. The following table summarized the idea of
respondents.

27
Table 4.8 Respondent that the bank has used modern technology (software) support
credit follow up

Answer Frequency Percentage

Yes 25 78
NO 7 22
Total 32 100
Source: primary Data

From the above table most of the respondents (78%) are reply the bank used
technology for supporting of credit follow up and also 22% of respondents reply the
banks not used technology for supporting credit follow up the researcher observed
that there is no problem related to modern technology support so this is important for
the bank for loan recovery performance improvements.

4.3. The efficient commercial bank of Ethiopia Kotebe branch in

collecting its loan
The respondents were interviewed concerning about the efficiency of commercial
bank of Ethiopia Kotebe branch in collecting its loan. The following interpretations
were taken from the respondents interviews.

“Yes in the first place the bank provide to those who have business experienced
customers and also assesses their past track records of its borrowers because of this
reason most of our loans are collected effectively with some problems.”

4.4. The sector the bank is more flexible to give loans

Respondent were also asked in which sector does the bank is more flexible to give
loans

“Specially, in this time commercial banks are engaged in giving loan the three
economic priority sectors of domestic trade, manufacturing and building term
loans.”

41. The respondents four past years ‘experience on the sector more
effective in returning of the loans
The respondents were asked to reply from their four past years’ experience the sector
that is more effective in returning of the loans. The following summarized the ideas
of respondents.

28
“The bank financing three economic priority sectors of domestic trade,
manufacturing and building from our past experience those customers who have
engaged in manufacturing term loans are more effective in loan repayment.”

4.5. Kinds of collaterals the bank mostly use for loan

There are question about, what kind of collaterals does the bank mostly use for loan.
Respondents showing types of collateral used by commercial bank of Ethiopia Kotebe
branch.

“Our bank uses different type of collateral for the requested loan such as building,
vehicles and others. But most of time bank uses residential and commercial
buildings as collateral for the requested loans.”

4.6. The strategies the bank use to assess the back ground of the
borrowers before they give the loan.
The respondents asked to respond the strategies they used when they assess the back
ground of the borrowers before they give the loan. Their responses were as follows;

“Before providing a loan to the customers the bank made an assessment on the
background of the borrower from different perspectives; from his financial
perspectives, from his business management perspectives, from his past loan
repayment perspective and from the profitability of business perspective”

4.7. The upper limit amount of loans the bank give for their customers
In this the respondents were asked to answer the upper limit amount of loans they
give for their customers. They replied in such a way;

“The upper limit is personal wealth and collateral, also the amount of assets the
applicant has available for use in securing the credit and currently our bank has its
own discretionary limit to approve a loan up to customer capital“

4.8. Past experience of respondents on male and female customers that

take big mount of loan and active in returning loans.
In this case, the respondents asked based on their past experience from males and
females customers of their bank who take the big amount of loan that were active in
returning loans. Their response were as follows

29
“The mix of gender of the takes ,but big amount dominated by the male parts ,due
to the education and experience required to take loans.”

4.9. The factors that contribute for non-repayment of loans in commercial

bank of Ethiopia Kotebe branch
In this the respondents were asked to answer the factors that contribute for non-
repayment of loans in commercial bank of Ethiopia Kotebe branch. Their answers
were;

 Market failure-“Market failure is analysed that as one of the major reason for
the failure of loan collection. It is not whether the bank s or the client’s
problem but it is generally economic problem Example inflation.”
 Management incapacity
”In management incapacity it is the problem that occurs from the bank and the
clients. From the bank that the banks management policy in collecting loan is
very week like in assessing project appraisal and screening clients
background before permitting loan. From the side of client the borrower may
be incapacitated in managing the money that is borrowed or the client may
fail on investing the money for future return which can cover their debt.”
 Division of fund to other business sectors-”This division of fund to other
business problem occurs on the side of client. It happens that when the client
changes the direction of its business which is not profitable.”
 Hoarding purchased items for long time demanding high profit

”The clients may expect excess profit in the future so they do not need to sell their
products now they went to wait until the price of the market rises. So this may not be
true philosophy all the time because the price may not rise as expected in the future so
they will fail paying their debt.”

 Collateral estimation problem that is much money lending for low market
value collateral

”Such kind of problem arises from credit assessment system of the bank. If the bank
gives loan for the collateral that does not much and if the client fails to repay its debt
then the bank cannot get its return by selling the collateral because its value is does
not much with the collateral.”

30
 CHAPTER FIVE

CONCLUSION AND RECOMANDATION

5.1. CONCLUSION
The conclusion and discussion of this research were drawn from questionnaires and
interviews made with respondents as follows;

 As educational level increases the skill to manage and understand the business
also increases accelerating productivity and this protects loan clients from
financial distress. But in this study shows that few employees of commercial bank
Kotebe branch is highly educated while majority of the employees are at diploma
and degree level that they slightly know the organization performance and the
hindrance to effective performance.
 The study also shows that most of respondents have been in this sector for
medium period; hence the have medium experience in credit area. This is due to
the recently establishment of the branch.
 Majority of the respondents in this study responded that the policy of CBE is
under somehow flexible and somehow rigid category. In compliance to the policy
of the regulating body ,all banks formulate their own credit policies and
procedures which assist to provide different types of credit within each credit
policy to their loan customers .Therefore ,knowing the outlook of loan clients for
each bank is very important in reshaping its credit policy and procedures
 Majority of respondents reply the existence of loan advisory service but not
satisfied with the advisory service of the bank so that there is no full-fledged and
well organized provisioning of advisory service to credit customer before and
after granting credit has significant importance in the effectiveness of loan
recovery performance of the bank.
 Majority of the respondents are replied that the bank used technology for
supporting of credit follow up. For instance, there is no problem related to modern
technology support so this is important for the bank for loan recovery performance
improvements.

31
 In addition to the questionnaires the interviews were distributed to the
respondents and the following discussions were taken from the interviews;

 Concerning the efficiency of commercial bank of Ethiopia kotebe branch in

collecting its loan, the interviewees replied that most of their loans were collected
effectively with some problems because the bank provide to those who have
business experienced customers and also assesses their past track records of its
borrowers.
 From the result of the interview the researcher summaries that commercial banks
are engaged in giving loan to the three economic priority sectors like domestic
trade, manufacturing and building term loans.
 From the interviewees past experience those customers who have engaged in
manufacturing term loans were more effective in loan repayment.
 The mix of gender of the takes very important ,but big amount dominated by the
male parts ,due to the education and experience required to take loans.”
 The result of present study indicate that the major Couse of repayment failures are
 Market failure
 Management incapacity
 Division of fund to other business sectors
 Hoarding purchased items for long time demanding high profit
 Collateral estimation problem that is much money lending for low
market value collateral

Timely and planned recovery of loans contributes to the profitability as well as

financial sustainability of any lending institution, the strength of which is believed to
enhance economic development efforts. Hence, lending institution like commercial
bank of Ethiopia, Kotebe branch is expected to have good loan recovery performance
compared to their counterpart elsewhere.

32
5.2. RECOMMENDATION

After analysing result obtained for responses to questioners and interviews gathered
from the bank employees based on the forgoing findings and conclusions, the
following recommendations are given to the bank to improve its loan recovery
performance.

 To increase the productivity, their bank should give the education opportunities to
their employees to improve their knowledge towards the organization
performance and the hindrance to effective performance.
 The bank should provide the well-organized provisioning of loan advisory service
to credit customer before and after granting credit has significant importance in
the effectiveness of loan recovery performance of the bank
 The bank should continue their strength of modern technology support which is
important for the bank for loan recovery performance improvements.
 As a loan officer indicated that from past four years’ experience the domestic
trade has not a good trend on returning a loan, the researcher recommends that, the
bank should performs an adequate screening on the report prepared for loan
request of the domestic trade sector and make corrections and change the way of
borrowing by seeing personal background.
 In order to improve the quality of the report prepared for loan request and to
provide sufficient technical assistance for the borrowers, it is better to allocate
sufficient budget or find funds to upgrade the knowledge and skill of its staff.
 It is recommended to the bank that it is better to revise and update the loan
processing parameter and formats that are used in client relation department so as
to be clearly understandable for the clients.
 Therefore the study’s observed and support with theories that the credit polices of
CBE are rigid. This affects the performance of the bank, so the management of the
bank should review the credit policy.

Finally, the researcher strongly recommends further detail research in loan operation
specially credit recovery performance of the bank which are problem areas and core
activities of the bank.

References
1. Baker Chester, B and Dia Bernadette, default management in agricultural lending
program in Ivory Coast, saving and development, vol, 4. No 2, 1987, pp .161-177.

33
2. Chirwas, EWadonda, econometric analysis of the determinants of agricultural
credit repayment in Malawi, African review of money, finance and banking, no 1-
2, 1997,pp, 107-123.
3. Charles Mensh, the economic development to social policy, New York (1999).
4. Fry Maxwell, money interest and banking in economic development, second
edition, the John Hopkins University press, and 1995.
5. Ghatakmaitreesh and guinnanetimothy,w, the economics of lending with joint
liability, theory and practices, journal of development economics, vol.60, 1999.pp,
195-228.
6. Joffre M Dwight, credit rationing and the commercial loan market, an economic
study of the structure of the commercial loan market, john Wiley and sons, Inc,
U.S.A, 1971.
7. Kitchen Richard, venture new approach to financing small and medium enterprise
in developing countries, saving and development,vol.7 no 3 1989.pp287.313.
8. Kumara gita recovery ethics in rural learning IBA bullet in vol 10,no dec
1988p.258
9. Lau, G.S the journal of banking studies vol.11.No.2 April 1988, p.21.
10. OkorieAja and Andrew c. Iheanocho, agricultural loan recovery strategies in a
developing economy: a case study of Imo state Nigeria, African review of money,
finance and banking, no. 2, 1992, pp, 195-202.
11. Oyatoye, E.T, (1983), an economic appraisal of small farmers credit schemes: a
cost study of 682 western Nigeria, sav,7(3): 279-292.
12. Vigano Laura, a credit scoring model for development banks, an African case
study, saving and development, vol, 16,no 4,1993,pp.441-482.
13. Von pischke,J,D. finance at the frontier: debt capacity and the role of credit in the
private economy, the world bank, Washington D.C, 1991.
14. Wiki answers.com.

APPENDIX
KOTEBE METROPOLLITAN UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING& FINANCE
QUESTIONNAIRE FOR EMPLOYEES OF COMMERCIAL BANK OF
ETHIOPIA KOTEBE BRANCH.

34
An objective dear respondent this is a questionnaire and interviews intended to obtain
relevant information on commercial bank of Ethiopia Kotebe branch .which is use for
academic purpose. The finding of study greatly depend on your cooperation for
which are grateful in advance to achieve this you are kindly requested to corporate
giving response for following question , please tick () on the box your choice and
fill the blank space.

Part I. Demographic information (CRM & CRO)

1. Sex male female

2. Age 20 -35 36 -45 above

3. Religion Orthodox Muslim

Protestant Catholic Other

4. Family size 1-4 5-8 9-12

5. Level of education

Diploma Degree

Post graduate degree Certificate

6. The level of position in the organization?

Customer relationship manager

Credit analyses & portfolio manager
Loan recovery office

35
 Loan recovery & rehabilitation
Other

7. How long have you worked for credit related?

Less than 1 year 1-5 years

More than 10 year 6 – 10 years

Part II. Study’s related question.

1. How did you rate the credit police & procedures of the banks? Giving loan service
to the customer?

Ridged Somehow ridged

Flexible Somehow flexible

2. Which types of collaterals frequently used in commercial bank of Ethiopia to give

term loans?

Building Machinery

Vehicles Personal guarantor

3. Do you believe that having strong collateral secures loan repayment?

Yes No
4. If the bank provides training to employees that are working in credit?

Yes Yes but not satisfactory No

5. If your answer is yes what types of training CBE gives?

On-work Off-work
6. Does the bank have modern technology (software) support credit analysis?

Yes No

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 1. Is commercial bank of Ethiopia Kotebe branch efficient in collecting its loan?

_____________________________________________________________________
_____________________________________________________________________
_________________________________________

2. In which sector does the bank is more flexible to give loans?

_____________________________________________________________________
_____________________________________________________________________
____________________________________________________________

3. From your four past years’ experience which sector is more effective in
returning of the loans?

__________________________________________________________________
__________________________________________________________________
__________________________________________________________________

4. What kind of strategies do you use when you assess the back ground of the
borrowers before you give a loan?

_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

5. What is your upper limit amount of loan to give for your customers?

__________________________________________________________________
__________________________________________________________________
__________________________________________________________________

37
 6. In case of Kotebe which one takes a big amount of loan through your past
experience male or female? And when they return their loan, which is more
active?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
7. How much amount of money did the bank spend for the past four years? ( cash
disbursement and recovery against disbursement in agricultural,
manufacturing and export sectors)

_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

8. What are the factors that contribute for non-repayment of loans in commercial
bank of Ethiopia Kotebe branch?

_____________________________________________________________________
_____________________________________________________________________
____________________________________________________________________

38
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