ADIGRAT UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

THE ASSESSMENT OF CREDIT RISK MANAGEMENT SYSTEM

(A CASE STUDY OF COMMERICIAL BANK OF ETHIOPIA
NEBELET BRANCH)

A Senior Essay Submitted to the Department of Accounting and Finance in

the Partial Fulfilment of the Requirement for the Degree of Bachelor of
Art (BA) of Accounting and Finance

Prepared By: Name ID No.

Tesheme Fsha Hailu----------------------------------------- RBE/04868/09
Advisor: Mr. Negasi M
December, 2019 Adigrat, Tigray,
Ethiopia
Abstract
Credit risk is the probable risk of loss resulting from a borrower’s failure to repay a loan or meet
contractual obligations. Due to this managing credit risk is a way of improving efficiency and
attaining a competitive advantage. This study will try to identify principles of credit risk
management, credit risk management approach and credit risk management functions briefly. In
this study both primary and secondary data’s will be used to address the desired objectives. The
primary data will be collected through structured interview and questionnaires. The secondary
data will be collected from published material and manuals which are available in the
organization document. Regarding the sample technique complete enumeration (census) will be
used. And finally after the data is collected the researcher will use descriptive method of analysis
using graphs, tables and charts if necessary.
Contents
CHAPTER ONE ............................................................................................................................. 4
1. Introduction ................................................................................................................................. 4
1.1. Background of the study ...................................................................................................... 4
1.3. Statement of the problem ..................................................................................................... 5
1.4. Objectives of the study......................................................................................................... 5
1.4.1. General Objective ......................................................................................................... 5
1.4.2. Specific objective .......................................................................................................... 5
1.5. Significance of the study...................................................................................................... 6
1.6. Scope of The study............................................................................................................... 6
1.7. Methodology of the study .................................................................................................... 7
1.7.1. Data type ....................................................................................................................... 7
1.7.2. Source of Data............................................................................................................... 7
1.7.3. Methods of data analysis ............................................................................................... 8
1.8. Organization of the study ..................................................................................................... 8
1.9. Time and budget schedule ................................................................................................... 8
1.9.1. Time schedule ............................................................................................................... 8
1.9.2. Budget break down ....................................................................................................... 9
Reference ...................................................................................................................................... 10
 CHAPTER ONE

1. Introduction
1.1. Background of the study
Credit risk management is the system mitigating losses by understanding the adequacy of a bank’s
capital and loan loss reserves at any given time. Credit risk management system is essential in
reducing losses and minimizing credit risk in commercial banks and other companies.

The word Credit drives from the Latin word “Creder” which shows the existence of trusts between
borrowers and lender. Without this, the development of modern industrial community would have
been impossible. The major principle believed in credit is “Buy now-pay latter”. The principle
shows that in the absence of cash on hand business entities in the economy can delay payment
until fund is available, by making agreement with seller. Most of the time the counter made
between buyer and seller, borrower and lender may become inefficient because of many reasons.
The existence of problems in the credit lends to the concepts of “credit risk management” on the
other hand the importance of credit for banks can be seen by its being one of the risks bank face.
Banks have managed four types of risk to earn profits for maximizing shareholder wealth. The
risks are credit risks, interest rate risk, liquidity risk and operational risks. And all the risks
mentioned above are directly or indirectly related to credit. The credit risk management process of
bank is believed to be a good indicator of the quality of the bank’s portfolio. (Source: Robert J.
1994:4)

The importance of credit in the banking industry can be seen position in the financial statement of
banks. Loans are the most important asset in any commercial bank. Loans account for half to
almost three quarter of the total value of all bank assets. In the income statement of banks interest
and fees generated from loans account for most banks. Revenues normally two-thirds or more of
the total income (http://www. erisk.com)

In the competitive environment, more and more lines of business which need a huge investment
are being opened. Some of these huge investments are financed through commercial banks loans.
With this respect, banks play a major role in the overall economic development of country.
However, in this process of extending credit to customer, a bank should have a way of examine its
borrowers so that it would minimize the risk of default. The effect of default is not limited to that
of affecting the profit of one particular bank but it has a ripple effect that extends itself in to the
economy at large. Hence, prudent banks are concerned about the quality of their loan and the
effectiveness of their risk management process in order to safeguarding their business as well as
the overall economy. (Herrick, 1990:68)

1.2. Statement of the problem

Credit risk is the main cause for most bank failure. It can be raised when the debtor cannot be able
to pay interest or repayment of principal according to the terms specified in credit agreement. High
credit risk would reduce earnings and capital, increase administration cost of bank and induce
liquidity problems affecting cash flow. That is why it is essential that management focus much of
its attention on managing the loan.
This study tries to investigate the following questions.
 What are the problems and challenges with regard to the bank’s credit risk management
strive?
 Does exist an adequate control over credit risk?
 What are the methods that are used by the bank in order to mitigate its credit risk
exposure?
 Does the interest income play a major role in increasing revenue of the bank?

1.3. Objectives of the study

This study is aimed to achieve both general and specific objectives related with evaluation of credit
risk management system of Commercial bank of Ethiopia in Nebelet branch.

1.3.1. General Objective

The general objective of this study is to assess credit risk management system of Commercial bank
of Ethiopia in Nebelet branch and to find out the problem related with credit risk management
system.

1.3.2. Specific objective

Besides to achieve the general objective, there are specific objectives at which the researcher will
address, those are:-

 To identify problems and challenges that the bank is facing in managing credit
risk.
 Examining the existence of adequate control over credit risk.
  Identifying those methods that are used by the bank to mitigate its credit risk
exposure.
 Seeing interest income of the bank how significant it is as compare with the other
type of income to increase revenue of the bank.

1.4. Significance of the study

This study is believed to be useful in uncovering the strong and weak points in the credit risk
management.

 This paper will mention several important ideas which would be the best reference
for the future researcher.
 And it is expected other organizations to use this method in order to avoid the risk
of credit as the organization perspective.
 This study will attempt to find out problems related with credit risk management
system. And as a better approach will deals with maintaining good credit risk
management system level in any organization. It provides information for future
research those who want to do.
 This study will also provide relevant recommendation and conclusion by assessing
a theoretical and description for better method for credit risk management system
in the organization.

1.5. Scope of the study

The scope of the study will be limited to emphasize only with the assessment of credit risk
management system in Commercial Bank of Ethiopia Nebelet branch. However, due to time and
financial constraints, it is out of the research to cover the study of credit risk management system
in other commercial banks in this area.
 1.6. Methodology of the study

1.6.1. Research Design

Research design will provide the relevant information efficiently and effectively use in this study.
In his study both quantitative and qualitative data are collected first and those data are both primary
and secondary. At the end of collecting data the researcher will use descriptive method of data
analysis using graph and tables to conceptualize data analysis.

1.6.2. Source and method of Data collection

For this study the researcher will use both primary and secondary source of data.

a. Primary data source

It is mainly available from personal interview of the selected division head of the Bank
/management of the Bank officer, which helps the study to be furnished with firsthand information
and questionaries’ will be distributed to the employees of the bank.

b. Secondary data source

This data is mainly available from the policy manuals, documents and publications will be used as
means of collecting second hand information.

1.6.3 Sampling

1.6.3.1 Target population

The target population of the study are employees of Commercial Bank of Ethiopia Nebelet branch.
The total population of the study is 13 respondents. Those respondents are going to be examined
to get a primary data, but published books and reports are to be used to get the secondary datas.

1.6.3.2 Sample Technique and Sample Size

The sample will be equal with the target population of the study. Because of the total populations
of the study are little, the researcher will use complete enumeration (census).

The sample size of this study will be employees and manager of the bank. According this study
will use census the researcher will select all employees and manager of the bank as respondents,
who are 13 in number.
1.6.4 Methods of data analysis

After collecting data from primary and secondary sources, the data will be analyzed by using
qualitative and quantitative method by table and percentage. By using that method, the data will
be collected by questionnaires and interviews will pass through the process of coding and editing
and will be checked by computer for completeness. The edited data is summarized in the form of
the statement, percentage and tabulation.

Finally, the result of analysis will be presented or interpreted carefully to reveal the credit risk
management system of Commercial bank of Ethiopia in Nebelet branch.

1.7. Organization of the study

This paper is organized in to four major chapters. The first chapter is all about an introduction that
discusses the background of the study, statement of the problem, objective of the study, scope and
methodology and at the end the organization. The second chapter will summarize the related
literature review of credit risk management system both theoretically and empirically. And the
third chapter will present the analysis and interpretation part of the study and finally the fourth
chapter is going to convey a conclusion and will recommend the concerned body standing from
the findings.

1.8. Time and budget schedule

1.8.1. Time schedule

The research is a seven months’ work; it starts from December to June. i.e., starts from topic
selection to final presentation and defenses of the outcomes or researches. Here are the activities
the researcher will perform while doing the research.

Table 1.Time schedule

No Activity Months

Dec Jan Feb Mar Apr May June

1 Topic selection ×

2 Identification of problem ×
 3 Definition of the problem ×

4 Development of hypothesis ×

5 Preparation of the plan ×

6 Preparing questionnaire ×

7 Data collection ×

8 Discussion and analysis ×

9 Conclusion and recommendations ×

10 Editing and finalizing the paper × ×

submission

11 Presentation ×

1.8.2. Budget break down

The estimated amount of money needed by the researcher to conduct the study accurately are listed
below.

Table 2.Budget schedule

No Items Unit Quantity Cost

measurement
Cost per unit Total cost

Birr Cent Birr Cent

1 Pen Number 4 5 .00 20 .00

2 Paper Pcs 1 packet 130 .00 130 .00

3 Typing Page 40 5 .00 200 .00

printing

4 Binding per bind 2 times 15 .00 30 .00

5 Internet Minute 7 hr. 12 .00 84 .00

 6 Miscellaneous 200 .00

Total cost 664 .00

1.9 Reference

1. Carol Alexander 1999, Risk management and analysis volume I

2. Http/www. Bir.org.pdf: Battle committee, on bank supervision (Nov1999), principle for the
management of credit risk.
3. Http/www. Erisk.com v. vedson 2003: credit risk assessment in bank
4. Paul S. may land 1993, bank operating credit risk
5. Pony von vestal 20014 credit risk management basic concept.
6. Tray G. Herrik 1990 Bank analysis