MADDA WALABU UNIVERSITY

COLLEGE OF BUSSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESSMENT OF CREDIT MANAGEMENT FINANCE

INTITUTIONS: A CASE STUDY ACCOUNTING ON OROMIA
CREDIT AND SAVING SHARE COMPANY ON BALE ROBE
BRANCH

RESEARCH PROPOSAL SUBMITTED TO COLLEGE OF

BUSINESS AND ECONOMICS DEPARTEMENT OF ACCOUNTING
AND FINANCE FOR THE PARTIAL FULFILMENT OF THE
REQUIREMENT OF BACHELER DEGREE OF ART IN
ACCOUNTING AND FINANCE (BA)

BY:

KEDIR LEGESSE. UGR/4593/11

ADVISOR: AHMED H

APRIL, 2021

BALE-ROBE/ETHIOPIA
 LIST OF ACRONYMS
GDP Growth and Development Program

MFIS Micro Finance Institutions

 ABTRACT
The purpose of this study is to investigate the credit management of in finance
institutions on Oromia credit and saving Share Company in Robe branch. The general
objective of this study is to examining the credit management of in finance institutions on
Oromia credit and saving Share Company in Robe branch. In order to achieve this
objective, the researcher employs mixed research methods (Both quantitative and
qualitative research methods will be used). Descriptive research design will be used. In
order to get sufficient and relevant information for the study the researcher will use both
primary and secondary data. Primary data will be collected using structural interview
from credit mangers because, to get relevant data and by using questioners from
customers and employees. In the questioners, the researcher will use both close- end and
open- end questions in such a way that they should generate important information on
credit management system of Oromia credit and saving institution. The collected data
will be analyzed by using descriptive analysis method according, percentage and
frequency count will be analyzed and interpret the data collect form the sample
respondent.

KEY TERMS: Credit management, finance, Institutions

 CHAPTER ONE

1. INTRODUCTION

1.1 Background of the study

According to Hulme, (1991) microfinance institution was first started in 1980, by
professor Mohammed Yenus in Bangladesh. He led the way with pilot group lending
scheme for the land less people, finally this become Grameen Bank which is used as
model for many countries in the world. When we come to Ethiopia the government
appreciate and support micro finance institution, According to proclamation number
40/1996 of the federal government of Ethiopia, microfinance business means an
activates, that extending credit, in cash or in kind to peasant (Abinet, 2007).

To undertake proper mobilization of funds, financial institution practices credit

management activities. Credit management involves many activities ranging from credit
investigation to contract with borrowers, appraisal review and follow- up, documentation
nursing, recovery and write offs, having two main functions: Those are credit sanction
(Provisions) and credit follow up functions which are valuable in managing credit it
risks, improves return from credit and making proper credit decision of the institution
(Yaregal, 2007).

Currently there are around 30 licensed micro finance institution in Ethiopia working both
rural and urban areas so this study would be conducted on Oromia credit and saving
micro finance institution which was established in 1995 (CIMMISA, 2010). Therefore,
this study tries to examine the issue of credit management in finance institutions in the
case of Oromia credit and saving Share Company on Bale Robe branch.
1.2. Statement of the problem
Microfinance in Ethiopia has been established in Accordance with the proclamation
issued by the national bank of Ethiopia in 1996. Microfinance is one of the financial
institutions that provides loans to clients to help them engage in productive activities and
to raise their small business. Most of microfinance institutions approve loans for
productive purpose, because income increment is positively indicator to which all
development activities are addressed (Daniel, 2010). Credit management is the most
important activities in micro finance institutions. An attending credit management
policies and procedures makes it sound at the time of managing credit risk and credit
decisions. Mulat (2003) argues that if you not follow the credit management policies and
procedures one cannot think of managing credit risk and at the same time credit decision
will be come arbitrary subject to individual discrimination and judgment.

The group base lending method is not effective in achieving the microfinance objective,
because due to default payment is made by the group members. In addition the
beneficiaries who use this method also face a problem in the repayment of loan, the rest
who pay regularly were enforced to pay the default amount (Meaza, 2010). The
researcher observes most customers did not show progress and some of them become rent
suckers. This makes me to propose for study. Even though some of them show progress
and change to high level. So what would be the source for this? Is that due to
ineffectiveness of credit management of micro finance institution or not?

Therefore, the researcher is motivated to study related to credit management in finance

institutions in the case of Oromia credit and saving Share Company on Bale Robe branch
by answering the following basic questions.

1. What are the activities practiced in credit management of institution Oromia

micro finance institution, in Robe branch?
2. What method the institutions use to follow up the loan?
3. What policies and procedures the institution follows?
4. What are the monitoring mechanisms to collect credit in the institution?
1.3. Objective of the study

1.3.1. General objective

The main objective of the study is to examine the credit management in finance
institutions in the case of Oromia credit and saving Share Company on Bale Robe branch.

1.3.2. Specific objectives

1. To assess the activities practiced credit management of the institution.
2. To assess the effectiveness of polices and procedure the institution follows in
providing loans.
3. To assess the methods of the institution uses to follow up loan.
4. To identify the monitoring mechanism used by the institutions to collect credit.

1.4. Significance of the study

The importance of this study is to enhance the competitive position of Oromia credit and
saving finance institution by finding ways that improve the credit management system of
the institutions. The researcher will also believes that the result of this study will pave the
way for the clients of the institutions, also for the institutions and additionally serves as
reference for other researcher. Also the study will provides additional knowledge to
credit managers in designing new credit management and for planning and controlling
procedures in credit activities and it helps the clients of the institution by informing
necessity of paying credit according to agreements, in preventing un necessary payments.
Finally, the study will helps for further researchers as reference who want to conduct
study on the area of credit management of financial institutions particularly microfinance
institutions.

1.5. Scope of the study

Because of no sufficient time and no enough budget to conduct study on wide area the
study is limited to Oromia credit and saving finance institution of Robe branch
geographically.

.
1.6. Organization of study
This research contains five chapters. The first chapter contains an introduction to the
study which as different parts. Background of the organization and the study; statement
of the problem objectives of the study; significance of the study; scope of the study;
limitation of the study and organization of the paper. The second chapter contains
literature review on credit management. The third chapter contains methodology of the
study. The fourth chapter contains data analysis, interpretation, and chapter five contains
recommendation and conclusion.
 CHAPTER TWO

2. LITERATURE REVIEW

2.1. Poverty in Ethiopia

Ethiopia is one of the poorest countries in the world with annual per/capital income of $
170. The United Nations development program’s human development report for 2007-
2008 ranked Ethiopia as 169th out of 177 countries on the Human development Index the
average life expectancy after birth is 48yers. Infant, mortality and malnutrition rate are
among the highest in the world while access to education has increased in recent years,
the overall adult literacy rates is low compared to the sub- Saharan African standards
roughly 44% of the population lives below marked differences between rural and urban
areas. Most rural households live on a daily per capital income of less then$ 0.50

Generally, rural households have less access to most essential assessment, overall
progress in reducing poverty since 1992 falls short of what is required of meet 190G 1 by
2015 as result high variability in agricultural GDP and rapid population growth. Most
rural households are finding if increasingly difficult to service with out resource to
seasonal or permanent urban migrations search of wage employment (http;//www.rvral
poverty portal.org).

2.2. Microfinance in Ethiopia

Formally in Ethiopia stated in 1994 -95, in particular, the licensing and supervision of
institution proclamation of the government encouraged the spread of institution
proclamation of the government encouraged the spread of insinuation currently, there are
29 licensed micro finance institutions reaching about 2.2 million actives borrowers with
are out standing loan of a portfolio of a approximately 4.6 billion concerned the potential
demand, particularly in rural areas, this satisfies only on insignificant proportion
(WWW. aemfi- Ethiopia. org)
2.2.1. Micro finance as Anti- Poverty strategy
The recent definition of poverty by the roared bank extended the conceptual dimension
beyond the conventionally held idea of permanent income/ consumption of lack of
income) assets, sense of noiselessness and strategies not only need to create income
earning opportunities, but also must empowerment of the poor in the sphere of state
social in situations, and security against variety of shockers. Micro finance is believed to
be one important entry point to addressing many of them. But services are limited in
some urban areas, neglecting the majority of the poor. In Ethiopia, for example, the
development bank the commercial bank of Ethiopians, having their branches in urban and
semi urban, provide virtually no access to the rural population AISD, private banks,.
through growing in number don’t engage themselves in this raids. According to an earlier
study. In rural Ethiopia as a whole, less than 1% of the population has access to this
source consequently, accessing credit for small scale and informal operators continue to
pose a major constraint to growth of the sector. The alternative is the “informal” financial
sector, mainly the individual money lenders. In this case, borrowers are required to
provide guarantors and the interest rate is ext remedy high, varying from 50% to 120%
that the errata interest can 90 high as 400% in some instances. And this exploitive interest
rate of the informal sector diminishes potential reform to factors of production, and is a
constraint to diversity economic activities of the rural sector. The feeder government of
Ethiopia has taken several economic reform measures to address poverty in its every
aspect. Thus, while trying to fulfill the basic needs of the population, it also embarks up
on economic reform measures conductive for free market competition and employment
creation which includes the promotion of policies that will encourage saving, private
investment, increasing income earning opportunities and promotion of small –scale in
dustiest in the informal sectors among others. The five-year development program
document emphasizes, among others, credit as a means to increase small holder
production (EPR DR, 1992E.C). fanatical markets are considered by the regional
governmental as a good entry point in achieving food security objectives as the will allow
rural house holds in both food secure and in secure area to explore their “ comparative
advantage” in the market place and to create (AEMFI, 2000). Thus, in addition to
promoting provision of credit through government channels, the program encourages
micro finance institution to prone the their services of credit provision and saving
mobilization. However, even of policies aimed at changing the regulatory environment
were expected to pave the way for increased fellows of resources to rural and informal
sectors, micro financial services are very in adequate still.

(http:// www.Ruralpovertyportal.org.web.gues)

2.2.2. The concept of micro financing and it’s objectives

Microfinance referred to as small scale financial services render to the rural and urban
poor, providing credit for self employment, and small business, and includes saving and
technical assistance microfinance schemes have recently aroused interest among policy
makes sand researches as vehicles of poverty mitigation. pioneered by the German bank
in Bangladesh, most micro finance program required the poor to from groups and repay
the loan in small and periodic installments under micro finance service, concept of
money. Lending has been institutionalized, rationalized and reformed for the
sustainability of both borrowers and lender 5.2t may encompass the provision of financial
and other support services like savings, collateral free credit, insurance to the poor and it
addresses the issues relating to poverty; and unemployment; micro finance institution
have been established in accordance with the proclamation issued by the national bank of
Ethiopia in 1996. there are about 30 micro-finance institution. All of them are share
companies administered by their respective board of directors. The central objective of
these financial institution is to provide credit and saving services to the poor. Micro
financial with gentilities whose cash requirements are small. The micro finance lending
program has many objectives. Among theses, some of the objectives are: to provide
credit facilities for those urban and rural poor people from paying high interest rates to
the informal money lender, improve the economic capacity of women and the saving
habit of the people, vitality and use the local material effectively and enhance investment
and income of the society (Daniel, 2010)

2.2.3. Mechanism for screening defaulting

Market interest rate is commonly used for screening borrowers. This technique has the
objective of encouraging loan taking on the basis of prospective returns, and not to
capture subsides. Self selection is another mechanism used to avoid defaulter borrowers.
In using this mechanism, prospective members are asked to form groups by them solves,
and screen in favor of those they believe will repay the loan. The group lending
methodology removers the main entry barriers for those with no collateral, limited
literacy, weak technical knowledge and narrow prior money management experience.
The other mechanism is character reference this is the use of officials or power structure
to approve loan applications. This may have negative effect on screening out of the poor
but may be used effectively in areas where the power structure in the community is
defined and strong. The poor are usually excluded because of the fear that they can’t their
loan repayment obligations. However, there are mechanisms for ensuring the repayment
of loan on time by poor borrowers with out. These me charismas in dude intensive
supervision, peer group monitoring, and provision of incentives to borrowers and staff of
the institution. Intensive supervision is concerned with the regular meetings of credit
officers in or near the homes of borrowers, though if may be costly to the institution.
Frequent follow up on the borrower and their activities has significant impact on the
repayment of the loans. One effective strategy is to place the credit officer within the
borrowing community or opening a one man satellite office from where the cordite
officer can easily follow-up why a particular member failed to meet his/her obligation.
Faure to repay in front of the public also creates psychological pressure on the borrower
there by forcing him to meet obligations. Moreover, borrower incentives can be
provided in the form of rebate of interest on loans repaid early, in addition staff.
Incentives can be related of the amount of loans repayment under this arrangement, the
MFIS staff may receive financial bonuses. Directly recanted to the repayment
performance of their clients over a given period of time progressive lending is also a
mechanism under which borrowers are able to gain repeated access to liens if they repay
on time. Finally, borrowers can beleaguered to make compulsory saving in which a small
amount is contributed regularity in to a group saving fund that provides insurance or
collateral for the loans of all group members. In case of repayment failure, the saving can
be used for covering,. At least some portion of the loans the may be defaulted. This is
also practiced by most MFIS. Some MFIS require clients to save ascertain proportion
before they are granted the loan. This shows the commitment of the borrowers provided
that they continue with regular saving after the loan. The above mechanisms are more or
less conventional and are practiced by many MFIS in Ethiopia. However, MFIS, need to
be innovative and creative experimenting with new approach cinder their own contexts
(Daniel, 2010).

2.3. Credit management an over view

CM is one of the major functions, which financial institutions undertake for proper
mobilization of funds the credit management function includes loans and advances it
also involves a large number of activities ranging form credit investigation to contract
with borrowers, appraisal, review, and follow- up, documentation nursing, recovery and
write offs. Safety of a financial institution loan or advance is advance is directly to the
basis on which decision to and is taken, the type and quantum of or credit to be provided
and the terms and condition on which the loan will be made available consequently, a two
pronged approach is required to be followed to ensure the safety of each loan.

 Presentation appraisal to determine the acceptability of each loan proposal and

 Post sanctions control to ensure proper documentation, follow-up and
supervision (Daniel, 2010).

2.3.1. Presentation appraisal

Is concerned with the measurement of the riskiness of a loan proposal not only financial
data relating to the past and projected working results are required but, a detailed credit
report is complied on the borrower, If any, based in information collected from the
borrower, market reports, final audited accounts, income tax and wealth tax returns.
Assessments for orders and confidential information called for from other lenders and
financial insinuations with whom the parties have clearing the credit report has to be up
dated periodically. It is important sources of reliable information of preparing the risk
profile of the borrower and for preparing the risk profile of the borrower and for
finalizing the credit rating of the borrower. The credit report reveals the personal details
of the prospector, partner or calibrators of the firm as well as his/their assets and
liabilities including indebtedness to other parties such as lenders and financial
institutions. The CR as a personal profile of the borrower if kept up to date is particularly
use full when the borrower /safety is financially embarrassed and the bank makes efforts
to have his personal assets attached. (IBID).
2.3.2. Post sanction control
To a large extent, it depends up on the findings of the pre- sanction appraisal. The post –
control involve proper documentation of the facility, and the after care or follow up and
supervision through monitoring of transaction in the lean amount, security of procedural
statements submitted by the borrower, physical inspection of the securities and books of
account of the borrower, periodical reviews and renewals etc. successful lending thus
depends up on careful selection of the customer, proper appraisal of his credit needs and
adequate control to insure that his dealing with the lender are above board and that he/she
is complying with the terms and conditions on which credit has been sanctioned to him.
In this post sanction approach the credit manager has the following functions

 Assessing of credit standing both new and existing customers.

 Establishment of terms having regard to the risk involved and the potential
profit.
 Maintaining of the sales ledger
 Monitoring and controlling customer balance
 Collection of payment as close to terms as possible with out jeopardizing
future business.

2.4. Credit policy system and procedures

Policy is a general rule to guide each Decision. A well developed credit risk management
policy ensures the success of financial institution in addition a well conceived credit
management policies are essential for financial institution to perform their functions
effectively and minimize the risk inherent in any extension of credit. Financial
institutions need policies specifying how much of what kind of loans will be made, of
whom and under what circumstances (determining the site of loan portfolio, specifying
the types of loans and policies affecting loan firms) (Daniel, 2010).

Many people believe that well developed credit policy has the following advantages

 They set objectives standards and parameters to officers who grant loans and manager
loan portfolio.
 They are a basis for evaluating lenders credit performance guide lender management.
 If they properly formulated, they enable lender mgt to maintain proper credit
standards, avoid excessive risks and evaluate business opportunities properly.
 They also have great contribution to good CR management, advance policy reduces
alternative coarsest of /actions and simplest the decision making process.
 A sound policy contributes to a lender’s success by supporting prompt credit
decision.
 It provides the frame work for the entire credit management process.
 Well designed credit policy has also its own objectives to meet necessary directions
in credit dispensation. The policy is subject to review periodically depending up on
the changes that may take place in the financial market in particular the banking
sector and the need with in the bank to build up quality assets. The procedure and
system laid down in the loan policy has to be followed consistently at all hierarchical
levels in the institution to ensure that canons of sound lending are uniformly adopted
with a view to consistently improve and maintain the quality of the credit portfolio of
the bank, it is there for imperative that all the institution staff is fully conversed with
the loan policy and its implications.
Some financial analysis advice that lender should establish an appropriate credit
environment on the basis of the 3 principles below.

1) The board of directors should have responsibility for approving and periodically
reviewing the CR strategy and significant CR policies of the institution. The strategy
should reflect the lenders to learned for risk and the level of profitability the
institution expects to achieve for incurring various CR.
2) Senior management should have responsibility for implementing the CR strategy
approved by the board of directors and for developing policies and procedures for
identifying measuring monitoring and controlling CR such policies and procedures
should address credit risk in all of the lenders activities.
3) Lender should identify and manage CR inherent in all products and activities new to
them are subjects to adequate procedures and controls before being introduced or
under taken and approved by other board of direction.
2.5. Repayment Ethics
In a country where a large proportion of people are very conservative and orthodox in
their thinking, taking loan form money lenders. Banks is considered to be grave risk. If
person dies with out repaying his debts, his sons and heirs feel their duty do so or the
fathers soul will not rest in peace. Also, the father of non repayment of debts due to
exorbitant interstates, could lead to alienation of property rights (Danielk, 2010)

2.5.1. Over does management

Overdoes arise due to non payment of loan installments on due dates willful default is
mainly due to the inadequate and ineffective organization efforts of banks to receive
dues. Clearly over does, can result form external or internal factors. (IBID)

2.5.2. External factors

There are factors over which the banks have no operational or demonstrative control,
such as: (Daniel K, 2010)

 Natural calamites like foods, drought and earth quakes.

 Political and government in interference cropping pattern changes not adopted by
farmers.
 Cropping pattern changes not adopted by farmers.
 Costs of in puts and prices of farm produce with out price support.

2.5.3. Internal factors

There are factors related to organizational deficiencies and administrative ineffectiveness,
such as (Daniek, 2010)

 Reflective Loaning policies procedures

 In effective supervision machinery over loan utilization.
 Lack of efforts for recovery and inadequate system for recovery.
There are other causes lending to loan over does, such as:

 Under financing /over financing.

 In fructuous investments
 CHAPTER THREE

3. METHODOLOGY

3.1. Study area

Robe, more commonly known as Bale Robe (in order to differentiate it from other towns
in Ethiopia which are also called Robe), is a town and separate woreda in south-central
Ethiopia. Located in the Bale Zone of the Oromia Region, this town has a latitude and
longitude of 7°7′N 40°0′E with an elevation of 2,492 metres (8,176 ft) above sea level. It
is located about 430 kilometres by road from Ethiopia's capital Addis Ababa. Robe
shares Robe Airport (ICAO code HAGB, IATA GOB) with neighboring Goba. Ethiopian
Airlines has a scheduled flight four times a week connecting it to the capital Addis Ababa
and to the southern city Arba Minch. The main market day is Thursday, with a smaller
market working on Tuesdays and Sundays at another place in the town. Notable tourist
attractions include the Sof Omar Caves, which lie to the east.

3.2. The research Design

The study is focuses on the assessment of credit management on finance institutions in
case of Oromia credit and saving Share Company in Robe branch. The study will be used
both qualitative and quantitative research approaches in order to achieve the research
objective.

3.3. Source of data

In order to get sufficient and relevant information for the study the researcher will use
both primary and secondary data. The primary data will be collected from customers,
employees of the institution and management on the current situation of the institutions
and performance of employee and secondary data will be collected from books, manuals
and reports.

3.4. Sample techniques and sample size

Since the number of employee in the organization is 12, the judgmental sampling method
will be used to collect data because this method avoids bias and allow the researcher to
get real information for each and every employee. But for the customers the researcher is
used convenient non probability sampling technique because there is no complete list of
customers.

3.5. Method of data collection

Primary data will be collected using structural interview from credit mangers because, to
get relevant data and by using questioners from customers and employees. In the
questioners, the researcher will use both close- end and open- end questions in such a
way that they should generate important information on credit management system of
Oromia credit and saving institution.

3.6. Method of data processing

The process will be carried out in clear way to reach the objective of the study after the
necessary primary and secondary data will be collected and will be started by editing and
classifying the collected data to more meaning full and relevant data editing means the
process of examining the collected data will Identify error and omission and to correct
them regarding data classification the collected data will be arranged and grouped in to
similar categorist.

3.7. Method of data analysis

The collected data will be analyzed by using descriptive analysis method according,
percentage and frequency count will be analyzed and interpret the data collect form the
sample respondent.
4.1 WORK PLAN in 2021
No
Activities Des Jan Feb Mar Apr May Jun

Summiting
Research
Title

1 Draft
proposal
writing

2 Questionnair
e preparation

3 Proposal
presentation

4 Submission
of proposal

5 Data
collection

6 Data coding
and editing

7 Data analysis

8 Submission
of draft
papers

9 Submission
of research
paper
4.2 Budget Plan
No Quantity Unit price birr Total cost Remark

1. Pencil 2 pieces 2 4
1
1. Pen 6 pieces 7 42
2
1. Writing pad 1 pieces 30 30
3
1. Staplers Printing 3 pieces 30 90.00
4 paper
1. Photo copy paper 1 pad 45 45.00
5
1. Printing paper 1 pad 45 45.00
6
1. Flash 1 250 250
7
1. Transportation 3 days 300 900
8
1. Researchers 3 researchers 100 300
9
2. Contingency 5% 12 36
o
Grand total 1742
 REFERENCES

Abinet Luseged. 2007. Credit Management in Microfinance Institutions in Ethiopia,

unity university, Addis Ababa, Ethiopia.

Aemfi,. 2008. Microfinance development review profile of Oromia credit

and saving institution, yearly bullet No2.

CIMMISA. 2010. Oromia credit and saving institution, written manuals and
pamphlets, Addis Ababa

Daniel Kassa. 2010. Credit Management in microfinance institutions in Ethiopia,

Arbaminch University, Arba Minch, Ethiopia.

Federal Government of Ethiopia, proclamation No/40/1996, Addis Ababa,

Ethiopia

Meaza L,. 2010. Loan management and credit facilities, Jimma University,

Jimma, Ethiopia.

Mulatu Demeke. 2000. Association of Ethiopia micro finance institution, Wello

University, Ethiopia.

Yaregal Abegaz. 2007. Fundamental of financial management, first edition, Ethiopia

Accounting Society of Ethiopia.

(http://www. rvral poverty portal. Org, Goggle, search,” poverty in Ethiopia.

(www. Aemfi – Ethiopia. Org).

(www.ruralpovertyportal/org/web/gues), “Ahandolet in credit management.