The main objective of the thesis is to assess the effect of credit risk management on the quality of loans portfolio in the case of Development Bank of Ethiopia. A sample of 84 respondents was drawn from the employees of the Development Bank of Ethiopia by using purposive sampling technique. Both primary and secondary data were used. Data related to loan portfolio and loan position is obtained from the bank whereas, primary data are collected using structured questioners from the employees of the bank.
Descriptive and inferential statistics were used to conduct the research and Multiple Regression Analysis was run using SPSS Version 21.0 to analyze the data. With regard to credit risk management practices, the result show that DBE has not satisfactory risk Management practice. Precisely, using score 1 (poor) to 5 (best), all the parameters of risk management practice assessment have a score value below 3.40, i.e. Credit Risk Granting and Portfolio Quality Control (3.40), Credit Risk System and Standard (3.20), Credit Risk and Portfolio Quality Control (3.17), Risk Identification, Measurement and Control (3.03), and Risk Environment (2.98). The Bank`s loan portfolio is also more vulnerable to various types of risks, such as to unpredictable risk, predictable, and controllable risks. The bank’s NPL ratio was above 15% for the last five years.
The regression result also showed that sound credit granting process and the existence of comprehensive risk management system and standards are the significant variables that affect loan portfolio quality of the Bank. Credit risk management practice of the bank has insignificant effect on loan portfolio quality. Both in terms of Non-performing loan and concentration, DBE has poor loan portfolio quality which is due to the bank’s poor credit risk management practice. Therefore, there is a need to improve and enhance credit risk management practice of the Bank, especially, by improving the credit granting process to have sound credit risk management, and by updating credit risk management system and standards so as to have strong credit management.
Table of Contents
1. INTRODUCTION
1.1. Background of the study
1.2. Statement of the Problem
1.3. Objective of the study
1.4. Research questions
1.5. Significance of the study
1.6. Scope of the Study
1.7. Organization of the Paper
2. REVIEW OF RELATED LITRATURES
2.1. Introduction
2.2. Theoretical Literature Review
2.2.1. Definition of credit risk
2.2.1.1. Determinates Portfolio quality
2.2.2. Loan Portfolio Theory
2.2.3. Credit Risk Theory
2.2.4. Credit Risk Management
2.2.5. Portfolio Management
2.2.6. Loan Portfolio Quality
2.2.7. Relationship between Credit Risk Management and Loan Portfolio
2.3. Empirical Literature Review
2.4. Conceptualization Frameworks
3. METHODOLOGY OF THE STUDY
3.1. Introduction
3.2. Research Design and Approach
3.3. Data Sources and collection Tools
3.4. Validity and Reliability of Research Instruments
3.5. Sampling and Sampling Techniques
3.6. Sample Size Determination and Selection
3.7. Data Analysis Techniques
3.7.1. Model Specification
3.8. Ethical Considerations
4. DATA ANALYSIS AND RESULT DISCUSSION
4.1 The General Background of the Respondents
4.2 Credit Risk Management Practice of DBE
4.3 Loan Portfolio Quality Assessment of DBE
4.3.1 Trend of outstanding loan by number of clients and loan amount
4.3.2 The Agriculture sub-sector loan outstanding Assessment
4.3.3 The Manufacturing sub Sector loan Assessment
4.4 Trend of Nonperforming loan by number of clients and loan amount
4.4.1 The Agriculture Sub- Sector Loan Assessment
4.4.2 The Manufacturing Sub Sector Loan Assessment
4.5 Loan Collection Performance
4.5.1 The nexus of NPL and Collections in DBE
4.5.2 Collection Trend and Performance for the Last Five Years
4.6 Credit risk management practice and loan portfolio quality in DBE
5. SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1. Summary of Findings
5.2. Conclusion
5.3. Recommendation
Research Objectives and Focus
The primary objective of this thesis is to assess the impact of credit risk management practices on the quality of the loan portfolio at the Development Bank of Ethiopia (DBE). By investigating the internal risk management mechanisms and analyzing historical performance data, the research explores how these processes influence loan defaults and overall asset health.
- Assessment of credit risk management practices within the Development Bank of Ethiopia.
- Evaluation of the bank's loan portfolio quality and non-performing loan trends.
- Investigation of the causal relationship between credit risk management and portfolio performance.
- Identification of the primary factors contributing to high non-performing loan ratios.
Excerpt from the Book
1.1.Background of the study
Risk management is core concept in bank and financial sector because it has substantial effect not only on the behavior of financial institution, but also economy of a country as well as entire world. For that reason, the risk management issue is paid more and more attention in the every level of any organization over the world. In addition, as financial industry becoming more competitive as well as complex, bankers and financial managers have been shifted away from consideration on profit or spread towards to risk pricing. In other words it is not only insufficient to earn high return rate on an investment; but also earn return that compensates the banks properly for the risk assumed. Thus, the quantifying risk and finding optimal mix between taking risks, maximizing returns by creating own capital provisions are crucial for financial world (Togtokh, 2012).
Similarly, credit risk can be defined as- the possibility of losses associated with reduction in the credit quality of borrowers or counter parties. In a bank’s credit portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet their commitments in relation to lending. Literature show that losses result from reduction in portfolio value are arising from actual or perceived deterioration in credit quality.
The idea of risk management is an exceptionally vital idea to numerous organizations as most financial choices spin around the corporate expense of holding risk on account of the critical risk it conveys regarding the survival of organizations. This issue is especially essential to banks since risk is a characteristic piece of their center business operations and activities.
Summary of Chapters
1. INTRODUCTION: This chapter provides the foundation for the research by defining the scope, the research problem regarding NPLs at DBE, and the objectives guiding the study.
2. REVIEW OF RELATED LITRATURES: This chapter surveys existing theories on credit risk management, loan portfolio theory, and previous empirical studies to establish the conceptual framework.
3. METHODOLOGY OF THE STUDY: This chapter outlines the research design, the mixed-method approach utilized, and the sampling techniques applied to gather data from bank employees.
4. DATA ANALYSIS AND RESULT DISCUSSION: This chapter presents the empirical findings derived from questionnaires and historical bank records, including a regression analysis of credit risk management variables.
5. SUMMARY, RECOMMENDATIONS AND CONCLUSION: This chapter synthesizes the findings and provides strategic recommendations for the bank to improve its credit risk management and loan portfolio quality.
Keywords
Credit Risk Management, Loan Portfolio Quality, Non-Performing Loans, Credit Granting Process, Risk Identification, Risk Assessment, Risk Monitoring, Development Bank of Ethiopia, Financial Performance, Risk Mitigation, Credit Risk Standards, Loan Recovery, Portfolio Management, Banking Risk, Asset Quality
Frequently Asked Questions
What is the core focus of this research?
The research examines the effectiveness of credit risk management practices at the Development Bank of Ethiopia and how these specific practices influence the quality of the bank's loan portfolio.
What are the primary thematic areas covered?
The study covers credit risk identification, assessment, monitoring, and control, as well as an analysis of trends in non-performing loans within the agriculture and manufacturing sectors.
What is the central research question?
The research asks how credit risk management practices impact the quality of the loan portfolio at the Development Bank of Ethiopia and seeks to identify the contributing factors to the bank's non-performing loans.
Which scientific methods were employed?
The study uses a mixed-methods approach, combining descriptive statistics for survey responses and inferential statistical tools, specifically Multiple Regression Analysis, to examine variable relationships.
What does the main body address?
The main body details the bank's existing credit risk practices, assesses the quality of the current loan portfolio using historical data, and presents regression models to determine the impact of management practices on portfolio outcomes.
Which keywords characterize this work?
The work is characterized by terms such as Credit Risk Management, Loan Portfolio Quality, Non-Performing Loans, and Financial Risk mitigation.
Why is the Development Bank of Ethiopia's NPL ratio considered critical in this study?
The study highlights that the bank's NPL ratio has remained consistently above the 15% threshold set by the National Bank of Ethiopia, signaling a systemic risk to the bank's financial sustainability.
How does the bank's credit granting process relate to portfolio quality?
The regression analysis revealed that a sound credit granting process is a highly significant variable that positively impacts loan portfolio quality.
What is the relationship between different sectors and risk?
The findings indicate that the agriculture and manufacturing sectors are heavily concentrated, with the agriculture sector showing the highest risk levels in terms of loan recoverability.
What is the primary conclusion regarding DBE's current practices?
The study concludes that DBE's current credit risk management practices are unsatisfactory and require urgent improvement, particularly through better credit granting processes and updated risk management standards.
- Arbeit zitieren
- Kebede Adane (Autor:in), 2020, Credit Risk Management in the Development Bank of Ethiopia. Effects on the Quality of Loan Portfolio, München, GRIN Verlag, https://www.grin.com/document/903762
