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<p> <b><b></b></b></p><p><b><b><b>INTRODUCTION</b></b></b></p><p><b><b><b></b></b></b></p><b><b><b><p><b>1.1 &nbsp; &nbsp; &nbsp; Background of the Study</b></p><p><b></b></p><b><p>Banks<br>are financial institutions that are established for lending, borrowing,<br>issuing, exchanging, taking deposits, safeguarding or handling money under the<br>laws and guide lines of a respective country. Among their activities, credit<br>provision is the main product which banks provide to potential business<br>entrepreneurs as a main source of generating income.</p><p>While<br>providing credit as a main source of generating income, banks take into account<br>many considerations as a factor of credit management which helps them to<br>minimize the risk of default that results in financial distress and bankruptcy.<br>This is due to the reason that while banks providing credit they are exposed to<br>risk of default (risk of interest and principal repayment) which need to be<br>managed effectively to acquire the required level of loan growth and<br>performance.</p><p>The<br>types and degree of risks to which banks are exposed depends upon a number of<br>factors such as its size, complexity of the business activities, volume etc. It<br>is believed that generally banks face Credit, Market, Liquidity, Operational,<br>Compliance /legal/ regulatory and reputation risks among which credit risk is<br>known to have the adverse impact on profitability and growth. Hence, the<br>success of most commercial banks lies on the achievements in credit management<br>mitigating risk to the acceptable level.</p><p>Charles<br>Mensah (1999) stressed the importance of credit management as follows: Credit<br>management process deserves special emphasis because proper credit management<br>greatly influences the success or failure of financial institutions.</p><p>This<br>indicates that credit provision should be accompanied by appropriate and<br>attractive credit policies and procedures that enhance performance of credit<br>management and protects the banking industry from failure.</p><p>Credit<br>management means the total process of lending starting from inquiring potential<br>borrowers up to recovering the amount granted. In the sense of banking sector,<br>credit management is concerned with activities such as accepting application,<br>loan appraisal, loan approval, monitoring, recovery of non-performing loans, etc.<br>(Shekhar, 1985).</p><p>According<br>to Hettihewa, 1997, Credit Management is extremely important as granting credit<br>is considered to be the equivalent of investing in a customer.</p><p>However,<br>payment of the debt should not be postponed for too long as delayed payments<br>and bad debts are a cost to the company. Thus, Efficiency and effectiveness in<br>performing each steps of loan processing using various parameters has<br>significant effect on performance of credit management.</p><p>UBA<br>Share Company is one of the financial institutions engaged in providing short<br>and medium credit like other commercial banks in the country in general and in<br>the region in particular. In the last few years, both public and private<br>sectors in the economy underwent encouraging development in investment and<br>business activities, thus becoming the fertile ground for the banking industry.<br>Since its establishment in 1997 G.C, United Bank of Africa (UBA) has been<br>striving to exploit such and all other opportunities towards achieving its<br>corporate goals. The bank has been providing only short and medium loans and<br>advances to its customers because of its early stage of capital base and<br>liquidity position. The bank has been playing a significant role in providing<br>loans and advances to its customers that enhances the investment need in the<br>country and as means of generating income for its shareholders.</p><p>Hence,<br>the purpose of this study is to assess the performance of credit management<br>problems and strengths of United Bank of Africa (UBA) Share Company in Tigray<br>Region from different perspectives in light of the practices of modern credit<br>management in financial institutions.</p><p><b>1.2 &nbsp; &nbsp; &nbsp; Background<br>of the Banking Industry in Ethiopia</b></p><p><b></b></p><b><p>As<br>a result of the agreement reached between Emperor Minilik II and Mr.Ma<br>Gillivray, representative of the British owned National Bank of Egypt; modern<br>banking in Ethiopia began in 1905 with the Bank of Abyssinia, a private company<br>controlled by the Bank of Egypt In 1931. It was liquidated and replaced by the<br>Bank of Ethiopia which was the bank of issue until the Italian invasion of<br>1936. During the Italian occupation, Bank of Italy banknotes formed the legal<br>tender. Under the subsequent British occupation, Ethiopia was briefly a part of<br>the East Africa Currency Board. In 1943; the State Bank of Ethiopia was<br>established, with two departments performing the separate functions of an<br>issuing bank and a commercial bank. In 1963, these functions were formally<br>separated and the National Bank of Ethiopia (the central and issuing bank) and<br>the Commercial Bank of Ethiopia were formed.</p><p>In<br>the period to 1974, several other financial institutions emerged including the<br>state owned: The Agricultural and Industrial Development Bank (established<br>largely to finance state owned enterprises); The Savings and Mortgage<br>Corporation of Ethiopia; The Imperial Savings and Home Ownership Public<br>Association (which provided savings and loan services).</p><p>Major<br>private commercial institutions, many of which were foreign owned, included the<br>Addis Ababa Bank, the Banco di Napoli, the Banco di Roma.</p><p>However,<br>the banking business could not move further because of the nationalization of<br>private investments by the Socialist regime (the Dergue regime) that came into<br>power leaving only three government banks; the National Bank of Ethiopia, the<br>Commercial Bank of Ethiopia and agricultural and Industrial Development Bank.</p><p>This<br>was reversed when the Socialist regime was overthrown in 1991. Following the<br>overthrown of the Dergue regime in 1991, the EPRDF declared a liberal economic<br>system. In line with this, Monetary and Banking proclamation of 1994<br>established the National Bank of Ethiopia (NBE) as a judicial entity, separated<br>from the government and outlined its main function.</p><p>Monetary<br>and Banking proclamation No.83/1994 and the Licensing and Supervision of<br>Banking Business No.84/1994 laid down the legal basis for investment in the<br>banking sector (<a target="_blank" rel="nofollow" href="http://www.nbe.gov.com)">www.nbe.gov.com)</a>.</p><p>After<br>the proclamation of 1994, the first private bank, Awash International Bank was<br>established in 1994 by 486 shareholders paving a way to the establishment of<br>related private banks such as Dashen Bank ( 1995), Abyssinia Bank (1996),<br>Wgegan Bank (1997), United Bank (1998), Nib International Bank (1999),<br>Cooperative Bank of Oromia (2004), Lion International Bank (2006), Oromia<br>International bank (2008), Zemen Bank (2006), Buna International Bank (2009),<br>Birhan International Bank (2009), and others which are under establishment.</p><p><b>1.3 &nbsp; &nbsp; &nbsp; Statement<br>of the Problem</b></p><p><b></b></p><b><p>According<br>to Shekhar, 1985, credit plays an important role in the lives of many people<br>and in almost all industries that involve monetary investment in some form.<br>Credit is mainly granted by banks including to several other functions like<br>mobilizing deposits, local and international transfers, and currency exchange<br>service.</p><p>Hence,<br>the issue of credit management has a profound implication both at the micro and<br>macro level. When credit is allocated poorly it raises costs to successful<br>borrowers, erodes the fund, and reduces banks flexibility in redirecting<br>towards alternative activities. Moreover, the more the credit, the higher is<br>the risk associated with it. The problem of loan default, which is resulted<br>from poor credit management, reduces the lending capacity of a bank. It also<br>denies new applicants’ access to credit as the bank’s cash flow management<br>problems augment in direct proportion to the increasing default</p><p>Problem.<br>In other words, it may disturb the normal inflow and outflow of fund a bank has<br>to keep staying in sustainable credit market.</p><p>Hence,<br>credit evaluation decisions are important for the financial institutions<br>involved due to the high level of risk associated with wrong decision. The<br>process of making credit evaluation decision is complex and unstructured. This<br>complex and unstructured decision making process of credit evaluation needs<br>proper credit management by the concerned banks.</p><p>Adequately<br>managing credit in financial institutions (FIs) is critical for the survival<br>and growth of the FIs. In the case of banks, the issue of credit management is<br>of even greater concern because of the higher levels of perceived risks<br>resulting from some of the characteristics of clients, business conditions and<br>economic environment in which they find themselves.</p><p>The<br>very nature of the banking business is so sensitive because more than 85% of<br>their liability is deposits mobilized from depositors (Saunders, Cornett,<br>2005). Banks use these deposits to generate credit for their borrowers, which<br>in fact is a revenue generating activity for most banks. This credit creation<br>process, if not managed properly, exposes the banks to high default risk which<br>might led to financial distress including bankruptcy. All the same, beside<br>other services, banks must create credit for their clients following prudent<br>credit management procedure to make some money, grow and survive in stiff<br>competition at the market place.</p><p>Even<br>though a preliminary study is made in preparing the master business plan for<br>the opening of branches; little work is done in studying the performance of<br>credit management of the branches that would alleviate the problems encountered<br>and contribute to the growth of market share and income generation of the bank.<br>Hence the researcher is interested to the research area in particular and to<br>the contribution and object of the bank in general in assessing the gaps in<br>credit management performance which is crucial to be studied in the prevailing<br>stiff competition in line of the modern financial measurements.</p><p>Therefore,<br>the principal concern of this study is to assess the performance of credit<br>delivery and management in United Bank of Africa (UBA) Share Company in Tigray<br>Regional State.</p><p><b>1.4 &nbsp; &nbsp; &nbsp; Research Questions</b></p><p><b></b></p><b><p>1. &nbsp; &nbsp; &nbsp; &nbsp; Does<br>the Bank consistently comply with its policy and procedures in entertaining its<br>loan applicants, loan processing, and collecting?</p><p>2. &nbsp; &nbsp; &nbsp; &nbsp; To<br>what extent is the Bank accelerating the performance of credit management in<br>line to its policy and national banks requirement?</p><p>3. &nbsp; &nbsp; &nbsp; &nbsp; Do<br>loan customers of the Bank support the prevailing loan policy and procedures<br>that could result long lasting relationship?</p><p>4. &nbsp; &nbsp; &nbsp; &nbsp; To<br>what level is the Bank building up quality loans arresting non- performing<br>loans in line to its policy and National Bank’s requirement.</p><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>1.5 &nbsp; &nbsp; &nbsp; Justification of the Study</b></p><p><b></b></p><b><p>Based<br>on the monetary and Banking proclamation No.83/1994 which laid down the legal<br>basis for investment in the banking sector a number of private commercial banks<br>are under establishment opening their head quarter at Addis Ababa which is the<br>capital city of Ethiopia and striving to stretch their branches to all regions<br>as a strategy to build up market share.</p><p>United<br>Bank of Africa (UBA) Share Company is one of the leading private commercial<br>banks playing its role in opening about 48 branches in the country. Of which 23<br>branches are in Addis Ababa, the major business center and the capital city of<br>the country, and the rest 25 branches are at different regions. (Annual report<br>of 2008/09)</p><p>Out<br>of these branches in different regions 7 (seven) branches are opened in Tigray<br>Region. However, though a preliminary study is made in preparing the master<br>business plan for the opening of branches, little work is done in studying the<br>performance of credit management of the branches that would alleviate the<br>problems encountered and</p><p>Contribute<br>to the growth of market share and income generation of the bank. Hence the<br>researcher is interested to the research area in particular and to the<br>contribution and object of the bank in general in assessing the gaps in credit<br>management performance which is crucial to be studied in the prevailing stiff<br>competition in line of the modern financial measurements.</p><p><b>1.6 &nbsp; &nbsp; &nbsp; Objective<br>of the Study</b></p><p><b></b></p><b><p><b>1.6.1<br>&nbsp; General objective</b></p><p><b></b></p><b><p>The<br>main objective of the study is to evaluate the performance of credit management<br>of United Bank of Africa (UBA) in Tigray region as compared to National Bank<br>requirements vis à vis its credit policy and procedures.</p><p><b>1.6.2 &nbsp; Specific objectives</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p>1. &nbsp; &nbsp; &nbsp; &nbsp; To<br>evaluate the compliance of the Bank to its policies and procedures in<br>processing loan applications.</p><p>2. &nbsp; &nbsp; &nbsp; &nbsp; To<br>evaluate the ability of the Bank in creating credit and collecting its loan on<br>their due date.</p><p>3. &nbsp; &nbsp; &nbsp; &nbsp; To assess<br>the perception of the customers towards the Bank’s policy in relation to its<br>loan provision.</p><p>4. &nbsp; &nbsp; &nbsp; &nbsp; To<br>evaluate the Bank’s credit quality as compared to National Bank’s requirements<br>and its credit policy.</p><p><b>1.7 &nbsp; &nbsp; &nbsp; Significance<br>of the Study</b></p><p><b></b></p><b><p>Loans<br>and advances are known to be the main stay of all commercial banks. They occupy<br>an important part in gross earnings and net profit of the banks. The share<br>advances in the total asset of the banks forms a lion share (almost more than<br>60 percent) and as such it is the back bone of banking sector. Bank lending is<br>very crucial for it makes possible the financing of agricultural, industrial,<br>construction, and commercial activities of a country. The strength and<br>soundness of the banking system primarily depends upon health of the advances.<br>Therefore the ability of banks to formulate and adhere to policies and<br>procedures that promote credit quality and curtail non-performing loans is the<br>means to survive in the stiff competition. In ability to create and build up<br>quality loans and credit worthy customers leads to default risk and bankruptcy<br>as well as hampers economic growth of a country. However, little work is done<br>to search the ways and means that enable to quality loan creation and growth as<br>well as to determine the relationship between the theories, concepts and credit<br>policies both at country level or regional level.</p><p>Hence,<br>this study is assumed to be significant in indicating best practice and<br>concepts for prudent lending to enhance the performance of credit management to<br>all managers and policy makers of the bank as well as to all financial<br>institutions and banks. Moreover, it may help as a benchmark for researchers<br>who are interested in the area to extend it further.</p><p><b>1.8 &nbsp; &nbsp; &nbsp; Scope<br>of the Study</b></p><p><b></b></p><b><p>The<br>study is concentrated on United Bank of Africa (UBA) Share Company branches<br>found in Tigray Regional state. This is because; it is one of the private banks<br>working with leading area coverage in the Region yet.</p><p>The<br>study covered credit policies, procedures, and credit operations of the Bank.<br>It assessed whether the loan growth and performance is to the required level of<br>the bank or not. In addition, the study is concerned with identifying the major<br>reasons for best practices of credit management, loan growth, and causes of<br>loan default if any in the region. Since the lending rules and procedures of<br>the bank is the same in all its branches, the result obtained taking case study<br>of this specific region is assumed to reflect the situation of all branches of<br>the bank in the country under normal circumstance.</p><p><b>1.9 &nbsp; &nbsp; &nbsp; Limitation<br>of the Study</b></p><p><b></b></p><b><p>Though<br>studying at full-fledged level of the bank would have better result, due to the<br>time and finance constraints the researcher is limited to undertake the study<br>in seven branches located in Tigray regional state. The branches are stretched<br>from Mekelle to Humera in the region and this has entailed transportation<br>problem, hardship, and time scarcity. The constraint of time had significant<br>impacts on the study.</p><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>1.10 &nbsp; &nbsp; Organization of the Study</b></p><p><b></b></p><b><p>The<br>Study is organized into six chapters. The first chapter introduces the<br>background of the study, the research objectives and questions, significance of<br>the study, scope of the study, limitation of the study and organization of the<br>study. The second chapter presents theoretical and empirical review of the<br>related literatures. The third chapter deals with methodology of the study. The<br>fourth chapter is concerned with the background of the organization and the<br>fifth chapter describes the analysis, results and discussions. The sixth<br>chapter presents the conclusion and recommendations drawn from findings of the<br>data in addition with implications for further research.</p><div>Get Complete Project Now »</div><p></p><p><b>Talk to us right now: (+234)906-451-7926 (Call/WhatsApp)</b></p></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b> <br><p></p>