ARBAMINCH UNVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANC

ASSESMENT OF CREDIT PROCESSING AND MANAGEMENT (THE CASE OF

DARA MALO WOREDA OMO MICROFINANC INISTITUTION)

A RESEARCH PROPOSAL SUBMITED TO ACCOUNTING AND FINANC

DEPARTMENT FOR PARTIAL FULFILLMENT OF THE REQUIREMENT FOR
BACHLAR ART (BA) DEGREE IN ACCOUNTING AND FINANCE

PREPERD BY: YOHANNIS MELESE ID: EBE/523/11

ADVISOR: MELKAMU GEZMU (MCS)

JAUNARY 2022

ARBA MINCH, ETHIOPIA

I
ACKNOWLEDGEMENTS
First and for most, I would like to thank the Almighty God without the help of him I could
never have been what am today. Next, I would like to express my sincere gratitude to my
advisor, Instructor Melkamu Gezmu for his patience and valuable comments and directors that
were very useful for completion of this paper. Besides, I would like to thank Dara Malo woreda
Omo microfinance institution Manager and the staff for their cooperation. I need to express my
deepest gratitude thank to my family for all their finance and moral help in the completion of
my university life. Lastly, my deepest gratitude thanks goes to Arbaminch University in general,
and Business and Economics College as well as Accounting and Finance Department in
particular.

II
ABSTRACT
The general objective of this study is assessment of credit processing and management in Dara
Malo woreda Omo microfinance institution. In order to achieve this objective, the study is
adopted descriptive research design approach. Primary data were collected from employees of
the institution holding different positions in the institution based on judgmental (purposive) and
customers of the institution selected through simple random sampling techniques using a
questionnaire and interview for the manager of the institution. Moreover, for the data analysis,
descriptive statistics are used and these analyzed data are presented using tabulation and
percentage. The major findings of the study indicate that the common causes of the problem
related to credit processing and its management is borrower related loan problem. Long-term
loan is the most risky type of loan and major risk exposures in the institution is inadequate
information about its borrowers, the institution determine non-performing loan by using loan
provision and reserved expense method.

TABLE OF CONTENTS

III
ACKNOWLEDGEMENTS............................................................................................................................I
ABSTRACT.................................................................................................................................................II
TABLE OF CONTENTS..........................................................................................................................III
LISTS OF TABLE……………………………………………………………………………………V

CHAPTER ONE..............................................................................................................................1
1 INTRODUCTION................................................................................................................................1
1.1 BACKGROUND OF THE STUDY..............................................................................................1
1.2 STATEMENTS OF THE PROBLEM..........................................................................................3
1.3 OBJECTIVES OF THE STUDY...................................................................................................4
1.3.1GENERAL OBJECTIVES OF THE STUDY..........................................................................4
1.32 SPECIFIC OBJECTIVES........................................................................................................4
1.4SIGNIFICANCE OF THE STUDY................................................................................................4
1.5 SCOPE OF THE STUDY..............................................................................................................4
1.6 LIMITATION OF THE STUDY...................................................................................................5
1.7 ORGANIZATION OF THE PAPER.............................................................................................5
CHAPTER TWO.............................................................................................................................6
2. REVIEW OF RELATED LITERATURE...........................................................................................6
2.1 THEORETICAL FOUNDATION OF THE STUDY....................................................................6
2.2 IMPROVEMENT OF GOOD LOAN MANAGEMENT..............................................................8
2.2.1 LOAN PORTFOLIO MANAGEMENT.................................................................................8
2.2.2 DEVELOPMENT AND MAINTENANCE OF AN EFFECTIVE LOAN POLICY..............9
2.3 HANDLING MECHANISMS ON THE LOAN RELATED PROBLEM...................................10
2.3.1 LOAN PRODUCT DESIGN................................................................................................10
2.3.2 CLIENT SCREENING.........................................................................................................11
2.4 MECHANISMS TO MANAGE THE NON-PERFORMING LOAN..........................................12
2.4.1 DELINQUENCY MANAGEMENT..................................................................................12
2.4.2 DESIGN BEST PRACTICEOF COLLECTIONS PROCESS..............................................13
2.5 CREDIT.......................................................................................................................................14
2.6 METHODS OF CREDIT DELIVERY SYSTEM........................................................................15
2.7 FUNCTIONS OF CREDIT..........................................................................................................15
2.8 MICROFINANCE STANDARDS AND PRINCIPLES..............................................................15
CHAPTER THREE.......................................................................................................................17

IV
 3 RESEARCH DESIGN AND METHODOLOGY...............................................................................17
3.1 RESEARCH DESIGN.................................................................................................................17
3.2 TARGET POPULATION OF THE STUDY...............................................................................17
3.3 SAMPLING TECHNIQUE AND SAMPLE SIZE DETERMINATION.....................................17
3.4 SOURCE AND METHOD OF DATA COLLECTION..............................................................18
3.5 METHODS OF DATA ANALYSIS AND PRESENTATION....................................................18
CHAPTER FOUR.........................................................................................................................19
4 DATA ANALYSIS AND PRESENTATION.....................................................................................19
4.1 RESPONDENT’S BACKGROUND (PROFILE)........................................................................19
4.2 PRIMARY DATA ANALYSIS...................................................................................................22
4.2.1 Analysis of data collected in questionnaire from employees and customers of the institution
.......................................................................................................................................................22
4.2.2 ANALYSIS OF INTERVIEW QUESTIONNAIRES FOR MANAGER OF THE
INSTITUTION..............................................................................................................................30
CHAPTER FIVE...........................................................................................................................32
5 CONCLUSION AND RECOMMENDATIONS................................................................................32
5.1 CONCLUSION...........................................................................................................................32
5.2 RECOMMENDATION...............................................................................................................34
REFERENCE....................................................................................................................................35
APPENDIX…1.................................................................................................................................36
DECLARATION.......................................................................................................................................42

V
LISTS OF TABLE

Table 4.1: Survey response rate

Table 4.2 Respondent’s profile
Table 4.3: common causes of problem in the institution
Table 4.4: Lender related problem in the institution
Table4.5: Extending loan
Table4.6: Risky type of loan
Table 4.7: Major risk exposures in the institution
Table 4.8: Means of protecting against default risk
Table4.9: Non-performing loan
Table 4.10: Source of finance
Table 4.11: Borrower related problem
Table 4.12: Causes of Borrowers inability to repay the loan
Table4.13: The role of the institution in granting credit

VI
CHAPTER ONE
1 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Credit is the power of ability to obtain goods or services in exchange for a promise to pay later.
It is also the power of ability to obtain money by borrowing process in return for a promise to
pay the obligation in the future. Credit is also in other word a tool of business promotion with
which the firm expand its business to customer who wants to buy their merchandise on credit
(Beckman and S. Foster, 1973).
As micro finance institutions have become more efficient and effective increased their current
based service, they have begun to expand their services through different product offering such
as, micro saving, fixable loan repayment and insurance. The theories of joint liability contracts
progressive lending, frequent repayment and flexible collateral adequately explain the higher
rates of repayment. For such micro finance institutions to be successful, they should be
sustainable financially as well as institutionally. On top of sustainability, one has to include
developmental effects like income on the target group as core measure of success. For agencies
that are involved in the development or in assisting the development of a micro credit
institution, it is recommended that profitability and sustainability should be the final goals, and
therefore the only indicators of success.
However, in most developing countries credit is a pivot on which development of any sector
rests on. In fact micro finance institutions are different from other financial institutions mainly
because their services are directed towards the lower income group of the society. They are
particularly, established to meet credit demands poor households who are often not well served
by the organized formal financial institutions mainly due to lack of appropriate and adequate
collateral (Stieglitz. S, 1990).
Lending is one of the core pillars of financial institution and for that matter; it is a significant
activity in their operations. It is at the same highly risky. So making loan means making
decision and advance policy and speeding up the decision making process. A sound policy
contributes to the micro finance institution success by supporting prompt credit loan. Credit
policy is the institutions method of analyzing results and its decision criteria for accepting and
rejecting applications. The credit manager carries out credit policy with personnel who
investigate, analyze, grant and collect loans. Granting credit is intrinsically risky. Some people
are going to skip and others become bankrupt, causing the institutions to sustain loss. The

1
possibility of borrowers failing to repay loan principal and interest is called default risk
(Edmister.R, 1980).

Credit management is vital to ensure that banking institutions and in facts it is taken as a main
task in banks. It is the process of controlling and collecting payment from customers.
Moreover, credit management is implementing and maintaining a set of policies and
procedures to minimize the amount of capital tied up in debtors and to minimize the exposure
of the business to bad debts (http://www.small business .wa.gov.all/asset/ small business-brief-
credit management.gdf)
Ramamoorthy .1976 explained that credit exploitation and financial institution to side by side.
Granting credit is making investment in customers. Firms offer credit to customer to stimulate
sales. There are costs associated with offering credit to customer. First granting credit exposes
the firm for possibility of that the customer default on the payment resulting in loses for the
firm, and other cost is the interest for gone between the time of credit and payment by
customer.
Credit manager is responsible to the credit of the institution to perform the following
functions, such as protection of the company investment in debts, assessment of credit standing
to both new and existing customer, monitoring and controlling of customers balance and
collection of payment and receivables.
Omomicrofinance is one of microfinance institution in Ethiopia. It gives credit and saving
services targeting to ensure sustainable life and saving services targeting to ensure sustainable
life and development to the rural and sub-urban low income earner groups.
Hence assessing credit process and management practice helps the institution to understanding
how effectively operating its credit processing and management strategies and frame the effect
of credit process and management. Therefore this study has significant contribution in
assessing credit processing and management practically in the Omomicrofinance institution at
Dara Malo woreda sub-branch.

2
1.2 STATEMENTS OF THE PROBLEM
Most micro finance institutions have tried their best by ensuring that the service offered meet the
demand of customers(clients) in that operational area are as efficient as possible costs minimized
that the fees and the interest rates are sufficient to cover cost and that clients are motivated to
repay loans (Legderwood.J 1999).

Efficient and effective credit management practice is a top practice activity of financial
institution. Currently, financial institution is faced with poor credit management that in turn
increasing credit risk. According to (Tizibit.Y, 2014) managing and maintain credit is a common
problem in that most financial institution including micro finance institution faces. This has
adversely affects the institution, since it affects the cash flows and impairs profitability. It is
believed that most loan advances go bad because of impacts of in credit provision inadequacy in
credit management and recovery procedure of banks. Good business requires that collection of
invoices be made prompts and without any damages resulting to the customer’s relationship may
be jeopardized in the effort is the question of the policy.

Financial institutions are also faced with poor management of its loan portfolios (Ross. A, 1997).
This leads to poor quality of loan portfolios which had to be provided fully. Most micro finance
institution as one of financial institution faced with all these difficulties. Since most of prior
studies emphasis on credit risks that affect the overall credit activities of financial institution.
Those difficulties were also true in case of Omo micro finance institution at Dara Malo woreda
sub branch. As a result, it was faced with challenges in relation with facilitation of loan services
and its repayment performances that results lower profit, higher costs in credit following,
increasing number of performing loans bad debts and etc. However existence of non repayment
in their loan portfolios would have a wider social and economic implication on the national
economy. Therefore, these indicate poor credit processing and management practices. So micro
finance institution enabled with efficient and effective credit processing and management
practice has crucial advantage in mitigating the above mentioned difficulties (problems).As a
results this study tries to assess credit processing and management of micro finance incase Dara
Malo woreda Omo micro finance institution.

In order to put the objectives of the study into effect this study was attempt to answer the
following questions.

1. What is the institutions mechanism to improve effective loan management before loan
granted and after its disbursements?
2. What is the handling mechanism of the riskier type’s of loan activity in the institution?
3. How the institution manage non performing loan?
4. What is the source of fund to provide loan in the institution?

3
1.3 OBJECTIVES OF THE STUDY
1.3.1GENERAL OBJECTIVES OF THE STUDY
The general objective of this study is to assess credit processing and management in case of Dara
Malo woreda Omo micro finance institution.

1.32 SPECIFIC OBJECTIVES

1. To assess the procedures to improve effective loan management before loan granted and
after its disbursement.
2. To assess the riskier types of loan activity in the institution.
3. To assess the mechanisms to manage non-performing loan in the institution.
4. To investigate the source of a fund to provide loan in the institution.

1.4SIGNIFICANCE OF THE STUDY

The outcomes of this study would benefit Dara Malo woreda of Omo micro finance institution
particularly; it helps the institutions to design efficient and effective credit processing and
managements. It also helps the institution to take the action based on the recommendations or the
results of the findings, that in turn helps effective and efficient credit processing and
managements. This study also would have significant contribution for other researchers who
conduct the further study on subjective matter or issue and enable credit processing and
management in the institution. In addition it would help the researcher to improve deep
knowledge, skills and experience on credit processing and management practices.

1.5 SCOPE OF THE STUDY

The scope of study was on assessment of credit processing and management of
Omomicrofinance institution in Gamo zone at Dara woreda

4
1.6 LIMITATION OF THE STUDY
The study would be conducted in Dara Malo woreda Omomicro finance institution with respect
to various limitations or difficult. During data collection the researcher has been faced some
difficult such as lack of sufficient time to collect data, unwillingness of manager to disclose the
annual reports of credit management as well as related secondary source of document and delay
of respondent to fill and return the required questioners.

1.7 ORGANIZATION OF THE PAPER

This research paper would contain five chapters. The first chapter would contain introduction
parts of the study including background of the study, statement of the problem, object of the
study, significance of the study, scope of the study and limitation of the study. The second
chapter contains the review of related literature. The third chapter would contain the research
design and methodology. The fourth chapter contains methods of data analysis and presentation.
The fifth and final chapter would contain summary conclusion and recommendation.

5
CHAPTER TWO
2. REVIEW OF RELATED LITERATURE
2.1 THEORETICAL FOUNDATION OF THE STUDY
The challenge of reducing poverty and improving living conditions for the poorest population is
a formidable one. The betterment of poor people requires an effort that spans all sectors of the
economy and may not be easy to achieve through economic growth alone. Improved access to
financial services helps poor people by enabling payment transactions then bring them into the
formal sector. Financial services enable poor people to use profitable business opportunities and
raise earnings. Since poor people often have insufficient traditional forms of collateral to offer,
they are often excluded from financial markets. The formal financial institutions were relevant to
extend credit facilities to the poor for fear that loans would not be repaid. Poor borrowers faced
high transaction costs when they sought loans from formal financial institutions. The costs
included time, travel and paperwork involved in obtaining credit.

From the 1950’s governments and international aid donors delivered subsidized credit to small
farmers in rural areas of many developing countries. It was assumed that poor people found great
difficulty in obtaining adequate volumes of credit and were charged high rates of interest by
monopolistic money lenders. Development finance institutions, such as Agricultural
Development Banks were responsible for the delivery of cheap credit to poor farmers. These
institutions attempted to supervise the uses to which loans were put and repayment schedules
were based on the expected income flow from the investment returns, which were often
overestimated. As the result, loans were often not repaid. The credibility and viability of these
subsided credit schemes were further weakened. Fluctuating whims of governments and donors,
together with poor investment decisions and low repayment rates made many of development
finance institutions unable to sustain their lending programs. Donors and other resource suppliers
criticized the model of subsidized credit. They recommend that the model should shift from
government intervention subsidy to market-based solutions. Policy makers were reminded that
credit should be described as debt and that the over-supply of subsidized credit without realistic
assessment of people’s ability to repay could result in impoverishment for borrowers (Ageba.G
2000).

6
According to there are two known approaches in microfinance development. These are poverty
lending approach and financial system approach. Both approaches share the goal of making
financial services available to poor people throughout the world. The poverty lending approach
focuses on reducing poverty through credit and other services provided by institutions that are
funded by donors and government subsidies and other concessional funds. A primary goal of this
approach is to reach the poor especially the poorest of the poor with credit. Saving is not a
significant part of this approach. But mandatory saving is a precondition for receiving the loan.
The emphasis is on micro- credit, not microfinance. The poverty lending approach was first
realized in Grameen bank in Bangladesh. It has wide outreach to poor borrowers. But the
approach has required large amount of continuing subsidies and does not meet poor people’s
demand for saving services. Due to these it has not proven a globally affordable model. With the
failure of credit institutions to address the grassroots (households’) financial needs, the situation
demanded an innovative approach to address the lower segment of the population.

The financial system approach focuses on commercial financial intermediation among poor
borrowers and savers; and also emphasis is given to institutional self-sufficiency. The approach
targets lending to the economically active poor people, i.e. people with the ability to use small
loans and the willingness to repay and to voluntary save mobilization. Bank Rakyat (Indonesian's
micro-banking system) and Banco Sol (salvia’s banking system) are models of profitable
microfinance institutions. Appropriate targeting of policies is needed to strengthen financial
access for those groups where services are most needed. The new paradigm was introduced as
loans are made available in small amounts at market rates, with low level of formality and
limited requirements of collateral repayment is undertaken frequently and rates of repayment in
many microfinance ventures are cited to be high. Many microfinance ventures also offer deposit-
taking services. In this context, microfinance is defined as “the delivery of such services by
financial institutions, which are small in size and informal in nature,” Gitman. L (1997).

Some donor agencies have provided strong support for the shift from donor-driven micro-credit
programs to self-sufficient microfinance institutions, and have initiated and coordinated the
dissemination of best practices in microfinance on regional and global scale. Recent studies
recognize that poor and low-income people slip from one poverty category to another as the
opportunities and risks change. These studies helped shed light on the levels of poverty at which
more poor people are reached by today’s successful microfinance intuitions. It is being
considered as a preferred vehicle for extending access to the poorest in many countries.

7
2.2 IMPROVEMENT OF GOOD LOAN MANAGEMENT
2.2.1 LOAN PORTFOLIO MANAGEMENT
Lending is the principal business activity for most financial institutions. The loan portfolio is
typically the largest asset and the predominate source of revenue. As such, it is one of the
greatest sources of risk to the institution’s safety and soundness. Whether due to lax credit
standards, poor portfolio risk management, or weakness in the economy, loan portfolio problems
have historically been the major cause of bank losses and failures .Effective management of the
loan portfolio and the credit function is fundamental to a bank’s safety and soundness. Loan
portfolio management is the process by which risks that are inherent in the credit process are
managed and controlled. Because review of the Loan portfolio management process is so
important, it is a primary supervisory activity. Assessing Loan portfolio management involves
evaluating the steps bank management takes to identify and control risk throughout the credit
process. The assessment focuses on what management does to identify issues before they
become problems.

Effective loan portfolio management begins with oversight of the risk in individual loans.
Prudent risk selection is vital to maintaining favorable loan quality. Therefore, the historical
emphasis on controlling the quality of individual loan approvals and managing the performance
of loans continues to be essential. But better technology and information systems have opened
the door to better management methods. A portfolio manager can now obtain early indications of
increasing risk by taking a more comprehensive view of the loan portfolio.

To manage their portfolios, bankers must understand not only the risk posed by each credit but
also how the risks of individual loans and portfolios are interrelated. These interrelationships can
multiply risk many times beyond what it would be if the risks were not related. Until recently,
few banks used modern portfolio management concepts to control credit risk. Now, many banks
view the loan portfolio in its segments and as a whole and consider the relationships among
portfolio segments as well as among loans. These practices provide management with a more
complete picture of the bank’s credit risk profile and with more tools to analyze and control the
risk .

2.2.2 DEVELOPMENT AND MAINTENANCE OF AN EFFECTIVE LOAN POLICY

According to James L. Adams this article touches on post origination risk management activities
and tools that examiners will normally find in an effective bank loan policy: a risk rating system;

8
a monitoring framework; management information systems (MIS) and reporting; internal
controls, including audit, loan review, and credit administration; and a problem loan workout
function. Although maintaining an appropriate allowance for loan and lease losses (ALLL) is
also a key component of post origination risk management, much guidance and numerous
articles have been written on the topic; therefore, it will not be covered in this article.

As mentioned in the prior articles in this series, processes and procedures that govern lending
activities do not necessarily need to be incorporated within one single loan policy; however, a
bank should maintain a central repository that houses all relevant policies to promote consistent
application by its employees.

 Risk Rating System

A key element of a sound monitoring framework is a well-defined and adequately documented

risk rating system. The importance of risk ratings was discussed in part two of this series, noting
that the bank should have a process to assign accurate and timely risk ratings and to update
ratings when appropriate. While the granularity of risk rating systems can vary significantly
based on portfolio size, composition, and product complexity, management should ensure that
risk ratings are accurate and reliable. Ineffective risk ratings systems will result in weak portfolio
oversight, an inaccurate ALLL, and ultimately, increased credit losses.

An effective risk rating system should:

 Provide the foundation for credit risk measurement, monitoring, and reporting
 Support management and board decision-making
 Be sufficiently flexible to allow for use with various types of credit exposure
 Provide appropriate granularity of risk ratings (including regulatory classification grades)
that accurately reflect the risk of default and credit losses
 Offer multiple pass grade options as appropriate for the complexity and risk of the
portfolio that adequately differentiate pass risk ratings
 Precisely define ratings criteria using both objective (quantitative) and subjective
(qualitative) factors
 Consider both the borrower’s expected performance and the transaction structure

 Monitoring Framework

9
To promote appropriate risk identification, measurement, and monitoring, the loan policy should
clearly identify and establish procedures related to the ongoing management of the loan portfolio
and identify the appropriate staffing level and skill sets required for such tasks.

Monitoring and reporting on the performance and collateral of loans should start immediately
following the dispersal of loan proceeds. Therefore, the individual, group(s), or committee(s)
responsible for ongoing monitoring, controls, and incentives should be well established to ensure
appropriate oversight. While a bank may choose different management approaches for credit
monitoring, many banks have the business line serve as the first line of defense for ongoing
monitoring in order to leverage their lending expertise to identify potential issues and to maintain
a strong, ongoing relationship with the borrower. This approach, however, is not a requirement.

The monitoring framework should also include an assessment of compliance with the bank’s
underwriting criteria. This includes testing loan covenants, both positive and negative, to
evaluate whether the borrower is complying with loan covenants or is in technical default, or
whether the repayment of principal is expected or jeopardized.

2.3 HANDLING MECHANISMS ON THE LOAN RELATED PROBLEM

2.3.1 LOAN PRODUCT DESIGN
For micro finance institution stage starts from design loan product to assessing clients to
recovering loans extended. Design loan product involves establishing appropriate loan amount,
loan terms, collateral requirements or substitutes, interest rates, fees and potentially compulsory
saying or group’s contribution. The micro finance institution can mitigate the default risk by
producing loan product design that satisfy client need because of loan terms, payment structure
and other factors of loan design that affect the clients capacity and willingness to
repay(J.Ledgerwood,1990).

Presented the following features of loan product design that micro finance institution should
consider in developing (designing) its loans so that it can mitigate its credit risk and delinquency.

 Eligibility criteria for a loan request

 Loan amounts reflecting the clients repayments capacity
 Loan terms matching the loan term to the clients need so that they could repay the loan
easily and comfortably
 Repayment frequencies (repayment pattern)-installment repayment or in a lump sum, as
appropriate based on the careful analysis of the cash flow pattern of the client.
 Collateral-use of the innovative way of banking loan, including collateral substitutes
(peer, pressure, group guarantees or character based lending, legal action, public

10
 embracement and alternative collateral (compulsory saving), personal guarantee pledging
asset.
 Loan pricing-setting an interest rate that covers the cost on microfinance institution in
delivering a loan and earns sufficient return to expand and sustain its operation.

2.3.2 CLIENT SCREENING

Client screening is one of the criteria for microfinance institution to provide credit to clients
it sees, the overall ability and willingness of customer to repay the loan mostly in similar loan
client screening is the important factor to determine the clients who will pay and will not pay.
It is controlling system to prevent credit risk. In general, the micro finance institution
evaluates the ability the clients by using screening. In screening the institution usually uses
five C’s.

1. Character - defined as an indicator or the applicant willingness to repay and run the
entire price. It also refers to the client willingness to meet its obligation to pay credit.
In screening the character of clients the credit officer should examine the integrity believe
on confidence. The followings are the characteristics of client screening technique.
 Checking personal and community references to assess the applicant’s
reputation.
 Use peer groups in which client select other group in members who they
believe at honest and reliable.
 Maintain black list of poor performance to avoid repeat lending of bad
client.
 Interview clients to understand their motivation for borrowing money.
 Cheek credit history with suppliers and other credit organizations if
available.

2. Capacity– this refers to the ability of the cash flows of the borrower from his business or
households’ income to service loan repayment. It is also the ability of client to meet
credit obligations out of operating cash flows. A client as an honorable character and
perfectly good intention of paying the loan but unless he/she have a capacity to pay debt,
it will not be satisfactory to give the loan. Capacity is asses and become as the loan size
increases.

3. Capital – it refers to the applicant’s financial reserve. It applies the businesses. If he/she
borrowed from the microfinance institution and invested to start business. That means the
risk is low. When in analysis the capital in large loans in more reliant than analysis the
capital in the small loans because for loans solvency is more determining factor to repay
a loan than willingness

11
 4. Collateral- this refers to an asset that an applicant is willing to code in case of non-
repayment and guarantee by a person to pay a loan in case of default. The amount of
assets the applicant has available for use in securing the credit. The large amount of the
available assets, the greater the chances that a firm will recover its funds if the applicants
face default. A review of the applicant’s balance sheet, asset value applicant, and legal
claims filed against the applicants assets can be used to evaluate its collateral.

Traditional collateral is not a major part of the loan design rather microfinance institutions use
both alternative and substitute collateral. In general collateral is the most important thing to
reduce the credit risk in clients screening. When on credit officer evaluate the credit the major
consideration to take place is collateral, the client will repay the credit risk is minimized.

5. Condition – this refers to assess the current business climate or environment of a client
operate as well as well as unique circumstances affecting the credit transaction. This includes
assessment of the level of competitions and the size of the client market and potential external
threats facing the client. Since the microfinance institutions don’t have expertise to analyze all
the primary means of controlling the credit risk posed by business conditions is to require that
applicants be in business for a certain period (usually 6 to 12 months) before they are eligible.
(Churchili.C,2001).

2.4 MECHANISMS TO MANAGE THE NON-PERFORMING LOAN

2.4.1 DELINQUENCY MANAGEMENT
The two controlling system loan product design and client screening is use only to reduce the
rate of non-repayment. However loan losses are inevitable components of lending activity. So
the institution will use the delinquency management before loan is turned to be writing off. The
institution must have good delinquency management culture to embrace zero tolerance arrears
and immediate follows up of all late payment. The institutions also have to orient property each
new client regarding about credit policy on delinquency management. According to the
following delinquency methods are recommended:

Institutional culture – this involves cultivating an institutional culture that embraces zero
tolerance for arrears and immediate follow up on all late payments.

Clients orientation – as part of zero tolerance institutional culture in micro finance institution
MFI orient each new clients regarding the credit policies on delinquency.

Staff incentive – the staff of micro finance institution play leading role in minimizing the micro
finance institutions delinquency. Hence financial and non-financial incentive may for instance
include promotions for an officer having good portfolio quality. Non-financial incentive may
include competition among branches and loan officer. This system may include disincentive such
as holding the officer accountable for making credit decisions.

12
Delinquency penalties – clients should be penalized for late repayment this would include
delinquency fees pegged to the number of day’s late, and limiting access to repeat loan based on
performance and public embracement.

Enforcing contracts – a micro finance institution enforces it contracts especially on those

clients having a wanted and uncooperative behavior in repaying their loans through the judicial
system.

Loan rescheduling and work out – rescheduling involves extending the loan period and (or
reducing the installment size but before rescheduling the micro finance institution should assess
whether the client is willing and unable to pay in addition it should distinguish between regular
and rescheduled loans in determining portfolio indicators.

Workout measures and strategies are used to collect loan that already are in problem. It involves
rehabilitation of agreements with the borrower if it can get out of problem. It may involve
extending the loan period.

2.4.2 DESIGN BEST PRACTICEOF COLLECTIONS PROCESS

The collections process is defined as the set of coordinated, appropriate, and timely
activities aimed at full collection of loans from clients. The process is intended to convert
the MFI’s receivables into liquid assets as quickly and efficiently as possible, while at
the same time maintaining the goodwill of the client in case of future transactions.

As such, the collections process requires significant interaction with the client, beginning with a
careful analysis of the client’s situation and continuing through timely and frequent contact over
the duration of the loan. Clients should be offered payment alternatives that are timely and
appropriate to each situation, and all collections activities should be recorded to facilitate
continuous monitoring and follow-up as well as control of client compliance with
negotiated agreements. Some typical collections activities are described below, followed by a
flowchart illustrating the collections process:

a) Analysis of the particular case: Who is the client? What is his situation? What were the
original loan conditions? Why did the loan fall past-due? Consider internal and external sources
of information such as credit bureaus and bad-debt or lists.

b) Contact with the client: What information does the client provide? Where is the client
located? What actions were taken previously?

c) Assessment: What problem is at the root of the current delinquency? What type of client are
we dealing with?

d) Suggesting an alternative: What are the possible solutions? The objective here is to sell the
benefits of paying on time in order to foster appositive payment culture with the client.

13
e) Securing payment commitments: Area we negotiating effectively? The MFI must clearly
identify when, where, how, and how much the client will pay and must remember, for example,
how a client in a situation of over-indebtedness or decreased income will prioritize the
payment of his bills. Are we able to get the client to commit to prioritizing repayment of this
loan?

f) Compliance with payment commitments: Did the client pay on the agreed-upon date? Does
the client demonstrate a desire to repay the loan? The objective here is to demonstrate
consistency throughout the collections process. It is not enough to reach an agreement and
depend on the client’s apparent goodwill and positive attitude; collections staff must follow up
on payment commitments.

g) Recording collections activities: Are collections activities carried out in a coordinated

manner? Put yourself in the position of the staff member next in line for collections
activities with that client.

h) Follow-up on the case: Are we aware of the client’s situation and the collections
activities the case has been subject to?

i) Intensification of collections activities: What is the best action to secure collections of the
loan in the most immediate manner? What assets does the client possess? How much can be
collected through legal action? The sole objective when a past-due loan reaches this point is
collections, even if it means losing the client.

j) Defining a loss: The MFI must also clearly define the conditions under which a credit is
deemed a loss; that is, when to cease collections activities. This may be when all possible
attempts to recover the funds have proven unsuccessful and/or when the probability of payment
is very low. The MFI must measure the cost/benefit of legal action, reporting past-due client and
other actions permitted by law.

2.5 CREDIT
Credit is provided for income generation and related purposes. The credit products consist of
installment, term and asset loans. The asset loans are being offered on a pilot basis, particularly
for the housing construction sector. The installment loan is aimed at traders, manufacturer’s
handicrafts producers. Term loans are mainly made in the agriculture sector, with balloon
repayments made at the end of the term (N. Beckman, and S. Foster, 1924).

14
2.6 METHODS OF CREDIT DELIVERY SYSTEM
There are two methods of credit delivery system. They are individual loan and group based loan
delivery system. Individual loan are delivered to individual based on his ability to repay the loan
with an agreed period and amount. Group based lending involves the formulation of groups of
people who have a common wish to get financial services and to change the way of life by using
money they get from financial institution (Tizbit.Y 2014).

2.7 FUNCTIONS OF CREDIT

Credit performance functions may be classified as economic, social and managerial. The firm
economic functions of credit are to serve as a medium of exchange in economy. Money
exchange is cultural stage of a head of barter but credit economy is a step in advance of more
money economy. The second function of credit is to make independence and action special
purpose. The other function is managerial function. For business manager credit performs
several functions. It is a tool of business promotion with which he or she expand business to
customers who want to buy their merchandise on credit (N. Beck man and S. Foster, 1973).

2.8MICROFINANCE STANDARDS AND PRINCIPLES

Practice were encapsulated in 2004 by CGAP and endorsed by the Group of Eight leaders at the
G8 Summit on June 10, 2004:

1. Poor people need not just loans but also savings, insurance and money transfer services.

2. Microfinance must be useful to poor households: helping them raise income, build up assets
and/or cushion themselves against external shocks.

3. "Microfinance can pay for itself." Subsidies from donors and government are scarce and
uncertain and so, to reach large numbers of poor people, microfinance must pay for itself.

4. Microfinance means building permanent local institutions.

5. Microfinance also means integrating the financial needs of poor people into a country's
mainstream financial system.

6. "The job of government is to enable financial services, not to provide them."

7. "Donor funds should complement private capital, not compete with it."

15
8. "The key bottleneck is the shortage of strong institutions and managers. Donors should focus
on capacity building.

9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering
their costs, which chokes off the supply of credit.

10. Microfinance institutions should measure and disclose their performance—both financially
and socially. Microfinance is considered a tool for socio-economic development, and can be
clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be
able to generate the cash flow required to repay a loan, should be recipients of charity. Others are
best served by financial institutions

CHAPTER THREE
3 RESEARCH DESIGN AND METHODOLOGY
3.1 RESEARCH DESIGN
This study is conducted to assess the credit processing and management of micro finance
institution in case of Dara Malo woreda Omo micro finance institution. Therefore, in order to put
the objective of the study into effect the researcher has been used descriptive research design
approach.

3.2 TARGET POPULATION OF THE STUDY

For this study the target populations were employees and customers of the institution.

3.3 SAMPLING TECHNIQUE AND SAMPLE SIZE DETERMINATION.

This study was used both probability and non sampling technique. Such that simple random
sampling technique has been applied for customers of the institution and judgmental sampling
technique has been applied for the employees of the institution

Therefore, by using these technique the researcher has used 11(eleven) employees as sample of
the population from the total target population of 38(thirty eight) employees of the institution
based on their responsibility or job position they assigned.

16
For the customers sample has been taken using the slovinformula which is taken from probability
and statistics text book of Lind.

Where, n=sample size

N=total target population
e= error

In this study the researcher estimates 90% of confidence level of the data that is going to be
reflective of the entire population and the remaining10%were taken as error.

=92

Therefore, actually the questionnaires were physically distributed to 11 employees and 92

customers of the institution. Out of 103 questionnaires only 93 questionnaires were completed
and returned. The remaining 10 questionnaires were not completed and returned by customers of
the institution –As the result the actual data were obtained from 93 samples as the representative
of the entire population.

3.4 SOURCE AND METHOD OF DATA COLLECTION

This study was used primary data source. Secondary data was not be used. Because of for the
purposes of confidentiality the manager of the institution unable to disclose secondary data
sources. For these difficulties the researcher has been used only primary data sources. The
primary data has been collected through questionnaires with the employees and customers of the
institution and interview with the manager of the institution.

3.5 METHODS OF DATA ANALYSIS AND PRESENTATION.

After the collection of data from primary sources, the collected data has been analyzed using
descriptive statistics and presented by using tabulation and percentage.

17
CHAPTER FOUR
4 DATA ANALYSIS AND PRESENTATION

This chapter designed to analysis, present and interprets the data collected on assessment credit
processing and management in case of micro finance institution at Dara Malo woreda sub
branch.

The questionnaire was physically distributed to 11 employees and 92 borrowers of the

institution. Out of total 103 questionnaires only 93 questionnaires were completed and returned.
As a result, the response rate was 90percent.

Table 4.1: Survey response rate

Sample size 103
Completed and returned questionnaires 93
Response rate 90%
Source: Response generated from respondents through questionnaire

18
4.1 RESPONDENT’S BACKGROUND (PROFILE)
The questionnaire of this study was distributed to finance officer, assistant finance officer,
customer service, customer assistance, and auditor of Omo micro finance institution at Dara
Malo woreda Respondent profile with regard to their gender, age, educational level and work
experience in the institution were presented below in form of table.

Table 4.2 Respondent’s profile

Item EMPLOYEES BORROWERS

Frequency Percentage Frequency Percentage

Sex Male 7 63.64 49 59.76

Female 4 36.36 33 40.24

Total 11 100 82 100

Age 20-25 - - 7 8.54

26-30 6 54.54 9 10.98

31-35 4 36.36 20 24.39

36-40 1 9 36 43.90

Above 40 10 12.19

Total 11 100 82 100

19
 Educational High school - - 37 45.12
level complete

Diploma 3 27.27 14 17.07

BA degree 7 63.63 9 10.98

MA degree 1 9.09 - -

Uneducated - - 22 26.83

Total 11 100 82 100

Work 0-2 years 5 45.45 - -

experience
3-6 years 6 54.54 - -

Total 11 100 - -

Occupation Merchant - - 7 8.57

Governmental - - 14 17.15
employees

Farmer - - 32 40

Small scale - - 29 34.28

business enterprise

Total - 82 100

Source: Response generated from respondents through questionnaire

Table 4.2 above shows that the questionnaires were distributed to 11 employees of the
institution. Out of these employees’ males and females are 7(63.64%) and 4(36.36%)
respectively. According to age 6(54.54%) employees are between 26-30 years old,
4(36.36%)employees are between 31-35 years old and 1(9%)employee is between 36-

20
40yearsold. In relation with educational level 3(27.27%), 7(63.63%) and 1(9%) employee are
Diploma, BA degree and MA degree respectively. And 5(45.45%) and 6(54.54%) of employees
of the institution has a work experience in the institution between 0-2 and 3-6 years respectively.

Table 4.2 above shows that 49(59.76%) and 33(40.24%) customers of the institution are males
and females respectively. From the completed and returned questionnaires customers of the
institution are included in different age class. 7(8.54%), 9(10.98%), 20(24.39%), 36(43.90%) and
10(12.19%) customers of institution are in age classes of 20-25, 26-30, 31-35, 36-40 and above
40 years respectively. According to data observed from the questionnaires 37(45.12%),
14(17.07%), 9(10.98%), and 22(26.83%) customers of the institution has completed high school,
diploma, BA degree, and uneducated respectively. According to the table above shows that
7(8.57%), 14(17.15%), 32(40%), and29 (34.28%) customers of the institution are involved in
different occupation i.e. merchant, governmental employees, farmer and small scale business
enterprise respectively.

4.2 PRIMARY DATA ANALYSIS

4.2.1 Analysis of data collected in questionnaire from employees and customers of the
institution

The common causes of the problem encountered (observed) in the institution

The problems that encountered in the institution are borrower related, lender related and
economic condition. According to the results of the study the cause of borrower related problem
is resulted from the inability of repayment of loan in the due date because inefficient use of
money and incapability of managing the borrowed money efficiently is more related to
borrowers.

Table 4.3: common causes of problem in the institution

Common causes Frequency Percentage

Borrower related 41 44.09

Economic condition 30 32.26

Lender related 22 23.65

Total 93 100

21
Source: Response generated from respondents through questionnaire

Table 4.3 above shows that the respondents opinion which are collected from both the employees
and borrowers of the institution shows 41(44.09%) of the respondents said that the Borrower
related problems are directly affect loan in Dara Malo woreda Omo microfinance institution. On
the other 30(32.26%) and 22(23.65%) of the respondents said that economic and lender related
problems respectively are affect the institution lending process. The study gain the knowledge of
borrower related problems is the major common cause of problem in the institution because
inefficient use of money and incapability of managing the borrowed money efficiently is more
related to borrowers.

Table 4.4: Lender related problem in the institution

Problems Frequency Percentage

Poor-loan review practice 5 45.45

Un realistic loan term 4 36.36

lower concentration of credit 2 18.18

risk

Total 11 100

Source: Response generated from respondents through questionnaire

From table 4.4 above the researcher observed that poor loan review practice, unrealistic loan
terms are lender related causes of problem on loans. As obtained from sample result45.45%
respondents said that poor loan review practice is a problem related to the lender. According to
alternative provided to respondent’s 36.36% of the respondents’ given their opinion that the main

22
lender related causes of problem are unrealistic loan term, the terms of loan that mentioned in the
policy where become unrealistic. 2 respondents that share 18.18% responded that lender related
problem is arising from low concentration of credit risk.

Table4.5: Extending loan

Borrowers Frequency Percentage

For low income society 4 36.36

Small scale business 7 63.64

Total 11 100

Source: Response generated from respondents through questionnaire

As the researcher can see from the above table 4.5 the most of the respondents’ replied that the
institution extends loan for small scale business which is indicated by 7(63.64% )of respondents
and the remaining 4(36.36%) respondents stated that the institution extends loan for low income
society. Therefore, from the study the researcher concluded that the institution provides loan to
small scale business enterprise and for low-income society who able to offer collateral.

Table4.6: Risky type of loan

Loan type Frequency Percentage

Short-term 2 18.18

Medium term - -

Long term 9 81.82

Total 11 100

Source: Response generated from respondents through questionnaire

As shown on the table 4.6 above the respondents give their opinion that long-term loan is the
riskier which takes 81.82% of the respondents. From the respondents the outcome sees long term
loan is much more risky than short-term and medium-term loan and it is directly connected with

23
uncertainty. Uncertainty is increase as time goes in to future. Also respondents responded their
opinion that short-term loan is riskier type of loan that shares 18.18% of respondents. No
respondents responded their opinion on medium-term loan type.

Table 4.7: Major risk exposures in the institution

Risk exposures Frequency Percentage

In adequate information about customer 6 54.54

Employment fraud/error 2 18.18

low concentration of credit risk 3 27.27

Total 11 100

Source: Response generated from respondents through questionnaire

As shown on table 4.7 the question is designed to receive the opinion of respondents on major
risk exposure in the institution. As the table 4.7indicate that 6(54.54%) employees of the
institution replied that inadequate information about customer was major risk exposure in Dara
Malo woreda Omo microfinance Institution. In most cases this problem arises from asymmetry
of information in which lender does not know whether the borrower wants money for a good
investment project of low risk or for investment which have higher risk. 3 (27.27 %) and
2(18.18%) employees of the institution replied that low concentration of credit risk and
employee fraud are also risk exposures in Dara Maloworeda Omo microfinance Institution
respectively.

Table 4.8: Means of protecting loan against default risk

Means Frequency Percentage

24
 Direct pledge asset 11 100

Group Guarantee - -

Personal guarantee - -

Total 11 100

Source: Response generated from respondents through questionnaire

Table 4.8 indicate that all the employees of the institution replied that the means of protecting
loan against default risk in Dara Malo woreda Omo microfinance Institution is direct pledge
asset i.e. someone who want to borrow money he/she should have to pledge her/his asset as
collateral for the loan that she/he received.

Table4.9: non-performing loan

How the organization determine non- performance loan? Frequency Percentage

Direct writ off method - -

Allowance method 3 27.27

Loan loss provision and reserved expense 8 72.72

Total 11 100%

Source: Response generated from respondents through questionnaire

According to the data gathered from the respondents through questionnaire about the
determination of non-performing loan 8(72.72%) respondents replied that the institution
determines non- performance loan through loan loss provision and reserved expense method and
also 3(27.27%) of respondents responded that the institution determine non-performance loan

25
through allowance method. Therefore, the researcher gain a knowledge of the institution use both
loan loss provision and reserved expense and allowance method, but most of time loan loss
provision and reserved expense is used by the institution rather than the others method.

Table 4.10: Source of finance

Source of finance Frequency Percentage

Contribution by owners - -

Deposit 11 100

Charge by providing service - -

Borrowing from national bank of Ethiopia -

Total 11 100

Source: Response generated from respondents through questionnaire

As the researcher can observe from the above table 4.10 the respondents were asked about the
source of finance to the Dara Malo woreda Omo microfinance institution. According table 4.10
employees of the institution replied that the source of finance to the institution is deposit. Debit
(loan) is obligation (liability) to the institution. Therefore the researcher concluded that source of
finance to the institution is debit financing.

Table 4.11: Borrower related loan problem

Problems Frequency Percentage

Personal circumstance problem 53 64.63

26
 Non-performing loan 29 35.37

External factors problem - -

Total 82 100

Source: Response generated from respondents through questionnaire

This question was designed to identify the reason of borrowers’ related problems. According to
the sample result obtained from table 4.11 above the total respondents about 53(64.63%) of the
respondents responded that the major reason for borrower related loan problem is personal
circumstance problem, such that the borrower’s not properly used money that he/she borrow for
purpose of creating job. As 29(35.37%)of respondents responded that non-performing loan is
also problem connected with borrowers.

Table 4.12: Causes of Borrowers inability to repay loan

Causes Frequency Percentage

Market problem 28 34.15

Inefficient use of money 47 57.32

Borrowing much amount of money 7 8.53

Total 82 100

Source: Response generated from respondents through questionnaire

According to table 4.12above47(57.32%) respondents’ opinion on borrowers inability to repay

the loan is inefficient use of money this is because the borrowers, borrow the money for the
purpose of investment but they use money inefficiently this also sometimes difficult to follow up

27
all borrowers in order to use their money efficiently. Market problem is also causes for
borrowers in ability to repay loan, this share 28(34.15%) and the remaining 7(8.53%) responded
that borrowers are fail to repay their loan because they were borrowing much amount of money.

Table4.1: The role of the institution in granting credit

Role of the institution

Agree %

Disagree
Strongly

Strongly
agree %

disagree
Neutral
%

%
The institution grant loan for low-income society 25.7 54.3 8.6 5.7 5.7

The institution provide credit as soon as the borrower 25.7 34.3 8.6 31.4 -
requested

The institution grants the amount of money that the - 20 34.5 45.7 -
borrower requested

Source: Response generated from respondents through questionnaire

Table 4.13 above shows that 44(54.3%) of respondents are agree on the statement of the
institution grant loan for low-income society and 21(25.7%) of respondents replied that they are
strongly agree on the statement of the institution grant loan for low-income society. In the other
hand 5(5.7%) and 5(5.7%) of respondents are disagree and strongly disagree on the statement of
the institution grant loan for low-income society respectively. And 7(8.6%) of respondents are
also neutral. As a result, indicates most of the respondents are agree on the role of the institution
grant loan for low-income society.

As the survey result indicated 21(25.7%) of respondents are strongly agree on the statement of
the institution provide credit as soon as the borrower requested. On the other hand, 28(34.3%) of
the respondents are agreed on the statements of the institution provide credit as soon as the
borrower requested. In addition, 26(31.4%) of respondents responded that they are disagreeing of
the statement of the institution provide credit as soon as the borrower requested. The remaining
7(8.6%) of respondents are also neutral on the statements of the institution provide credit as soon
as the borrower requested. This indicate that most of the society agree on the statement of the

28
institution promote credit as soon as the borrower requested and relatively most of respondents
also replied that they are disagree.

According to table 4.13 above the respondent’s opinion on the statements of the institution grant
the amount of money that the borrower requested are observed. From the table the researcher
observed that 37(45.7%)of respondents are disagree on the statement of the institution grant the
amount of money that the borrower requested, And 16(20%)of respondents are also agree on the
role that the institution grant the amount of money that the borrower requested. The remaining
29(34.5%) of respondents responded that they are neutral on the statement of the institution grant
the amount of money that the borrower requested. The study gain the knowledge of that number
borrowers who disagree on the statement of the institution grant the amount of money that the
borrower requested are large relative to others.

4.2.2 ANALYSIS OF INTERVIEW FOR MANAGER OF THE INSTITUTION

1 What is the problem in borrower related loan?
As a result of the conducted interview for manager of Dara Malo woreda Omo
microfinance institution, among common causes of problem in Dara Malo woreda Omo
microfinance institution borrower related loan problem is a major problem. These
borrowers related problem is arising from personal circumstance, external factor and
economic condition. Particularly, borrower related loan problems are resulted from: -
 Inability of repayment of loan in the due date.
 Inefficient use of money which is a major cause in borrower’s inability to repay the
loan.
 Incapability of managing the borrowed money efficiently is more related to
borrowers.
2 What is the problem in lender related loan?
The lender which is the institution is also responsible for the lender related problems
that affects loan process and management in Dara Malo woreda Omo microfinance
institution. From the interview the researcher observed that poor loan review practice,

29
 lower concentration of credit risk and unrealistic loan terms are lender related causes of
problem on loans.
3 How the institutions improve effective loan management before loan granted and
after its disbursement?
Interview for manager of the institution indicates as improving good loan management
before loan granted and after its disbursement is can be improved by: -
 hiring employees who have more work experienced in managing loans,
 the creditor (lender) should process the loan, which is offered by debtors effectively
and efficiently;
 create a system that help to follow up the borrower on weekly basis or less than
monthly basis;
 Encouraging borrowers to repay loan by offering loan provided to specified period;
reducing the times takes to process and lend.

4 What is the role of the institution in granting credit to low-income society?

As a result of the conducted interview for manager who gives his/her opinion about the
role of the institution in granting credit and he/she said that since its establishment was
try to achieve these objectives by giving (lending) money for those people. As the result
currently it lending for active poor people and most of the borrowers by using the
money could be created self-employment and increase their living standards. This result
encourages active poor people to create income in less effort. This is fundamental for
development program launched by the government. Any client who fulfills these
criteria, the loan provision of the institution is available for all customers. And
customers receive services as their amount needed to create self-employment.

30
CHAPTER FIVE
5 CONCLUSION AND RECOMMENDATIONS
5.1 CONCLUSION
Loans are negotiated directly between the lender and the borrower. The loan agreement is an
understanding between lender and borrower. After the lender listens to the request and asks
about finances of the borrower, he/she may respond that the loan agreement must include a
pledge of collateral and limit on additional borrowing. In response borrower may argue for high
limit on later borrowing, perhaps a limit based on sales and profit. The negotiation continues
until both the borrower and lender agree to amount, maturity, interest rate, and
covenants/restriction of a loan (Edmister. R 1980).

Loan in financial institutions are a source of significant amount of income, therefore processing
and managing this loan accurately was appropriate in order to improve their profit. In case of
microfinance institution, it’s appropriate for ensuring the fundamental objective of institution is
too achieved. According to the study conducted on assessment of loan processing and
management the following conclusion is drawn.

 The study indicates that among common causes of problem encountered in Dara Malo
woreda Omo microfinance institution are borrower related loan and lender related loan

31
 problem but borrower related loan problem is a major one. This borrower related problem
is arising from personal circumstance problem and non-performing loan. The lender
which is the institution is also responsible for the cause of problem that affects loan
process and management because of using unrealistic loan term. Inefficient use of money
is a major cause in borrower’s inability to repay the loan.
 Credit is extended to groups, individuals and for small scale business. According to the
study the institution recently extending loans to low-income society and small-scale
business. The finding of the research shows that the institution extends most of their
loans for small scale business.
 According to the study result long-term loan is the most risky type and it is much more
risky than short-term and medium term loan and it is directly connected with uncertainty.
Uncertainty is increase as time goes in to future.
 Among the major risk exposures inadequate information about customer was highly
affect the credit and management process of the institution than lower concentration of
risk and employment fraud that encouraged in the institution.
 From different mechanisms of handling against default risk the institution apply the
method of direct pledge of asset.
 Non-performing loan is common in micro finance institutions, particularly Dara Malo
woreda Omo microfinance institution is affected by this problem. Dara Malo woreda
Omo microfinance institution handle such type of loan by using loan loss provision and
reserved expense method.
 Dara Malo woreda Omo microfinance institution plays the role that the institution grants
the loan for the low-income society, provide credit as soon as the borrower requested and
grant the amount of money that the borrower requested are the major roles of the
institution.
 Dara Malo woreda Omo microfinance institution improve good loan management by
using different approaches like: hiring employees who have more work experienced in
managing loans, the creditor (lender) should process the loan, which is offered by debtors
effectively and efficiently; create a system that help to follow up the borrower on weekly
basis or less than weekly basis; Encouraging borrowers to repay loan by offering loan
provided to specified period; reducing the times takes to process and lend.

32
  The institution gets its’ source of finance from debit financing source i.e., Mostly deposit.

As a general, the study found that borrower related problem is the common cause of problem in
the institution and they are unable to pay their credit because they use the money inefficiently.
The institution itself is also responsible for the common causes of the problem. The results the
study indicate that the institution extending loan for small scale business and low-income
society. In addition, long-term loan is the most risky type while inadequate information is the
major risk exposure with regard to this the institution determine non-performing loan by using
loan loss provision and reserving expense method.

5.2 RECOMMENDATION
Based on the findings, in order to avoid or possibly reduce the problem existing in loan
processing and management of microfinance institution in general and Dara Malo woreda Omo
microfinance institution in particular some recommendations can be suggested like:

 To reduce the problem of borrower related loan problems the customer should understand
and be aware of the credit terms of repayment period, interest rate, and activity to be
financed with the loan. So the institution has to give announcement about the needed
requirement to its borrowers.
 To reduce risk exposures like inadequate information about customer the institution
should identify, quantify and manage all the risks to which it exposed.
 To handle risky type of loan which is long-term loan, the institution has to establish
appropriate loan terms.
 The institution should minimize non-performance loan by using appropriate mechanism
like rescheduling method which means extending the loan period.

33
REFERENCE

Ageba. G (2000) micro finance institution in ethiopia: issues of portfolio risks, institutional
arrengements and governance, retrived sebtember 31,2007 from:http://www.eae con.org/v7n2
Gebrehiwot/GEBRH-A.htem Addis Abeba.

Churchill Craig.F (2001). Microfinance hand book. Building customer loality; Apractical guide
for micro finance institutions,Washington DC. Available fromPACT publications.

Comptroller's, H. (April 1998) comptroller of the currency administer of national banks loan
portfolio management; Washington DC.

Edmister, R. (1980). Finacial Institutions Markets and Management.

Gitman LawrencePrinciple of managerial finance 13thedition 1997; united state.

Kumar.A (2005). Access to finacial service in Brazil, The world bank. washington DC.

Ledgerwood.Joanna (1999). Sustainable banking with the poor; Microfinance Handbook, The
Institutional and financial perspective. Washington DC.

Robinson.J (2001). The microfinance Revolution: Sustainable finance for the poor. Vol.1.

Stieglitz. J.E(1990). peer monitoring and credit markets world bank economics.

Stephen A. Ross (1997) fundamentals of corporate finance 5thedition.

Theodore N. Benckman and Ronald S. Foster (1924) credit and collection 8thedtion.

34
TizibitYirga (2014) credit management practice (a case of Awash International bank share
company Arbaminch branch ArbaminchUniversity) Arbaminch Ethiopia.

V.E. Ramamoorthy (1976) working capital management. Institute for financial management and
research, madras, 1976. India.

APPENDIX…1

Arbaminch Univeresity
College of business and economics
Department of accounting and finance
Questionnaire: -To study on assessment of credit processing and management in case of Dara
Malo woreda Omo micro finance institution.
Dear respondents,
The researcher is student of Arbaminch University college of Business and Economics
Accounting and Finance department, the purpose of this questionnaire is to collect information
that would help for the research that would conducted on assessment of credit processing and
management in Dara Malo woreda Omo micro finance institution. The success of this study is
highly depending on the reliability of the data to be collected from this questionnaire.
So, researcher kindly requests you to give the right information to the questions. The answer you
pruned will be confidential.
THANK YOU FOR YOUR COOPERATION!!!
PUT THIS “√” IN THE BOX
Questionnaires For employees of the institution
Section one – Back ground of respondents
 Sex
Male Female
 Age
20-25 years 26-30 years above 40 years

35
31-35 years 36-40 years
 Educational level
Diploma MA degree
BA degree
If there is other…………………………………………………
 Work experience
0-2 years 3-6 years above 6 years

Section two: - questions

1. What are the common causes of the problems related to loan?
Borrower related
Economic condition
Lender related
If there is other cause please specify it……………………………………………….
2. What are the reasons for lender related loan problem?
Unrealistic loan term
Lower concentration of credit risk
Poor-loan review practice
If there is other cause please specify it……………………………………………….
3. For which type of borrowers the institution extending loan?
For low income society
Small scale business
If there is other cause please specify it……………………………………………….
4. Which one is the most risky type of loan?
Short-term
Medium-term
Long-term

36
If there is other cause please specify it……………………………………………….
5. What are the major risk exposures in the institution?
Inadequate information about customer
Employment fraud/error
Lower concentration of credit risk
If there is other cause please specify it……………………………………………….
6. What are the handling mechanisms of default risk against loan?
Direct pledge asset
Guarantee payment
If there is other cause please specify it……………………………………………….
7. How the institution determines non-performance loan?
Direct write off method
Allowance method
Loan loss provision and reserve expense
If there is other cause please specify it………………………………………………
8. Where does the institution get source of finance?
Contribution by owners
Deposit
Charge by providing service
From national bank of Ethiopia
If there is other cause please specify it ………………………………………………
9. How the institution manage loan before and loan granted and after its
disbursement?
…………………………………………………………………………………………..

37
 Questionnaires for customers of the institution
Section three: -Back ground of respondents
 Sex
Male Female

Age 20-25 years 26-30 years above 40 years

31-35 years 36-40 years
 Educational level
Diploma High school complete
BA degree uneducated
If there is other…………………………………………………
 Occupation
Merchant small scale business enterprise
Governmental employees Farmer
If there is other…………………………………………………
Section four:-Questions
1. What are the common causes of the problems related to loan?
Borrower related
Economic condition
Lender related
If there is other cause please specify it……………………………………………….
2. What are the reasons of borrower’s related loan problems?

38
 Personal circumstances
External factors
Non-performing loan
If there is other cause please specify it……………………………………………………
3. Causes of borrowers inability to repay the loan on the due date?
Inefficient use of money market problem
Borrowing much amount of money
If there is other cause please specify it……………………………………
4. Role of the institution in granting credit.

Agree %

Disagree
Strongly

Strongly
agree %

disagree
Neutral
Role

%
The institution grant loan for low income society

The institution provide credit as soon as the

borrower requested

The institution grant the amount of money that the

borrower requested

Interview Questionnaires for manager of the institution

Section one: - background information of the manager
Age: less than 25 years 25-30 years 30-40 years
Above 40 years
Marital status: married unmarried
Educational level: diploma BA degree MA degree
Section two:-questions

39
 1. What is the problem in borrower related loan?
2. What is the problem in lender related loan?
3. Does the borrower pay the loan on time?
4. What is the role of the institution in granting credit to low income society?

DECLARATION
I under designed declare that this research paper is my original work and has not been presented
for a BA degree program in other university. All the material used for this research paper has
been duly acknowledged.

____________________ ____________________

Name of student signature

This student research paper has been submitted for examination with my approval as a university
advisor.

___________________ _____________________

Name of advisor signature

Date: ________________

40
41