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BCC- Branch Credit Committee BOD- Board of Directors CAD- Cash against Document CEO- Chief Executive Officer CIC- Credit Information Centre

DLL- Discretionary Lending Limit

EC- Ethiopian Calendar

EPRDF-Ethiopian People’s Revolutionary Democratic Party

FIS- Financial Institutions

GC- Gregorian Calendar

L/C- Letter of Credit

LAF- Loan Approval Form

MCC- Management of Credit Committee

NBE- National Bank of Ethiopia

NOW- Negotiable Order of Withdrawal Account

NPLS- Non Performing Loans

NPTL- Non Performing to total Loan NPTGL- Non Performing Loan to Gross Loan OBC- Outward Bills for Collection

ODBC- Outward Documentary Bills for set for Collection ODBP- Outward Documentary Bills Purchased

OPD- Outward Bills Purchased

PSS- Proportionate Stratified Sampling

SC- Share Company

SBB- Supervision of Banking Business

VP- Vice President

ZBA- Zero Balance Account



1.1       Background of the Study

Banks are financial institutions that are established for lending, borrowing, issuing, exchanging, taking deposits, safeguarding or handling money under the laws and guide lines of a respective country. Among their activities, credit provision is the main product which banks provide to potential business entrepreneurs as a main source of generating income.

While providing credit as a main source of generating income, banks take into account many considerations as a factor of credit management which helps them to minimize the risk of default that results in financial distress and bankruptcy. This is due to the reason that while banks providing credit they are exposed to risk of default (risk of interest and principal repayment) which need to be managed effectively to acquire the required level of loan growth and performance.

The types and degree of risks to which banks are exposed depends upon a number of factors such as its size, complexity of the business activities, volume etc. It is believed that generally banks face Credit, Market, Liquidity, Operational, Compliance /legal/ regulatory and reputation risks among which credit risk is known to have the adverse impact on profitability and growth. Hence, the success of most commercial banks lies on the achievements in credit management mitigating risk to the acceptable level.

Charles Mensah (1999) stressed the importance of credit management as follows: Credit management process deserves special emphasis because proper credit management greatly influences the success or failure of financial institutions.

This indicates that credit provision should be accompanied by appropriate and attractive credit policies and procedures that enhance performance of credit management and protects the banking industry from failure.

Credit management means the total process of lending starting from inquiring potential borrowers up to recovering the amount granted. In the sense of banking sector, credit management is concerned with activities such as accepting application, loan appraisal, loan approval, monitoring, recovery of non-performing loans, etc. (Shekhar, 1985).

According to Hettihewa, 1997, Credit Management is extremely important as granting credit is considered to be the equivalent of investing in a customer.

However, payment of the debt should not be postponed for too long as delayed payments and bad debts are a cost to the company. Thus, Efficiency and effectiveness in performing each steps of loan processing using various parameters has significant effect on performance of credit management.

UBA Share Company is one of the financial institutions engaged in providing short and medium credit like other commercial banks in the country in general and in the region in particular. In the last few years, both public and private sectors in the economy underwent encouraging development in investment and business activities, thus becoming the fertile ground for the banking industry. Since its establishment in 1997 G.C, United Bank of Africa (UBA) has been striving to exploit such and all other opportunities towards achieving its corporate goals. The bank has been providing only short and medium loans and advances to its customers because of its early stage of capital base and liquidity position. The bank has been playing a significant role in providing loans and advances to its customers that enhances the investment need in the country and as means of generating income for its shareholders.

Hence, the purpose of this study is to assess the performance of credit management problems and strengths of United Bank of Africa (UBA) Share Company in Tigray Region from different perspectives in light of the practices of modern credit management in financial institutions.

1.2       Background of the Banking Industry in Ethiopia

As a result of the agreement reached between Emperor Minilik II and Mr.Ma Gillivray, representative of the British owned National Bank of Egypt; modern banking in Ethiopia began in 1905 with the Bank of Abyssinia, a private company controlled by the Bank of Egypt In 1931. It was liquidated and replaced by the Bank of Ethiopia which was the bank of issue until the Italian invasion of 1936. During the Italian occupation, Bank of Italy banknotes formed the legal tender. Under the subsequent British occupation, Ethiopia was briefly a part of the East Africa Currency Board. In 1943; the State Bank of Ethiopia was established, with two departments performing the separate functions of an issuing bank and a commercial bank. In 1963, these functions were formally separated and the National Bank of Ethiopia (the central and issuing bank) and the Commercial Bank of Ethiopia were formed.

In the period to 1974, several other financial institutions emerged including the state owned: The Agricultural and Industrial Development Bank (established largely to finance state owned enterprises); The Savings and Mortgage Corporation of Ethiopia; The Imperial Savings and Home Ownership Public Association (which provided savings and loan services).

Major private commercial institutions, many of which were foreign owned, included the Addis Ababa Bank, the Banco di Napoli, the Banco di Roma.

However, the banking business could not move further because of the nationalization of private investments by the Socialist regime (the Dergue regime) that came into power leaving only three government banks; the National Bank of Ethiopia, the Commercial Bank of Ethiopia and agricultural and Industrial Development Bank.

This was reversed when the Socialist regime was overthrown in 1991. Following the overthrown of the Dergue regime in 1991, the EPRDF declared a liberal economic system. In line with this, Monetary and Banking proclamation of 1994 established the National Bank of Ethiopia (NBE) as a judicial entity, separated from the government and outlined its main function.

Monetary and Banking proclamation No.83/1994 and the Licensing and Supervision of Banking Business No.84/1994 laid down the legal basis for investment in the banking sector.

After the proclamation of 1994, the first private bank, Awash International Bank was established in 1994 by 486 shareholders paving a way to the establishment of related private banks such as Dashen Bank ( 1995), Abyssinia Bank (1996), Wgegan Bank (1997), United Bank (1998), Nib International Bank (1999), Cooperative Bank of Oromia (2004), Lion International Bank (2006), Oromia International bank (2008), Zemen Bank (2006), Buna International Bank (2009), Birhan International Bank (2009), and others which are under establishment.


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