Kassahun Fiseha Research A STUDY ON THE FACTORS CAUSING NON PERFORMING LOAN TO DEVELOPMENT BANK OF ETHIOPIA DILLA BRANCH

     

A STUDY ON THE FACTORS CAUSING NON PERFORMING LOAN TO DEVELOPMENT BANK OF ETHIOPIA DILLA BRANCH

A RESEARCH PAPER SUBMITTED TO DEPARTMENT OF ACCOUNTING AND FINANCE IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR BACHELOR OF ARTS DEGREE IN ACCOUNTING

SUBMITTED BY:

                  KASSAHUN FISEHA

ADVISOR:

            AMBAYE MERGA

JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING & FINANCE

MAY, 2013

JIMMA, ETHIOPIA

ACKNOWLEDGEMENT

First and for most, I would like to thank almightily God, who gave me health and strengthen to do these research paper. secondly, my deepest gratitude to  my advisor Ato Ambaye Merga for his valuable advice, suggestion, encouragement and offering useful hints since the date of topic selection to the submission of research paper. Also I would like to thanks Jimma University. College of business and economics; for giving me this chance to prepare student research project for the  graduation. Besides my advisor I would like to say thanks to w/rt  Meskerem Gezahegn for her due  effort in writing student research project and printing activities.

ABSTRACT

The purpose of the study was to find out the causes of non performing loan in DBE.   Since loans forms greater portion of the total asset in banks, these assets generate huge interest income for banks which to a large extent determines the financial performance of the banks. in view banks play a critical role in an economy, therefore it is essential to identify problem that affect the institutions. This is because non performing loans can affect the ability of banks to play their role in the development of the economy. Interview and questionnaires were used to collect data for the study. The paper revealed that external factors are more prevalent in causing non performing loan in DBE. The major factor causing non performing loans were natural disaster and integrity of the borrowers.

Generally, this study undertakes to asses and investigates the factors affecting non-performing of loan and its impact on the profit of development bank of Ethiopia Dilla branch. 

 

TABLE OF CONTENTS

ACKNOWLEDGEMENT. i

ABSTRACT. ii

TABLE OF CONTENTS. iii

CHAPTER ONE:- INTRODUCTION……………………………………………………5

1.1. Background of the study. 5

1.2. Background of the Organization. 6

1.3. Statement of the Problem.. 7

1.4. Objective of the Study. 8

1.5. Significance of the Study 8

1.6. Scope of the Study. 9

1.7. Limitation of the Study. 9

    1.8. Organization of the paper…………………………………………………………..9

CHAPTER TWO:- Litrature Review…………………………………………………….10

2.1 Introduction. 10

2.2. Banking and Risk. 11

2.3. Definition of  non-performing loans. 13

2.4. Criteria for NPLs recommended by banking and accounting institutions. 14

2.5. Criteria for NPLs as per directive of national bank of Ethiopia (NBE) 15

2.6. Loan made by Banks. 16

2.7. Loan grant procedures in DBE.. 18

CHAPTER THREE:- RESEARCH METHODOLOGY.. 21

3.1. Research Design. 21

3.2. Sources of Data. 21

3.3. Data collection techniques. 21

3.4. Target population. 21

3.5. Sampling method. 22

3.6. Method of data analysis and Presentation. 22

CHAPTER FOUR:- DATA PRESENTATION, ANALYSIS AND INTERPRATATION. 23

4.1. Introduction. 23

4.2. Characteristics of Respondents. 23

4.3. Questions and Related Response of borrowers. 24

4.5. Questions forwarded for loan officers. 28

CHAPTER FIVE:- CONCLUSION AND RECOMMENDATION.. 31

5.1. Conclusion. 31

5.2. Recommendation. 32

REFERENCES. 33

APPENDICES. 34

 

CHAPTER ONE

INTRODUCTION

1.1. Background of the study

The contribution of financial institution plays a great role in development of a national economy. The financial sector gives much important function for the economic growth and development. Among there other, Banks are generally charted to support the community with adequate supply of cored its inline with the competitively determined Interest rate. Loan   means any financial facts of a bank  arising from a direct or indirect advance or commitment to advance funds by a bank to person that are conditional  on the obligation of the person to repay the funds either on specified date or on demands usually with interest (Adrian. M. n.d).

This study shows the factor casing of non- performing loan which is loans or advances   whose credit quality has deteriorated such that full collection of principal and interest in accordance with the contractual repayment in terms of the loan or advance is in question.  

Since loan portfolio is the largest asset and predominant source of revenue, effective management of credit function is fundamental to development bank of Ethiopia safety and soundness (Ciornelis,1990 p.679).

1.2. Background of the Organization

The history of the development bank of Ethiopia goes back to 1909, when first the society for promotion of agriculture and trade was established in the Menellik II era. Since then, the bank has taken different name of different times, although its mission and vision or business purpose has not under go significant changes. Except for occasional adjustment that were necessitated presently, the bank has 8 main branches and 33 sub branches strategically located all over the country for its smooth operation. Dilla sub branch is one among the 7 (seven) branches, which fund under Hawassa regional office since 1973. It is 360 km far away from A.A and 90km from Hawassa town. Since the region is highly known by coffee production. The branch from is inception up to now renders in giving loan to farmers service. Cooperative and private borrowers who are mostly engage in coffee trading activity. 

Regarding to credit activity, the branch has had about 279 numbers of borrowers as January 30, 2012. Most of the borrowers have taken loan to perform on the agricultural sectors. Some among the total numbers of the borrowers are engaged in industrial and other service sector (feb, 26 01 2013.www. Dbe.com.et/About/guideAbout.htm).

1.3. Statement of the Problem

Making loans is the principal economic function of banks to fund consumption and investment spending by the Business, individual and unit of government. Most banks fail seem to do so because of problems in their loan portfolio non performing loans grow to such extent that revenue fall of and loss expense. Failing banks often have in adequate system for spotting problem loans approval and disbursement.

This study would to assess the factor affecting non-performing loan of development bank of Ethiopia Dilla sub-branch. The researcher would answer the following questions.

·        What are the factor causing non-performing loans and its impact on the profit of the bank?

·        Does the borrower use the loan for the intended purpose?

·        What is the trend of non performing loans in development bank of Ethiopia dilla branch?

·        How does development Bank of Ethiopia follow up the customers or the borrowers?

1.4. Objective of the Study

1.4.1. General Objective of the Study

The general objective of the study is to indicate the causes of non performing loans and its impact on the profit of the bank.

1.4.2. Specific Objectives

The specific objectives of the study are:

·        To asses whether the borrowers use the loan for the intended purpose.

·        To find out the trend of non performing loan in the bank.

·        To examine how the development bank of Ethiopia follow up the customers or borrowers.

·        To forward possible suggestions or recommendation.

1.5. Significance of the Study

The study will attempt to find out the problem which reduce the bank profit and effective of non performing loan on the bank profitability and economic growth further more, it will be helpful for administater of development bank of Dilla branch to assess the factor Causing non performing loan.

1.6. Scope of the Study

The study would to investigate the cause of non-performing loan and the controlling of non performing loan effect in development bank of Ethiopia. The study would focused on the non-performing loan management effect on the economic growth and also discuss the type of loan that would rendered by the development bank of Ethiopia.

1.7. Limitation of the Study

In addition to the effort utilized to make study smooth from the beginning to the end, limitation became inevitable the following are the limitation during the study of this paper.

·        Lack of experience i.e. deep knowledge

·        Lack of getting adequate documents and data for the study

·        The interviewer and the respondents would not come to a common plan of thinking.

1.8. Organization of the paper

      This research paper would have Five chapter organization of the study. the first chapter deals with the introduction of the study the second chapter would focus on literature review. the third chapter deals with research  methodologies and the forth chapter would be data presentation,analaysis and interpretation and the last chapter would be concerned about conclusion and recommendation.
                      CHAPTER TWO

             LITERATURE REVIEW

 

2.1 Introduction

In the literature review, there  review, there seems a general consensus that among there other important function, banks are generally chartered to support the community with adequate supply of credits reasonably in line with the competitively determined interest rate or in Ethiopia case by controlling body, the national bank  of Ethiopia (NBE). This also stressed by different guidelines and directives by the government of Ethiopia through the different policy statements and directives.

Indeed, making loan is the principal economic function of banks to find consumption and investment spending by the business, individuals, and units of government.  From different annual reports of various commercial banks and the national bank of Ethiopia, it can be seen that by holding the government bonds and buying treasury bills they support the development effort in order to stabilize the economy by different fiscal and monetary policy instruments. This role is known as the “intermediation function” of commercial banks. The banks by  accepting different types of deposits from people who spend less than their income and people who keep their money until they need if and brightly if to individuals, business and government who invest it.(Stiglith,2000)

And most of standards banking text books state that how well a bank performs. The intermediation function has great deal to do with the economic health of the country because bank loan support the growth of new business and jobs with in the country and promote economic utility. Bank loan often seems to convey positive information to the market place about the borrowers credit quality enabling a borrowers to obtain more and perhaps some cheapest funds from other sources. Each Asian financial crisis in the late 1990’s and economic problems in may Latin American countries like Argentina was caused by mismanagement of the banking system and also the effect of misjudged economic polices revealed by crisis in the banking system (Stiglith, 2000)

2.2. Banking and Risk

Banks are subjected to a wide array of risk in the course of their operations. In general banking risks fall in to four categories. These are:-

Þ       Financial risk

Þ       Operational risk

Þ       Business risk

Þ       Event risk

2.2.1. Financial Risk: - is in turn comprises two types of risks

A) Pure Risks:- includes liquidity, credit and solvency risks which can be result in a losses for a bank if they are not properly managed.

B) Speculative Risks:- are based on financial arbitrage and can result in a profit, it the arbitrage is correct or loss if it is incorrect. The main categories of speculative risks are, interest rate, currency and market price (position) risks. Financial risks are also subject to complex interferences that may significantly increases a banks over all risk profile. For example, a bank engaged in foreign currency business is normally exposed to currency risk but will also be exposed to additional liquidity and interest rate risk if the bank caries open positions or mismatches in its forward book.

2.2.2. Operational Risk:- are related to a bank’s over all a business strategy, organization, functioning of internal systems, including computer related and other technologies; compliance with bank policies and procedure and measures against mismanagement and fraud. The main aspects of operational risk include, fraud, operational error, and system related or informational problems.

2.2.3. Business risk:- are associated with a bank’s business environment including macro-economic and policy concern, legal and regulatory factors, the financial sector infrastructure and payment system, and the over all systematic risks for operations.

2.2.4. Event Risks:- include all types of exogenous risk which, if they were to materialize could jeopardize a banks operations or undermine its financial condition and capital adequacy (Greuning, H& bratanbic, S, 2000, 3).

The very natural of banking activities that they may take deposits that have to be repaid at one time and extend credit that may not match the maturity  of the deposits leaves them open to risk and uncertainty, Especially in situations where information  deficiencies do not permit a good assessment of the borrowing clients. Normally banks need to hold only a small fraction of assets in liquid reserves to meet depositor withdrawal. How ever, when exceptionally high withdrawals occur and long term loans can not be liquidated this fractional reserve holding can lead to illiquidity and even default, although the bank might to fundamentally solvent in the long run. 

The ability of borrowers of long term capital to repay the bank is affected by a number of factors including risk and uncertainly (Enweze, 2001,p: 2)

In spite of the presence of the risk categories like liquidity, market, interest risk, and solvency risks  in the literature  a supreme importance is given to credit risks. They justify this by sitting facts that credit represents the major asset hold by banks and are sources from which banks generate their in come. The literature on risks has grown in quantity and quality recently. Recently especially on methods of quantifying them, quantitative finance addresses extensively risks in the capital markets. How ever, extending the various risks measures to the financial institutions remained a challenge for various reasons (Joel basis, 2002). The French scholar attributes the changes to the intangibility and invisibility of risks than income and according to him academic models provide instrumental tools for helping decision makers. The basic pre-requisites for deploying risk management in banks are:-

Þ       Risk measuring and valuation

Þ       Tracing risks back to risk drivers under management control

Credit risk is the financial risk that a bank might face in its operation. Credit risk is defined as the chance that adaptor will not be able to pay in test on repay the principal according to the terms specified in a credit agreement. This type of risk is inherent defined as the chance that adaptor will not be able inherent  part of banking that means payments may be delayed or ultimately not paid at all which in turn can cause cash flow problems and affect a bank’s liquidity. Despite innovations in the financial services sector, credit risk is still the major single cause of bank failures. These are three types of credit risks:-  

1.      Personal or consumer risk

2.      Corporate or company risk

3.      Sovereign or country risk

 Because of the potentially direct effect of credit risk,  it is important to hare a proper credit risk management policy (Greuning, H & Bratanovic 2000,p:3)

2.3. Definition of  non-performing loans

Non-performing loan are loans that are in default or close to being in  default. (investo pedia Inc. 2000) or  non performing loans are loans or advance whose credit quality has deteriorated such that full collection of principal and interest in accordance which the contractual repayment term of the  loan or advance is in question (NBE, 2002).

2.4. Criteria for NPLs recommended by banking and accounting institutions

The extents to which authorize  have been involved in developing criteria to distinguish b/n good and bad differs  substantially b/n countries and as mentioned banking and financial institution have come in to provide guidance on this issue. Some countries use quantitative criteria (e.g number of days of overdue schedule payments). While other counties exclusively rely on qualitative norms (such as availability of information about the clients financial status, management judgment about feature payments), some counties (Including Germany and U.K) do not give standard criteria at all further more, if can not be said that a loan is either good or bad as there is a sliding scale in credit quality from risk free loans to these that do into give any hope for recovery (Adrin, M & Ciorelis, Undated:3)

To improve the ability to make comparison between banks across countries, the institute of international finance (IIF)  report that for world wide external reporting the following categories be used:-

Þ       Standard:- Credit sound principal and interest payments are current. Repayment difficulties are not for seen under circumstances and full payments is expected.

Þ       Watch:- Asset subject to conditions, if left on correct, could raise concerns about full payment. These require more than normal attention by credit officers.

Þ       Sub standards:- full payment is in doubt due to in adequate protection (E.G… Obligor net worth or collateral) or interest or principal or both are more than 90 days overdue, these assets  show underling, well- defined weakness that could lead to probable loss if not corrected and thus risk becoming impaired assets.

Þ       Doubtful:- Assets fro which collection /liquidation in full is determined by bank management to be improbable due to current condition and interest or principal both  are over due more than 180 days. Assets in this categories are considered impaired but are not yet considered total losses because some spending factors may strengthen the asset quality (Merger, New Banking, or Capital injection)

Þ       Loss:- an asset is down graded to loss when management considers the facility to be virtually uncollectible or when interest or principle or both are over due more than one fear.

This classification may indicate that there are two cases that have to be addressed:-

I.              Loans that are a complete loss and

II.           Loans whose quality significantly impaired (sub standard or doubt full) and for which taken as a group experience source that a considerable portion of the feuture interest or instrument payments will never be made. According to the international accounting standard board (IASB) a financial asset is impaired  if its carrying amount is greater than its estimated recoverable amount (IAS 39, par. 109).

2.5. Criteria for NPLs as per directive of national bank of Ethiopia (NBE)

As per the national bank of Ethiopia’s, directives issued in relation to non-performing loans.

1.       Loans and advances with per established repayment program are non performing when principal and or interest is due and uncollected for 90 days or more beyond the scheduled payment date or maturity.

2.      Loans and advances that don’t have a per-established repayment program shall be considered as non-performing loans when:-

A.         The debit remains out siding fro 90 consecutive days or more beyond the scheduled payment date or maturity.

B.          The debit exceeds the borrowers approved limit fro 90 consecutive days or more.

C.          Interest is due and uncollected for 90 days or more.

D.         For over draft the account has been n active for 90 consecutive days and/or deposit is insufficient to cover the interest capitalized during the period.

The entire principal balance of loan or advances outstanding exhibited the characteristics described under 1 and 2 shall be considered non performing (NBE, 2002). 

The directive also state that banks shall be classify  a loan and advances whether such loans or advances have pre-established repayment programmers or not in to the following five categories.

1.      Pass: loans and advances in this category are fully protected by the current financial and paying capacity of the borrowers and is not subject to criticism. In general, any loan or advance or portion there of, which is fully secured, both as to principal and interest, by cash or cash substitutes, shall be classified under this category regardless or past due status or other adverse credit factors.

2.      Special mention: - any loan or advance past due 30 days or more, but less than 90 days.

3.      Substandard: - non-performing loan or advance past due 90 days or more but less than 180 day’s shall at a minimum be classified substandard.

4.      Doubtful: - non-performing loans or advance past due 180 days or more but less than 360 days shall be classified at a minimum as doubtful.

5.      Loss:- non-performing loan or advances past due 360 or more shall be classified loss. 

2.6. Loan made by Banks

The principal business of banks is to make loans to qualified borrowers (or at least make if easier fro their customers to find credit from some sources with a bank perhaps a greening to under write a customer’s security issue or guarantee a loan from a third party (lender) . loans are among the highest yielding assets a bank can add to its portfolio, and they often provide  the largest portion or traditional banks operating revive and also it arise from negotiation between the bank and its customer and real in a written agreement designed to meet the specific credit needs of the customers and the requirements o the bank for adequate security and income.

Many authors classify loan for analysis purpose in many different ways. (V.Beastie). for analyzing the, “provision for bad debts” instead of analyzing loan by loan basis. Loans are “pooled” with respect to industry group, country group, overtime for which they are extended or over due.

Development bank of Ethiopia’s guideline for” loan processing activities” group loans in time according to the maturity date thus;

-         Short-term loans:- loan with initial maturity of  one year or less.

-         Medium-term loans:- Loans extending beyond one year but exceeding five years.

-         Loan-term loans:- Loans exited beyond five years. Both medium and long-term loans are termed as “ term-loans” and they are usually referred as such.

The controlling boy is U.S. the federal; reserve, in its “statistics on banking” book classifies loans as follows.

-         Real estate loans:- which are secured by real property such as loans, buildings, and other structure and include short term loans for construction, loan finance, the purchase of farm land, home, apparent commercial structures; and foreign properties.

-         Financial institution loan: - Including crudities, Banks, insurance companies and other financial institution.

-         Agricultural loans: - extend to form and rank operations to assist in planting and harvesting crops to support the feeding and care of live stock.

-         Commercial and Industrial loans:- Granted to business to cover such expenses as purchasing inventories, paying taxes, and meeting payrolls.

-         Loan to individuals: - Including credit to finance the purchase of automobiles, mobile, homes appliances and other personal expenses, either extended directly to individuals or indirectly through retail deals.

-          Miscellaneous Loans: - Which include all those loans not classified above, including security loans.

-         Lease financing receivables: - where the bank buys equipment or vehicles and leases them to customers.

2.7. Loan grant procedures in DBE

The bank has leading procedure for their lending loans, those procedures are:-

Þ       Initiation

Þ       Evaluation

Þ       Approval

Þ       Disbursement and follow up

Initiations: - it is customary practice that customers visit the bank offices fro credit faculties with or with out written application. The first approach win normally be to have general information about the lending procedure and the type of credit facilities available with the bank. In this perspective the customer should get complete information about loan amount requested, purpose of loan, term of loan with made up of payment, type and value of the collateral proposed to secure the loan when loan applications received by the banks if it is necessary, to examine and identify as to who the applicant is, to ensure that the loan requested is initiated by legitimate body and the loan application is signed by authorized person.

Evaluation: - once the loan application and accompanying relevant documents are reserved check and fund to be in order to complete the loan process is evaluating by the banks. This includes:-

Þ       Preliminary screening (selection and identification based on available general information)

Þ       Application of  the “know you customer approach” a test of the basis of credit decoration i.e. five CS of credit

This are:-

Þ       Character:- The previous credit experience of the borrower which includes manner of meeting financial obligation. Which individual compliance association of groups. This also includes the general bank ground history, company culture and attitude, internal and external communication.

Þ       Capacity:- points to be resend and evaluated under this aspect should include determination of the loan to be  availed. Amount to be availed should be sufficient enough for smooth operation. It should neither active which will lead to upland diversion. It includes monthly income, stability of business and the cash flow to verify.

Þ       Capital:- Does the  customer have alternative source of capital to repay the loan in the event of adverse situations. In this connection factory like net worth, equality in home and other asset should be taken as indicator.

Þ       Collateral:- credit is not only a money expected to be repaid  inclusive of cost of money (interest). Banks therefore ask for security collateral to minimize the rise of loan collectables. Hence it is necessary the collateral questions.

Þ       Conditions:- General economic conditions forecast to prevail over the life of the loan stability of size and magnitude of business and the resultant income relative to these conditions.

·        Review of financial statements and their important in appraisal of credit.

·        Major components of financial statements and system of their verification.

·        Credit appraisal techniques company used which includes:-

Þ                Ratio analysis

Þ                Industry analysis

Þ                Cash flow  statements

Þ                Management evaluating

·        Credit information

Approval:- if the proposed loans has been found to be feasible the bank summarizes the facts founded during evaluating stage of the loan process a format known as “loan approval form” this approval form shall be handled by committees organized at different levels.  It starts from exercise of discretion by the bank loans committee and goes up to the lending power of the boards of directors finance and credit committee.

Disbursement and follow up:- after having ascertained competition of formalities required to be met prior disbursement, the bank manager loan officer will disburse the loan. Once found are disbursed, the bank design a system where by borrowers are persuaded to repay their loans regularly.

CHAPTER THREE

RESEARCH METHODOLOGY

 

3.1. Research Design

This paper would studies the causes of non performing loan interference to development bank of Ethiopia reference only one branch of the bank, i.e DBE, Dilla sub branch. The bank from its establishment up to now rendering loan service to its customer the area coverage of the branch operation ranges from 11km to 40 km to south of Dilla.

3.2. Sources of Data

The data which related to non performing loans would obtained from both primary and secondary sources of data.

·         Primary sources of data would collected by distributing questionnaires for some selected employee of the bank and consumer of the bank.

·        Secondary sources of data would collected from sources like books, annual report and loan manual.

3.3. Data collection techniques

Primary data would collected through questionnaire and interview. Secondary data would collected from different records. Especially interview technique would used to acquire data about the various components related to the problem under the study by conducting structured interview to the person.

3.4. Target population

In this paper 30 customers and 10 loan officers would selected for the study from the bank.

3.5. Sampling method

The population from which the representative sample is taken would be the customers and the loan officer of the bank. the study would be conducted by taking portion of the population as sample. Since there lower heterogeneity among members of population the lower sample size would be required. The purposive (judgmental) sampling would be used for conducting the study due to sample size to be selected would be small and the researcher wants to determine(generalize) some idea of population in a short time .

3.6. Method of data analysis and Presentation 

The data that would collected in different forms can be organized properly and examined by using qualitative and quantitative data. In addition to these, it would analyzed properly by using descriptive method like percentage and tables.

In general, all the necessarily data would organized and complied in percents and tabular form. If would analyzed and described accordingly on the theoretical basis.

 

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1. Introduction

This chapter deals with the presentation and interpretation of data collected from secondary sources and the respondents in development bank of Ethiopia, Dilla sub-branch through questionnaire conducted with customers and loan officers.

4.2. Characteristics of Respondents

The general characteristics of respondents total sample can be categorized in selected group, based on sex, educational level experience and types of loan they borrowed from the bank.

Table 4.1: Background of respondents

No	Particular	Character	No of respondents	Percentage
1	Sex	Female	9	36%
		Male	16	64%
2	Educational certificate	Certificate	7	28%
		Diploma	15	60%
		Degree and above	3	12%
3	Experience	>5 year	10	40%
		<5 year	15	60%
4	Types of loan borrowed	Short term	6	24%
		Medium	4	16%
		Long term	15	60%

As shown on table 4.1 above, 36% of the respondents are females and 64% of the respondents are male regarding the educational level of respondents 28% are certificate, 60% of respondents also diploma and the reaming 12% are Degree.  regarding to the experience of customers 40% of respondents serve below 5 year and 60% serves above 5 year, lastly regarding to types loan they granted 34% took short term,, 16% medium term loan an the rest of 60% took long term loan.

4.3. Questions and Related Response of borrowers

Table 4.2:  Purpose of loan to the borrowers

Category	No or respondents	Percentage
Service	4	16%
Industry	6	24%
Agriculture	15	60%
Does the loan spent on the intended purpose?
Yes	6	36%
No	16	64%

As shown on table 4.2 above regarding to the purpose of loan 16% of the borrowers used for service, 24% of the respondent uses for industry and the remaining 60% uses the loan for agricultural purpose.

The summarized answer regarding to whether the borrower uses the debt for the intended purpose or not 36% of the respondent says yes and the rest 64% of the respondent does not use the loan for the intended purpose. This indicates the diversification of funds. This diversification of funds is either for productive or non productive purpose. If the borrowers use funds for non productive purpose they can not able to repay the debt.   

Table 4.3: Consultancy service provided by Bank

Questions	Response	No of respondents	Percentage
Are you aware of the consultancy?	Yes	18	72%
	No	7	28%
Have you used before?	Yes	16	64%
	No	9	36%

As shown on the table 4.3 above, regarding to the consultancy service of DBE 72% of the respondent aware the service offered by the bank but 28% of the respondents have no idea about it, in addition to these regarding to the consultancy service of the bank 64% of the respondents says yes the rest of 36% says no from this it is clearly shows that DBE gives consultancy service to its borrowers.

Table 4.4: Interest rate of the bank

Response	No of respondents	Percentage
Fair	17	68%
Not fair	8	32%

The summarized answer regarding to the banks interest rate 68% of the respondents say it is fair while the rest 32% of the respondents says it is not fair. These shows that most of the customer of the bank were agreed on the interest rate of the bank relative to the other banks.

Table 4.5: Time duration takes in granting loan?

Category	No of respondents	Percentage
Less than one month	-	-
B/n one and three month	5	20%
More than three month	20	80%
Are you paying back the loan on time?
Category	No of respondents	Percentage
Yes	7	28%
No	18	72%
Time taken for loan processing
Category	No of respondents	Percentage
Fair	15	60%
Unfair	10	40%
Lengthy	-	-

As shown on the table 4.5 above, 80% of respondents says it takes more than 3 months and the rest 20% says between one and three months. Regarding to timely repayment of the loan 72% of the respondents say no. the rest of 28% of the respondent say yes. The reason for not repay the debt on time is market failure and diversification of funds. Lastly regarding to time taken for loan processing 60% of respondents comparing to the other banks loan processing time of DBE is fair and the remaining 40% of the respondent says the process lengthy.

Table 4.6: Does the banks officer follow up the loan?

Response	No of respondents	Percentage
Yes	16	64%
No	9	36%

As shown on the table 4.6 above, 64% of the respondents says yes. The rest of 36% of the respondent says No. even if most of the respondent says yes, there is a problem follow up procedure after the loan distributed to the borrowers. This initiated the borrowers to use the loan for unintended purpose.

Table 4.7: Have you ever taken loan from different bank at a time?

Response	No of respondents	Percentage
Yes	4	16%
No	21	84%

As shown on table 4.7 above 16% of the respondents says yes and the rest 84% says No. This shows some borrowers have debt from different banks at a time. This will affects the loan portfolio during the failure of the market:; since if the market is fail the debtor can not able to repay an all loan which borrowed from different banks.

Table 4.8: Does the bank give the requested amount of loan fully?

Response	No of respondents	Percentage
Yes	14	56%
No	11	44%

As shown on the table 4.8 above 56% of the respondent says yes and the remaining 44% says No. This refers just the bank even if not effectively and efficiently gives the requested amount of loan fully, slightly DBE trying to give the requested amount in some extent.

Table 4.9: Are you satisfied by the loan processing system of the bank?

Response	No of respondents	Percentage
Yes	20	80%
No	5	20%

Regarding to the above table 4.9, 80% of the respondent satisfied by the loan process of the bank and the rest 20% not satisfied by the loan process of the bank. This due to they take lengthy time for the process.

4.5. Questions forwarded for loan officers

Table 4.10: Priority investment area in which the bank lends the loan

Category	No of respondents	Percentage
Agriculture	7	70%
Industry	3	30
Service	-	-

As shown on the table 5.0 above,30% of the respondents says industry and the rest 70% of the total respondent says agricultural. This is due to the aim of its establishment; the bank gives a priority for agricultural sector.

Table 4.11: Does the bank collect its loan from the borrowers at intended time?

Response	No of respondents	Percentage
Yes	4	40%
No	6	60%

As shown on the above table 5.1, regarding to the way of the bank in which collects its loan from the borrowers 40% of the respondents says yes and the rest of 60% says No. this due to the borrowers were using the loan for on productive purpose as a result they face the problem of paying back of intended time.

Table 4.12: Does the bank follow its customer activity regularly?

Response	No of respondents	Percentage
Yes	6	60%
No	4	40%

As we can see from above table 5.2 regarding to the following up activity of the bank to the customers business 60% of the respondent says the bank follow regularly. But the rest 40% says No. This due to difficulty of transportation. They does not follow the customers activity periodically.

Table 4.13: Does the bank asses its customers financial statement periodically. 

Response	No of respondents	Percentage
Yes	6	60%
No	4	40%

As shown on the above table 5.3, 60% says yes and the remaining 40% say No. This due to some customers does not provide the data of financial statement to the bank regularly.

Table 4.14: Do you think that the collaterals estimated properly by the responsible body?

Response	No of respondents	Percentage
Yes	10	100%
No	-	-

As shown on the above table 5.4, 100% of the respondent says the collateral of the customer estimated properly. The reason for this is, the bank has its own engineers and collateral estimation committee, as a result it minimize the cause of corruption.

Table 4.15   Non performing loans profitability and liquidity ratio

Year	2010	2011	2012
Non performing loan ($)	856,686	1,744,826	47,223,532
Profitability (&)	7,896,701	20,947,197	24,698,365
Liquidity ratio (%)	37	26.26	25.99

January 2013, NPL at $ 47 million were more than the profit of $ 24.6million recorded by the bank. Also the liquidity ratio is decreasing as non performing loans are increasing. The above statics indicated that non-performing loan is negatively affecting the bank interims of profitability and liquidity.

Table 4.16 weight of significant factor causing non performing loan

SFCNPL	No of respondent	Percentage
In adequate risk management	1	10%
Integrity of borrower	3	40%
Natural disaster	3	40%
Poor credit monitoring	1	10%
Low capitalization	-	-

Respondent highlighted that 80% significant factor causing non perform loan were integrity of the borrower and Natural disaster the rest 20% were caused by  poor credit monitoring and in adequate risk management.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1. Conclusion

Research findings indicated that non performing loans were caused by both internal and external factor in the context of development bank of Dilla Branch. Internal factors such as poor credit policy, Weak credit analysis, poor credit monitoring and inadequate risk management. The researcher finding highlighted; external factor namely natural disaster, market failure and integrity of the borrowers. Findings further indicated that non performing loans have negatively affected the performance of the bank interims of profitability and liquidity. In addition to the above factors most of the borrowers do not use the loan for the intended purpose. as a result, diversification of fund or debt occurs. This diversification of fund might be used for non productive purpose; the debtor will not be able to repay the loan.  

Internal factors can be easily controlled while external factors can be a threat to the viability of the banks. Banks have to be vigilant in their lending decision so as to avoid loans losses and the accumulation of non performing loans.  Banks need to concentrate on the sectors that are performing well and avoid lending to those sectors which have already recorded a significant amount of non performing loan.

Due to the above listed reason development bank of Ethiopia has portfolio problem which lead the bank unable to grant loans for new creditor. This directly affects the profitability of the bank.

5.2. Recommendation

It is apparent that banks need to seriously consider all the internal and external factor causing non performing loans as well as the impact of non performing loan on the banks overall performance.

·        It is advisable to the bank if the impact of environmental factors such as natural disasters be considered seriously during the credit assessment process.

·        It is advantageous to the bank if the bank slow down on issuing loan to agricultural sectors as they are currently not performing well. Loan in this sector should only be granted if the borrowers prove that they have the capacity to pay back loan given.

·        It also advantageous to the bank if the Management head to ensure that borrowed funds are being used for the intended purpose, achieved by adopting a relationship management approach which helps management have a closer look at the business as well as the characters of the senior mangers running the organization.

·        In addition to these it is advisable if the bank decide rapidly to collect the loan by foreclosing the defaulter’s collaterals before its value depreciate and deteriorated through time.

·        Finally it is important if the bank reschedule additional loan to reduce the non-performing loan when the defaulter faces market failure due to price inflation.

 REFERENCE

Þ       Advian, M. and ciornelis, N.d)

“The macro economics statistical treatment of NPL” Washington DC IMF.

Þ       National Bank of Ethiopia “ directive on computation of RISK WEIGHTED ASSETS “Directive No-SBB/24/29.

Þ       Geunlng H. and Bratanovic, S (2000) “ analyzing Banking Risk a frame work for assessing corporate Governance and financial risk management”  Washington DC world Bank.

Þ       Joel Bellis (2002) “Risk Management in banks “ 2^nd edition. John Wiley PLC.

Þ       National bank of Ethiopia “licensing and supervision of Banking business.”

Þ       Development Bank of Ethiopia, various annual reports.

APPENDIX

Jimma University

College of Business and Economic

Department of Accounting

The aim of these questionnaires is to collect data for the student research project in  requirement for the partial fulfillment of Bachelor of Arts (B.A) in accounting.

So that I need your cooperation in providing the available information by answering each questions.

Question forwarded to only to customers of the bank

1.      Personal background

Þ          Sex                     Male 5                     Female 5

Þ          Educational level        certificate  5   diploma 5 degree and above

Þ          How long customer service by DBE?

Below 5 years 5                    Above 5 years 5

Þ          What type of long taken from DBE?

Short term 5               Medium 5                long term 5

2.      For what purpose you borrow?

Agricultural 5                     Industrial 5                         Service 5

3.      Are you spending the loan for its intended purpose?

Yes 5                                    No5

4.      Are you aware of th service of the bank?

Yes 5                                    No5

If yes, explain _________________________________________________

____________________________________________________________

5.      Have you used the consultancy service of the bank?

Yes 5                                    No5

6.      How do you evaluate the interest rate of the bank?

Fair 5                       Not fair 5

7.      Are you paying back the loan on time?

Yes 5                                    No5

8.      What is the time duration the DBE takes in granting the loan?

Þ       Less than one month 5

Þ       Between one and three month 5

Þ       More than three months 5

9.      What do you think of the time take for loan processing?

Fair 5                       Unfair 5                   Lengthy 5

10. Does the banks loan officer follow the loan?

Yes 5                                    No5

11. Have you ever taken loan from different bank at a time?

Yes 5                                    No5

12.  Does the bank give the requested amount of loan fully?

Yes 5                                    No5

13. Are you satisfied with the loan processing system of the bank?

Yes 5                                    No5

Jimma University

College of Business and Economic

Department of Accounting

Question forwarded to loan officers

1.            For what types f investment the bank gives a priority for lending the loan?

Agriculture 5                         Industry 5                service 5 

2.            Does the bank assess its’ customers financial statement periodically.

Yes 5                                       No 5

If your answer is no, why? ______________________________________

_____________________________________________________________

3.            Does the bank assess the market before granting loan?

Yes 5                                       No 5

4.            Do you think the collaterals estimated properly by the responsible body?

Yes 5                                       No 5

If No, explain your reason?  ______________________________________

_____________________________________________________________

5.            Does the bank follow its’ customers activity regularly?

Yes 5                                       No 5

If No, explain your reason?  ______________________________________

_____________________________________________________________

6. Any other information you can give me that are important?