ASSESSMENT ON LOAN RECOVERY PERFORMANCE (IN CASE OF DEVELOPMENT BANK OF ETHIOPIA, DIRE DAWA BRANCH)

DIRE DAWA UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING

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ASSESSMENT ON LOAN RECOVERY PERFORMANCE

 (IN CASE OF DEVELOPMENT BANK OF ETHIOPIA, DIRE DAWA BRANCH)

SENIOR ESSAY IN PARTIAL FULFILMENTS OF THE REQUIRMENT FOR BA DEGREE IN ACCOUNTING

PREPARED BY: GOBENA DUGASSA

ADVISOR: GEDION M. (MCS)

JUNE 2012

DIRE DAWA

ETHIOPIA

Acknowledgement

First and for most I would like to thanks my god for endowing me the endurance and courage of going all ups and downs to reach the stage where I am now. Then, I would like to take express my advisor Mr.  Gedion M (MCS) for his technical and professional guidance in writing this paper. Next my best thanks goes to Ato Teshome, the manager of development bank of Ethiopia, Dire Dawa branch and the employees of that organization for their corporation and unreserved help.

Finally, I would like to thanks my father Ato Dugassa Ararso and my mother w/r Sogide Taressa who support me financially to accomplish this research paper. 

Abstract

This research paper has been entitled the loan recovery performance of development bank of Ethiopia Dire Dawa branch.

This paper has been included introduction, statement of problem, objective of the study, significance of the study, scope and limitation of the study, literature review and research design and recommendation. Under the objective of the study, the researcher question that the researchers where emphasized to answer has been raised. The literature part which are directly related to loan recovery performance has been reviewed from several source.

Finally, for data analysis purpose, source of data, method of data collection and sampling techniques has been stated. Then based on analyzed data appropriate conclusion and recommendation have been suggested. 

Chapter 1

Introduction

1.1    Background of the study

Lack of financial resources usually regarded as a major bottleneck to the development of many developing countries. The government has set policies and strategies to extricate the country from poverty, backwardness and anti-domestic practices. Among the policies and strategies adopted by the government, civil service reform program is one of them. Civil service reform program (CSRP) is devised to investigate and examine the status and competence of public institution. The program ascertains compatibility to effectively and efficiently. Civil service reform program in general and financial sector reform program in particular is believed to provide good opportunity for smooth credit operation of the development bank of Ethiopia (annual placed and budget for 2006/7, august 2006).

According to regulation 200/1994, the main objective of DBE is mobilization of funds from national and international sources and provision of short, medium and long term investment credits. To achieve its stated objectives the bank has to be sustainable by generation sufficient profit from its operation. This rests on efficiency and effectiveness of loan able fund mobilization, credit provision and ultimate collection of loans which has direct impact on the banks profitability and liquidity.

Credit recognized as the important financial service that contribute to the success of business venture. This success in turn, believed jot contribute towards economic development, however the existence of credit facility alone does not necessarily. Result in supporting economic development unless and otherwise it is combined by the existence of factors conducive to the efficient utilization of credit funds. For instance, if the abdicative of making loan able funds available to these who want them for productive purpose on continuous basis to be met, a loan has to be rapid on time, chronic over due

Becomes irrecoverable as a result of the next worth of the lending institution will be eroded and it will have a serious impact of the volume of lending activity. 

  In the light of above factors, the study is important to assess some dimensions and to suggest suitable remedies that should help to loan recovery performance of the development bank of Ethiopia under the trade 2007/2008 to 2010/2011. 

1.2  Statement of the problem

Our country Ethiopia is characterized by under utilization of land capital and abundant man power resources. There is scarcity of capital, lack of investment opportunity and unemployment. Considering this fact, development bank of Ethiopia Dire Dawa branch provide credit for establishment and expansion of agricultural, industrial and other services with the objective of economic development in the country. The loan extended to various sectors of the economy must be recovered in full, if the objective of circulating more and more financial resources to meet the increase demand for credit and to keep the bank in sound financial health. Both the principal and interest to meet the operation cost mist be recovered. The bank collects the principal and interest from the client during the due date but defaults may occur on the side of the client due to various reasons if there is a high incidence in the deficit of client, this leads the bank to be insolvent and weaken its financial position. This situation will paralyze the investment program as well as the economy as a whole. In this study the researcher focus on evaluation the credit repayment performance of development bank of Ethiopia ,Dire Dawa branch between the period 2007/2008 to 2010/2011.

·       What is the reason for the defaults of the client?

·       Does the bank collect its loan effectively on time?

·       Which sectors are more effective in returning of their debt?

·       How loan is recovered among different sectors?  

1.3 Objective of the study

1.3.1 General objective

The main objective of the study was to examine and assess the loan collection performance of development bank of Ethiopia Dire Dawa branch.

1.3.2 Specific objective of the study

The specific objectives of this study was:-

1.   To examine loan recovery performance among different sectors.

2.   To see weather the bank collects its loan on time or not?

3.   Which sectors are more effective in repayment of loan?

4.   What are the factors that results in non repayment of loan?

1.4     Significance of the study

The findings of the study would have some important contribution to the manager of development bank of Ethiopia Dire Dawa branch in the assessment of loan granted procedure of the bank, the credit worthiness of borrowers and other interested parties about the performance in the bank.

1.5     Scope and limitation of the study

The study would have focused on assessment of loan collection performance of development bank of Ethiopia Dire Dawa branch. Hence, this study would only addresses issues relates to loan repayment and collection in development bank of Ethiopia Dire Dawa branch. The problem will face in conducting this research is insufficient time to investigation more facts and information and also limited availability of all sorts of resources.

1.6     Methodology

1.6.1 Data type and sources

To gather information about this research the researcher would be use both primary and secondary data sources. The primary data would be collected by using questionnaires distribute to loan repayment department of development bank of Ethiopia Dire Dawa branch and secondary data would be collected from the organizational historical records relates to loan repayment performance.

1.6.2 Sampling method

To collects available data the researcher would be prepare questionnaires to distribute to the respondents by using simple random sampling technique, taking the sample size of eight from the total population of nineteen. The reason for used this type of sampling technique would be less costly and less time consuming.

1.6.3 Method of data analysis

  The researcher designed is descriptive type and data is both quantitative type in nature. The researcher would be use tabulation, percentage and graphics to analysis the data collected.

CHAPTER TWO

Literature Review

2.1 What is loan?

Is an arrangement in which lender gives money or property to a borrower and the borrower agrees to return the property or repay the money, usually along with interest, at some future points in time, usually there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan (through modern capital markets have developed many ways of meaning this risk).

An amount of money advanced to a borrower to be rapid at a later date, usually with interest. Legally a loan is a contract between a buyer (a borrower) and a seller (a lender enforceable under the uniform commercial coder most status. The term and conditions for repayment of a loan including the finance charge or interest rate are specified in a loan agreement. A loan may be payable on demand (a demand loan) in equal monthly installments (an installments a loan). (wiki. answers.com).

2.2 debt recovery low

The recovery of debts is to reclaim that which is owned from a contractual debtor. A debtor can be either a business or single individual recovery can be sought through many legal channels but direct negotiations are always required before legal procedure can take place

      2.2.1 Lender liability low

In entering a contractual agreement as a lender, the providing party becomes subject to liability low, enforcing the fair treatment of borrowers.

In the event that a lender breaches regulations set out in lender liability low they may be subject to borrower litigation under a Varity of legal claims. Recent years have seen a progression of liability claims, paralleling the alternate action of previous years. A large proportion of claims now involve a breach of contact and/or fraud claims.

   Similarly to any other contract, a loan agreement can not be formed of anything less than mutual consent; neither may it be fraudulently induced. In the event that an agreement is set out conflicting with either of these rules, the contract is not considered legitimate and can not be enforced. When a contract is breached the offending party may be liable to legal action under breach of contract.

      2.2.2 Recovering debt through court

Court proceedings should only be a last resort in reclaiming debt often threatening legal action is enough to induce payment, only in the event that proven negotiations with the opposing party have failed can court action take place.

Initially, alternative dispute resolution (ADR) must be considered i.e. negations, mediation or arbitration, resolution may already be specified with in the contract, so through checks must first be administered.

Through channeling disputes through ADR processes, costs can be control and conformational proceedings may be avoided.

It appropriate, in recovery situations the supplier could consider taking back goods or services, however mediation is preferable using an independent third party as a mediator aiding a mutual agreement, an actual member can often be beneficial. Any mediation arrangements can help maintain goods relations.

Negotiations can commonly involve representatives i.e. solicitors and is when two opposing parties discuss the matter until reaching a solution that is agreeable to both sides.

Arbitration, not dissimilarity to mediation, is involving a third party who is independent, but in this instance deciding up on presented evidence here fault lies and consequential action, as opposed to drawing a more mutual agreement conciliation, following closely to mediation, seen as independent adjudicator (the conciliator) aid parties in dispute resolution.

Early neutral evaluation (ENE) is when opposing parties send evidence to an independent third individual who gives their judgment on the disagreement. ENE may be used to supply information to individuals prior to negotiations and can be considered a form of ADR.

      2.2.3 Wind up orders

Debt recovery through wind up is to seek debt repayment from a liquidated source through an official receiver (OR)

A partnership must have at least three years trading in England/Wales prior to a creditor applying for a winding up order ( www.bussiness link.gov.uk)       

2.3 The nature & role of credit market

Credit is the device for facilitating transfer of purchasing power from one individual or organization to another. It indicates that credit provides the basis for increased production efficiency through specialization of functions thus bringing together in a more productive union. The skilled labor force with small financial resolves and

though who have substantial resource but lack of entrepreneurial abilities (Oyatoya, 1983).

There are two important respects that a credit market differs from standard market for goods and services. First standard markets, which are focus of classical competitive theory, involve a number agents who are buying and selling a homogenous commodity. Secondly in standard market, the delivery of a commodity by a seller & payment for the commodity a buyer occur simultaneously. In contrast credit received to day by an individual or firm in exchange for promise of payment in the future. A loan is a type of debt. Like all debts, a loan involves the real allocation of money over a period of time between the borrower and the lender. This money is paid back either in full or regular installment (with interest of course). Acting as a provider of loans is one of the principal task for financial institutions such as a bank. For banks, loans are generally found by deposits. That is how banks usually learn. Their deposits are loaned out and when the borrowers pay with interest earning for the bank. Other types of dept include mortgages, credit card debt, bonds and lines of credit. A mortgage is a very common type of debt used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The bank, however, is given the title to the house until the house and sell it, to get their money back.

2.4 Economic benefits

Recovery should be made at the time when the borrower is most likely to have money. According to Charles Mensh(1999) credit can generate accelerate economic growth only when the amounts taken are rap it in time. The problem of accumulated over due and arrears of interest amount need to be solved immediately and once for all. The accumulated over due have passed many problems and if not solved it would continue to oppose problems in to the issuance of future loans. He also revealed that the regional rural banks, being an organization for development, provide cheep credit to the deserving target group with objective that the loan less who shall repay the loan in easy installments in accordance with phased repayment schedule.

“There are two problems that are major causes of poor loan recovery performance; credit project design problems and credit project implementation problems. Credit project design problems in clued debt versus equity realism versus aspiration (how realistic the projection of the product designer is), expected value versus dispersion (details consideration of the variety of results which occur in the field), book keeping convenience versus borrower cash flow pattern, collection mechanism, institutional scope or range of service offered and interest rate credit project implementation problems included low services levels, coordination access (i.e. information problem & lack of decision making experience in the lending to specific target groups) and financial recording.

“Strong recovery of loan plays a very important role in the entire economy and builds confidences of general public in the soundness of the banking system. It also reduces the cost of credit operations appreciable by avoiding litigation. It also improves the efficiency of the operations staff & helps them to devote more for development work rather than keeping them selves busy in recovering loans”.

2.4.1 The importance of qualification recovery performance

Discussion of recovery performance are vital because most attempts at its quantification conducted by development banks different banks experienced with the qualification of loan recoveries performance for the purpose of monitoring the collection of institutions. Development banks of Ethiopia also experienced their own loan recovery performance quantification method. Records must be timely and clearly kept disclosure in report should not be selective and sanitized.

“Mathematical problems usually associated with measures of repayment performance. For example a popular repayment ratio divides the amount collected during a given period by the sum of amounts falling due during the period plus amount over due at the beginning of the period (called demand in south Asia’s countries). This ratio continually declines as bad debts accumulated. It declines even though there is no change in the collection of amounts falling due each year. Accommodation of amounts that likely even to be collected eventually dominates.

The effect can be managed by writing of amounts that unlikely to be recovered, writing off removes such amounts from the denominator, raising the arrears would display no over due carried from one year to the next and demand equals to amounts reflective of actual performance, providing transparency, which in most endeavors help to finish collectives for remedial action & strategic reconsideration (to Jacob garon, 1997). But according to Jacob developing countries financial institution supported by donor are generally very reluctant to write off bad and doubtful debts. This reluctant has several sources.

v Instructions given by the central bank of financial ministry, possible to make it difficult for bankers to reduce their profits and hence their tax liabilities.

v Statutory limitations on state owned lenders that interpret write offs as a use of public fund which only parliaments has the authority to approve.

v Lenders internal rules that prohibits writing off amount in litigation and legal systems that take a very long time to deliver judgments.

v The mistake belief that writing off or even making a provisions against doubtful loans, accounting procedures that help to keep accounting values consistence with the actual value of a loan portfolio means that no further efforts is to be made in collecting written off loans. This relevant confuse good accounting practices with the demonstrative or strategic decisions to continue to press defaulter for payment.

v The fear that the public knowledge of write offs will only encourage borrowers not repay.

v Incentives to pretend that the portfolio is healthy when in fact it is deteriorating.

v  The use of demand in the denominator challenges the validity of simply, comparing collection with amounts taking due, because it is distorted by the burden of arrears. An alternative would be to include separate calculation of collection of over due amount with the arrears on the book at the close of the reporting period.

2.5 Borrowing requirement and procedure

Borrowing requirement and procedures vary from bank to bank but the procedure described here illustrate what can generally be expected when an entrepreneur approaches a bank to obtain credit i.e. get a loan.

2.5.1 Application form

The loan application form is the instrument through which is a client formally applies for a loan. The application form serves for several purposes. First it is an expression of the clients desire to borrow from development banks and it is an expression of the development band acceptance of the application. Finally as accounting documents, it is both a requisition for payment and an acknowledgment of payment. When applying for a loan you must prepare a written loan proposal make you best presentation in the initial loan proposal and application you may not get a second opportunity.

Always begin your proposal with a cover letter or executive’s summary clearly & briefly explain who you are. In clued all there is to know about you. Your business background, the nature of your business, the amount and purpose of your loan request, your requested terms of repayment, how the funds will benefit your business, and how you will repay the loan keep this cover page simple and device.

Many different loan proposal formats are possible you may want to contact your commercial lender to determine which format is best for you were writing your proposal don’t assume the readers is failure with your industry or your industry business. Always in clued industry specific details so your reader can understand how your particular business is run what industry trends affect it.

Loan repayment: provide a brief written statement indicating how the loan will be repaid including repayment sources and time requirement. Cash-flow schedules, budgets and other appropriating information should support this statement.

Existing business: provide financial statement for at least the last three years plus a current dated statement including balances sheets, profit & loss statements & a reconciliation of net worth. Again of accents payable & account receivables should be included as well as a schedule of term debt. Other balance sheet items of significant valve contained in the most recent statement should be explained.

Projects show how your operations will make money, including earings, expresses and reasoning for these estimates. The projection should be in profit or loss format. Explain assumptions used it they are different from trend or industry standards & support your projected figures with clear, domination explanations.

Collateral:- list real property and other assets to be held as collateral basically, collateral is the banks way of injuring that they will get some thing back from if you are unable to pay back the loan. Few financial institutions will provide non-collateral based loans. All a loan should have at least two identifiable sources of repayment. The first source is ordinarily cash flow generated from profitable operations of the business the second source is usually collateral pledged to secure this loan.

Your bank is in business to make many. Consequent, when a bank lends money it wants to ensure that it will be paid back. The bank considers the five “C’S” of credit each time it makes a loan.

Capacity to repay is the most critical of the five factors. Capital is the money your personally have invested in the business & is an indication of how much you will loss should the business fail.

Collateral or guarantees are additional form of security you can provide the lender. I the business can not repay its loan, the bank wants to know there is a second source of repayment conditions focus on the intended purpose of the loan. Character is the personal impression you make on the potential lender or investor.  

In general, the following information is usually asked when entrepreneurs apply for a loan Name, Address, Telephone No, regal form of and nature of the business, registrations with government business registries such as the security and exchange commission (SEC). the department of trade and industry, or the city of municipal government, product lines, amounts of capitalization. Name of owners (partners) stock holders, type, amount purpose of loan applied for and description of collateral offered.

2.5.2 Documentary requirement

The request papers should preferably be prepared for be fore applying for a bank loan, incomplete documents can cause delays. The following documents are commonly asked for.

v Residence certificates tax players’ identification number. BIR stamped tax declaration for the past three years, financial statement for the past three years, bank & grade references.

v Mini-business plans or projects feasibility study; especially for borrowers who are just starting in business. The business basically contains for cast in term of money of what the business is going to be like for each month of a given year. It gives estimates of production expenses and expected sales revenues.

v Business registration papers for single proprietorship, registration with the department of trade and industry and with the municipal office. For partnerships, articles of partnership and joint resolution to borrow-for corporations, security and exchange commission critical articles of incorporation with by-laws, boar resolution to borrow and stock holder bio data for corporative, registration with the because of cooperative department.

v Paper pertaining to collateral: for real estate mortgage copy of TCT location plans with vicinity map, tax clearance, tax receipts, tax declaration, insurance floor plan or pictures. For chattel, registration certificates, insurance loan (credit) evidencing payment in the case of important equipment for exporters’ letters of credit, confirmed purchase orders and sales contracts.     

2.5.3 Credit investigation

§  The company’s background and history covering the date of registration (in corporation), the type of business organization, records of registration name of incorporators, and a summary of operating records.

§  Financial condition: the current break down of financial statement reflecting the result of operations for the past three years. It also includes schedules, explanation of extra ordinary items, break down of merchandise and receivable and full explanation of all inter-company loans, and merchandise transactions.  

§  Dealing with government agencies; the lending bank checks on the credit availed of by the applicant form lending government agencies, the nature of the loan. Collateral offered, and installment payment, including arrear ages if any.        

§  Banks experience with the borrower if the applicant is old client.

§  Court asset; the bank cheeks on civil and criminal case involving credit applicants. It also obtains information of the applicant from compotators. After the credit investigation and supporting have been accomplished and evaluated, a recommendation for approval is prepared and the release of the loan is facilitated.

CHAPTER THREE

Data analysis, Interpretation and Discussion

This chapter contains analysis and interpretation of data collected on the credit recovery performance of DBE Dire Dawa branch in the period of four years that is the period from 2007/2008 to 2010/2011. The analysis is made using statistical tools graphs, tables and ratio to assess the loan recovery performance of the bank.

3.1 general characteristics of the respondents

Table 3.1.1 respondents sex structure

Sex	No of respondents	Percentage %
Male	6	75%
Female	2	25%
Total	8	100%

The above table 3.1.1 shows that about 75% of the respondents of the organization employees are male and remaining 25% of the employees are female. From the above table 3.1.1 the researcher concludes that most of the respondents are male.

Table 3.1.2 Educational level of the respondents

Educational level	No of respondents	Percentage %
Above degree	1	12.5%
Degree	4	50%
Diploma	3	37.5%
Certificate	-	-
Total	8	100%

Table 3.1.2 reveals that 50% of the banks employees are degree holder, while 37.5% and 12.5% are diploma and above degree holders respectively on the other hand there are no employees who are holders of certificate. So this implies that the employees are competent to carry out their responsibilities or duties.

Table 3.1.3 responses given by respondents

No	Question	No of respondents who say		Percentage %
		Yes	No	Yes	No
1	DBE examine the potentiality of the clients before giving the loan	8	-	100	-
2	Does the organization collect and recover all loans at due date?	6	2	75	25
3	Are there factors responsible for non payment of loan?	8	-	100	-

As shown on table 3.1.3 above, for item number question out of eight respondents all of them responded by saying yes. This implies that the organization or the bank examine the potentiality of customer before giving the loan. Similarity to this, besides the respondents mentioned some of the criteria’s such as trade license, master plan, kind of project, professional experience, legal registration certificate, sire plan, 5cs such as character, capacity, capital, collateral and condition of the clients and the like that the bank provide for evaluation of clients back payment capabilities.

Based on the above information the researcher suggested that the bank holders a collateral, which is at least equivalent to disbursed amount.

According to the above table 3.1.3, for item number two question 75% of respondents replied that the bank collects and recovers all loans on the due date. Contrasting to this, the remaining 25% of the respondents responded that the bank does not collect all loans on the due date. Based on the above responses the researcher concludes that the bank collects and recovers the loans on the due date.

As indicated on the table 3.1.3 for item number three question 100% implies or reveals that all of the respondents responded that there is factors responsible non repayment of loan.

As the respondents explain that the main factors responsible for non repayment of loan are spending of the loan an intended project, incremental of the price of the raw materials, lack of raw material on the market, internal problem of the organization, an for seen occurrence and negligence of the clients because most of the loan provided to customers are long term loan.

Generally, the respondent’s responses which are mentioned above indicate that as there are different bottlenecks on the collection and recovery of the loan against disbursement.

Table 3.2 types of service provided by the bank

No	Description	Respondent response	Percentage %
1	Short term	-	-
2	Medium term	-	-
3	Long term	-	-
4	All type	8	100%

As indicated on the above table 3.2 the respondent’s response reveals that 100% the bank can provide all types of loan service that is short term, medium term and long term loan to its customer or client. – Their composition is also indicates as follows;-

No	Description	Percentage %
1	Short term	12.5%
2	Medium term	25%
3	Long term	62.5%
	Total	100%

Based on the information provide on the above table the researcher summarized that the bank can provide a widely loan service.

Among the loan service which is provided by the bank, the largest portion of the loan is covered by long term loan, that is about 62.5% and it is followed by the medium term loan which is about 25%.

Generally, the bank gives the loan for its customer in long term that is above five year.

Source of funds for the bank to give loan service

For the question raised for the respondents about the source of fund bank to provide loan service the respondents provided the following response.

According to their responded, the banks gets the fund from the government budget, domestic loan, foreign loan, loan interest and other service income, based on the above information the researchers can conclude that the source of fund for the bank are domestic and foreign source.

The major factors for the ban in provision of loan

For the question provided for the respondents about the factors of the bank to disburse loan service for loan demanders, the respondents replied as follows.

As the respondents responded, the major factors of the bank is failure of providing loans service to an individual because the government gives priority for limited sectors. As the result an individual who wants to borrow could not get loan.

Based on the above information the researchers conclude that even through the bank provides loan service it could not have capacity to provide loan for all loan demander.

       

3.3 Over all credit recovery performance of DBE

Table 3.3.1 over all credit recovery performance of DBE

Description	2007/2008			2008/2009			2009/2010
	Principal	Interest	Total	Principal	Interest	Total	Principal	Interest	Total
1.total disbursement	274,650.000	26,091,750	300,741,750	1,413,997,000	134,329,715	1,548,326,715	1,282,557,000	121,842,915	1,404,399,915
2.recovery against disbursement	154,243,440	11,436,014	157,468,380	1,364,365,704	77,951,534	1,326,451,497	1,070,422,072	115,373,056	1,246,264,485
3. recovery rate	56.16%	43.83%	52.36%	96.49%	58.03%	85.67%	83.46%	94.69%	88.74%
4. balance in arrears	120,406,560	14,655,736	143,273,370	49,631,295	56,378,181	221,875,218	164,295,552	6,469,859	158,135,430
5. percentage in arrears to total disbursement	43.84%	56.17%	47.64%	3.51%	41.97%	14.33%	12.81%	5.31%	11.26%

Description	2010/2011			Total(2008/2009-2010/2011)
	Principal	Interest	Total	Principal	Interest	Total
1.total disbursement	252,737,000	24,010,015	276,747,015	3,223,941,000	306,274,395	3,530,215,395
2.recovery against disbursement	191,928,478	16,780,599	209,110,045	2,780,959,694	198,496,435	2,247,688,142
3. recovery rate	75.94%	69.89%	75.56%	63.38%	64.81%	63.67%
4. balance in arrears	60,808,522	7,229,416	676,370	1,180,607,194	107,777,960	1,282,527,253
5. percentage in arrears to total disbursement	24.06%	30.11%	24.44%	16.62%	35.19%	36.33%

Figure 3.3.2 DBE’s average recovery ration trends from year 2007/2008 to 2010/2011

As shown in table 3.3.2 above total disbursement for the period under review 2007/2008 -2010/11 was about birr 3,530,215,395 of which birr 3,002,500,897 was recovered. The over all average recovery rate during the four year was only 63.67%. Apportioning this figure in to principal and interest, the average recovery rates comes about 63.38% and 64.81% respectively.

The total disbursement shows a various trend for period to period. Principal disbursement was increasing through out the period. Interest disbursement for the period shows a fluctuation trend. From the period 2008/09 – 2009/10 and 2009/10 shows declination.

As indicate in figure 3.3.2 and table 3.3.2 above recovery rate was increasing except in the period of 2010/11, similarly to the recovery rate the interest rate was also indicate an increasing trend with the exception of the 2010/11.

Constructing to recovery rate and interest rate amount in arrears rate was decreasing continuously for the first three years except for the period 2010/11 the principal recovery rate was increasing through out the four year.

This implies that the recovery performance of the bank in its principal, interest and the total recovery rate shows an improvement performance during the period 2007/08 – 2010/11 indicated decline for interest rate and recovery rate.

        Credit recovery performance of the agricultural sector

to understand the recovery performance of the DBE it is important to see its loan recovery rate by sector the following table shows the recovery performance of the development bank of Ethiopia Dire Dawa branch in the agricultural sector.

Table 3.4.1 credit recovery performance of the agricultural sector

Description	2007/2008	2008/2009	2009/2010	2010/2011	Total
1.total disbursement	960,00	85,000	4,705,000	600,000	6,350,000
2.recovery against disbursement	415,000	46,248	566,482	193,200	1,220,930
3. recovery rate	43.23%	54.41%	12.04%	32.20%	31.46%
4. balance in arrears	545,000	38,752	620,118	406,800	1,610,670
5. percentage in arrears to total disbursement	56.77%	45.59%	87.96%	67.80%	68.54%

As shown in table 3.4.1 the total disbursement for the period 2007/2008 to 2010/2011 was about birr 6,350,000 of which birr 1,220,930 was recovered. The total disbursement for agricultural loans indicates a fluctuating trend the total disbursement for agricultural was increasing except in the period of 2009/2010.

The recovery against disbursement for this sector shown as an increasing through out the whole studied period, the recovery rate of this sector indicates an increasing trend from 2007/2008 to 2008/2009 and decline in the period of 2009/2010 but it increase in the subsequent year. In the specified year that is 2009/2010ther was an inflation and other related bottlenecks in the country. Due to this factors the recovery rate of the bank was declined however due to the interference of the governance in to the market in the following subsequent years the inflation reduced and the market partially become stabilized. So this indicates that the recovery performance of the agricultural sector is rises and the bank shows an improvement performance.

3.5 Credit recovery performance of Industry sector

The development banks provide loans for financing the establishment and expansion of industrial sector for the national economy. The following table indicates the recovery performance of the industrial sector with in the development bank of Ethiopia Dire Dawa branch.

Table 3.5.1 loan recovery performance of the industrial sector

Description	2007/2008	2008/2009	2009/2010	2010/2011	Total
1.total disbursement	208,520,000	1,278,230,000	1,059,982,000	128,835,000	2,675,567,0000
2.recovery against disbursement	146,550,000	337,033,000	429,612,000	83,888,000	997,083,000
3. recovery rate	70.28%	73.63%	40.53%	65.11%	82.38%
4. balance in arrears	61,970,000	941,197,000	630,370,000	4,497,000	213,537,230
5. percentage in arrears to total disbursement	29.72%	26.37%	59.47%	34.89%	7.98%

As indicated in table 5.3.1 the total disbursement for the industrial sector was birr 2,675,567,000 of which birr 997,083,000 was recovered. The overall average rate of the sector during the four year was 82.38% the total disbursement indicated an increasing trend except for a decline in the period of 2010/2011.

The recovery rate shows fluctuating trend from period to period. Even though, the recovery performance of the industrial sector shows a decreasing rate in the period 2009/2010, the recovery performance of the bank was rise or improved in the year 2010/2011. This implies that the recovery performance of the industrial sector is satisfactory.

3.6 Credit recovery performance of the service sector

The service sector advances constitute a major part of the priority sector advances. It is the activities of the development banks were advances of several types for increasing the production and providing employment can be made for economic development.

In this sector, the bank provides loan to transport, communication, mining and energy, education, health, hotel and tourism sector of the national economy. In evaluating the recovery performance of development bank of Ethiopia Dire Dawa branch, the following table shows recovery performance of the sector.

Table 3.6.1 credit recovery performance of the service sector

Description	2007/2008	2008/2009	2009/2010	2010/2011	Total
1.total disbursement	65,170,000	135,682,000	217,870,000	123,302,000	542,024,000
2.recovery against disbursement	46,222,000	82,003,000	91,336,000	51,078,000	270,667,000
3. recovery rate	70.924%	60.44%	41.94%	41.42%	49.94%
4. balance in arrears	18,950,000	53,679,000	126,504,000	72,224,000	271,357,000
5. percentage in arrears to total disbursement	29.08%	39.56%	58.06%	58.86%	50.06%

As shown in table 3.6.1 the total disbursement for the period under review 2007/2008 to 2010/2011 was about birr 542,024,000 of which birr 270,667,000 was recovered from the sector. The total disbursement for the period shows an increasing rate except decline in the year 2009/2010 from 217,870,000 to in 2010/2011 birr 123,302,000. But the recovery rate shows a continuously decline for the four subsequent years.

In general, as indicated in the above table the recovery rate was decreasing from the period 2007/2008-2010/2011. Based on this information the researchers summarized that the recovery performance of the service sector is not effective that much.

CHAPTER FOUR

Conclusion and Recommendation

4.1 Conclusion

The aim of this research paper was top examine and assess the loan recovery performance of the development bank of Ethiopia Dire Dawa branch. Thus based on the findings presented in chapter three the following conclusion has been drawn.

Timely and planned recovery of loans contributes to the profitability as well as financial sustainability of any lending institution, the strength of which is believed to enhance economic development effort. Hence, lending institutions like development bank of Ethiopia are expected to have good loan recovery performance comparable to their counter part else where.

The development bank of Ethiopia examines the potentiality of the customer before giving the loan depending on the criteria stated.

The DBE collects and recovers most of its loan on the due date and the remaining portion of the loan which is uncollected on the due date is recovered after the due date.

The major source of capital for the bank to provide loan service is from domestic and foreign source. The DBE is used lock box system to recover its loan from different sectors.

As over all repayment performance of the bank shows the table disbursement for the period under reviewed (2007/2008 to 2010/2011) was about 3,530,215,395 of which birr 2,247,688,142 was recovered.

The over all average recovery rates during the four years period was only 63.67%. Apportioning this figure in to principal and interest, the average recovery rate comes to about 63.38% and 64.81% respectively.

The gap between the total disbursement and the total recovered over the period under the consideration was significant. The recovery rate was increasing except in the period of 2010/2011. Similarity to the recovery rate the interest rate was also indicates an increasing trend with the exception of the year 2010/2011. this implies that the recovery performance of the bank in its principal, interest and the total recovery rate shows and improvement during the period 2007/2008 to 2010/2011 except the period 2010/2011 indicating decline for interest rate and recovery rate.     

In the sector wise recovering, the development bank of Ethiopia recovered 1,220,930 to the total disbursement in the agricultural sector during the period 2007/2008 to 2010/2011 constituted birr 6,350,000. the country is industrially backward and the performance of DBE in this sector is relatively better performance. It has a total of birr 2,675,567,000 and only birr 997,083,000 is recovered during the period under consideration.

There fore, the performance of DBE in the industry sector is satisfactory relative to other economic sector. Next to industry sector, agriculture sector is better recovering performance than the service sector which has a total disbursement of birr 542,024,000 of which only birr 270,667,000 was recovered.

4.2 Recommendation

Based on the for going and conclusion, the following are recommended for management decision so as to help the bank to improve its loan recovery performance

In order to improve the quality of project appraised reports and to provide sufficient technical instance of borrowers, the bank should allocate sufficient budget or find funds to upgrade the knowledge and skill of its staff.

In order to select potential and risk taking applicants the bank should have adequate applicant screening criteria such as credit discipline or repayment history current capacity to repay loan personnel behavior and business experience should be considered at the time of applicant screening.

The bank should revised and update the loan processing parameters and formats that are used by lending department so as to be clearly understand able to the clients.

The bank should set conditions that enforce clients, especially clients with big project, to present project execution contact document and recent managerial and technical staff or their project.

The government has to re-capitalization the bank to solve the problem of capital in adequate and there by to satisfy the capital adequacy requirement of international lenders by making additional investment or some other means.

Finally, the researcher strong recommends further detail research in loan operation specifically credit recovery performance of the bank which are problems area and core activities of the bank.

                

Dire Dawa University

School of business and economics

Department of Accounting

Questionnaires to be filled by employees of development bank of Ethiopia Dire Dawa branch at loans repayment department.

·       We would like to thank you for your cooperation and willingness to fill up the following questionnaires.

·       Your information is used only for research purpose.

·       All your response are valuable for the study.       

N.B:- please write the necessary information in the space provided and put a tick (P) mark in the box.

1. Age ------------------------

2. Sex               

           M £                         F £        

3. Educational status  

         Diploma  £                                 Certificates   £ 

Degree  £                           above Degree  £                                                                              

4.  What are the sources of capital for the organization to give a loan to clients? _______________________________________

5. What are the major factor of the bank concerning to loan service? _________________________

6.  What kind of loan service can the DBE gives to the customer?

Short term  £                     Medium term  £                                                                   

                                 

Long term  £                      all  £

7. DBE examines the potentiality of the clients before giving the loan?

            Yes   £                          No   £        

8. If you say yes for the Q.8 what criteria’s does the DBE use to evaluate them?

______________________________________________________________

9. Does the organization collection and recover all loans at the due date?

  Yes  £                                     No  £         

10. If you answer for Q.10 is no what are the reason for non collectivity?

______________________________________________________________

11. Which sectors are more effective in returning of their debt?

12. Are there factors responsible for non repayment of loan?

 Yes  £                                      No   £        

13. If your response for Q.13 is yes, what are the factors? Please state that.

________________________________________________________________________________