Assessment Credit Risk Management

Credit risk management practices is an issue of concern in financial institutions today and there is needto develop improved processes and systems to deliver better visibility into future performance. There have been controversies among researchers on the effect of credit management techniques adopted by various institutions. According to Saunders and Allen (2002), good selection strategy for risk monitoring is adopted by the credit unions implies good pricing of the products in line with the estimated risk which greatly affect their profitability. Mwirigi (2006) on the other hand stated that loan portfolio management and operational efficiency management are the most important to consider in CRM as they are the most important in enhancing the performance.

Microfinance in Ethiopia has been established in Accordance with the proclamation issued by the national bank of Ethiopia in 1996. ACSI is one of the Micro finance institutions that provides loan to clients to help them engage in productive activities and to raise their small business. Most of microfinance institutions approve loans for productive purpose, because income increment is positively indicator to which all development activities are addressed (Daniel, K, 2010).

Credit management is the most important activities in Amhara credit and saving institutions. An attending credit management policies and procedures make it sound at the time of managing credit risk and credit decisions.

Mulat (2003) argues that if you not follow the credit management policies and procedures one cannot think of managing credit risk and at the same time credit decision will become arbitrary subject to individual discrimination and judgment.

The group base lending method is ot not effective in achieving the ACSI objectives, because due to default payment is made of the group members. in addition, the beneficiaries who use this method also face a problem in the repayment of loan, the rest who pay regularly were enforced to pay the default amount (Meaza, 2010).

According to the above studies Even though, some of them show progress and change to high level, but most customers did not show progress and a large amount of them not return on time the loan they received. so what would be the source for this? Is that due to ineffectiveness of credit risk management of micro finance institution or not? moreover, most researchers have been done related with credit risk management on banks and other financial institution but those researchers were not focused on customer’s relation, methods to follow up loans, reasons of customer’s for nonpayment of their debt on time and on effective policies and procedures of loans. So, the researchers are interested to fill for the above gaps by assessing the above listed issues on ACSI, Debre Berhan. Accordingly, the researcher has tries to answer the following basic research questions:

  1. How is the working relation between the institution and the borrowers in ACSI?
  2. What method does the institution use to follow up the loan?
  3. What is the cause for the customer for nonpayment in repayment?
  4. How effective the policies and procedure followed by the ACSI in providing loan?
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