DEVELOPING A COMPETENCY-BASED FRAMEWORK FOR CREDIT MANAGEMENT SYSTEM IN THE ETHIOPIAN BANKING INDUSTRY

Abstract

This study, titled "Developing a Competency-Based Framework for Credit Management in the Ethiopian Banking Industry," examines the pressing issues confronting Ethiopia's banking sector, including rising non-performing loans (NPLs) and inefficiencies in credit management practices. The sector's challenges stem from inadequate professional competencies among credit officers, leading to flawed risk assessments, inconsistent lending decisions, and heightened financial instability. Drawing on recent studies indicating that over 60% of credit professionals lack essential skills in modern credit risk evaluation, this research underscores the need for human capital enhancement through structured frameworks. As Ethiopia pursues economic transformation, bolstering the banking sector's credit management is crucial for sustainable growth, regulatory compliance, and institutional resilience. Prior research has largely emphasized financial metrics and macroeconomic factors, overlooking the pivotal role of human competencies. This study fills that gap by proposing a novel, context-specific competency-based framework that integrates professional skills, risk assessment capabilities, behavioral attributes, and technological proficiency to align with both local realities and global benchmarks. The primary objective is to develop a framework that equips credit professionals with standardized skills and knowledge, thereby reducing NPLs, improving loan performance, and enhancing overall banking stability. Specific aims include identifying essential competencies for effective credit management, evaluating their impact on credit risks, and outlining integration strategies into existing practices. Guided by research questions on required competencies, their influence on outcomes, and practical implementation, the study adopts a mixed-methods approach to provide a comprehensive analysis. A descriptive-correlational design facilitates the exploration of relationships between competencies and financial performance indicators. Data collection involved purposive sampling from 17 commercial banks, targeting credit officers, analysts, risk managers, and departmental heads. Quantitative data were gathered via 85 structured questionnaires distributed to senior credit officers, while qualitative insights came from 34 semi-structured interviews with credit managers and relevant stakeholders, ensuring diverse operational and managerial perspectives.

Analysis employed the Statistical Package for Social Sciences (SPSS) Version 21 for quantitative data, incorporating descriptive statistics, correlation, and multiple regression to quantify impacts. The regression model revealed statistically significant positive effects, with competency showing the strongest influence (β=0.482, p<0.001), followed by experience (β=0.231, p=0.002) and training (β=0.305, p=0.001) on credit performance, supporting the hypothesis that enhanced human capital directly mitigates NPLs. Qualitative thematic analysis from interviews highlighted inadequate training in advanced risk assessment, with 70% of participants noting reliance on outdated methods contributing to higher NPLs, institutional barriers like limited technology access, and the need for behavioral competencies such as ethical judgment to address cultural challenges. These findings corroborate quantitative results, emphasizing gaps in training programs, technological adoption, and regulatory support that perpetuate inconsistencies in credit appraisal, monitoring, and recovery. The proposed framework standardizes competencies across technical, analytical, and ethical domains, offering a roadmap for banks to implement targeted training, performance evaluations, and policy reforms. By bridging theory and practice, it promotes evidence-based decision-making and accountability, reducing loan defaults and fostering financial sustainability. Implications extend to policymakers, particularly the National Bank of Ethiopia, advocating for regulatory integration of competency criteria to standardize practices and build resilience. Furthermore, incorporating technological proficiencies positions banks to adapt to evolving financial landscapes, enhancing credit assessment and customer benefits. Limitations include reliance on self-reported data and the exclusion of broader macroeconomic variables, suggesting avenues for future research on digital integration and cross-regional comparisons.In conclusion, this research advances understanding of credit management in Ethiopia by prioritizing human competencies as a driver of performance. The tailored framework serves as a foundation for continuous professional development, benchmarking, and economic progress, providing valuable resources for banking executives, regulators, and emerging markets committed to robust financial systems.