Credit Risk Management Practices And Financial Performance Of Commercial Banks In Kenya

ABSTRACT

Commercial banks all over the world enhance the economic growth of nations by providing funds to customers of investments. The survival of commercial banks like every other financial institution depends largely on their profitability. However, the profitability of these banks is dependent on the risk management practices which they adopt. This is because granting of loans to borrowers is accompanied with its own risks. Credit risk is regarded as the most adamant risk faced by banks due to the nature of their activities. Studies relating to credit risk management practices were done in developed and other developing countries other than Kenya. Similarly, some of these studies focused on microfinance banks and Sacco societies. These studies among other findings have indicated a high default rates among commercial banks which in turn leads to their low performances. The current study sought to fill the conceptual and contextual gap in literature by focusing on credit risk management practices and commercial banks financial performance in Kenya. Therefore, the specific objectives of the study were to determine the effect of client appraisal, credit terms and conditions, credit collection policies and credit control practices commercial banks’ financial performance in Kenya. Also, to assess the moderating influence of interest rates on the relationship between credit risk management practices and commercial banks’ financial performance in Kenya. The research utilized descriptive research design and the sampling design was purposive sampling design. The research made use of a multiple regression model for the analysis. Findings of the study indicate that there exist a positive and significant effect of credit risk management practices that is, credit terms and conditions, client appraisal, credit practices and credit control practices on financial performance of commercial banks in Kenya. However, the study found an insignificant moderating effect of central bank rate on the relationship between credit risk management practices and financial performance of commercial banks in Kenya. The study recommends that credit managers should come up with efficient terms and conditions and client appraisal that will enhance credit control and collection. The study recommends that further studies on credit risk management practices and financial performance of banks should consider the moderation effect of bank specific interest rates.