Effect of Credit Risk Management on the Financial Performance of the Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Credit creation among the commercial banks plays a critical role in income generation. However, this activity is characterized by a number of risks which are a threat to both the lenders and the borrowers. The paper tried to establish the impact of the management of credit risks on the financial performance of the commercial banks quoted under the NSE of Kenya. Cross sectional descriptive survey was used in this paper. The paper employed a census method where all the eleven quoted commercial banks were studied. The paper used secondary data from the Audited Financial Statements of the banks, those listed at the Nairobi Securities Exchange and financial performance data from CBK annual banking survey reports. The collected data was analyzed by use of the Statistical Package for Social Sciences. Analysis of data was on the basis of the mean and the F test statistic was computed at 5% significance level. To check for the strength of the model and the impact of the management credit risks on financial performance of the commercial banks quoted with the NSE, the paper did an Analysis of Variance. From the regression model, the paper established that there were credit risk management variables influencing the financial performance of commercial banks quoted under the NSE namely; interest rates, capital adequacy and liquidity. They affected it positively. The paper established that the six independent variables that were studied which included leverage, inflation rate, firm size, liquidity, capital adequacy and interest rate explain 13.0% of variability on fiscal performance of the commercial banks quoted under the NSE. The paper therefore concludes that the management of credit risks affects the financial performance of the commercial banks quoted under the Nairobi securities exchange. The conclusions are in accordance to the Arbitrage theory which posits that there is positive connection linking the risk of assets with their expected returns. This implies credit risk is invertible among the commercial banks in Kenya; therefore necessary strategies need to be put in place to help in the mitigation of this kind of risk so as to improve the financial performance. This study recommends the adoption of credit risk management because it focuses on the risk minimization which in turn improves the financial performance. This paper makes recommendations that a study be done to evaluate how the management of credit risks will impact the financial performance of the Kenyan non- quoted banks.