The relationship between credit risk management practices and the level of non.performing loans for commercial banks in Kenya

Abstract

Commitment to credit risk management is an essential component of a comprehensive technique to risk management and critical to the long-term success to all banking institutions. The rising non-performing loans and compressed profit margins, combined with slow economic growth over the past years have created a much more challenging environment for banks. The objective of this study was therefore to find out the relationship between credit risk management practices and the level of non-performing loans for commercial banks in Kenya. Causal research design was used for the study. The population of the study consisted of all the 44 commercial banks in Kenya. The study involved the collection of primary and analysis of secondary data for the purpose of meeting its objective. Self-administered questionnaires were used to collect the data. The study intended to establish the relationship between credit risk management and the level of non-performing loans and therefore linear regression analysis model was used to determine the nature of this relationship. The study revealed that commercial banks review their credit policy yearly and half yearly, and that employees are made aware of credit policies through credit manual, regular training, regular meeting and supervision. The study further revealed that methods mostly used in credit risk assessment among commercial banks in Kenya are; risk adjusted return on capital and linear probability model. The study established that there is a negative relationship between the level of non-performing loans and credit risk management practices in banks with a correlation coefficient of 0.918, implying that the level of non-performing loans is inversely affected by credit risk management practices. The study recommended that there is need for commercial banks to adopt various credit risk management’s practices in order to reduce their level of non-performing loans. It further recommended for sustainable and reliable credit database for immediate and quicker use when needed by banks.