The effect of credit risk management practices on the level of non-performing loans. A case study of commercial banks lending to smes in Kenya

Abstract

Small and medium Enterprises Sector was formerly considered as the missing middle because the businesses were too small to be financed by commercial banks and too large to be financed by microfinance institutions. This financing gap has however started shrinking, but on the other hand the high percentage of nonperforming loans of commercial banks are associated with the SME sector. The immediate consequence of nonperforming loans in the banking industry leads to bank closure. The objective of the study was to establish the effect of credit risk management techniques used to evaluate SMEs on the level of Nonperforming loans by Commercial banks in Kenya. A descriptive study of credit risk management techniques was used by commercial banks in Kenya was carried out on all the banks. A regression analysis was developed in order to examine the relationship credit risk management and SME Nonperforming loans in Banks in Kenya. The study established that there is a negative relationship between Credit Risk Management and Non performing loans. Implying that the level of nonperforming loans is inversely affected by credit risk management practices. To identify, analyse, monitor and mitigate loan losses in the SME sector, most banks visited their SME business premises, sent credit reminders, used risk based pricing and collateralized their loans. The paper recommends a thorough re examination of economic importance of SMEs in Kenya and calls upon more efficient support strategy and fund allocation from the government and banks.