Credit risk management practices by oil companies in Kenya

Abstract

Credit is one of the many factors that can be applied by a firm to influence demand by increasing sales volume, market share and hence profitability. However, it can only benefit a firm if the rate of return of the added accounts receivables exceeds its associated direct and indirect costs. Credit is always risky and an exposure to firms. Credit risk if not efficiently managed affects organization’s adversely in that it may lead to liquidity problems whereby short term obligations far much exceeds the rate of cash inflows, in severity it can lead to insolvency and collapse. To be able to avoid these adverse effects of credit, credit risk management must be undertaken by firms when advancing credit. This involves designing and documenting processes, ways and strategies through which credit risk can efficiently be managed. Successful and effective credit appraisal and evaluation processes determine the quality of an organization’s credit risk management strategy. This involves determining your customers’ creditworthiness achieved through sourcing of relevant credit information and accurately analyzing it through credit rating and scoring to enable objective credit decision making. This study focused on credit risk management practices adopted by oil firms in Kenya and the underlying factors affecting these approaches. To satisfy the objectives of this study both primary and secondary data was collected. The primary data, which was collected through questionnaires and personal interviews, was used to satisfy the first objective that is determination of credit management practices. On the other hand the second objective that is determination of factors affecting choices of credit management approaches, primary data was supplemented by secondary data obtained from brochures, credit reports and in-house credit management publications. The data obtained was analyzed using descriptive statistics, which included frequencies and percentages and data presentation was done using comparative analysis and tables