A study of the relationship between credit risk Management and non-performing loans: The case of Commercial banks in Kenya

Abstract

This study examined the relationship between credit risk management and non performing loans in the financial sector in Kenya. The population of the study included all the 45 commercial banks in Kenya based/headquartered in Nairobi. Primary data was collected by use of questionnaires. Out of the targeted 45 respondents 37 responded thus a respondent rate of 82.2%, a confidence level sufficient enough to make conclusions on the objective of the study. The data was analyzed using descriptive and inferential statistics. The research found that in the Kenyan set up a combination of intensive credit risk management by the banks coupled with close supervision by the central bank has greatly enhanced the decline of nonperforming loans ratio in the banking sector yearly. Analyzing the asset quality of the financial sector for the past six years, the ratio of gross nonperforming loans to gross loans has declined from a high of 35% in 2003 to a low of 9.23% in 2008. The decline of this ratio confirms the close relationship between nonperforming loans and credit risk management as the reasons behind this decline has been explained as being mainly due to enhanced corporate governance and risk management as well as credit underwriting standards by the banks coupled with CBK strict supervision. On the credit risk techniques, the research found that credit limits, diversification of credit portfolio, BIS requirements, credit insurance, securitization and credit scoring are used by all the banks studied. Loan scoring was found to be unpopular as a credit risk tool with only 48.65% of the banks using the same. In addition to that, pricing and loan syndication are also not used by all the banks in Kenya.