The Relationship Between Credit Risk Management and Financial Performance of Commercial Banks in Kenya

Abstract

As an MSc Finance student with prior experience as a Credit Officer at the Agricultural Finance Corporation (AFC), I have personally experienced the difficulties involved in managing credit risk within the financial sector, especially when it comes to lending to both small and large-scale farmers. AFC, a government established financial institution aimed at providing financial credit to farmers, has grappled with a high default rate in loan repayments due to the credit risks associated with lending to individuals with varying credit ratings. My experience with AFC has sparked my interest in exploring the intricacies relating to management of credit risk and its influence regarding the fiscal performance of Kenyan commercial banks. Commercial banks are crucial to the economy as they provide essential monetary services to various sectors, including agriculture. However, they face similar challenges in managing credit risk even though they have other strategies and frameworks in place. I have therefore decided to undertake a research project focusing on exploring the connection regarding credit risk oversight practices and the fiscal performance of banks in Kenya. By researching more about this topic, I intend to add to the current understanding of risk management in banking and provide insights that could potentially enhance the efficiency in the oversight of credit risk strategies. For the purposes of achieving my research objective, I intend to collect data from all commercial banks in Kenya. These banks were selected based on their significant market presence and diverse customer base, which includes agricultural borrowers. By analyzing data from these institutions, I seek to identify patterns, trends and correlations between the oversight of credit risk and key economic performance indicators such as profitability, liquidity and asset quality. The findings from this research will not only enhance academic understanding but also offer practical solutions to policymakers, banking regulators and industry practitioners. By deepening the understanding of how credit risk control practices affect economic performance, banks can refine their risk oversight frameworks, mitigate potential losses and foster sustainable growth within the banking sector.