Impact of Covid-19 on the Relationship Between Credit Risk and Financial Performance of Commercial Banks in Kenya

Abstract

Covid-19 was a pandemic that rocked the entire world and different sectors took significant losses on their businesses, the financial sector being one of them. Descriptive research design that targeted all commercial banks in Kenya was adopted and focused on two eras, pre and post Covid-19 and sought to find out the impact it had on the variables under study. The results indicated the existence of positive and significant correlation between Capital adequacy ratio (r=.610; p<0.05) and Return on assets. It also established a moderately strong positive relationship (r=0.450; p<0.05) between liquidity ratio and return on assets among the banks reviewed. It further established a weak positive relationship (r=.165; p<0.05) between the total assets held by the banks and return assets. On the other hand, the researcher established a negative slope and significant correlation (r=-.489; p<0.05) between NPLs ratio and Return on assets. Subsequently, the researcher established that Capital adequacy ratio, Liquidity ratios and Total assets had significantly positive relationship with Return on Assets of the identified banks operating within Kenya. Moreover, the study established that in the financial year 2018/2019, the independent variables had strong correlation with Return on assets as indicated by R=0.880. The adjusted R2 was 0.775 which implied that 77.5% of the changes in the financial performance of the banks could be attributed to variations in the study predictor variables. Similarly, in the years after Covid-19 outbreak 2021/2022, the study variables had a strong positive correlation R= 0.803 with a coefficient of determination of r2= 0.645. One can deduce that the financial performance of the banks reduced after the Covid-19 outbreak compared to previous period. Since the variables under study was affected by the dependent variable by 77.5% (adjusted R2 = 0.775), this means, a small variation of 21.5% was affected by other factors. In this regard, the researcher advocates for further studies especially on mobile loan products in view of how well banks perform. One key area would be the impact of mobile loans on the credit risk to banks. Such a study would help the stakeholders in the sector to review impact of the unique mobile loan products such as M-shwari on financial performance. Some of the limitations faced in this study were overreliance on secondary data which some banks did not have due to their date of incorporation, having been recently merged and also stakeholders in the banking sector were not engaged so as to provide qualitative data.