Credit Scoring Practices and Non-performing Loans in the Kenyan Commercial Banks

Abstract

This study was carried out to achieve two objectives, to evaluate the credit scoring practices in Kenyan commercial banks and to assess the relationship between these credit scoring practices and non-performing loans. The first objective was necessitated to the fact that, in the developed world, the use of credit scoring practices by banks was widely documented but in Kenya, information on the extent of use of credit scoring practices was non- existent. Data was collected using questionnaires from 43 commercial banks in Kenya as at end of the year 2004. The findings were that 62% of the banks used credit-scoring practices compared to 38%, which never used. Analyzing the level of non-performing loans measured by assets quality ratio and comparing this with the credit scoring practices using correlation analysis achieved the second objective. The results indicated a negative relationship between credit scoring practices and nonperforming loans with a correlation coefficient of -0. 773 ...