A survey of credit risk management practices by commercial banks in Kenya

Abstract

Effective credit risk management has gained increased focus in the recent years, largely due to the fact that inadequate credit risk policies are still the main source of serious problems within the banking industry. Managing credit risk thus remains an essential and challenging corporate function. The chief goal of an effective credit risk management policy must be to maximize a banks risk adjusted rate of return by maintaining credit risk exposure within acceptable limits. Moreover, banks need to manage credit risk in the entire portfolio as well as the risk in individual credit or transactions. The research seeks to determine the credit risk management practices among commercial banks in Kenya. The specific areas of research were geared towards identifying the sources of credit risk exposures in banks and identifying the measures and strategies that the banks in Kenya have adopted to monitor and mitigate against the credit risk exposures inherent in the operations of their business. To facilitate the attainment of the objectives of this study, questionnaires were administered to the credit risk managers and credit managers of the respondent banks. The response rate was thirty two (32%) per cent. Research findings were further presented and discussed using tables and bar graphs. From the study, it was found that in most banks credit risk management was organized in units within the credit management department with persons responsible for credit risk management reporting to the credit manager. Most banks did not have an autonomous credit risk management department. Qualitative loan assessment methods were found to be the most prevalent methods in making credit granting decisions while liquidity run on the borrower, credit concentration and adverse trading by the borrower were the main sources of credit risk among the banks in Kenya. In addition, most banks were found to use loan diversification, bank guarantees and bank covenants to mitigate against credit risk. The main challenges and limitations encountered during the research were lack of adequate time to follow up potential respondents, suspicion from some respondents over the confidentiality of data disclosed and the lack of adequate local literature and research materials on the subject of credit risk management.