Risk management strategies used by Fina Bank limited in lending to SME's

Abstract

Bank financing of small and medium-sized enterprises (SMEs) recently received renewed interest as a result of the ongoing internationalization of financial markets for corporate finance. Effective risk management, from the point of view of financial institutions, is the key to the future success in banking and therefore these institutions should focus on professional management of risk. The successful financial institutions are and will increasingly be those that develop focused strategies, lower their overhead ratios, ingeniously exploit their advantages and know how to calculate their risks. The most important areas of concern to banks in credit risk management is to be integrative in terms of risk a bank is taking in doing business by client, by channel, by product, by business, by industry, by currency and by country. The objective of this study was to investigate the risk management strategies used by Fina Bank limited in lending to SMEs. A survey method with reference to Fina Bank of Kenya was adopted. Primary data was collected for the purpose of this study using a self administered interview guide. The variables focused on included Credit scoring models, Credit Policy, Credit risk assessment and approval level, Credit risk management methodologies, 6 C's Credit Appraisal and Default Rate measurement and evaluation issues around risk management strategies at Fina Bank of Kenya . The results of the study indicate that risk control is the most central aspect of risk handling and can involve a variety of different strategies. One of these seeks to reduce the magnitude of risk by controlling the terms on which the loan has been granted for instance interest rate variability, another consists of demanding security and using the 12Cs in credit risk assessment. Risk management strategies are not a substitute for poor management. This will only succeed where best management practices are practiced. The study was however, limited to Fina Bank due to time and cost constraints. Replication of this study through comparative study using samples from other institutions is thus recommended.