The Use of 6 C's Credit Risk Appraisal Model and Its Relationship With the Level of Non­ Performing Loans of Commercial Banks in Kenya

Abstract

The banking industry is a major player in the Kenyan economy The industry provides credit, which is one of the important vehicles for the country's economic development. To be able to continue giving credit, borrowers from commercial banks should repay as agreed and on time, In this regard, the criteria for assessing credit risk are essential, Successful and effective credit risk appraisal and evaluation determines the success of the credit journey, One of the criteria for establishing credit worthiness of a borrower IS the SIX C's model, namely: Character, capacity/completion, common sense, collateral, contribution and condition,

The study focuses on establishing the important factors in credit risk assessment, appraisal and evaluation, The two objectives of the study were:

• To establish the importance of the six C's model in assessing, appraisal and evaluating credit risk by commercial banks in Kenya, • To establish the relationship between the use of the six C's credit appraisal model and level of non-performing loans of commercial banks in Kenya,

To satisfy the objectives of the study, the data was collected, using a questionnaire, from 41 commercial banks in Kenya, Secondly, data was obtained from Central Bank of Kenya supervision reports and the banks' annual reports, These two sources provided information on financial performances of the banks and the level of non­ performing loans level.

The findings of this study is that the six C's model is essential in credit risk appraisal and that the most critical factors of the six C's model are character, capacity/ completion a.n..d common sense in that order.

Further, the study established that the most important risk banks face in Kenya is the liquidity risk followed by the credit risk and they mostly use forwards and swaps to manage these risks,

These findings are in agreement with the assertions of scholars such as Abedi (2000) who found out $1at character is the most important criteria in risk assessment by conuucnial b.ml.« III \llll'lll':l. I'lllllj\\ l'd 1,\ CJP:ll'll\ Il) lep:l\ the 1\):1l1 :1III1 Ihl' reasonableness of the c.ixh 11\)\\ lrum Ihl' II1il'lllkd 111c\stmcut .uid thai the 11]\)St

important risk banks face is the liquidity risk followed by the credit risk and they mostly use forwards and swaps to manage these risks.