The Determinants of credit risk in commercial banks in Kenya

Abstract

The global financial crisis and increasing vulnerability of commercial banks has of late sparked interest on the analysis of the problems banking crisis can have over an economy. Of great interest has been the determinants of that could trigger a crisis in the financial sector. The main objective of the study therefore was to establish macroeconomic and microeconomic variables that influence credit risk in commercial banks in Kenya. A descriptive research design was used to describe data and there characteristics. The data collected was analyzed using the quantitative methods to obtain descriptive statistics. The study was conducted using correlation and regression techniques in analysis of data on factors affecting credit risk on commercial banks in Kenya upon which statistical inference were made. The study findings revealed that credit risk in commercial banks was significantly influenced by GDP, inflation, interest rates, unemployment, stock performance and management efficiency when all the variable are working simultaneously. Analysis on individual determinants established that only management efficiency significantly influenced credit risk where as other factors held a relationship on credit risk though not significant at 5% significant level. The model findings will help the management of commercial banks and the regulators such as central bank in setting credit policies and make projections of credit risk and taking necessary actions to avoid the adverse effects of credit risk on the banks and financial industry performance.