The Relationship Between Credit Risk Management Practices and Loans Losses - a Study on Commercial Banks in Kenya

Abstract

This study investigated the relationship between credit risk management practices and loans losses - a study on commercial banks in Kenya. The objective of the study was to establish if there is a relationship between credit risk management practices and loans losses in commercial banks in Kenya. Descriptive research design was utilized in this study as it aimed to see if there is a relationship between credit risk management practices and loan portfolio losses in commercial banks in Kenya. It also tried to look at the most preferred practice in commercial banks and the effects on loans portfolio losses. The study utilized a standard questionnaire to collect primary data from the credit managers/officers through the drop and pick method form forty two (42) commercial banks in Kenya. However, only thirty six (36) of the respondent commercial banks completed the questionnaire. The data was then analyzed and the findings presented using tables giving descriptive statistics including frequencies, mean and percentages. Research findings indicated that a significant number of commercial banks in Kenya had not put in place credit risk management information systems to effectively measure, monitor, control and identify risk, and that majority of management of commercial banks in Kenya recognized the need for information sharing among players within the industry in order to mitigate the risk. It was concluded that credit risk management practices are common among most of the commercial banks in Kenya and that management of these commercial banks appreciated government legislation relating to credit risk management through the introduction of the credit sharing information Act, and that there is a significant negative relationship between credit risk management practices and loans losses in commercial banks in Kenya. In line with the findings and conclusions of the study it was recommended that sound credit risk management practices are adopted and implemented especially though credit risks management information systems, and that the board of directors of commercial banks in Kenya and Kenya Bankers Association should consider provisions for specific credit risk management practices to be adopted and implemented uniformly by commercial banks in Kenya.