Effects of Credit Risk Management Practices on Nonperforming Loans in Commercial Banks in Kenya

Abstract

Risk management is an integral part of good management practice. Poor credit risk management practices leads to rising non-performing loans which compresses profit margins, of commercial banks hence bringing about more challenging environment for banks. Lending has been and still is the mainstay of financial institutions and this is more true to emerging economies of developing countries where capital markets are not yet well developed. To most of the transition economies, lending activities has been a controversial and difficult matter. This study sought to determine the effects of credit risk management practices on non-performing loans in commercial banks in Kenya. The study used descriptive research design and the target population for this study was 44 banking institutions transacting business in Kenya as at December 2012 whereby the study carried out census. the study used both primary and secondary data whereby the dat was analyzed using Statistical Package for Social Sciences (SPSS). Data presentation was done by the use Frequency tables and graphs and percentages. The study findings established that Risk identification affected the level of nonperforming loans in their banks to a great extent and that risk rating and collateral, credit scoring, credit worthiness analysis affects the the level of nonperforming loans' the banks to a great extent. The study findings established that risk analysis and appraisal affected the level of nonperforming loans their bank to a great extent and that measurement, risk estimation and determining risk reduction measures affect the performance of the bank to a great extent. This study recommends that clear established process for approving new credits and extending the existing credits need to established in banks as it is very important while managing credit risks in banks. the study further recommends that credits to related parties should be closely analyzed and monitored so that no senior individual in the institution is able to override the established credit granting process and that monitoring of borrowers should be keenly executed by banks