Relationship between credit risk management practices and financial performance of Saccos in Murang' a county

Abstract

The study sought to find out the relationship between Credit Risk Management Practices and Financial Performance of SACCOs in Murang'a County. The objectives that guided the study were to determine the credit risk management practices used and then establish the relationship between credit risk management practices and financial performance. The study had its target population as the Saccos in Murang'a County. They were all forty three in number. Simple random sampling method was used for sampling purposes. The sample size was thirty Saccos. The study employed descriptive research design. The data was collected by use of questionnaires and secondary data analysis. The data was analyzed by use of S.P.S.S (Statistical Package for Social Sciences) and thereafter presented by use of statistical means which were tables and percentages. Inferential statistic was used to establish the relationship between credit risk management practices and the financial performance of Saccos, where performance of Saccos was measured by their profitability in terms of Return on Assets. Out of the sampled Saccos, 28 responded and this constituted 93.33% response rate. From the findings, the study found out that all the sampled Saccos in Murang'a County adopted credit risk management practices i.e. credit scoring mechanism, risk identification, risk analysis and assessment, diversification of assets, Sacco's loan policy procedure, portfolio asset quality/portfolio management and segregation of duties to counter credit risks they are exposed to. The study further found out that Saccos adopt various approaches in screening and analyzing risk before awarding credit to clients to minimize on loan loss. This included establishing capacity/completion, conditions, character of borrower and use of collateral/security. Some of the Saccos also use guarantors to guarantee the loan that a client intends to take. The study established that Saccos make their staff aware of credit risk through regular meetings, staff supervision and regular training. Saccos also consider risk identification process in credit risk management. Most of the Saccos consider that a client has defaulted on loan repayments after failing to repay for three consecutive months while most were indifferent on whether one month late payment should be considered as a default to loan repayment. The study established that there is a positive relationship between credit risk management practices and the financial performance of Saccos in Murang'a County. Thus, credit risk management is vital in maximizing the performance of Saccos. The study recommended that the management of Saccos ensure that there is an on-going evaluation and assessment of the credit related risks. The study further recommended that Saccos should put in place an effective system of internal controls that is consistent with the nature, complexity and risk inherent, have credit risk monitoring systems that are simplified and customized to Sacco operations and consider implementing modern approaches in risk identification and analysis. This will increase effectiveness in risk identification, analysis and monitoring of credits.