The effect of credit assessment process on repayment of bank loans in commercial banks in Kenya

Abstract

The purpose of this study was to determine the impact of credit assessment process on loan repayment. The methodology employed in the study was a census survey. The study targeted all the 43 commercial banks registered in Kenya as at December 2013. Data collection was by means of a self-completion questionnaire which was filled by credit assessment officers. Secondary data was obtained from the annual reports from the publications by the Central Bank of Kenya. A response rate of 65.33 % was achieved which was considered adequate for analysis. The parameters considered under the credit appraisal processes were; the 5C’s Process, 5P’s Process, CAMPARI Process, LAPP Process, PACT Process and financial ratios. The factors in the credit assessment process that were analyzed include; policy, screening, appraisal and review. The study revealed that no one credit appraisal technique was used in isolation, with the banks opting to use more than one of each of the credit appraisal techniques. The most commonly used process was the 5C’s followed the use of financial ratios which had means of 1.96 and 2.64 based on a scale of 1 to 5 where 5 used to a very large extent while 5 was used to very little extent . PACT was the least used appraisal with a mean of 3.54 followed by LAPP with 3.14. The CAMPARI and 5Ps techniques had means of 2.89 and 2.96 respectively. A correlation analysis revealed that the use financial ratios was closely related to CAMPARI, PACT and LAPP appraisal processes which had correlation coefficients of 0.923, 0.819 and 0.709 respectively. Banks that used the 5Cs process tended to use the 5Ps as well as this had a correlation coefficient of 0.849. A regression analysis revealed that the main predictors of the credit appraisal process were financial ratios, the personal or corporate profile and the adequacy in staffing. The level of staffing was noted to cause work overload in some of the banks which reduced staff morale and efficiency. Factor analysis applied on the collected data using principal component analysis (PCA) produced three main components which had a cumulative factor score of 93.7%. The component that was related to previous business performance had the greatest weight of 52% while factors related to the future business prediction such as business plans, and the general business profile accounted for less than 30 % in considering the credit worthiness of borrowers. The study revealed there were weaknesses in credit appraisal policies (82%), which allowed rogue bank staff to award loans to non-qualifying applicants. The respondents however agreed the drafting of appraisal policies involved the input of bank staff. The study also revealed that the banks yet to fully integrate computerized credit appraisal techniques to include lie detectors to weed out borrowers who supply false information knowingly.