The relationship between credit risk management and non - performing loans in commercial banks in Kenya

Abstract

The study investigated th e relationship between credit risk management and the level of non - performing loans in commercial banks in Kenya . The study adopted a descriptive survey design. Through use of descriptive and inferential statistics, this design was deemed the best design t o fulfill the objective of th e study. The target population of the study was all the 43 commercial banks in Kenya as re gistered by CBK by December 31, 2013. The c ensus method was used for this study since the population was small and variable and the insti tutions are easily accessible; hence the sample size was all 43 commercial banks in Kenya. In order to achieve the set objectives of the study, both primary and secondary data was used. The primary data was collected using a questionnaire. The questionnair e had both closed and open - ended questions. The closed ended questions enable d the researcher to collect quantitative data while open - ended questions enabled the researcher to collect qualitative data. The secondary data was obtained from the annual report s of the banks. Data collected covered a per iod of 5 years, from 2009 - 2013. The study concluded that most bank have a sound credit risk management system and the senior management banks develop policies and procedures for identifying, measuring, monitoring and controlling credit risk. The study further concludes that most banks in Kenya operate under a sound credit risk management process that reduces loan default which leads to low non - performing loans. The study also concluded that banks take into conside ration potential future changes in economic conditions when assessing individual credits and their credit portfolios. For proper credit management process, banks should have management information system s that provide adequate information on the compositio n of the credit portfolio. The study recommended that banks must respond to this by combining this information with different credit risk management techniques used to evaluate the clients by reviewing the lending terms and conditions of the clients. The o verall responsibility of risk management vests in bank’s board. The board should outline risk management strategy and formulate well - defined policies and procedures. Risk management department be made on portfolio or business line basis, to adopt a holisti c approach judging the overall risk exposure in assessing and managing risk profile of the bank.