Effects of credit risks on the financial performance of sugar firms in Kenya

Abstract

The overall objective of this study was to establish the effects of credit risk on the financial performance of sugar firms in Kenya. This was achieved by looking at the effect of credit risk exposure rate, default rate, and recovery rate on the return on equity of sugar firms in Kenya. This is led by the fact that sugar industry in Kenya is faced with financial challenges and many sugar firms are struggling with operational cost to make profit. The study covered all the eight registered sugar firms in Kenya by the Kenya Sugar Board as at December 2013. Cross-sectional survey design was used to collect the data from the field. The researcher carried out a census survey where all the registered sugar firms by the Kenya sugar board as at the time of the study were studied. Descriptive statistics and inferential analysis of the data were done using measures of central tendency and Pearson correlation analysis. This study induced and actualized better understanding of credit risk effect on sugar firms’ performance. Secondary data collected from the sugar firms annual reports for the period 2009 to 2013 was used in this study. The data collected from the annual report was analyzed using the multiple regression analysis. The regression out put was obtained using statistical package for social sciences. In the model, the dependent variable return on equity was used as an indicator of financial performance while the independent variables credit risk exposure rate, default rate, and recovery rate were used as credit risk indicators. The findings of the study showed that there is a significant relationship between financial performance and credit risk. The dependent and the independent variables in the study indicated a relationship with credit risk exposure rate and default rate showing a negative relationship with the return on equity while recovery rate showing a positive relationship with return on equity. The regression results shows that exposure rate have a higher significant effect on return on equity than the default rate. The regression results is significant since both the independent variables (ER, DR, and RR) can reliably predict the independent variable return on equity. The study concludes that credit risk exposure rate, default rate and recovery rate have a significant relationship with the return on equity of sugar firms in Kenya. The recommendation from the findings of the study suggests that all sugar firms in Kenya should implement credit risk measurement system such as credit ranking and credit scoring to customers to avoid incurring more cost on customers who have proved to be not credit worthy. All sugar firms should define the credit risk profile of their clients to ensure that necessary measures are taken before credit facilities are granted. The study suggests that more independent variables to be added in the regression model to help improve the results of the study.