The effects of financial innovations on credit risk management of com mercial banks in Kenya

Abstract

Various profit making firm and institutions would s eek the investment that have lower risk and uncertainties wit h a large magnitude of returns. In Kenya, f inancial institutions encounter major risks in rendering their services. The study adopted descriptive research design. In seeking to establish the effe cts of financial innovations on credit risk management of commercial banks in K enya , t his study utilised the population of which comprises of 43 Commercial banks in Kenya. This study sought to collect secondary data for the period between 2003 - 2013. The d ata was collected from the relevant documentations and official records like the Financial Products Report and the Risk Manuals of the selected commercial banks. The measure for credit risk management was Non - Performing Loans Ratio (NPLR). The data collect ed from the annual reports of the banks was analyzed using multiple regression analysis . The regression output was obtained using Statistical Package for Social Sciences (SPSS version 18). In this study, multiple regression model with three ind ependent var iables. Financial innovation was measured and quan tified in term of its variables. F indings revealed that financial innovations h ave a positive effect on credit risk management of commercial banks . Among the bank financial innovations: institution, produc t and process innovations. This finding is supported by the coefficient of determination which shows that the 40.4% of the variations in bank nonperforming loan ratio are explained by bank s’ financial innovations. The influence of bank financial innovation s on income are also statistically significant (p < .001) hence justifies the aforementioned relationship . This means that the influence is not by chance