The relationship between credit risk management practices and the performance of loan portfolio of commercial banks in Kenya

Abstract

Credit risk management is a structured approach to managing uncertainties through risk assessment, developing strategies to manage it, and mitigation of risk using managerial Credit risk management practices in banks influence the efficiency of bank’s risk management and are expected to significantly influence its loan portfolio. Commercial banks in Kenya adopt different credit risk management practices informed by ownership of the banks, credit policies of banks, credit scoring systems, banks regulatory environment and the caliber of management of the banks. This study therefore sought to fill the existing knowledge gap by answering the question what is the relationship between credit risk management practices and the performance of loan portfolio of commercial banks in Kenya. This research used descriptive survey research design. The study adopted a census study and collected data for five years from 2010 to 2014. Primary data was collected using semi-structured questionnaires. The secondary data was collected from commercial banks financial reports and CBK supervisory reports. The study used qualitative and quantitative techniques in analyzing the data. The study established that commercial banks used credit risk control practices in credit risk management to a very great extent to minimize credit loss A linear regression model was applied to examine the relationship between the variable. From the findings, the study concluded that commercial banks uses credit risk identification to a very great extent which resulted in reduction in default rates among bank clients. The study concluded that there existed a significant negative relationship between use of credit risk control and level of non-performing loans .Hence use of credit risk control practices to a very great extent led to a decrease in level of non-performing loans in commercial banks in Kenya. The study recommends that commercial banks should use credit risk identification practices in risk management to a very great extent. This is due to its impact on reduction of the level of non-performing loans. The study also recommends that bank should use credit risk identification to a very great extent as this resulted into significant reduction in default rates among banks’ clients