Effect Of Credit Risk Management Practices On Financial Performance Of Commercial Banks In Kenya

Abstract

Lending by commercial banks is vital to an economy since it can finance many if not all sub- sectors of financial arena, these sectors may include commercial, agriculture, industrial activities and so on. However, the harmonious stream of collapse, discredits and failures in the banking and financial services industry has served as a catalyst for concern about credit risk. The study therefore seeks to assess effect of management of credit risk practices on performance of the Kenyan banks especial commercial ones. The study used a descriptive research design. The census of 43 Kenyan banks was undertaken however; only data from 39 commercial banks was obtained. Both primary and secondary data were used in the study. Primary data on credit risk management practices was collected using a questionnaire while secondary data on the banks performance in financial perspective was obtained from various bank's published financial statements for 5 years from 2011-2015. Collected data was summarized by descriptive statistics like the standard deviation and the mean and then analyzed using regression analysis and correlation. The study found a significant positive relationship between credit risk identification and credit risk monitoring and the financial performance of commercial banks. The study found a positive insignificant relationship between credit risk appraisal and financial performance of commercial banks. The study also found a negative insignificant relationship between credit risk control financial performance of commercial banks in Kenya. The study concluded that that credit risk identification and credit risk monitoring significantly and positively affects financial performance of commercial banks in Kenya. The study also concluded that there is direct relation between credit risk appraisal and an inverse relationship between credit risk control financial performance of commercial banks in Kenya. The study recommended that the management of the Kenyan banks to put more emphasis on credit risk identification since proper identification of risk would help to develop the basis for the other stages of management of credit risk.