The Effect of Credit Risk Management on Financial Performance of Commercial Banks in Kenya

Abstract

Credit risk is the probability of incurring losses as a result of non-payment of debt. Over the years it has emerged as the crucial and foremost risk for most financial institutions due to the rapid and dynamic advancement of financial institutions and occurrence of global financial crisis. The objective of the study was to determine the effect of credit risk management on financial performance of commercial banks in Kenya by applying a descriptive research design. It aimed at adding on to already existing knowledge on credit risk and to widen the level of understanding of the concept in banks. The study period was 5 years from 2011 to 2015 and secondary data for forty out of a possible forty three banks was collected. It was analyzed using a regression model and descriptive statistics. The independent variables were NPLR CAR ISR Size and LTD while dependent variable was ROE. The study revealed that non-performing loans have a negative relationship with ROE as indicated by the co-efficient while size as measured by natural logarithm of total assets has a positive relationship with ROE.CAR has a positive relationship with ROE while liquidity measured by LTD has a negative relationship with ROE. In conclusion credit risk management measured by NPLR has a significant negative relationship with financial performance measured by ROE. The study recommends banks should work on minimizing their exposure to credit risk for improved performance. Further it recommends that banks look at other factors influencing their performance other than credit risk.