Determinants of Credit Risk in Islamic Commercial Banks in Kenya

Abstract

Islamic Banks continue to experience increase in high default rate and high level of nonperforming loans indicating presence of credit risks. The study objective was to examine determinants of credit risk in Islamic commercial banks in Kenya. The study adopt descriptive survey research design. The population of study consisted of all Islamic banks in Kenya and the commercial banks in Kenya offering the Islamic banking products and services. The study used secondary data collected from Islamic commercial banks financial books and financial report of the institutions. Inferential statistic was used to establish the relationship between credit risk and performance of loans portfolio for the Islamic commercial banks in Kenya. Predictor bank lending had a statistically significant and negative relation with credit risk in Islamic banks. The study found that Predictor Management efficiency has a significant and negative relationship with credit risk. It is evidenced that increase in total costs of bank financing through loans would results into increase in total loans exposing the banks to more unforeseen credit risks. The predictor liquidity management had a significant negative relation with credit risk in Islamic bank. Increase in liquidity management would lead to decrease in credit risks among the Islamic banks. The study established that predictor capital adequacy had a significant, negative relationship with credit risks in Islamic Bank. The increase in bank size predict significant positive relationship with credit risk in Islamic Banks. The increase in bank volume of assets would improve bank management capacity to reduce the occurrence of credit risks in Islamic Banks in Kenya. The study conclude that there exist a strong, significant and positive correlation between lending rate and credit Risk Bank lending has a statistically significant and negative relation with credit risk in Islamic banks. The Predictor Management efficiency has a significant and negative relationship with credit risk and therefore that increase in total costs of bank loans increase total loans exposing the banks to more unforeseen credit risks. The study concluded that liquidity management has a strong, significant and negative correlation with credit Risks. The predictor liquidity management had a significant negative relation with credit risk in Islamic bank. The findings led to conclusion that there exist a strong, significant and negative relationship between capital adequacy and credit Risk and that predictor capital adequacy had a significant, negative relationship with credit risks in Islamic Banks in Kenya. The study recommend that management in Islamic commercial bank should determine an optimal bank lending rate to manage occurrence of unforeseen credit risks and reduce bank lending rate and reduce occurrence of Non-performing loans. The study recommend that management in Islamic bank should enhance Management efficiency by reducing total cost of bank financing of credit facilities and reduce as Management efficiency has a significant and negative relationship with credit risks and therefore that increase in total costs of bank loans increase total loans exposing the banks to more unforeseen credit risks. The study recommend that management of Islamic banks should enhance liquidity management so as to decrease occurrence of credit risk. Increase in predictor liquidity management would significantly negative relation with credit risk in Islamic banks. The study recommend that regulatory authority such as Central Bank of Kenya and other financial agencies should clearly enhance monitoring and assessment on Islamic bank capital adequacy and increase risk weighted assets to safeguard occurrence of credit risk.