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

Abstract

Credit risk control is a function that cannot be ignored by any institution regardless of the nature of business that the institution undertakes. This research intended to determine the effect of credit risk control on financial performance of Commercial Banks in Kenya and was steered by the following theories; Liquidity Preference Theory, Credit Risk Theory and Theory of Information Asymmetry. The study employed a descriptive research design which enabled the researcher to describe the characteristics of the research variables. There are 42 commercial banks in Kenya (CBK, 2016). The research focused on all the 42 commercial banks. Secondary data was collected from audited annual financial reports for individual banks found on the Central Bank of Kenya website and library. Annual audited financial statements were used in the study due to ease of availability and the fact that they are credible. The quantitative data generated were analyzed with the help of Statistical Package for Social Sciences (SPSS) version 20. Descriptive statistics was used to quantitatively describe the important features of the variables using: frequency, mean, maximum, minimum and standard deviation. Multiple regressions were also used to measure the quantitative data which was analyzed using the SPSS. Regression was used in determining the effect of credit risk control on financial performance of commercial banks. Credit risk control was found to have a negative statistically significant relationship with the performance of commercial banks. Every shilling classified as NPL leads to a decrease in the performance of commercial banks by 6.1 %. Management should therefore pay more attention to the assessment of credit risk since it impairs the profitability of companies. Management can also increase their monitoring on non performing portfolios and take remedial action in good time to protect their profits. These remedial actions include outsourcing of collection services to manage the existing bad book. The study proposes that a similar research should be done but with a specific focus on East Africa. This is because of the inter trade among the countries it would be important to know how the trade relationships affect the financial performance of commercial banks in East Africa.