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

Abstract

Credit Risk Management policy has increased concerns in financial institutions industry due to high level of risks. However, the recent events witnessed in collapse of a number of banks discredits most failure in banking and financial service industry has abetted as the most catalyst for concern about risk. The main goal of the research being to determine the effect of Credit Risk Management policy on financial performance of commercial banks in Kenya. Specific goals being to determine in what way does capital adequacy and liquidity affect Commercial banks in financial perspective in Kenya. Descriptive investigation design was used to gain important data to the above study. The study focused on the entire commercial Banks listed by Central Bank that operate in Kenya. Secondary data used were the financial statements of respective commercial banks and Central Bank of Kenya report Publications. Descriptive statistics and Statistical Package for Social Sciences (SPSS) used in analyzing the data. The study indicated that a unit increase in liquidity, while holding other factors constant, leads to reduction in financial performance by 0.782 (p=0.003); a unit increase in capital adequacy, while holding liquidity constant, leads to an increase in financial performance by 0.463 (p=0.001). The study concluded that a unit increase in liquidity, while holding other factors constant, leads to decrease in financial performance. Further, unit increase in capital adequacy, while holding other factors constant, will result into an increase in the performance in the financial sector. The study recommended that policymaking entities and regulatory authorities in Kenya should develop effective prudential guidelines and polices to strengthen the management of credit risk.