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

Abstract

Commercial banks play an imperative role within the economy through offering savings alongside credit facilities. However, giving out loans poses the banks to credit risks. There is empirical research evidence showing that credit risk possesses negative effects on the financial performance, thus it necessitated the need to scrutinize the credit risk management effect on the commercial banks’ performance in Kenya. This research has established how credit risk management affects the performance of Kenyan commercial banks. The objective of the research was to investigate the credit risk management effects on the Kenyan commercial banks’ performance. The researcher utilized secondary data and descriptive research design whereby the population were all licensed banks as at 31st December, 2020. The research period was 5 years between 2016 to 2020. The data analysis was steered through SPSS version 26 software. The researcher used multiple regression model to perform analysis of the amassed data thereby establish the link between the variables of study. The researcher also utilized F-test to establish the regression model’s significance. The study findings unveiled that non-performing loans significantly and negatively affect the performance of banks. Moreover, the capital adequacy exhibits positive as well as significant influence on the banks’ performance. Additionally, the scholar established that loan loss provisions positively affect the banks’ financial performance even though the impact is insignificant at 5%. Hence, the researcher concluded that credit risk management possess a positive effect on the financial performance, so the risk managers and policy makers should establish proper strategies in managing credit risks in banks.