Strategies adopted by co-operative bank of Kenya in response to loan defaulters among the small and medium enterprises in Kenya

Abstract

Credit risk has been a concern to all financial institutions involved in lending money because the risk of default by clients can jeopardize the business of the lending institution. It‟s therefore prudent that lending procedures are consolidated into an integrated strategy aimed at reducing late repayment and default in repayment. The main objective of this study was to identify strategies adopted by Co-operative Bank to reduce loan defaults among SME customers. The study adopted case study design to carry out this research where an interview guide targeting 5 business relationship officers of the bank was employed to collect data using open-ended questions. The data collected was analysed qualitatively using content analysis method. The study found that loan default among clients is influenced by external factors such as the prevailing economic conditions in the country and globally, political environment at a particular time, and even socio-cultural factors and internal factors to the organization such as lax procedures for credit management, untrained staff and unaggressive debt collection methods. The study also established that various strategies can be adopted by a lending institution to reduce loan defaults including diversification of credit portfolios, establishing sound credit granting process, effective credit administration and monitoring and even training staff and educating clients on prudent investment of loans. The study finally recommended that every lending institution should develop sound credit control policy, establish mandatory credit risk departments, and develop an integrated credit risk strategy aimed at dealing with loan defaults.