Effect of Lending Practices on Credit Risk of Commercial Banks in Kenya

Abstract

The study sought to establish the effect of lending practices on credit risk of commercialbanks in Kenya. Descriptive survey design was adopted targeting 40 commercial banks inKenya and census were used, but only 35 commercial banks had the reliable data for analysis. The study covered the period 2017-2021 and both primaryand secondary data was collected. The analysis was done through Statistical Package for Social Sciences version 24 supported by means and standard deviations, correlation and regression analysis and presented through tables. The study established that lending practices and the control variables could explain 60.9% of credit risk and they also significantly affect credit risk (F {df=4,30} =12.065; p=0.000). It was further established that lending practices positively contributes to the improvement of credit risk of the commercial banks (β=0.021; p= 0.000). It was further determined that bank size contributes to the credit risk of the banks (β=0.016, p=0.000). On the operational efficiency, it was determined that it contributes to the credit risk of the banks (β=0.008; p= 0.047). Finally, on the bank liquidity, it was also determined that it significantly contribute to the credit risk of the banks (β=0.034; p=0.000). The study concludes that lending practices mainly KYC play an instrumental role when it comes to credit risk of commercial banks. The study recommends that the credit managers working incommercial banks in Kenya should come up with clear lending policies and practices. In order to mitigate the risk occasioned by non-performing loans, comprehensive customer appraisal systems and techniques should be embraced by commercial banks in Kenya. The policy makers working at the Kenya Bankers Association should develop sound industry practice in regard to lending practices for members. Policy makers working in commercial banks in Kenya ought to relevant industry practice to guide the operations as far as lending practices and credit risk are concerned.