Relationship Between Loan Characteristics And Credit Risk Among Commercial Banks In Kenya

Abstract

In the banking industry in Kenya, some of the commercial banks like Consolidated Bank and Development Bank of Kenya are facing financial issues that have been attributed to interplay of a complex of factors credit risk being one of them. The characteristics of loans include the interest rate charged and maturity period are critical when it comes to repayment among customers. Credit risk has remained a key challenge among the commercial banks in Kenya. For instance, the value gross non-performing loans among commercial banks in Kenya for the period 2017, 2018, 2019 and 2020 stood at Kshs. 256,405 million, Kshs. 303,378 million, Kshs. 324,272 million and Kshs. 425,268 million respectively. This signifies an increasing trend in credit risk among these institutions which is not sustainable as failure to curb it may lead to a possible financial crisis and thus the motivation of this present study. The objective of this study was to establish the relationship between loan characteristics and credit risk among commercial banks in Nairobi, Kenya. Descriptive survey research design was adopted targeting 39 commercial banks with operations in Kenya and census was used. Information was obtained from auxiliary sources within the period 2017-2021 from central bank reports and the financial statements of the banks. The analysis was conducted through statistical package for social sciences guided by means and standard deviations, correlation and regression analysis and presented through tables. The study established that loan interest rate (β=0.233, t>1.96 & p<0.05) and loan size (β=2.819, t>1.96 & p<0.05), are significant loan characteristics that predict credit risk among commercial banks in Kenya when economic growth (β=-0.010, t>1.96 & p<0.05) and stock market performance (β=0.158, t>1.96 & p<0.05) are controlled. The study concludes that loan characteristics are significant predictors of credit risk among commercial banks when economic growth and stock market performance are controlled. The study recommends that the credit managers and loan managers working in commercial banks in Kenya should review their loan characteristics including the interest rate to allow customers repay their loans thus reducing exposure to credit risk. There is need for commercial banks to adopt modern lending practices involving in-depth quantitative appraisal of borrowers before a loan is advanced. The policy makers at the Central Bank of Kenya should have in place checks and balances to monitor compliance of commercial with credit risk guidelines. The policy makers at the Capital Market Authority should put in place relevant policies to enhance performance of stock markets.