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

Abstract

Banks majorly generate their income through giving credits to customers hence credit risk management is crucial to their financial performance. Poor management of the credit risk exposes the bank to huge financial problems. Effective risk management approaches as well as controlling of loan quality are vital components in financial performance of banking industry because they tend to increase profitability. Efficient credit risk management is the essential component since it improves the financial performance. The main research objective was to establish credit risk management effect on financial performance of listed banks in Kenya. The independent variable for the research was credit risk management measured using default rate while the control variables were firm size and liquidity. The dependent variable was financial performance measured using ROA. The research was anchored on modern portfolio theory, credit scoring model and arbitrage pricing theory. Descriptive research design was utilized in this research. The 11 listed banks in Kenya as at December 2021 served as target population. The research obtained secondary data for five years (2017-2021) on an annual basis from CBK and individual listed banks annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes presented in tables followed by pertinent interpretation and discussion. The multivariate regression analysis further revealed that individually, default rate displayed a negative significant ROA influence as shown by (β=-0.4911, p=0.0000). Both firm size and liquidity have a positive effect on ROA of listed banks as shown by (β=0.2921, p=0.0101) and (β=0.2342, p=0.0203) respectively. The research recommends listed banks necessity to reduce their credit risk as it adversely affects ROA in a negative way. Further, the research recommends that listed banks improve their liquidity and asset base as this will contribute significantly to their ROA. Future research can focus on other financial institutions in Kenya.