Impact of Credit Risk Management on Financial Performance of Commercial Banks in Kenya

Abstract

Credit risk remains one of the main challenges that face commercial banks in their pursuits of wealth maximization reflected through better financial performance. In terms of interest income, banks make money by ensuring that there is a positive difference between interest earned on assets such as loans and interest expense on liabilities such as customer deposits. Thus, the Banks are always faced with a tradeoff between the quantity of the loan they advanced to customers which increase income on short terms basis and the quality of the loans which affect performance on long term through the levels of expected losses from loans advanced. In a bid to mitigate effects of credit risk Banks set the credit risk appetite. Credit risk appetite is the level of risk that a bank is prepared to accept to achieve its objectives. Determining the appropriate credit risk appetite requires credit risks to be well measured and modelled. The limits for credit risk nevertheless at times a subjective decision by the management influenced by degree to which management is willing to take up risks. Credit risk management framework is combination of policies, authorities and infrastructure that ensures that credit risks are assessed, accepted, and managed within the confides of credit risk appetite. The research will seek to establish the impacts of credit risk framework on the financial performance and whether credit risk management framework is a condition for Bank to meet its objectives both in short term and long term. Financial performance which is measured through return on assets and return on capital will be the dependent variable while the Commercial Bank credit management practices will be the independent variable