The Relationship Between Credit Risk Analysis and the Level of Non-performing Loans
Abstract
Studies done indicate that credit is the single major cause of risk to commercial
banks. Credit risk is mainly a factor of the analysis done before granting credit.
This study set out to evaluate credit risk analysis by Kenyan commercial banks
and to establish the relationship, if any, between credit risk analysis and the level
of non-performing loans.
Using a census of the 43 commercial banks in Kenya as at December 31st 2001, the
researcher personally administered a questionnaire to the person in charge of
credit risk management in each of the commercial banks. The level of nonperforming
loans (NPL) was determined using secondary data.
From the analysis of the responses received, it was evident that all the
commercial banks have in place measures for mitigating against risk arising from
-credit poor analysis, Analysis of credit risk involved various levels of officers and
committees with varying experience. Either a single officer or a combination of
officers and committees with varying credit limits approve credit.
Various attributes were identified as a consideration in rating of clients for credit
risk analysis. Cash and semi-cash assets were highlighted the most suitable form
of collateral for credit. The frequency of review of the credit policies as reported
by the respondents ranged from quarterly to annually. Different officers or
committees were said to review internal credit ratings at varied time intervals.
The majority of the commercial banks that took part in this study indicated that
they do not have credit limits as a measure of mitigating against credit risk
Use of some forms of credit limits and an increase 1 the attributes that are
considered in analyzing clients for credit risk decreases the level of nonperforming
loans.
Citation
Masters of business administrationSponsorhip
University of NairobiPublisher
Faculty of commerce university of Nairobi