A survey of credit risk management techniques of unsecured bank loans of commercial banks in Kenya

Abstract

Banks operate in an environment of considerable risks and uncertainty. Credit risk is one of the major risks Commercial Banks face today. The objective of the study was to assess the credit risk management techniques adopted by Commercial Banks in Kenya to assess un- secured bank loans. The population of the study consisted of 47 Commercial Banks and a census study was adopted. Data was collected from primary sources through a semi-structured questionnaire, administered to the Credit Officers of the various Commercial Banks. The results were analyzed and presented in the form of frequency tables and percentages. The findings reveal that a majority of the Commercial Banks in Kenya are involved in un-secured loan services. Most of the Commercial Banks had both minimum and maximum loan limits. It was also found that all the Commercial Banks have credit management policies as a basis for objective credit risk appraisal. Formulation of unsecured loan policies was undertaken by their Top Management. Majority of the Commercial Banks have distinctive separate departments where un-secured loans activities are organized. From the study it was revealed that Statistical Method of credit assessment is the mostly used in assessing/screening loan applications. A majority of the Commercial Banks maintained a certain Debt Ratio. Quality appraisal of loan portfolios was found to be the mostly considered measure able to improve loan serviceability/ reduce credit risk. Irregular credit turnover/ salary and declining turnover/ salary are the trends greatly affecting customers' credit worthiness. A loanee is considered a defaulter after three late repayments in most of the Commercial Banks. Further, the study established that Credit risk and Liquidity risk are the most important risks for Commercial Banks. Improved credit appraisals is the most considered factor responsible for banks improved financial performance. Capacity and Character of the borrower are the most considered of the 6 Cs when appraising customers credit worthiness.