Relationship between credit risk management practices and financial performance of Saccos in Murang' a county
Abstract
The study sought to find out the relationship between Credit Risk Management Practices
and Financial Performance of SACCOs in Murang'a County. The objectives that guided
the study were to determine the credit risk management practices used and then establish
the relationship between credit risk management practices and financial performance.
The study had its target population as the Saccos in Murang'a County. They were all
forty three in number. Simple random sampling method was used for sampling purposes.
The sample size was thirty Saccos. The study employed descriptive research design. The
data was collected by use of questionnaires and secondary data analysis. The data was
analyzed by use of S.P.S.S (Statistical Package for Social Sciences) and thereafter
presented by use of statistical means which were tables and percentages. Inferential
statistic was used to establish the relationship between credit risk management practices
and the financial performance of Saccos, where performance of Saccos was measured by
their profitability in terms of Return on Assets. Out of the sampled Saccos, 28 responded
and this constituted 93.33% response rate. From the findings, the study found out that all
the sampled Saccos in Murang'a County adopted credit risk management practices i.e.
credit scoring mechanism, risk identification, risk analysis and assessment, diversification
of assets, Sacco's loan policy procedure, portfolio asset quality/portfolio management
and segregation of duties to counter credit risks they are exposed to. The study further
found out that Saccos adopt various approaches in screening and analyzing risk before
awarding credit to clients to minimize on loan loss. This included establishing
capacity/completion, conditions, character of borrower and use of collateral/security.
Some of the Saccos also use guarantors to guarantee the loan that a client intends to take.
The study established that Saccos make their staff aware of credit risk through regular
meetings, staff supervision and regular training. Saccos also consider risk identification
process in credit risk management. Most of the Saccos consider that a client has defaulted
on loan repayments after failing to repay for three consecutive months while most were
indifferent on whether one month late payment should be considered as a default to loan
repayment. The study established that there is a positive relationship between credit risk
management practices and the financial performance of Saccos in Murang'a County.
Thus, credit risk management is vital in maximizing the performance of Saccos. The
study recommended that the management of Saccos ensure that there is an on-going
evaluation and assessment of the credit related risks. The study further recommended that
Saccos should put in place an effective system of internal controls that is consistent with
the nature, complexity and risk inherent, have credit risk monitoring systems that are
simplified and customized to Sacco operations and consider implementing modern
approaches in risk identification and analysis. This will increase effectiveness in risk
identification, analysis and monitoring of credits.
Citation
Degree of Master of Business Administration,Publisher
University of Nairobi,