The effect of credit risk management on the financial performance of commercial banks in Kenya
Abstract
Credit risk in banks is the possibility that loans will not be paid or go in to default with resultant
loss to the bank. Proper management of credit risk by commercial banks is therefore crucial to
enhancing their financial performance. The objective of this research was to determine the
relationship between credit risk management and financial performance of commercial banks in
Kenya.
This research study adopted a descriptive research design. Regression analysis model was used
with the ROA as the dependent variable. Credit risk was the independent variable measured by
variability in the ratio of loans to deposits. The research was done on all the commercial banks in
Kenya over a five year period. Return on assets was determined as the ratio of Earnings before
Interest and Tax to book values of assets. The regression results showed that the constant term
was positive and significantly different from zero. The regression the constant term was
0.0179148 which was significantly different from zero indicating that a part of variation in ROA
could not be explained by variation in credit risk across commercial banks. However, the
coefficient of credit risk was a positive value of 0.00982604 indicating that higher credit risk
led to better financial performance for commercial banks in Kenya as measured by an
improvement in the ROA.
The study recommends that commercial banks in Kenya should be encouraged to share
information on their borrowers in order to improve the quality of the loan book. However banks
should have better credit risk management practices so as to enhance their financial performance.
Publisher
University of Nairobi