Effects of Credit Risk Management on the Financial Performance of Commercial Banks in Kenya

Abstract

This study was undertaken to analyze the effects of credit risk management practices on the performance of Financial Banking Institutions. The study attempted to establish if there exists any relationship between the credit risk management determinants by use of CAMEL indicators and financial performance of commercial banks in Kenya. The study reviewed several literatures in line with the area of study. This review enabled the researcher to demonstrate and familiarize with the area of study. The review also helped identify gaps in previous studies. This study sought to review the effect of credit risk management on the financial performance of commercial banks. The research design used in this study was descriptive research design. The design was appropriate because the study involved an in depth study of credit risk management and the relationship between the two variables i.e. credit risk management and the financial performance of commercial banks was described extensively and this was facilitated by the use of secondary data which was obtained from the Central Bank of Kenya publications on banking sector survey. The study used multiple regression analysis in the analysis of data and the findings have been presented in the form of tables and regression equations. The study found out that there is a strong impact between the CAMEL components on the financial performance of commercial banks. The study also established that capital adequacy management efficiency and liquidity had a strong relationship with financial performance (ROA).The study also established that credit risk had a weak and negative relationship with financial performance (ROA).This study concludes that CAMEL model can be used as a proxy for credit risk management when measuring the financial performance.