The Relationship Between Credit Evaluation And Non-performing Loans In Commercial Banks In Kenya

Abstract

Most of the commercial bank failures in Kenya are caused by non-performing loans. Arrears for the affected client firms form more than half the loan portfolios which are typical of the failed banks. Many of the bad debts were failure by the commercial banks to apply the six Cs in credit evaluation, in particular insider lending and lending at high interest rates. The main objective of the study was to determine the relationship between credit evaluation and non-performing loans in commercial banks in Kenya. The research design employed in this study was exploration design. The population of the study was the forty three commercial banks in Kenya. For the purpose of collecting primary data, the researcher used questionnaire as the main data collection instrument. The researcher developed a questionnaire that was to obtain important information about the population. Collected data was checked for completeness, ready for analysis then coded. Tables using spreadsheet were used for further representation of the data for easy understanding and analysis. The inferential statistic regression was established to determine the relationship between credit evaluation and non-performing loans. From the findings, the study concluded that client ability to repay loan facility is of great concern during credit evaluation and that commercial banks appraisal should have a strategic analysis of the applicant Corporation or firm in relation to market conditions and competitor behavior. The study concluded that the prevailing market conditions were found to be of great importance in credit evaluation. The study further concluded that the character of the clients is of great importance and can be derived through the credit history when determining the character of the clients during the credit evaluation and that the motivation of the clients to repay loan obligation. The study finally concludes that determining character, capability and prevailing market conditions are the most critical aspects in credit evaluation. This call for judgment derived from careful interviewing of the applicant and study of the applicants’ historical credit reputation. This concluded that adoption of credit evaluation practices in evaluating credit worthiness of commercial banks clients has negative effects on non-performing loans.