The relationship between credit risk management and non-performing loans in commercial banks in Kenya

Abstract

The aim of the study was to identify the connection between Credit Risk Management and Non-Performing loans in Kenyan banks. This study considered two major theories which the Capital Assets Pricing Model and the modern portfolio theory. This study targeted all the licensed banks in Kenya which formed the population. The Central bank supervision report declares that there are 43 banks operating commercially in Kenya. The 43 banks, therefore, formed the target population of the study. A questionnaire was used to collect data on credit risk management in various banks and secondary data was used to obtain Non-Performing Loans. Inferential and descriptive statistics was used in data analysis. The study concluded that Commercial Banks in Kenya have developed guidelines and guiding principles for recognizing, weighing, monitoring and controlling credit risk. The credit risk policies and procedures developed looks into credit risk in all the bank’s actions and at the personal and portfolio credit levels. According to the study, the board of directors approves the polies and strategies of the risk. New credit output and actions are subjected to sufficient risk management methods and measures before introduction and implementation. The results of the study recommends the fact banks should use credit risk management techniques to evaluate the clients by reviewing the lending terms and conditions of the clients to reduce level of Non-Performing loans. The bank board should lay down risk management strategy and devise rules and procedures to be observed in lending. The management of risk should also be constituted on portfolio basis, to adopt an inclusive approach determining the total exposure of risk in evaluating risk profile of the banks and reducing Non-Performing Loans.