The Relationship Between Credit Risk Management Practices and Financial Performance Among Commercial Banks in Kenya

Abstract

Commercial banks in Kenya face tough competition as all the 42 banks fight for the same customers. While most banks try to adopt flexible solutions for the purpose of gaining a competitive advantage in the industry, there is a temptation to break rules on lending guidelines. This is what leads to credit risk that must be managed by all commercial banks. Credit risk management practices must be adopted by all commercial banks to ensure the continuity of business. This is because the core business of commercial banks is lending. This study therefore sought to establish the relationship between credit risk management practices and financial performance among commercial banks in Kenya. The credit risk management practices that were used in this study were: credit risk identification, credit risk evaluation, credit risk control and the credit risk policy manual. This study’s objective was to establish the relationship between the practices and financial performance. The population of the study was the 42 commercial banks in Kenya and a descriptive research design was adopted. Data collection was done using questionnaires which were given to staff working in credit departments. The questionnaires were to provide information on the extent of use of credit risk management practices which was done using a likert scale. Secondary data was also used to collect information on return on assets for the commercial banks in Kenya. The multiple regression analysis was done using the SPSS data analysis tool in order to analyze the relationship between the dependent variable (financial performance) and the independent variables (credit risk management practices). The results of the study indicated that there was a positive relationship between credit risk management practices and financial performance among commercial banks in Kenya. From the findings, it was observed that credit risk identification, credit risk evaluation, credit risk control and credit risk policy manual have a correlation coefficient of 85.8 % with the dependent variable (financial performance). The t-test was used in this study and the linear association of the variables showed that they were statistically significant. The study findings revealed that all credit risk management practices have a significant influence on financial performance of commercial banks in Kenya. The study concluded that credit risk management has a positive influence on financial performance. The study recommendations included improvement in risk control systems, and constant review of credit policy in order to improve on credit risk management practices.