The Effect of Credit Risk Management Strategies on Financial Performance of Commercial Banks in Kenya

Abstract

The management of credit is critical to any firm since it impacts significantly on firm performance. Effective management of credit is a requirement for the stability of a financial institution and continuous generation of profit while poor management of credit is a leading cause of loss and sometimes death of an institution. This study was set out to establish the effect of credit risk management strategies on financial performance of commercial banks in Kenya. To accomplish this objective, the researcher employed a descriptive type of design so as to address the research question. The study population involved 40 commercial banks. Quantitative secondary data was utilized was collected by the use of a data collection instrument. Data for the period (2016 to 2020) was retrieved from the Central Bank of Kenya reports, Kenya National Bureau of Statistics and was used. Primary data was gathered using questionnaires. The study applied both descriptive and inferential statistical approaches in analysis. Tests to diagnose the data were used kolmogorov-Smirnov and shapiro-wilk; the data was found to be distributed normally. Descriptive analysis involved mean, normality, standard deviation, while inferential analysis included regression analysis. Tables were utilized be to present the analyzed data. The study revealed that credit: terms, appraisal, policy and control were significantly linked to ROA, while firm size and default rate was insignificantly linked to ROA. Further, findings disclosed that credit: terms, policy, control and appraisal were positively associated to ROA, on the other hand, firm size and default risk were inversely associated to ROA. CBK plays an integral role in policy development hence should be deeply involvement in credit management to ensure proper standards are maintained so as to protect both commercial banks and the customers. Credit appraisal enhanced bank performance; considering that this is first step that the credit officer conducts before deciding whether to issue credit or not. There were adequate measures to regulate credit risk and shield commercial banks from exposure to loss through default for example, guarantee credit policy. Most commercial banks had arrangements with insurance companies for credit insurance and collateral as well as loan covenants through a lawyer to minimize credit risks and loan defaults. Effective supervision of credit risk and monitoring impacted positively on bank performance since it helped to minimize non-performing loans. The limitation faced by the researcher was scope, as the study was restricted to commercial banks only. A multi-sectoral study would be more exhaustive in terms of richness of findings and association between the variables. In the foreseeable future, researchers interested in this field of research can do a replica of this research in a different sector for example, Microfinance banks where loans are issued using more flexible credit policies because of the nature of their operations and the products and services that they offer. Then, the findings can be compared after which a plausible conclusion may be drawn.