The Effect of Credit Risk Management Practices on Profitability of Energy Supply Companies in Kenya

Abstract

Energy supply companies have a pivotal role in the economy, their products are engines that drive the economy. Over the years, energy companies have come to face many challenges revolving around inadequate resources. Credit risk has made the operation of these firms more complex with the diversified nature of the customers. Adopting risk management practices in the daily management of energy companies will go a long way in ensuring minimal exposure to this kind of risk. The purpose of this research was to investigate the impact of credit risk management practices on profitability of energy supply companies in Kenya. A descriptive research design was employed. A census was conducted where the entire population of 60 energy supply companies in Nairobi was studied. Questionnaires were used to collect primary data. The data collected was analyzed using, frequencies, percentages, mean, standard deviation and regression analysis. Diagnostic tests were conducted prior to running the regression model to guarantee best linear unbiased estimators. The study established that energy supply companies have adopted credit management practices namely credit policy, credit collection practices, customer credit appraisal and customer information system to a great extent. The research utilized inferential statistics multiple linear regression analyses. The study findings showed that credit policy, credit collection practices, customer credit appraisal and customer information system explains to a great extent profitability as evidenced by a co-efficient of determination of 28.6%. The findings revealed that the model entailing the selected credit management practices significantly predicts tax profitability. The results of the research revealed that credit policy, credit collection practices and customer credit appraisal have a positive significant relationship with profitability. On the other hand, an insignificant relationship was found to exist between customer information system and profitability of energy companies. The study recommends the top management of energy supply firms to collaborate with the credit bureau to evaluate the credit score rating of the borrower before issuing credit. Utilizing such information would reduce the chances of issuing services on credit to potential defaulters thus preventing loss of revenue through client defaulting.