Credit Risk Management Practices and Financial Performance of Manufacturing Firms in Uasin Gishu County, Kenya

Abstract

Manufacturing firms have become very key in the Kenyan economy as they shape several parameters in the economy which includes credit management (CM). Credit Management is like a two-edged sword since manufacturing firms also buy goods on credit and at the same time required to advance credit. Now, this has become a dilemma for firms as they ought to strike a balance of their cash flow and ensure there is profitability from their operations. It has become truly relevant to understand CRMP and how they contribute to firm’s financial soundness. Common CRMP are credit insurance (CI), Know your customer (KYC), Letter of credit (LC), bank guarantees (BG), credit rating (CR) and debt collection (DC). Our study focused on three key practices; credit insurance, debt collection and know your customer. These practices were found to be lacking in most of the studies and if any, they were done in other countries and lacked the Kenyan context. Major theories used were the theory of internal control that looked at internal control and how it could help eliminate the default rate. The other theory was credit risk and here the focus was the probability of default on contractual objectives and finally we also looked at credit scorecard theory that focused on internal analysis of customer transaction history that gives the company confidence to trade with the company. This could also be obtained from external data such as from credit reference bureau. Our study found out that DC and KYC had negative influence on FP than CI which has not been quite common in Kenya and hence the concept is not known hence not much information is available. The CRMP studied had negative correlation and to some point resulted into negative FP if strongly enforced. These practices therefore can only be used as internal control tool and strengthen the management of cashflows and avoid liquidity problems. It is therefore our recommendation that organizations in UG country popularize the practices to safeguard asset in receivable. Other scholars could enhance the scope of the study by looking at other enterprises such as SMES.