A survey of credit card risk assessment practices in Kenya banks
Banks provide financial services to everyone, holds enormous potential to support economic activities and thus contribute to the development in an economy. Widespread experiences and research have particularly shown the importance of credit facilities for all the individuals and organizations. Credit systems have been developed in response to the needs of entrepreneurs who otherwise do not have access to finance. To be able to continue giving credit, borrowers from commercial bank offering credit products should repay as agreed and on time. Successful and effective credit risk assessment, appraisal and evaluation determine the success of the credit journey. An established credit risk assessment process ensures that this journey succeeds. The study focuses on the credit risk assessment practices that have been adopted by banks offering credit products with objective of evaluating the practices. To satisfy the objective of the study, primary data was collected, by use of a questionnaire from 25 banks offering credit services. The primary data was supplemented by information obtained from brochures and direct interviews to clarify answers on the questionnaires. The data was analyzed by use of statistical package for social sciences (SPSS) that is used internationally for statistical analysis. The results have been presented in form of frequency tables, graphs and percentages. The findings of this study are that a significant number of 60% (25 out of 42 respondents) have credit risk assessment policies as a basis for objective credit risk appraisal and that they involved their employees in developing the credit risk assessment policies. Most of the banks used the credit manual to sensitize their employees about credit risk assessment. It was also found that most banks have distinctive separate departments where credit activities are organized, an indication of growth in the development of credit institutions in the country. It was also found that most of the banks work with pre-set targets that are closely monitored and that credit departments had specific credit officers. Further, the study found that a majority of the banks considered that as early as one late repayment, a loanee was considered a defaulter and thus collection efforts were intensified. This partly explains why banks command low default rates. On dealing with difficult-to-repay-on-time clients, the study found that most indicated the preferred method was sale of property to recover the money, followed by write-off of the balance while others would consider writing off the interest and allowing defaulters to repay the principal loan only. Further, most of the banks used the 6 C’s criteria and that capacity/completion was the most important factor followed by contribution and character, and reasonableness (common sense) of cash flows from business. This finding is not consistent with assertions by Mutwiri (2003) who found that character was the most considered followed by capacity/completion and common sense/reasonableness, in commercial banks. Further, the study established that the most important risk that they face was credit risk followed by interest rate risk and technological risk, and that they used swaps followed by forwards, futures and lastly options to manage the risks. This finding is consistent with Abedi (2000) who found that liquidity risk and credit risk are the most important risks.