Influence of Credit Risk Management on Financial Performance of Commercial Banks in Kenya

Abstract

The last couple of years saw the banking industry in Kenya grow tremendously with huge increase in their profitability which was termed as good performance. The banking industry was however shocked after the Central Bank of Kenya put three banks under statutory management within a period of nine months (August 2015, October 2015 and April 2016).The level of non-performing loans has also been on an increase over the last couple of years and this brings to question whether the factors believed to affect the performance of commercial banks in Kenya are actually true and if true, to what extent do they affect the financial performance of the banks. One of the main sources of bank profitability is derived from their lending activities which exposes the banks to credit risk. Credit risk management is therefore one of the factors that is essential in the performance of banks due to their lending activities. This study was therefore carried out to establish the influence that credit risk management has on the financial performance of commercial banks in Kenya thus enable the stakeholders determine the level of attention that they should place on credit risk management. The study was made through a combination of theory and empirical work. Descriptive research design was employed for this study as the data studied was based on what had already happened. Data was collected using census method for the period: January 2007 to June 2017. Quarterly analysis of the ten and half year period was deemed sufficient to provide updated results of credit risk management on financial performance of banks. Data used was solely quarterly secondary data which was gathered through quantitative approach.  Statistical analysis was used to determine if there was any relationship between the banks financial performance and credit risk management. The findings have been presented in tables, charts and regression equation. At the end of the study, the indicators of credit risk management which were, Capital adequacy, Cost of Loans, Non-performing loans and the loans to asset ratios explained up to 77.64% of the financial performance of commercial banks in Kenya which was measured by ROA (Return on Asset). Continued management of credit risk should be emphasized and introduction of new techniques to curb this risk such as introduction of credit derivatives into the Kenyan market should be considered so as to protect and promote the banking industry. The influence of other factors such as the effect of interest rate capping on financial performance of the commercial banks should also be considered and other risks faced by the banks such as fraud and its effects on the financial performance of the commercial banks and the strategies to mitigate this risk should be enforced.

Keywords: Credit Risk Management, financial performance, Commercial banks in Kenya, interest rate capping, credit derivative