Effect Of Credit Risk Management On Financial Performance Of Kenyan Commercial Banks

Abstract

The financial sector performs a key role in the development of a country and the world at large. Banks operate in an environment of considerable risks and uncertainty due to various challenges experienced over time. Most commercial banks have registered unsatisfactory financial performances largely related to ineffective credit risk management. Credit risk is most critical and expensive risk associated to the banking sector as it is a direct threat to solvency of the institution and its level of loss is severe compared to other risks and can easily cause failure of a financial institution. Performance of commercial bankspositively influences economic growth by accelerating the economy whereas negative performance hampers the economic growth and enhances poverty in the country. Credit provision requires due attention as credit risk management is a critical component amongst challenges faced by banks. In response to this, commercial banks have almost universally embarked on upgrading their risk management and control systems. The objective of the study was to establish the relationship between credit risk management and financial performance of commercial banks in Kenya while internally focusing on the credit policy,credit administration unit, top management and credit risk management practices as the key dimensions of within commercial banks that determine their respective financial performances. For statistical evaluation, a descriptive research design was preferred since it allows for quantitative analysis of the primary data to be collected from a target population of managerial level and credit administration staff from the sampled commercial banks under survey by use of semi-structured questionnaires. Cluster sampling technique was used to select the respondents from a 50% sample size. Multiple regression analysis was used for empirical relationship evaluation of the study objectives while primary data was analyzed by employment of descriptive statistics. SPSS was used in analyzing correlations amongst the variables.The study foundthat credit policies, credit administration unit, top management and credit risk management practices have a positive and significant influence on financial performance of selected banks in Kenya. The study recommends that commercial banks shouldcontinue improving on their credit management practices such as regular policy reviews, knowledge advancement, securitization and standardized loan terms in accordance to CRM practices. In addition the commercial banks managementshould oversee facilitation of credit risk management as a substantial degree of standardization of process and documentation.