Credit default risk has been cited as the primary cause of bank failures in Kenya. Between 1984 and 1991 there were a total of 29 bank failures reported. This is an alarming rate given that it represents on average two or more bank failures per year during that period. Though this trend has been reversed, credit default risks continue to be a major challenge among banks. The main objective of the study is to establish the effect of credit risk management practices on performance of commercial banks in Kenya. Particularly, the study examined the effect of loan appraisal, lending requirements, credit management tools and loan recovery process on financial performance of commercial banks in Kenya. The study adopted descriptive research design. The target population were all the licensed commercial banks operating in Kenya by the year 2017 as reported in the Bank Supervisory Report 2017. The unit of observation comprised the credit officers and finance managers of the commercial banks. A census was adopted on all the 39 commercial banks hence a total of 78 respondents were targeted. The study used both primary and secondary data. The study findings revealed that loan appraisal, lending requirement, credit management tools and loan recovery process had a positive and significant relationship with the financial performance of commercial banks in Kenya. The study recommended that commercial banks need to establish an overall credit limits at individual borrowers as well as clearly establish a process for approving new and refinancing of existing credits. Further, there is need for follow-up on payment schedule of borrowers and reminding customers before maturity. The commercial banks also need to develop a well-documented lending procedure, do lending against its lending standards, set lending policies in line with the market requirement as well as develop well-established lending policies regarding interest rates
| Published in | International Journal of Finance and Banking Research (Volume 4, Issue 3) |
| DOI | 10.11648/j.ijfbr.20180403.12 |
| Page(s) | 57-66 |
| Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
| Copyright |
Copyright © The Author(s), 2018. Published by Science Publishing Group |
Credit Risk Management, Financial Performance, Commercial Banks, Loan Appraisal
| [1] | Early J. S. (2006), Problems in the Measurement of the Quality of Credit, Proceedings of the Business and Economic Statistics Section of the American Association, 202-217. |
| [2] | Kinthinji, A. M. (2010), “Credit risk management and profitability of commercial banks in Kenya”. Acts Press, Nairobi. |
| [3] | Njuguna, S. N., & Ngugi R. W., (2010). Banking Sector Interest Rate Spread in Kenya. |
| [4] | Woźniak, M., Graña, M., & Corchado, E. (2014). A survey of multiple classifier systems as hybrid systems. Information Fusion, 16, 3-17. |
| [5] | Krawczyk, B. (2016). Learning from imbalanced data: open challenges and future directions. Progress in Artificial Intelligence, 5(4), 221-232. |
| [6] | Onuonga, S. M. (2014). The Analysis of Profitability of Kenya’s Top Six Commercial Banks: Internal Factor Analysis. American International Journal of Social Science, 3(5), 94-103. |
| [7] | Mwega, M. (2009). Global Financial Crisis. Journal of Banking and Finance. |
| [8] | Buzzell, D. H., & Spasovski, S. (2004). Principles of banking. American Bankers Association. |
| [9] | Garber, C. (1997). Private investment as a Financing source for Micro credit. The north-South Centre, University of Miami. |
| [10] | Gyntelberg, J., & Remolona, E. (2007). Risk in carry trades: a look at target currencies in Asia and the Pacific. |
| [11] | Hempel, G. H., & Simonson, D. G. (1999). Bank management: text and cases. Wiley |
| [12] | Margrabe, K. (2007). The incidence of secured debt: evidence from the small business community. Journal of Financial and Quantitative Analysis, 24, 379-94. |
| [13] | Darell, D. (2012). Credit Risk Modeling Theory and Applications. |
| [14] | Mutima, R. (2009). Perceived quality of loan appraisal reports, relationship quality, mutual disclosure and loan performance: A case of Centenary Rural Development Bank (Doctoral dissertation, Makerere University). |
| [15] | Kim, K. J., & Ahn, H. (2012). A corporate credit rating model using multi-class support vector machines with an ordinal pairwise partitioning approach. Computers & Operations Research, 39(8), 1800-1811. |
| [16] | Nzuve, (2013). Credit Risk Management Models. Nairobi: Act Press. |
| [17] | Ross, S. A., Westerfield, R. W. Jordan, B. D. (2008), Essentials of Corporate Finance. Hill International edition. USA:McGraw Hill Companies |
| [18] | Basel Committee on Banking Supervision, (2000). “Credit rating and complementary sources of credit quality information”, working paper, No. 3 |
| [19] | Greenbaum, S. & Thakor, A. (2007). Contemporary Financial Intermediation, 2nd: Elsevier Academic Press |
| [20] | Swanson et al. (2008). A Practitioner's Guide to Corporate Restructuring. New York: City & Financials Publishing. |
| [21] | Central Bank of Kenya, (2013). Bank Supervision Annual Report. Nairobi, Kenya. |
| [22] | Njuguna, S. N. (2009). The Exchange Rate and Interest Rate Differential in Kenya: A Monetary and Fiscal Policy Dilemma. |
| [23] | Hennie V. G (2003), Analyzing and Managing Banking Risk: A Framework for Assessing Corporate Governance and Financial Risk, 2nd Edition, Washington DC: World Bank Publications. |
| [24] | Mugenda, O. M., & Mugenda, A. G. (2008). Research methodology. Qualitative and Quantitative Methods. |
| [25] | Central Bank of Kenya, (2009). Bank Supervision Annual Report 2008. Nairobi, Kenya. |
APA Style
Robert Gitau Muigai, Mary Wanjiru Maina. (2018). Effect of Credit Risk Management Practices on Performance of Commercial Banks in Kenya. International Journal of Finance and Banking Research, 4(3), 57-66. https://doi.org/10.11648/j.ijfbr.20180403.12
ACS Style
Robert Gitau Muigai; Mary Wanjiru Maina. Effect of Credit Risk Management Practices on Performance of Commercial Banks in Kenya. Int. J. Finance Bank. Res. 2018, 4(3), 57-66. doi: 10.11648/j.ijfbr.20180403.12
AMA Style
Robert Gitau Muigai, Mary Wanjiru Maina. Effect of Credit Risk Management Practices on Performance of Commercial Banks in Kenya. Int J Finance Bank Res. 2018;4(3):57-66. doi: 10.11648/j.ijfbr.20180403.12
Share This Article
Twitter
Linked In
Facebook
Copy
Download@article{10.11648/j.ijfbr.20180403.12,
author = {Robert Gitau Muigai and Mary Wanjiru Maina},
title = {Effect of Credit Risk Management Practices on Performance of Commercial Banks in Kenya},
journal = {International Journal of Finance and Banking Research},
volume = {4},
number = {3},
pages = {57-66},
doi = {10.11648/j.ijfbr.20180403.12},
url = {https://doi.org/10.11648/j.ijfbr.20180403.12},
eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20180403.12},
abstract = {Credit default risk has been cited as the primary cause of bank failures in Kenya. Between 1984 and 1991 there were a total of 29 bank failures reported. This is an alarming rate given that it represents on average two or more bank failures per year during that period. Though this trend has been reversed, credit default risks continue to be a major challenge among banks. The main objective of the study is to establish the effect of credit risk management practices on performance of commercial banks in Kenya. Particularly, the study examined the effect of loan appraisal, lending requirements, credit management tools and loan recovery process on financial performance of commercial banks in Kenya. The study adopted descriptive research design. The target population were all the licensed commercial banks operating in Kenya by the year 2017 as reported in the Bank Supervisory Report 2017. The unit of observation comprised the credit officers and finance managers of the commercial banks. A census was adopted on all the 39 commercial banks hence a total of 78 respondents were targeted. The study used both primary and secondary data. The study findings revealed that loan appraisal, lending requirement, credit management tools and loan recovery process had a positive and significant relationship with the financial performance of commercial banks in Kenya. The study recommended that commercial banks need to establish an overall credit limits at individual borrowers as well as clearly establish a process for approving new and refinancing of existing credits. Further, there is need for follow-up on payment schedule of borrowers and reminding customers before maturity. The commercial banks also need to develop a well-documented lending procedure, do lending against its lending standards, set lending policies in line with the market requirement as well as develop well-established lending policies regarding interest rates},
year = {2018}
}
TY - JOUR T1 - Effect of Credit Risk Management Practices on Performance of Commercial Banks in Kenya AU - Robert Gitau Muigai AU - Mary Wanjiru Maina Y1 - 2018/09/27 PY - 2018 N1 - https://doi.org/10.11648/j.ijfbr.20180403.12 DO - 10.11648/j.ijfbr.20180403.12 T2 - International Journal of Finance and Banking Research JF - International Journal of Finance and Banking Research JO - International Journal of Finance and Banking Research SP - 57 EP - 66 PB - Science Publishing Group SN - 2472-2278 UR - https://doi.org/10.11648/j.ijfbr.20180403.12 AB - Credit default risk has been cited as the primary cause of bank failures in Kenya. Between 1984 and 1991 there were a total of 29 bank failures reported. This is an alarming rate given that it represents on average two or more bank failures per year during that period. Though this trend has been reversed, credit default risks continue to be a major challenge among banks. The main objective of the study is to establish the effect of credit risk management practices on performance of commercial banks in Kenya. Particularly, the study examined the effect of loan appraisal, lending requirements, credit management tools and loan recovery process on financial performance of commercial banks in Kenya. The study adopted descriptive research design. The target population were all the licensed commercial banks operating in Kenya by the year 2017 as reported in the Bank Supervisory Report 2017. The unit of observation comprised the credit officers and finance managers of the commercial banks. A census was adopted on all the 39 commercial banks hence a total of 78 respondents were targeted. The study used both primary and secondary data. The study findings revealed that loan appraisal, lending requirement, credit management tools and loan recovery process had a positive and significant relationship with the financial performance of commercial banks in Kenya. The study recommended that commercial banks need to establish an overall credit limits at individual borrowers as well as clearly establish a process for approving new and refinancing of existing credits. Further, there is need for follow-up on payment schedule of borrowers and reminding customers before maturity. The commercial banks also need to develop a well-documented lending procedure, do lending against its lending standards, set lending policies in line with the market requirement as well as develop well-established lending policies regarding interest rates VL - 4 IS - 3 ER -
Information
Email: