Credit Risk and Lending Performance of Commercial Banks in Kenya

Abstract

Credit risk poses substantial exposure both to the banks and the economy; a scenario evident in East Africa financial crises; this is in part owing to the fact that the banking sector is vital in any economy. The decline of profitability within the banking industry and financial losses can be attributed to credit exposures that went awry. This underscores the significance of the management of credit risk within the banking sector. While lending is profitable for the banks especially because of the interest paid on the amount borrowed, it also has disadvantages resulting from delays or default in loan repayments. This study was purposed to evaluate the credit risk on the lending performance of commercial banks in Kenya. A descriptive survey research design was employed while the target population for this study was employees of the 42 commercial banks in Kenya as at 1st January 2018. Purposive sampling was used to pick 42 credit managers and simple random sampling was invoked to determine the other 301 respondents from the target population of 1260 employees. Both structured and unstructured questions were used to collect primary data. Thereafter, data was analyzed using descriptive statistics including frequency distribution tables, measures of central tendency, and standard deviations. In addition, advanced statistical techniques including logistic regression analysis and Pearson correlation were used to establish relationships among variables and provide a description of the data. The results were then presented in tabular representations supplemented by relevant explanations. The results of the study revealed that the combined effect of credit risks positively influenced the lending performance of banks. The study concluded that credit risk activities significantly influenced the lending performance of commercial banks, and as a result, the operating capital of commercial banks had gone down to very low levels since lending is a source of income for the commercial banks and this has affected the performance of the entire banking sector. The study recommended that the Government of Kenya through the National Treasury and in collaboration with the Central Bank of Kenya and the Kenya Bankers’ Association should formulate policies that will help the commercial banks reduce the level of credit risks and improve the lending performance which was currently affected to a great extent.

The Reality of Credit Risk on Threat of Financial Performance of Tier IV Commercial Banks in Kenya

“…The findings are in line with Taiwo, Ucheaga, Achugamonu, Adetiloye,Okoye and Agwu (2017), Gaturo (2018), Omondi (2019) and Karanja (2019) who also established a negative relationship between credit risk and financial performance of commercial banks.…”

“…Credit risk was established to have a negative and significant effect on financial performance of commercial banks in Kenya with coefficients of β=-0.3395534. Karanja (2019) purposed to evaluate the credit risk and lending performance of commercial banks in Kenya. Descriptive survey research design was employed on a target population of the 42 commercial banks in Kenya.…”

Untitled

“…There are two methods to calculate CAR; one is using the total capital while another one is using only Tier 1 capital. In our research, we plan to use the model as previous researchers (Kargi, 2011;Epure and Lafuente, 2011). Therefore, we will use the former one as the formula for calculating CAR.…”

The Impact of Credit and Liquidity Risk on Bank Performance

“…H1, There is a significant impact of non-performing loans (NPL) on bank performance The NPL particularly reveals how banks operate handle credit risk. It does after all specify the percentage of non-performing loans in terms of the total loan amounts Kaaya & Pastory (2013). When the quantity of this ratio rises, it sends a bad message to bank management since it suggests that banks are more likely to fail to recover funds given to consumers.…”