Credit Risk Management and Financial Performance of Listed Commercial Banks in Kenya

Abstract

Commercial banks are concerned with the provision of credit facilities in form of loans and advances to customers. These loans and advances are expected to be repaid by customers in line with the agreement reached with their bankers. Customers’ default in the repayment of loans and advances at the agreed period may lead to bad and doubtful debts and this can affect the financial health, profitability and going concern status of the bank. This study empirically explored the effect of credit risk management on the financial performance of nine listed commercial banks in Kenya for the period, 2018-2022. Credit risk management as the independent variable, was surrogated by two parameters- loans to deposit ratio and Non-performing Loans ratio. Return on Assets was used as a proxy for financial performance of the listed commercial banks in Kenya. The study utilized the information asymmetry theory and the theory of moral hazard and adverse selection. A correlational research design, using secondary data derived from listed commercial banks’ annual audited reports and information from Nairobi Securities Exchange was used in this study. The target population of the study was the nine listed commercial banks in Kenya. A pilot study was carried by performing the normality and multi-collinearity tests from the sample data collected for purposes of assessing the reliability and validity of the model. A census method was adopted in data collection since the target population was manageable. Collected data was analyzed using the Statistical Package for Social Sciences Version 28 where both descriptive and inferential statistical methods were used to describe and depict the results (Mean, Standard Deviation, Correlation, Regression and Analysis of variances). The findings of the study revealed a statistically significant regression effect and indicative of accomplished prediction of financial performance of the listed commercial banks through the F-calculated value which showed that the model was significant. Loan to deposit ratio explained .4% (r =.280) of financial performance of listed commercial banks in Kenya and non-performing loans ratio -36.5% (r=-.681) of financial performance of the listed commercial banks in Kenya. The study will be expected to add to the existing literature in the finance field and more importantly, the credit risk management in commercial banks and other related sectors. The study recommended that; management balance the ratio of financing between equity, debt and customer deposits to extend lending capacity, and generate high earnings volume; desist from holding capital without investing for improved financial achievement; management should maintain a moderate level of Loans and advances to deposit ratio since it is a measure of the banks’ ability to survive withdrawals, because higher rates lead to liquidity problems; give credit-risk management prominence in their strategic policies and finally, due to the continuous deterioration and accumulation of the nonperforming loans, management ought to strengthen loan recovery measures. Keywords: Credit Risk Management, Financial Performance, Listed Banks, Equity Multiplier Ratio, Capital Adequacy Ratio, Nonperforming Loans