Effectiveness of Credit Appraisal on management Non-Performing Loans in Kenyan Commercial Banks

Abstract

The purpose of this study was to determine the effectiveness of credit appraisal on management of Non-Performing Loans in Kenyan Commercial Banks. The specific objectives were to determine the effect of borrower’s income, credit rating, credit history and collateral issued on the management of non-performing loans recorded in corporate, business and personal sections of Kenyan Commercial Banks. The study was guided by the Theory of Information Asymmetry and Credit Scorecard Theories. An explanatory research design was adopted, using simple random and stratified sampling techniques in the collection of data. Data was collected from a sample size of 222 credit officers working in 41 commercial Banks in Kenya by use of self-administered questionnaires. Cronbach alpha and factor analysis were applied to test the reliability and validity of the research instruments respectively. A multiple regression model using SPSS (version 23) was used to analyze the obtained data and test the hypotheses. The findings revealed that credit appraisal (ꞵ= .302) had a positive and significant effect on the management of Non-performing Loans. Based on the new findings, the management of commercial banks and policymakers should develop effective credit appraisal strategies, policies and techniques that make borrowing affordable hence attracting credit-worthy borrowers to the banks.