Implication of Credit Risk Management Practices on Financial Sustainability: A Case Study of Digital Lending Firms in Kenya

Abstract

Any profit-making organization such digital lending firms will always aim at maximizing the returns of shareholders wealth. As such, the organization should aim at enhancement of her financial stability which is a fourpronged undertaking; enhancement of level profitability; solvency, promotion of efficiency operation and ensuring achievement of adequate liquidity to ensure the meeting of own obligations as and when they fall due.According to Woods and Dowd (2008), all establishments encounter financial risks, and their capacity to accomplish their goals and even their existence depends on how well they cope those risks. Kyei and Antwi (2017) observes that risk associated with lending is one the greatest and most obvious source of credit risk associated with financial institutions. Financial risk normally effects volatility of a firm's cash flows, a situation that ends up leading to a lower alteration of firm value (Bartram, 2002). The value of a firm is generated when a firm's asset is able to generate a return on assets that exceeds its cost of capital and in an instance where return on assets drops below the cost of capital, value is ruined (Tseng & Goo, 2005).Financial sustainability of is a firm institution is one of the key dimension's sustainability. Kinde (2012) states that there are two types of Financial Sustainability that one could observe in evaluating organization performance. These are; financial self-sustainability (FSS) and Operational self-sustainability (OSS). Operational Self-Sufficiency is used to evaluate whether an organization generates enough income has been earned to cover the organizations' direct costs, eliminating the cost of capital but containing actual funding costs while financial selfsufficiency on the other hand represents the real financial health of a firm (Tehulu, 2013)Financial Institutions face several credit risks spread across different areas of business. Credit risk as 'the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed term' (Furfine, 2000). These include lending, trading and investing. However, this risk can be mitigated through sound credit policies which are used determine ones' loan ability, a product of sound management.The digital lending in Kenya has gained popularity as the services appear to be bridging the gap for citizen's majority of whom do not have formal bank accounts, or whose earnings are not support the borrowing from recognized financial institutions. A GeoPoll survey contacted in in December 2019 showed that access to financial products and