Internal Controls and Credit Risk Among Commercial Banks Listed in Nairobi Securities Exchange, Kenya

Abstract

Inappropriate credit policies, as well as inadequate, limited institutional capacity by Kenya's financial sector, led to several of the banking institutions collapsing over what was termed as poor management of credit risks which resulted to increased amounts of loans that were not being serviced. The main aim of the research project was to establish the effects of internal controls on credit risk among the banks listed in NSE. The distinctive goals included to find out the influence of internal control, assessing risk ,activities in control and monitoring among banking organizations listed in NSE. The study was guided by capital asset pricing model, agency theory and modern portfolio theory. The study adopted a casual descriptive research design. The target population encompassed the eleven listed banks in Nairobi Securities Exchange where cencus was done. Both primary and secondary data were collected. The questionnaires were applied to gather data. The diagnostic tests include multicollinearity and normality. Data was evaluated using both descriptive and inferential statistics using SPSS. The findings show that there is a positive and significant link between monitoring and credit risk. The study found that assessment of the risk has a significant way on credit risk and that internal controls that are not strong such as poor ethical values have stimulated the involvement to fraud that leads to income loss and misuse of the income received. The study concluded that risk assessment P=.000 < 0.05, control activities P=.000 < 0.05, monitoring and control environment P=.001 < 0.05 have a significant effect on credit risk among commercial banks listed in NSE. The study recommends that banks should implement proper risk assessment to guide their operations and also implement efficient control activities to guide their operations. Further, the study recommends that banks’ monitoring approaches should be guided towards effective tasks and achieving the goals of the organization. In regard to propositions for more studies, this investigation could be further advanced by looking at the effect on credit risk management in other institutions such as investment banks and microfinances. It will help in the management of credit unions, Savings and Loans Associations, investment banks and microfinances in Kenya.

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

“…A conceptual framework is a blend of wideranging notions explaining the correlation linking the dependent variable and independent variables (Agang & Njoka, 2020). The study conceptual framework showed the relationship between financial performance of listed commercial banks at the NSE, Kenya (dependent variable) as affected by components of credit risk management (Independent variables) which were loans-to-deposit ratio and nonperforming loan ratio.…”

A Study on the Effectiveness of Internal Control System on Commercial Banks Risk Minimization in Zambia

“…Nguyen (2021) conducted a study on the relationship between internal control and credit risk-the case of commercial banks in Vietnam for the period of 2009-2018, The study reviewed that the agency problem is a statistically significant variable in the model. Agang and Njoka (2020) conducted a study on Internal Controls and Credit risk among Commercial banks listed in Nairobi Securities Exchange, Kenya. The study reviewed that risk assessment, control activities, monitoring and control environment have a positive and significant effect on credit risk among banking companies trading in Kenya.…”

“…The last section of the questionnaire required the respondents to choose an option that best described what their institution practiced determining how effective the components of an internal control system is in reducing risks in Zambian commercial banks. Studies (Haddad, 2016;Ogwiji & Lasisi, 2022;Agang & Njoka, 2020;Ho Tuan Vu, 2016;Olatunji, 2009;Umar & Dikko, 2018;Ofel et al, 2020;Nguyen, 2021) have shown that a relationship exist between components of an internal control system and risk minimization. Therefore, Multiple regression was used as an analytical tool to understand the relationship that exist journal-ems.com between the dependent variable (Risk reduction) and the independent variables which are the five components of an effective internal control system (control environment, risk assessment, control activities, information, and communication as well as monitoring activities).…”

“…These results also agree with Muthusi (2017) who indicated that the major loss cases that has happened in banks has been related to the laxity and inability of management and directors in ensuring a strong control culture in banking organizations is established and a high level of control consciousness within the banking sector is maintained to reduce risk. In addition, the control environment is evident through commercial banks efforts to exhibit a commitment to integrity and ethical values (Agang & Njoka, 2020).…”

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“…this include integrity, ethical values and competence of the management's and board of directors provide direction for the company (Joseph et al, 2015). Risk assessment component were evaluate using the aspects relating to risk detection, analyzing risk, and procedures of managing risk of a company to show a fair financial statement in conformity with international accounting standard (Agang & Njoka, 2020). Control activities are policies and procedures that help to reduce firm risk in order to achieve the set objectives (Whittington & Delaney, 2016).…”