Abstract
Credit default risk has been cited as the primary cause of bank failures in Kenya. Between 1984 and 1991 there were a total of 29 bank failures reported. This is an alarming rate given that it represents on average two or more bank failures per year during that period. Though this trend has been reversed, credit default risks continue to be a major challenge among banks. The main objective of the study is to establish the effect of credit risk management practices on performance of commercial banks in Kenya. Particularly, the study examined the effect of loan appraisal, lending requirements, credit management tools and loan recovery process on financial performance of commercial banks in Kenya. The study adopted descriptive research design. The target population were all the licensed commercial banks operating in Kenya by the year 2017 as reported in the Bank Supervisory Report 2017. The unit of observation comprised the credit officers and finance managers of the commercial banks. A census was adopted on all the 39 commercial banks hence a total of 78 respondents were targeted. The study used both primary and secondary data. The study findings revealed that loan appraisal, lending requirement, credit management tools and loan recovery process had a positive and significant relationship with the financial performance of commercial banks in Kenya. The study recommended that commercial banks need to establish an overall credit limits at individual borrowers as well as clearly establish a process for approving new and refinancing of existing credits. Further, there is need for follow-up on payment schedule of borrowers and reminding customers before maturity. The commercial banks also need to develop a well-documented lending procedure, do lending against its lending standards, set lending policies in line with the market requirement as well as develop well-established lending policies regarding interest rates
Highlights
The high level of credit default risk in the banking industry has been a hindrance to economic stability
It implies that when a commercial bank has a well-documented lending procedure, does lending against its lending standards, setting lending policies in line with the market requirement as well as having a well-established lending policies regarding interest rates, it leads to a decrease in credit risk improving performance
These findings reveal that when the unrecovered loans are manageable among the commercial banks, the banks incentives increases the number of loan borrowers, the commercial banks uses threats and penalties on loan defaulters; it leads to an improvement in performance
Summary
The high level of credit default risk in the banking industry has been a hindrance to economic stability. China Banking Regulatory Commission report 2014 revealed that default risks has been observed to continue to increase for Chinese banks through 2014, with nonperforming loans of the country’s commercial banks increasing from 250.6 billion Yuan to 842.6 billion Yuan from the previous year. According to the Bank Supervision Annual Report of 2006, in 2003 and 2004, the average non-performing loan to total loans for the industry was 25% and 24% respectively. This represented 38% of total loan of Kshs.281.7 billion in the banking sector [2]. Commercial banks need better risk management strategies to manage the credit risk default
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