Browsing by Author "Mucheke, Ken Mithika"

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    Firm Characteristics and Credit Risk of Tier III Commercial Banks in Kenya
    (Kenyatta University, 2025-06) Mucheke, Ken Mithika
    Tier III commercial banks play a pivotal role in the Kenyan economy as intermediaries of connecting investors and savers to achieve economic meaning of financial inclusion. These commercial banks effectively use their limited resources to perform the following two roles of banking; extending banking services to the needy areas and the integrated development of Kenya’s economy. However, these financial institutions have faced severe challenges in performing this noble function due to high exposure to credit risk that continue to threaten their sustainability. Non-performing loans among the Tier III banks in Kenya has been rising over the past five years, threatening the sustainability of these institutions. In the year ending September 2023, Tier III commercial banks recorded a growth in provision for bad loans by $207 million (75.34%) of the total loan portfolio as the institutions sought to cushion themselves against ripple effect of deteriorating asset quality and non-performing loans. This was significantly high compared to the Tier I commercial banks’ $102 million (69.8%) of the total loan portfolio. In the same period ending September 2023, about ksh. 121.05 billion were declared bad loans by the tier three commercial banks, compared to Tier I commercial banks 82.3 billion occasioned by high interest rates, high inflation, unpredictable political environment, and weakening shillings against the dollar. This study sought to determine the effect of firm characteristics on credit risk of Tier III commercial banks in Kenya. The specific objectives included the determination of the effect of; capital adequacy, bank size, bank competitiveness, and management efficiency on credit risk of Tier III commercial banks in Kenya. Information asymmetry, market power, liquidity preference, and credit risk theories were used. Descriptive research design was adopted and target population was 22 Tier III com banks. Census sampling technique and secondary data from 2019 to 2023 using the secondary data collection sheet were applied. The Statistical Package for Social Sciences Version 26 software was used for data analysis, using the panel regression model. Findings were presented in tables and narration to inform their application in research and practice. Diagnostic tests performed included data normality of residuals, multicollinearity, autocorrelation, heteroscedasticity, stationarity, and hausman tests. That study found that capital adequacy had a negative significant effect on credit risk, bank size had a positive significant effect on credit risk, bank competitiveness had a negative significant effect on credit risk, and management efficiency had a positive insignificant effect on credit risk. The study concluded that capital adequacy, bank size, and bank competitiveness greatly enhances credit risk while management efficiency has no effect on credit risk of Tier III commercial banks in Kenya. To the regulator, the study recommends a review of existing minimum reserve requirements, increasing the requirements to acceptable high levels to shield the Tier III commercial banks from adverse effects of credit risk and enable the financial institutions support realization of Kenyan Vison 2030 of economic growth and development.