An analysis of credit risk assessment through credit scoring Models among commercial banks in Kenya
Loading...
Date
2014-07-07
Authors
Kioko, Peter Mwanzia
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
Risk management is a cornerstone of prudent banking practice. All banks in the present day
volatile environment are facing a large number of risks such as credit risk, liquidity risk, foreign
exchange risk, market risk, interest rate risk among others. These risks may threaten a bank's
survival and success. From literature reviewed, effective credit risk management is lacking in
most of the banking institutions. Credit risk assessment has been identified as one of the key
skills required for successful banking operation. From literature reviewed, banks have been
urged to engage in effective credit risk management techniques able to determine risk of default
in their loan advances. One of these ways is through the use of credit scoring models in credit
risk assessment.
The study sought to analyze credit risk assessment through credit scoring models within
commercial banks in Kenya. It further sought to identify if there is any relationship between
NPLs and credit scoring practices. Credit policy is also vital for effective risk management and
was therefore analyzed. The study will be of great help to commercial banks, the public and
academicians by providing further insights on credit scoring and credit risk assessment in banks.
The study is a census therefore the population of the study consisted of all commercial banks
operating within Nairobi. Data was collected using questionnaires which were administered to
Personal banking officers of the various commercial banks through the headquarter offices.
Descriptive data analysis techniques have been used in form of percentages and tables to show
the various findings. Correlation analysis is used to determine the relationship between NPLs and
credit scoring. These methods were chosen because the data collected is in frequencies as the
variables are measured in categorical scale.
The study established that, 60.6% of the banks surveyed use credit scoring models during credit
risk assessment of the various loan applicants while 39.4% do not use any credit scoring models
on credit risk assessment. The study established that other methods used to assess credit risk are
credit committee and analysis of financial statements like balance sheet and the profit and loss
accounts incase of business loans. For personal loans, field observations on personal property
and employment details are sometimes used. On the types of credit scoring models used, the
study established that, risk adjusted return on capital model was the one mostly
Description
Department of Accounting and Finance, 45p. 2011, HG 3751.9 .K4M9