Corporate Loan Portfolio Diversification and Credit Risk Management among Commercial Banks in Kenya

Abstract

To minimize the total loan portfolio risk, it is important for commercial banks to consider diversifying their corporate loan portfolio. Yet, research indicates that the effect of such diversification has conflicting findings by various scholars. This study therefore sought to establish the association between corporate loan portfolio diversification and credit risk management among commercial banks in Kenya. The specific objectives of the study included: to determine the relationship between geographical diversification and credit risk management, to establish the relationship between industry diversification and credit risk management and to establish the relationship between the size of borrowing company and credit risk management among the commercial banks in Kenya. The study employed descriptive research design. The study targeted 86 respondents. Data was collected by use of a questionnaire. The obtained data was cleaned; coded and statistical outputs generated using SPSS. Descriptive and inferential statistics were used to analyze the data. The analyzed data was then presented in charts and tables. The study found out that there was no association between geographical diversification (p=0.113, r=0.197) and credit risk management, an association (p=0.001, r=0.515) between industry diversification and credit risk management and an association (p=0.004, r=-0.351) between size diversification and credit risk management at the banks. Consequently, the following recommendations were proposed; a framework is established that helps determine the size of the borrowing companies and their potential to grow over time, measures are put in place that helps identify borrowing companies based on specific parameters such as level of corporate tax and those that identifies borrowing companies based on competitive advantages in areas of existence other than mere geographical locality among other recommendations.