Risk Management and Performance of Unsecured Loans in Commercial Banks in Nanyuki Town, Kenya

Abstract

Banks have to manage more types of risks in order to maximize the shareholders‟ wealth. Kenyan banks have witnessed increasing non-performing loans. The liberalization of interest rate controls, the privatization of publicly owned banks, and the expansion on the variety of financial instruments, provided new business opportunities for banks but they also increased the need for proper risk management systems to be put in place in order to control the risks and uncertainties deriving from these changes. Evidence shows that non-performing unsecured loans are on the rise. The gross non-performing loans (NPLs) increased by 6.6 percent in the first quarter of 2017. The study focused on the effect of risks management on performance of unsecured loans in banks. The objectives of the study were to establish the effect of information technology on performance of unsecured loans; examine the effect of risk analysis on the performance of unsecured loans; assess the effect of risk monitoring on the performance of unsecured loans and find out the effect of risk reporting on the performance of unsecured loans. The study was anchored in the information asymmetry, technological determinism, modern portfolio, contingency theory and theory of constraints. The current study used a descriptive cross sectional research design. Commercial banks in Nanyuki town were targeted. Branch managers and departmental heads were the respondents in the study. The study used purposive sampling where all 12 banks and 60 respondents were involved in the study. A selfadministered questionnaire was used to collect data. Descriptive statistics such as frequencies, percentages, mean and standard deviation were used to organize findings. Regression analysis was conducted to determine the statistical significance of the attempted prediction between risk management and performance of unsecured loans among commercial banks. The tests were performed the help of SPSS software at 95% confidence level. Findings were presented in form of tables and figures. The study found that that information technology was used in risk management to a large extent and participating banks conducted risk analysis to a large extent. The findings showed gaps in risk monitoring while risk reporting was conducted to a very large extent. Regression analysis showed that there was a strong positive correlation (r=0.837) between risk management on performance whereby 68.4% of performance of unsecured loans in commercial banks in Nanyuki town, Kenya could be attributed to risk management. There was statistically significant relationship (F(4,7) = 4.394, P=0.004) between risk management on performance of unsecured loans in commercial banks in Nanyuki town, Kenya. Among the variables, information technology (p=0.044), risk analysis (p=0.006) and risk monitoring (p=0.016) were statistically significant. The findings showed that risk analysis (β=0.920) was the most affecting followed by risk monitoring (β=0.488), information technology (β=0.044), and risk reporting (β=0.156) in that order. The study concluded that risk management is vital to performance of unsecured loans in commercial banks. This relationship is driven by utilization of information technology, risk analysis and risk monitoring which enable the bank assess and predict risk and therefore employ corrective and mitigation strategies to avoid default. The researcher recommended that commercial banks should make greater investments in information technology in risk management especially in the area of data mining. Commercial banks should also seek to utilize scenario analysis more in risk analysis as it is a good credit risk assessment tool.