Risk Management and Performance of Unsecured Loans in Commercial Banks in Nanyuki Town, Kenya
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Date
2018-11
Authors
Kariu, Joseph
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
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.
Description
A Research Project Submitted to the School of Business in Partial Fulfillment of the Requirement for the Award of Degree in Master of Business Administration in Finance of Kenyatta University