Credit Management Practices and Loan Performance of Commercial Banks in Kenya

Abstract

Commercial banks in Kenya as per the World Bank report were recording higher nonperformance in loans than the standard globally in spite of Kenya having the most stable and developed banking system in East and Central Africa region. Commercial banks non-performing loans for five years from 2015 to 2018 averaged eleven percent which was higher than the recommended rate of six percent. In Kenya, banks’ nonperforming loans remain higher than the recommended rate which could be due to inadequate credit management practices. The study therefore aimed at examining the effect of credit management practices on loan performance of commercial banks in Kenya. Specifically, the study sought to establish the effect of debt collection policy, client appraisal and lending policy on the loan performance of commercial banks in Kenya. The study also determined the moderating effect of the central bank regulations on the relationship between credit management practices and loan performance. The underpinning theories of the study were Asymmetric Information theory, 5Cs model for credit and Credit risk theory. The study used explanatory research design and the research philosophy adopted was positivism. The target population was 44 commercial banks in Kenya using census approach. Both primary and secondary data were used, where primary data was collected through structured questionnaires and related to credit management practices while secondary data was obtained from review of existing bank loan records in relation to loan amount advanced and non-performing loans for a period of four years from 2015-2018. The data collected was analyzed using both descriptive and inferential statistics with the help of SPSS version 22. Descriptive statistics used included mean, frequencies and standard deviation. Multiple regression analysis was used to test the study hypothesis. The study found out that debt collection policy and lending policy had a significant effect on loan performance of commercial banks in Kenya. However, client appraisal had no significant effect on loan performance of commercial banks in Kenya. The study further found that Central Bank regulations had no significant moderating effect on the relationship between credit management practices and loan performance. Therefore, the study concluded that the current level of loan performance by the commercial banks may be largely attributed to the efficiency of the credit management practices that are put in place. The study faced limitations whereby some of the respondents were reluctant to take part in the research and also questionnaire administration was a challenge. This was controlled by sorting permission from relevant bodies prior to commencement of the study and using pick and drop method when administering the questionnaires. The study recommended that commercial banks to regularly evaluate and update credit management practices framework that are capable of ensuring that all credit risks are identified and recorded from departmental level to the institution at large. The study further recommended that Central bank of Kenya to continuously assess and update credit management practices and the central bank regulations. The Government through regulating bodies should thus establish credit policies that regulate traditional and emerging credit practices among financial institutions.