Effects of Credit Policy on Performance of Commercial Banks in Kenya

Abstract

The study intended to investigate the effects of credit policy used by commercial banks on their performance. Credit policy refers to statement of philosophy, standards and guidelines that bankers observe in granting or refusing a loan request while performance refers to change in number or value of loan granted and profit level. Commercial banks were used because of the role they play in the economy; they act as barometer to reflect important changes in the economy, they are governed by CBK which operates with favourable policies such as deregulation of interest rates, reduction of imposed regulations and restrictions of commercial banks. The study was guided by research objectives: to examine relationship between loan terms and conditions and performance, to examine the relationship between loan processing procedures and performance, to establish amount of loan disposable and their relationship with performance and to examine the relationship between credit information and length of credit relationship with the bank and performance. The problem of the study was that some commercial banks use stringent credit policy thus losing customers to other commercial banks with lenient credit policy, this has led to decline in performance of such banks .The study consisted of dependent variable which represent performance and independent variables which explain changes in commercial banks performance. The study was carried out using descriptive research design. The population for the study was all the forty three commercial banks headquarters thus a census was taken. To obtain information from respondents both open and closed ended questionnaires was used. In order to meet the study's objective both primary and secondary data was collected. The target population was forty three respondents consisting of credit officers of the banks. Pilot study was carried on four branches of commercial banks which were selected by simple random sampling method to test the validity of the instrument. Data collected was coded using statistical package for social science (SPSS). Descriptive statistics was used to analyze the data in terms of frequency tables, pie charts, graphs and percentages. The study found that the nature of loan terms and conditions have a large effect on the bank's competitiveness. Also it was found that the nature of the loan policies a bank adopts affect the volume of loan applications that a bank attracts. Further, it was found that most loan terms and conditiOJ:;s only affect the volumes of the loans procured at a bank to a small extent. Finally, the study found that most commercial banks rely to a large extent on the borrower's credit history in awarding loan amounts, that account movement is considered to be an important factor in considering and approving loans. And that majority of the commercial banks consider borrower's personal behaviour as an important factor in approving loans sought from the banks. Thus, the findings of the study indicated that the nature of the credit policies adopted by the banks influence the volumes of the loans procured by the banks and thus the competitiveness of the bank inlending and thus the performance in the industry.