Credit Risk Management and Loan Performance of Digital Lending Companies in Kenya
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Date
2024-11
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Kenyatta University
Abstract
In Kenya, more than 50% of loans issued by digital lending companies were defaulted by borrowers, highlighting a significant issue in the credit market. Digital lending companies primarily assessed borrowers' willingness to repay rather than their ability to do so, which led to increased exposure to credit risk and threatened the financial stability of these institutions. This study aimed to address the urgent need for effective credit risk management to enhance loan performance, particularly given the slow growth of digital lending firms attributed to high default rates exacerbated by a lack of collateral. The objectives of the study included examining the effect of risk identification on loan performance, assessing the impact of risk quantification on loan performance, and evaluating the influence of risk measurement on loan performance within digital lending companies in Kenya. The study was guided by the Credit Risk Theory, Asymmetric Information Theory and Agency Theory. The study adopted a descriptive research design targeting a population of 108 digital lending firms in Kenya, utilizing a census sampling technique. Primary data were collected and analyzed using the Statistical Package for the Social Sciences (SPSS) version 28, employing descriptive statistics, correlation analysis, and regression analysis. The analyzed data were presented using pie charts, bar charts, and frequency distribution tables. Ethical considerations were prioritized, including confidentiality, permission, and informed consent. The findings indicated that both risk identification and risk quantification positively and significantly impacted loan performance in digital lending firms. The study concluded that effectively identifying and quantifying risks enhanced loan performance by allowing digital lending firms to detect potential loan defaults through regular monitoring of borrowers’ cash flows. Each identified risk should have been distinctly labeled to avoid confusion with other risk management activities. To mitigate loan default rates, the study recommended that digital lending companies establish a robust institutional framework for effectively identifying loan-related risks. Additionally, appointing dedicated digital lending managers would facilitate timely communication of identified risks to upper management. The Central Bank of Kenya, as the regulatory body for digital lending firms, should have ensured that these institutions proactively identified emerging risks and developed strategic responses. Continuous monitoring of risks was deemed essential, and firms should have reviewed existing risk conditions regularly to determine the necessity of reassessment. Future research should focus on exploring the long-term effects of enhanced risk management strategies on the sustainability of digital lending companies in Kenya, as well as comparative studies involving traditional lending institutions.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fullfillment of the Requirement for the Award of Degree Master of Business Administration (Finance Option) of Kenyatta University, November, 2024