Credit Risk Management Practices and Profitability of Regulated Digital Credit Providers in Kenya
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Date
2025-06
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Kenyatta University
Abstract
The digital credit sector has emerged as a significant component of Kenya's financial landscape, contributing approximately 3.2% to the nation's GDP and serving over 6 million Kenyans. However, profitability challenges threaten the sustainability of these institutions, with industry average Return on Assets (ROA) declining from 3.2% in 2019 to 0.9% in 2021 before a modest recovery to 2.3% in 2023. This study aimed to determine the effect of credit risk management practices on the profitability of regulated digital credit providers in Kenya. Specific objectives included examining the effects of borrowers' screening, credit scoring, credit reminder practice, and credit risk control on profitability. The study employed a comprehensive theoretical framework integrating Credit Risk Theory, Innovation Theory of Profits, Information Asymmetry Theory, and Financial Intermediation Theory. Using an explanatory research design with quantitative methods, the research targeted all 22 digital credit providers licensed and regulated by the Central Bank of Kenya as of January 2023. Data was collected using structured questionnaires administered to credit officers and finance officers, achieving a response rate of 86%. Descriptive and inferential statistics were used to analyze the data following rigorous diagnostic testing. The research established that all four credit risk management practices significantly influenced profitability of regulated digital credit providers in Kenya. Borrowers' screening enhanced profitability through effective evaluation of borrowers' capital, capacity, conditions, and character. Credit scoring improved profitability by enabling more precise risk assessment and appropriate pricing. Credit reminder practices increased profitability by improving repayment rates and reducing collection costs. Credit risk control demonstrated the strongest impact on profitability through comprehensive risk management frameworks. The study concludes that credit risk management practices collectively exert a profound influence on profitability, explaining 79.3% of profitability variation among digital credit providers. The findings establish the critical importance of integrated credit risk management approaches for sustainable financial performance in digital lending operations. Based on these conclusions, the study recommends that digital credit providers implement comprehensive screening frameworks incorporating alternative data sources; develop proprietary scoring models that continuously refine accuracy through performance feedback; design personalized reminder strategies optimizing frequency, timing, and content based on borrower characteristics; and establish dynamic risk control systems adjusting to borrower performance and economic conditions. For regulatory authorities, the study recommends developing guidelines that promote effective credit risk management while supporting innovation in digital lending. For investors, the findings suggest evaluating credit risk management sophistication as a key indicator of digital lenders' long-term profitability potential.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfillment for the Award of Degree in Master of Business Administration (Finance Option) of Kenyatta University, June 2025.
Supervisor
Lucy Wamugo