Credit Management Practices and Loan Performance of Commercial Banks in Kenya
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Date
2022
Authors
Geoffrey, Obae Ondeng’i
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Commercial banks operating in Kenya have been reporting dismal performance, with
escalating amounts of non performing loans between 2018 and 20 20 as evidenced in the
central bank’s reports. The non p erforming loans of these banks were averaged at 11
perce nt, a rate higher than the central bank’s recommended rate of 1 percent, probably
associated with insufficie nt credit management practices . The current analysis sought to
determine credit management p ractices’ effects on commercial banks’ loan performance
in the country. It specifically examined the objectives of the effect of credit rationing,
client appraisal, debt collection, and credit monitoring on the loan performance of
commercial banks in Kenya . The appropriate research design was descriptive survey
applied to the targeted 38 commercial banks in the country. Questionnaire instrument
assisted i n collecting primary data on credit management practices while secondary
information on loan performance was obtained from document review form based on
loan records of 2018 2020. SPSS (v 21) aided the descriptive as well as inferential
analyses of data. The findings of the regression analysis showed that the predictions in
the model provide a positive corr elation (R = 0.759) with loan performance. The
coefficient of determination (r 2 ) was 0.5761. The predictors of credit rationing, client
appraisal, debt collection, and credit monitoring were all significant as an increase in unit
on credit rationing could lead to an increase in loan performance by 0.356. In addition, a
unit increase in the client appraisal could lead to an increase in loan performance by
0.408; the debt collection of the unit increase would lead to an increase in loan
performance by 0.445, and an increase in the credit monitoring would lead to an increase
in loan performance by 0.312. Further the results indicated that at 95 percent confidence
level, credit rationing (p value = 0.001), client appraisal (p = 0.001), debt collection (p =
0.000 ), and credit monitoring (p value = 0.001) were significantly found in the regression
model. The study concluded that debt collection has a significant impact on performance
of loans, which is better to collect debt as the shorter debt collection period wo uld lead to
improved performance of commercial bank loans. The assessment also concluded that
client appraisal has a significant effect on credit performance of the banking sector,
implying the development of client appraisal would improve the performance of loans in
the banking sector. Hence, the analysis concluded that commercial banks' loan
performance was largely linked to efficiency in credit management practices adopted by
the financial institutions. Based on the assessment findings , the study recomme nded that
credit management practices should be adopted and applied equally by all commercial
banks in Kenya to reduce the amou nt of non performing loans in the banking sector.
Description
A Research Project Presented in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Business Administration (Finance) School of Business, Kenyatta University, June, 2022
Keywords
Credit Management, Practices, Loan Performance, Commercial Banks, Kenya