Effects of Credit Policy on Performance of Commercial Banks in Kenya
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Date
2013-02-19
Authors
Wanja, Mwaura Dorcas
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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.
Description
Department of Accounting and Finance,2011