Credit Risk Management and Financial Performance of Commercial Banks Listed in The Nairobi Security Exchange, Kenya

Abstract

Effective credit risk management is crucial for banks as it helps prevent significant losses from defaulted loans, thereby safeguarding the institution's capital. By identifying, assessing, and mitigating potential credit risks, banks can ensure a more stable income stream and reduce the volatility in their earnings. Additionally, strong credit risk management practices enhance a bank's reputation and customer confidence, which can lead to increased business opportunities and sustained profitability. The purpose of this study was to analyze the effect of credit risk management on financial performance of commercial banks listed in the NSE. The study was guided by three objectives specifically; to establish the levels of credit risk managements adopted by Commercial banks listed at the NSE, to determine the trends in financial performance of Commercial banks listed at the NSE, and to analyze the effect of credit risk management on Commercial banks listed at the NSE. It was underpinned by credit risk theory, agency theory and modern portfolio theory, which guided in outlining the significance of credit risk management in improving the financial performance of commercial banks. The study adopted a mixed methods research design where both qualitative and quantitative approaches were used. The target population of 10 commercial banks registered at the NSE. This study used secondary data from the reports of these banks from 2018 - 2023. The gathered data were analyzed using Statistical Package for Social Sciences (SPSS) Version 27 where data were coded, entered, cleaned and analyzed. Both descriptive and inferential analysis were used in the analysis. Descriptive statistics analysis were in form of means and standard deviations and were presented in the form of figures and tables, while Pearson’s Product Correlation and regression analysis were used to study the relationship among the variables of the study and there was a strong positive correlation between return on assets and CRM values [r=.8, p=.000 at α=.05]. Findings revealed that majority of the sampled banks assessed their credit risk management at four levels thus; capital adequacy ratio, loan to deposit ratio, non-performing loans and loan loss provision. Findings also revealed that the financial performance of the sampled banks have been on the upward trend from 2014 up to 2019 when there was a sharp decline in the year 2020 and thereafter a steady upward trajectory up to 2023. Moreover, the study found out that there is a significant positive association between credit risk management and financial performance of banks listed on NSE [r= .882, R2=.777, p= .039] which implies that the higher the credit risk management scores the higher the financial performance and vice versa. It is recommended that banks on NSE should adopt the study’s regression model as a basis for implementing strategies of improving their performance and a similar study should be carried out in the SCCOs and other digital lenders so as to determine how the five aspects of credit risk management that were investigated in this study would affect the performance of banks and financial institutions that are not yet listed on the NSE.