CREDIT RISK MANAGEMENT AND PROFITABILITY OF COMMERCIAL BANKS IN NAIROBI CITY COUNTY, KENYA
Vincent Nyakweba Ayieko - Master of Business Administration Student, Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
Dr. Moses Odhiambo Aluoch, PhD - Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
The connection between credit risk management and profitability in Kenyan commercial banks is a significant issue, as the financial health and profitability of these institutions have been adversely affected by elevated non-performing loans. Thorough credit assessments and strong risk mitigation strategies are necessary for preventing defaults and maintaining stability; however, they can also result in decreased lending and lower revenue from interest income. The Kenyan banking sector faces a delicate balance between managing credit risk and maintaining profitability, which is further complicated by the country's fluctuating economic growth rates and political uncertainties that can exacerbate credit risk, leading to higher provisions for loan losses and reduced profitability. Lending remains the main purpose of commercial banks, making it the main cause of credit risk. Therefore, it is crucial for banks to reduce their exposure to credit risk in order to ensure their continued operation. The aim of this research was to analyse how credit risk management impacts the profitability of commercial banks in Nairobi City County, Kenya. Its main goal is to determine how credit approval, collateral policies, credit limitations, and solvency impact the profitability of commercial banks in Nairobi City County, Kenya. It was based on four theories: adverse selection theory, asymmetric information theory, credit risk theory, and lending credibility theory. Descriptive research design was utilized. The target group consisted of the 38 commercial banks located in Nairobi City County of Kenya according to the Central Bank of Kenya Report (2023). A census was conducted due to the population being fewer than 100 individuals. A questionnaire was used to collect primary data, while a data collection sheet was used for secondary data. The analysis was assisted by a multiple regression model. Various assessments were conducted, such as autocorrelation, heteroskedasticity, multicollinearity, normality, and stationarity tests. Data analysis involved the use of descriptive statistics as well as multiple regression analysis. The findings revealed significant insights into the components of credit approval, with borrower character and collateral being crucial factors. Regarding collateral policies, a strong belief in the link between asset quality and profitability emerged; highlighting that high-quality collateral enhances bank profitability. In terms of credit restrictions, there was a strong consensus on the importance of borrower payment history in determining credit eligibility, with stringent restrictions seen as a means to improve profitability by reducing default risks. The study concluded that that effective credit approval processes significantly enhance the profitability of these banks. Given the positive effect of credit approval on profitability, it is recommended that the management of commercial banks implement comprehensive credit approval processes that rigorously assess borrower character and financial history. While this study examined the impacts of credit approval, collateral policies, credit restrictions, and solvency on profitability, future research could investigate the interaction effects of these factors in greater detail.