Credit risk in commercial bank lending practices in Kenya

Abstract

Excess credit risk has been known to be a major contributor to bank failures. Some of the symptoms of excess credit risk include high non-performing loans (NPL), high growth in asset base and over optimistic categorisation of customers during credit risk analysis of customer applications among other symptoms. Some of these symptoms have been evident in the Kenyan environment and has in the past resulted in bank failures in Kenya. This research sought to find out lending structures by banks in Kenya and determinants of credit risk. The study is restricted between 1998 and 2008 and employs both qualitative and quantitative data. Regression analysis was conducted to confirm the relationship between credit risk and identified independent variables including type of loan, economic sectors lent to, interest rates and bank credit policies. The results show that although the economic sector receiving/applying for the loans is an important determinant of credit risk, bank credit policies is the most significant determinant of credit risk. This must be strengthened to keep banks sustainable in the long run. Other determinants of credit risk include economic sectors, type of loans, amount of loan and interest rates charged banks. The study recommends the need for banks to strengthen their credit risk policy that guides their day to day lending operations. These policies must be based on research and long term sustainability of the banking business and not only short term profitability.