Organizational factors influencing the credit risk management strategies by digital credit providers in Kenya

Abstract

Digital lending has transformed access to credit using digital technologies, leading to the rapid growth of Digital Credit Providers (DCPs) in Kenya. However, increased access to credit has also heightened concerns regarding credit risk, loan defaults, and consumer protection. In response, the Central Bank of Kenya introduced Digital Credit Provider regulations in 2022 to strengthen consumer protection and influence credit risk management practices within the sector. Guided by the Resource-Based View and Prospect Theories, this study examined the credit risk management strategies employed by DCPs, the organizational factors influencing their adoption, and management perceptions regarding their effectiveness. The study adopted positivist and post-positivist philosophies and utilized mixed-methods research design. Primary data were collected through online semi-structured questionnaires administered to licensed Digital Credit Providers in Kenya. The findings from 93 DCPs indicate that Digital Credit Providers employ various credit risk management strategies, including loan structuring and limits, automated collection and warning systems, dynamic credit scoring models, and partnerships or credit guarantees. Organizational characteristics such as years of operation, firm size, and credit management training were found to influence the adoption of selected credit risk management strategies. The study further established that DCPs are increasingly leveraging artificial intelligence, machine learning, alternative data, and adaptive credit scoring models to enhance credit risk management. However, the implementation of these technologies is constrained by technical challenges, limited availability of quality data, and regulatory requirements relating to data privacy and consumer protection. The study concludes that the future of digital credit risk management will depend on balancing technological innovation, regulatory compliance, and consumer protection. It recommends increased investment in advanced analytics and data infrastructure by DCPs, strengthening regulatory frameworks by policymakers, and support for capacity building and governance by investors and development partners. Further research should examine digital lending practices across different jurisdictions and institutions to enhance the sustainability and effectiveness of credit risk management strategies.