The Effect of credit risk management on financial performance: a case of Kenyan commercial banks

Abstract

Credit risk is one of the most impactful risks that commercial banks and other lending institutions face and is a lead cause of bank failure in Kenya. Therefore, it is crucial for this risk to be managed effectively to ensure profitability of commercial banks. This study determines the relationship between credit risk management and financial performance of Kenyan commercial banks. We also aim to determine the effect of credit risk management on profitability across different bank tiers. The study adopted a descriptive research design and collected quarterly data from 8 Kenyan commercial banks from 2014 to 2023. The research model specified ROE and ROA as measures of profitability and the CAMEL indicators and board composition as measures of credit risk management and bank tier as a categorical variable. The study utilised multiple linear regression analysis, where the results were presented in tables. The research found that medium and large tier banks have a lower ROE compared to small tier banks while they have a higher ROA compared to small tier banks. Therefore, the study concluded that there exists a mixed significant relationship between the CAMEL indicators and Board composition and profitability and that commercial banks across different bank tiers require customized approaches to tackle the issues they face and improve credit risk management.