The Relationship Between Credit Risk Management and Financial Performance of Listed Commercial Banks in Kenya

Abstract

The financial sector in Kenya, particularly commercial banks, is a cornerstone of the country's economy. Over the years, these institutions have played a pivotal role in the economy however, listed commercial banks in Kenya face several financial performance issues that threaten their stability, profitability, and overall contribution to economic development. One of the most significant issues affecting the financial performance of Kenyan banks is credit risk management issues. NPLs are loans in default or close to being in default therefore the study seeks to assess the influence of credit risk management and financial performance of listed commercial banks in Kenya. Specifically, the study sought to determine the influence of capital adequacy, loan loss provision, liquidity and management efficiency and financial performance of commercial banks Listed in NSE, Kenya. The study was anchored on the Capital buffer theory, Liquidity preference theory, Modern portfolio theory and Agency theory. The study adopted explanatory research study. The study targeted 11 listed commercial banks in Kenya for a period of five (5 years) covering between 2019 and 2023. The study conducted census of all the 11 listed commercial banks in Kenya. The researcher used data collection sheet to extract and compile the required secondary data. The study used both inferential and descriptive statistics. Descriptive statistics involved the use of standard deviation and mean. Inferential statistics involved the use of correlation and regression analysis to identify the influence of independent on the dependent variable. All inferential statistics were tested at  = 0.05 significance level. The findings revealed that listed commercial banks in Kenya for the last 5 years have maintained a strong capital base for last five years (2019-2023). In addition, the findings indicated that listed commercial banks are setting aside a reasonable amount for loan losses relative to their total loans. Furthermore, the study found out that majority of listed commercial banks in Kenya has sufficient liquidity. Finally, the findings revealed that listed commercial banks are managing their operations with moderate efficiency. From the findings the study concluded that there is a weak negative and statistically significant correlation between capital adequacy and the financial performance of listed commercial banks in Kenya. In addition, the study concluded that that there is a strong negative and statistically significant correlation between liquidity and financial performance of listed commercial banks in Kenya. Furthermore, the study concluded that there is a weak negative correlation between loan loss provision and financial performance of listed commercial banks in Kenya. Finally, the study concluded that there is a moderate negative correlation exists between management efficiency ratio and financial performance of listed commercial banks in Kenya. From the findings the study recommended that commercial banks in Kenya should aim to maintain a well-balanced Capital Adequacy Ratio (CAR) that aligns with regulatory requirements while also considering their income-generating activities. Banks should also implement robust risk assessment and credit evaluation processes that reduce the likelihood of non-performing loans. Commercial banks should also strike a balance between maintaining adequate liquidity and pursuing higher-yielding investment opportunities.