THE EFFECT OF CREDIT MANAGEMENT TECHNIQUES ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

ABSTRACT

Sound credit management is a basic for an institutions in financial sector performance. With
declining performance of the institutions due to increasing competition and changing regulatory
framework, credit quality is imperative for continued wellbeing of the institutions in terms of
financial performance. The greatest hazard in the credit business is loaning cash and not getting
it back as with every single budgetary organization. Credit chance specifically is one of the
greatest attentiveness toward banks since a portion of the loaning is unsecured. Some of the
general population financed are new companies who do not have the capacity to give assurances
or security against the cash acquired as assurance of that payment will be done which exposes
the lenders. In this way this study tried to evaluate the impact of credit management procedures
on the financial performance of business banks in Kenya. The indicator factors of the study
were customer evaluation, Collection arrangement and Credit hazard control while the needy
variable was money related execution of Commercial Banks in Kenya. This study embraced a
descriptive research.

The design was fit as it allowed a thorough investigation of the effect of
credit management on the money related execution of banks in Kenya. The number of
population in the study comprised of all the 45 banks in Kenya. . A census study was used to
carry out the research. Data collection instruments that were used included questionnaires,
financial statements, annual reports on record and data from the financial market. Primary data
was collected using questionnaires where all the concerns on the questionnaire were addressed.
Secondary data was collected from annual reports and financial statements. The secondary data
from the financial statements included after tax profit, written off debt, total assets and value of
loans outstanding. The researcher will administer the questionnaire to each respondent in the
study. The questionnaire consisted both open and close ended questions. The closed ended
questions was used to test the rating of various attributes and this helped to reduce the number
of related responses so as to obtain more varied responses. The open-ended questions will
provide additional information that will not have been captured in the close-ended questions.
The study revealed that credit management techniques had a significant effect on the
performance of the commercial Banks. Therefore the study recommended that there is need for
CBK to enhance their client appraisal techniques so as to improve their financial performance.

CHAPTER ONE
INTRODUCTION
1.1 Background of the Study

Banks are monetary organizations that are set up to offer services related to financial
management and other non-financial services. Financial services offered by the banks include
loaning of funds, receiving of cash for deposits to customer, trading in foreign exchange and
facilitating investment in financial instruments like shares. Nonfinancial services offered by
banks include acting as custodians for valuable documents in the safes on behalf of the
customers (Campel, et. al., 1993). Banks offer these crucial services under strict laws in the
respective countries meant to maintain sanity in the industry and protect the interest of the
general public.
Lending is a basic component of keeping money business; it is itself at the heart of an
economy’s monetary foundation. The sum of amounts loaned out forms the debt portfolios of
the financial institutions. Debts are presented as liabilities to the customers as they are under
obligation to pay interest and principal upon maturity (Edwin, 2005). It is along these lines
requires policy formulators constantly survey the credit market to minimize wasteful aspects
that impede speedier monetary and economic development. Interest on loans constitute to a
substantial source of bank income. However, while this is the case, banks are faced by credit
risk when loaning out money where the loaned funds may not be repaid on time or interest
and principal not paid at all.

The risk facing loaned funds is the credit hazard which is the
risk of fluctuations on future incomes and asset expected from loaned funds (Kargi, 2011).
Credit management according to Mensah (1999), handle merits uncommon accentuation on
the grounds that legitimate credit administration impacts the achievement or disappointment
of money related organization This shows credit arrangement ought to be joined by alluring
and fitting credit strategies and approaches that upgrade execution of credit administration
and shields the managing an account industry from failures. Credit administration implies the
aggregate procedure of loaning beginning from inquisitive potential borrowers up to
recuperating the sum conceded or financed. In the banking business, administration of credit
is about for exercises, for example, managing loan applications, advance examination,
advance endorsement, observing and the recuperation of non-performing credits (Shekhar,
1985).

Hettihewa (1997) reiterate the need of credit function by insisting that credit Management is
critical as giving credit is thought to be what might as well be called putting resources into a
customer. Be that as it may, installment of the obligation ought not to be put off since a long
repayment period and deferred installments imply terrible obligations and cost to the bank.
Additionally, efficiency and adequacy in playing out every means of advance preparing
utilizing different parameters has huge effect on the execution of credit management roles.
The concern of this research work was evaluating the impact of management of credit
procedures on the performance commercial banks in Kenya.

1.1.1 Credit Management
Organizations’ biggest challenge historically is the management of credit. This is specifically
so for institutions dealing with financial services like commercial banks. It would be too
expensive for banks to ignore the aspects of credit management considering that it interest is
the main source of banks’ income. A financial institution that fails to give attention to the
function, sooner or later will record poor performance characterized by lack non-performing
loans. Myers and Brealey (2003) acknowledge administration of credit to be a critical
methodology and strategy if adequately embraced by a firm guarantee an ideal level of credit.
Credit administration is part of money related administration that includes credit
examination, FICO assessment, credit order and credit reporting. Nelson (2002) reiterated
that financial institutions credit management process will involve of techniques and process
applied in systematic way.
Nzotta (2004) indicated that credit administration impacts the achievement or failure to
achieve performance of banks and other monetary organizations. This is because of the way
that the performance of banks is affected, all things considered, by the nature of credit

choices and henceforth the nature of the unsafe resources. Nzotta (2004) showed that,
management of credit gives a high marker of the nature of a bank’s credit portfolio. A
noteworthy prerequisite for powerful credit administration is the capacity to proficiently and
wisely deal with a client’s credit lines. In attempt to minimize presentation to awful
obligation and liquidations, banks ought to must understand the clients’ monetary
requirements, assess the credit trustworthiness, ability to pay among other aspects.
Credit management process starts with receiving applications and finishes just when the
borrower meets all obligations of repaying the loaned funds.

Credit management cannot be a
success if the loaned funds will not be received in full. Standards of good loaning state that
lending institutions should be worried with guaranteed returns from loans, beyond what many
would consider possible that the borrower can make planned installments without delays or
fail. Credit administration is concerned basically with financing obligations and overseeing
indebted individuals. The essential destinations of credit administration can be pronounced as
protected guarding of the clients’ hazard and upgrading operational money streams.
Approaches and methodology must be connected while agreeing credit to clients and amid
the gathering of installments.

1.1.2 Financial Performanc