Effect Of Credit Analysis On Non - Performing Loans Of Commercial Banks In Kenya

Abstract

Credit analysis is carried out by commercial banks to analyze and assess the credit risk and credit worthiness of borrowers. Credit analysis is important since it helps lenders to secure their funds, mitigate credit risk and improve on the performance of loans. The aim of the study was to assess the effect of credit analysis on non-performing loans of commercial banks in Kenya. The specific objectives of this study are to assess the effect of credit history analysis, credit capacity analysis and credit repayment period analysis on the non-performing loans among the commercial banks in Kenya. Target population used for this study was 42 commercial banks which are operating in Kenya. The study was anchored on credit risk theory, Liquidity theory and Loan pricing theory. The study adopted a descriptive research design and the questionnaires were used to collect primary data from the 42 officers or heads of credit section in the head offices for all the 42 commercial banks in Kenya and the secondary data was collected from the bank websites and published reports. The coded data was analyzed using the multiple regression analysis with the help of SPSS software and Microsoft Excel spreadsheets. From the study findings it was found that the credit history analysis had no significant effect on non-performing loans while credit capacity analysis and credit repayment period analysis had a significant effect on the level of non-performing loans in Kenya’s commercial banks. The study recommendations to commercial banks were: commercial banks should ensure that they conduct extensive research to come up with other credit analysis tools and techniques so that they can be able reduce the non performing loans, Capacity analysis should include the analysis of expected cash flows, tangible assets, firm size and equity share. Extending loans to borrowers with good credit capacity leads to decrease in non-performing loans among the commercial banks in Kenya. Commercial banks should reevaluate the credit repayment periods so as to set optimal periods which borrower should be able to repay the loan on time but also research on other factors influencing the loan performance and level of non-performing loans. Finally, recommendations were made to interested parties and a suggestion for further research gaps to be researched by the upcoming researchers