Influence Of Credit Policy On The Performance Of Loans Among Commercial Banks In Kenya

Abstract

Sound credit management policy is a prerequisite for a financial institution’s stability and financial performance with continuing profitability. The general objective of this study was to assess the influence of credit policy on the performance of loans among commercial banks in Kenya. This study was led by the following specific objectives: To determine the effect of credit terms on performance of loans among commercial banks; To evaluate the effect of credit appraisal process on the performance of loans among commercial banks; and to establish the effect of credit risk control on the performance of loans among commercial banks. The study focused on 43 licensed commercial banks in Kenya whose head offices are within Nairobi. The study applied a descriptive research. Credit manager and analyst from each bank were selected upon giving a sample of 86. Purposeful sampling was used because the selected respondents are more knowledgeable on the subjects of the study. Primary data was collected through a structured questionnaire. Data was analyzed through qualitative and quantitative approaches. A multiple regression analysis was used to establish the relationship between credit policy aspects and performance of loans among commercial banks. The study found out that credit terms give the credit period and the credit limit and stipulate the credit period, banks need to take a close look at the borrowers’ economic, legal and environmental situation, segmentation was done to differentiate the services offered to individualize the respective marketing efforts and it was necessary to establish a proper credit risk environment, sound credit granting processes, appropriate credit administration, measurement, monitoring and control over credit risk by use of an optimum credit policy. The study concluded that commercial banks had adopted credit term policy loan ratio in determination of how much a client would borrow, applied collection policy, that credit period of funds do increase the level of loans defaults while credit appraisal through frequency of loan reviews and that commercial banks uses credit risk control practices in credit risk management to a very great extent reducing default rates indicated by reduction in level of non-performing Loans. The study recommends that commercial banks should have clear credit policy with proper monitoring and review from time to time in order to reduce the cases of non-performing loans, commercial banks should have operational credit policy manual and credit committees should be employed to approve loans and enhance usage of credit risk control practices in credit risk management determine how to respond to bank risks.