CONTRIBUTION OF CREDIT RISK MANAGEMENT STRATEGIES ON FINANCIAL STABILITY: AN EVALUATION OF COMMERCIAL BANKS IN KILIFI COUNTY

Abstract

For a bank to sustain long-term profitability and a competitive advantage, the bank must respond strategically to challenges arising from credit risk. Over the years, there have been an increased number of significant bank problems in both matured and emerging economies. Credit problems, especially weakness in credit risk management, have been identified to be a part of the major reasons behind banking difficulties. The purpose of this study was to establish the contribution of credit risk management strategies to the financial stability of commercial banks in Kilifi County. This study borrowed from competitive advantage theory, resource based view theory and loan pricing theory to advance better credit risk management strategies to safeguard financial stability of the commercial banks. Descriptive research design was used and questionnaires were used to collect data. Analysis was done using descriptive statistics and content analysis as well as Mann Whitney and regression tests. Central Bank is the key player in prompting commercial banks to change their policies in regard to cushioning banks’ risks. Land is the most common and preferred assets to secure loan from commercial banks as a collateral as indicated by majority of the respondents. Many commercial banks prefer interest rates of between 16% and 19%. The study shows that commercial banks use numerous tools for controlling credit losses such as collaterals and credit protection. It also emerged that Majority of borrowers do not repay their debt in time as confirmed by more than three quarter of the respondents. Mann Whitney tests of medians were run to determine whether banks in Kilifi perceived credit control policies to be appropriate for a variety of credit scenarios among clients and whether some measures were considered superior to others. Collaterals and Credit protection were considered to be equally (W=1584 p=0.2902) robust tools to control credit losses but superior to agreements (W=1860.5 p=0.0001), credit rationing (W=1782 p=0.0352) and contract evaluation (W=1712.5 p=0.0368). vi Credit protection as a strategy, to a great part contemplated as collateral by the bank, provided the most appropriate measure for handling multidimensional risks to credit for a diverse clientele operating in diverse client risk scenarios. The study recommends that Commercial Banks should develop risk management strategies that are consistent with their credit risk tolerance and their business goals. The management should periodically review the credit risk strategies and any changes and concerns should be effectively communicated to all relevant staffs. Shifts from the approved credit risk strategies should be subjected to appropriate review and endorsement.