Credit Risk Management and Profitability of Commercial Banks in Kenya

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  • Topic: Capital requirement, Bank, Credit risk
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CREDIT RISK MANAGEMENT AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA

BY

ANGELA M. KITHINJI

SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI, NAIROBI – KENYA. akithinji@yahoo.com or akithinji@uonbi.ac.ke

OCTOBER, 2010

TABLE OF CONTENTS
1.0 INTRODUCTION....................................................................................................................1 1.1 Background ................................................................................................................................1 1.2 Statement of the Problem .........................................................................................................11 1.3 Objectives of the Study ............................................................................................................12 2.0 DATA ANALYS IS AND APPROACH................................................................................12 3.0 FINDINGS AND DISCUSS ION OF THE RES ULTS ........................................................12 3.1 Credit Risk Policies Adopted by Commercial Banks in Kenya..............Error! Bookmark not defined. 3.2 Amount of Credit and Level of Non-Performing Loans ..........................................................19 3.3 Profitability of the Banks .........................................................................................................21 3.4 Profitability, Level of Cedit and Non Performing Loans........ Error! Bookmark not defined. 3.5 Relationship Between Profits, Amount of Credit and Nonperforming Loans ................2Error! Bookmark not defined. 3.6 The Regression M odel .......................................................... 2Error! Bookmark not defined. 4.0 S UMMARY OF FINDINGS AND CONCLUS IONS ............ Error! Bookmark not defined. REFERENCES .............................................................................................................................27

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1.0 INTRODUCTION
1.1 Background The risk focused examination process has been adopted to direct the inspection process to the more risk areas of both operations and business. Skills in risk-focused supervision are continually being developed by exposing examiners to relevant training. By adopting this approach, the banking industry, and specifically the small banks are sensitized on the need to have formal and documented risk management frameworks (De Juan, 1991). Notably, the more complex a risk type is, the more specialized, concentrated and controlled its management must be (Seppala, 2000; M atz and Neu, 1998; Ramos, 2000). Risk management is defined as the process that a bank puts in place to control its financial exposures. The process of risk management comprises the fundamental steps of risk identification, risk analysis and assessment, risk audit monitoring, and risk treatment or control (Bikker and M etzmakers, 2005; Buttimer, 2001). Whereas a risk in simple terms can be measured using standard deviation, some risks may be difficult to measure requiring more complex methods of risk measurement. Good risk management is not only a defensive mechanism, but also an offensive weapon for commercial banks and this is heavily dependent on the quality of leadership and governance. Jorion (2009) notes that a recognized risk is less “risky” than the unidentified risk. Risk is highly multifaceted, complex and often interlinked making it necessary to manage, rather than fear. While not avoidable, risk is manageable – as a matter of fact most banks live reasonably well by incurring risks, especially “intelligent risks” (Payle, 1997; Greuning and Bratanovic, 1999)).

Financial institutions are exposed to a variety of risks among them; interest rate risk, foreign exchange risk, political risk, market risk, liquidity risk, operational risk and credit risk (Yusuf, 2003; Cooperman, Gardener and M ills, 2000). In some instances, commercial banks and other financial institutions have approved decisions that are not vetted,...
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