Effect of Credit Risk on Financial Performance of Commercial Banks in Kenya.

Abstract

Commercial banks play a vital role in the modern-day economies. The core business of the banking sector worldwide is creation of credit to deserving and deficit units of the economy, a role that also happens to be the main income generating activity for the banks. This activity comes with huge risks; both to the lender and the borrower. Banks are particularly subjected to a wide array of risks in the course of their operations. These risks generally fall into three categories namely: financial, operational, and environmental. Of these risks experienced, credit risk is of great concern to banking management and regulators as this can easily lead to bank failure. This study investigated the effect of credit risk on financial performance of commercial banks in Kenya. The study sought to operationalize credit risk through capital to risk weighted assets, asset quality, loan loss provision as well as loan to advance ratios while financial performance was measured by return on equity (ROE). Secondary data was extracted from audited financial statements of all the 44 commercial banks under the purview of Central Bank of Kenya (CBK) for the 10-year period covering 2008 to 2017. The study adopted longitudinal research design using an in-depth analysis of entities over a lengthy period of time. Regression analysis were used to estimate the relationship between the independent and dependent variables. The F and t ratios will be used at 95% confidence level to determine the significance or otherwise of the overall model and the respective coefficients of the independent variables respectively. Findings of the study will be useful to academicians and management of commercial banks as well as policy formulators.