Impact of Credit Risk Management on the Financial Performance of Indigenous Banks

Abstract

Through their financial intermediation, banks perform critical functions in national economic development, as they stimulate economic growth. This function is largely carried out through loan advances to businesses and individuals and earns income from interests on these loans. However, the banks are faced with credit risks as some customers may not be able to refund credits advanced to them. Managing credit risk effectively is therefore critical to the health and sustainability of the bank. The health and sustainability of a bank is usually assessed through its financial performance. Thus the study sought to ascertain how credit risk management affected the 7 indigenous banks who are now defunct. The quantitative approach was used and panel data covering the period 2010 to 2016 was gathered from the banks’ annual reports. The multivariate regression technique and descriptive statistics were employed in the analysis of data. The study established that adequate capital impacts positively on a local bank’s performance (profits). In addition, the research found credit risk management indicators, cost per loan as well as non-performing loan to affect local banks’ profitability negatively. It was suggested that existing indigenous banks ought to develop reliable credit management strategies to reduce the incidence of non-performing loans. This must include the use of credit bureaus to reduce information asymmetry during loan administration.