EFFECTIVENESS OF CREDIT POLICY ON MANAGEMENT OF NON-PERFORMING LOANS IN KENYAN COMMERCIAL BANKS

Abstract

The financial growth and stability of commercial banks majorly depend on regular loan repayments by their borrowers. In the recent past, commercial banks have been facing challenging matters originating from steady increases in Non-Performing Loans due to borrowers defaulting in making their loan repayments as scheduled. The purpose of this study was to determine the effectiveness of credit policy on management of NonPerforming Loans in Kenyan Commercial Banks. The specific objectives were to determine the effect of credit terms, credit appraisal and collection policy on management of non-performing loans in Kenyan Commercial Banks. The study literature was supported by information from the Theory of Information Asymmetry and Credit Scorecard Theory. The study adopted an explanatory type of research design on a sample size of 222 credit officers working in the 41 commercial banks within Nairobi city. Cronbach alpha and factor analysis were applied to test the reliability and validity of the research instruments respectively. Data collection was done using self-administered questionnaires. A multiple regression model using SPSS (version 23) was used to analyze the obtained data and test the hypotheses. The findings revealed that credit terms (ꞵ= .570, p < .000), credit appraisal (ꞵ = .302, p < 0.000), and collection policy (ꞵ = .201, p < .000) all had a positive and significant effect on management of Non-Performing Loans. Based on the new findings, the management of commercial banks and policy makers should develop effective strategies, policies and techniques that would make borrowing affordable to attract creditworthy borrowers to the banks. The study brings new knowledge that credit terms have the greatest predictive power on management of Non-Performing Loans compared to credit appraisal and collections policy. Whereas the study used quantitative data, future studies may consider using mixed approaches as they may uncover other issues affecting the management of Non-Performing Loans in commercial banks.