Credit Risk Management in Commercial Banks
CREDIT RISK MANAGEMENT PRACTICES AMONG COMMERCIAL BANKS IN KENYA
BY:
PAUL MWANIKI THUO
BUSINESS SEMINAR PAPER
AUGUST 2013
Abstract
Financial and non-financial organizations have financial disasters which point to the need for various forms of risk management practices. Banks and other financial institutions have faced difficulties over the years for a number of reasons. However, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or lack of a watchful eye to the changes in economic or other circumstances that can lead to deterioration in the credit standing of a bank’s counterparties. This paper aims at highlighting the factors influencing credit risk management practices among commercial banks in Kenya. This is an empirical review of studies carried out related to the objectives of this paper. In pursuit of developing this paper the following critical factors that influence credit risk management practices by banks are reviewed: effectiveness of credit risk management practices put in place by commercial banks in Kenya in controlling the level of credit risk exposure, the factors that determine credit risk management practices put in place to mitigate credit risk exposure; the effectiveness of each of these factors in controlling the level of credit risk exposure; and lastly the impact of credit appraisal process enforced on the organization’s growth and profitability and lastly it intends to conclude by bringing to light the barriers to effective credit risk management practices among commercial banks in Kenya.
TABLE OF CONTENTS
Abstract ii
1.0 Background of the study 4
2.0 The problem statement 7
3.0 Literature review 8
4.0 Conclusion 15
5.0 Recommendations 16
6.0 References 17
1.0 Background of the study
The concept of a “credit crunch” has a long history reaching as far back as the Great Depression of the 1930s.
BY:
PAUL MWANIKI THUO
BUSINESS SEMINAR PAPER
AUGUST 2013
Abstract
Financial and non-financial organizations have financial disasters which point to the need for various forms of risk management practices. Banks and other financial institutions have faced difficulties over the years for a number of reasons. However, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or lack of a watchful eye to the changes in economic or other circumstances that can lead to deterioration in the credit standing of a bank’s counterparties. This paper aims at highlighting the factors influencing credit risk management practices among commercial banks in Kenya. This is an empirical review of studies carried out related to the objectives of this paper. In pursuit of developing this paper the following critical factors that influence credit risk management practices by banks are reviewed: effectiveness of credit risk management practices put in place by commercial banks in Kenya in controlling the level of credit risk exposure, the factors that determine credit risk management practices put in place to mitigate credit risk exposure; the effectiveness of each of these factors in controlling the level of credit risk exposure; and lastly the impact of credit appraisal process enforced on the organization’s growth and profitability and lastly it intends to conclude by bringing to light the barriers to effective credit risk management practices among commercial banks in Kenya.
TABLE OF CONTENTS
Abstract ii
1.0 Background of the study 4
2.0 The problem statement 7
3.0 Literature review 8
4.0 Conclusion 15
5.0 Recommendations 16
6.0 References 17
1.0 Background of the study
The concept of a “credit crunch” has a long history reaching as far back as the Great Depression of the 1930s.
References: Bank of International Settlement. (2005). Best Practices for Credit Risk Disclosure (Basel II). Geneva, Switzerland: Author. Retrieved from http://www.bis.org/publ/bcbis54.html Brown, F Brunnermeier, M. K. (2009). Deciphering the Liquidity and Credit Crunch 2007-2008. Journal of Economic Perspectives, 77–100. Carey, A. (2001). Balance sheet vo.l 9(3). Effective risk management in financial insitutions:The turnbull approach, 24-27. Carlo Panico (2008). "Liquidity Preference," The New Palgrave Dictionary of Economics, 2nd Edition Central Bank of Kenya David H. Pyle (1997) Bank Risk Management: Theory. Paper presented on the annual conference on Risk Management and Deregulation in Banking, Jerusalem, May 17-19, 1997. Gauti B. Eggertsson (2008). "Liquidity Trap,"The New Palgrave Dictionary of Economics, 2nd Edition. Holton, G Kariuki, J. (2011, August 17). Banking Industry booms Amidst Economic Downturn. The Standard. Retrieved form http:// www.standardmedia.co.ke. Kilonzo, S. (2009) The Global Financial Crisis : Its Impact on Kenya and Possible Strategies to Mitigate the Effects.Paper presented at the Annual African Symposium on Intergration of Finacial Markets In Africa,Johannesburg, South Africa, September 2010. Mizen, P. (2008). The Credit Crunch of 2007-2008: A Discussion of the Background, Market Reactions, and Policy Responses. Nottingham, St. Louis, United Kingdom Prapawadee Na Ranong (2004) Rochart, J. (1999). Critical success factors for effective risk management. Journal of commercial management, 51-83. Santomero, A. M. (1995). Commercial bank risk analysis:An analysis of the process. Journal of financial risk management;vol 4, 5-10. Sharma, M. (2008). Management of Financial Institutions With Emphasis on Bank and Risk Management. New Delhi: Prentice Hall.