Thesis

CREDIT RISK IN COMMERCIAL BANK LENDING PRACTICES IN KENYA

NYARUMBA GEDEON JARED OLILI

SUPERVISOR: THOMAS N. KIBUA

A research project submitted to Strathmore Business School of Strathmore University in partial fulfillment of the requirements for the degree of Master of Business Administration

May 2011

Dedication
This dissertation is dedicated to my wife Eunice for her never ending support. To her I will forever be deeply grateful.

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Declaration

I hereby declare that this dissertation is my own work and all authors referenced in the text are acknowledged. The dissertation has not been submitted elsewhere and I submit this dissertation as a partial fulfillment of my degree in Master of Business Administration at Strathmore
Business School.

Mr. Nyarumba Gedeon Jared Olili
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Registration number: MBA/0264/08

This research project has been submitted for examination with my approval as a university supervisor. Dr. Thomas N. Kibua
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Abstract
Excess credit risk has been known to be a major contributor to bank failures. Some of the symptoms of excess credit risk include high non-performing loans (NPL), high growth in asset base and over optimistic categorisation of customers during credit risk analysis of customer applications among other symptoms. Some of these symptoms have been evident in the Kenyan environment and has in the past resulted in bank failures in Kenya.

This research sought to find out lending structures by banks in Kenya and determinants of credit risk. The study is restricted between 1998 and 2008 and employs both qualitative and quantitative data. Regression analysis was conducted to confirm the relationship between credit risk and identified independent variables including type of loan, economic sectors lent to, interest rates and bank credit policies. The results show that

Bibliography: increased to over KES 50 billion (CBK Annual Banking Reports, 1998-2008). A bank by definition is an institution whose operations consist of granting loans and receiving deposits from the public (Xavier and Rochet 1997). From the definition by Xavier, banks have an obligation to maintain or increase their lending asset size or risk being irrelevant to the economy instability in banking sector. This is especially so if lending is not conducted in a structured and secure way leading to banking and economic failures (Gonzalez 1999). 1980- 1995). However, as the Kenyan economy stabilised, returns from the treasury bills and bonds reduced and the lending market liberalised, banks had to look for alternative means of financial sector and economic growth. Studies also show the importance of sound banking industry to the economy (Godlewski 2005, Koivu 2002, Barth, Caprio and Levine 2001)