Credit Risk Management and Profitability of Commercial Banks in Kenya

14066 Words Apr 23rd, 2012 57 Pages
CREDIT RISK MANAGEMENT AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA

BY

ANGELA M. KITHINJI

SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI, NAIROBI – KENYA. akithinji@yahoo.com or akithinji@uonbi.ac.ke

OCTOBER, 2010

TABLE OF CONTENTS
1.0 INTRODUCTION....................................................................................................................1 1.1 Background ................................................................................................................................1 1.2 Statement of the Problem .........................................................................................................11 1.3 Objectives of the Study
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This has led to reduced interest income for the commercial banks and other financial institutions and by extension reduction in profits (De Young and Roland, 2001; Dziobek, 1998; Uyemura and Van Deventer, 1992).

Credit risk is the possibility that the actual return on an investment or loan extended will deviate from that, which was expected (Conford, 2000). Coyle (2000) defines credit risk as losses from the refusal or inability of credit customers to pay what is owed in full and on time. The main sources of credit risk include, limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, directed lending, massive licensing of banks, poor loan underwriting, reckless lending, poor credit assessment., no non-executive directors, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank. To minimize these risks, it is necessary for the