RELATIONSHIP BETWEEN CREDIT APPRAISAL AND LOAN PERFORMANCE BY COMMERCIAL BANKS IN UASIN GISHU COUNTY, KENYA

Salome Watiri Ndero, Joshua Matanda Wepukhulu, Jared Bitange Bogonko

Abstract


Commercial banks play a very important role in economic growth of nations as they channel financial resources from savers (surplus units) to lenders (deficit units). The aim of this paper is to explain the relationship that existed between loan policy of credit appraisal and loan performance by commercial banks located in Uasin Gishu County, Kenya. Theoretically, this paper is anchored on moral hazard theory developed by Akerlof (1970). The population of study comprised of all credit officers working in commercial banks in Uasin Gishu County. According to figures from banks, there are 189 credit officers in 39 commercial banks that are located in the county and thus formed the target population. A sample size of 128 was chosen for this study. Research result showed that 78.1% of commercial banks conducted credit appraisal through use of 5Cs credit appraisal technique, credit-scoring model and through credit reference bureaus. The research also found out that there existed significant positive relationship (r=0.206 and p=0.035) between credit appraisal and loan performance by commercial banks in Uasin Gishu County, Kenya. The paper recommends that there is need for commercial banks to consider using mobile telephony company’s financial statements for an individual borrower to check on the cash flow before awarding a particular loan.

 

JEL: G21, E51, E51

 

Article visualizations:

Hit counter

DOI

Keywords


credit appraisal, loan, performance, commercial banks

Full Text:

PDF

References


Byusa, V. & Nkusi D. (2012). The effects of credit policy on bank performance: Evidence from selected Rwandan Commercial banks. Rwanda Journal, 26, 116-119.

Central Bank of Kenya (2017). 2016 Annual Bank Supervision Report. Nairobi: Government press.

Chepkoech, D. (2014). The Effect of Credit Assessment Process on Repayment of Bank Loans in Commercial Banks in Kenya. MBA Project, University of Nairobi.

Cincinelli, P., & Piatti, D. (2017). Non-Performing Loans, Moral Hazard & Supervisory Authority: The Italian Banking System. Journal of Financial Management Markets and Institutions, 5(1), 5-34.

Faizan, S. A. & Ali, Q. M. (2015). Credit Risk Management and Loan Performance: Empirical Investigation of Micro Finance Banks of Pakistan. International Journal of Economics and Financial Issues, 5(2), 574-579.

Gehrig, T. & Stenbacka, R. (2013). Information Sharing and Lending Market Competition with Switching Costs and Poaching. European Economic Review, 51, 77 – 99.

Hoffman, P. S. (2011). Determinants of the Profitability of the US Banking Industry. International Journal of Business and Social Sciences, 2(22), 255 – 269.

Jerop, L. K. (2015). Effects of Credit Assessment on Loan Repayment in Microfinance Institutions in Nakuru Central Business District (CBD). MBA Project, Kabarak University.

Kagoyire, A. & Shukla, J. (2016). Effect of Credit Management on Performance of Commercial Banks in Rwanda: A Case Study of Equity Bank Rwanda Ltd. International Journal of Business and Management Review, 4(4), 1-12.

Karumba, M., & Wafula, M. (2012). Collateral Lending: Are there Alternatives for the Kenyan Banking Industry? Working Paper Series: Centre for Research on Financial Markets and Policy.

Kisaka, G. (2016). Effect of Credit Rating Practices on Loan Book Performance of Commercial Banks in Kenya. MBA Project, University of Nairobi.

Kothari, C. R. (2014). Research Methodology: Methods and Techniques. New Delhi: New Age international Publishers.

Misati R. & Kamau, A. (2015). Local and International Dimensions to Credit Provision by Commercial Banks in Kenya. Working Paper Series, WPS/04/15. Centre for Research on Financial Markets and Policy. Nairobi: Kenya Bankers Association.

Moti, H. O., Simiyu, J. M., Galo, N. M. & Nelima, M. S. (2012). Effectiveness of Credit Management System on Loan Performance: Empirical Evidence from Micro Finance Sector in Kenya. International Journal of Business, Humanities and Technology, 2 (6), 99-108.

Mumbi, W. M. & Omagwa, J. (2017). Credit Risk Management and Financial Performance Of Selected Commercial Banks In Kenya. IOSR Journal of Business and Management, 19(11), 92 – 98.

Murray, J. (2011). Default on a Loan, United States Business Law and Taxes guide.

Njeri, A. M. (2016). Effect of Lending Practices on Financial Performance of Commercial Banks in Kenya: A Survey of Selected Banks within Nairobi. MBA Project, United States International University-Africa.

Njeru, M. Mohammed, S. & Wachira A. (2016). Effectiveness of Credit Appraisal on Loan Performance of Commercial Banks in Kenya. International Journal of Recent Engineering Research and Development, 1(6), 9-14.

Ochieng, P. (2012) “Determining Loan Recovery among Women Owned Enterprises in Kenya. A case of Eldoret Municipal”. Lambert Academic Publishing.

Ogoro, J. O., & Onditi, L. A. (2016). Influence of Loan Lending Policies on Financial Performance of Commercial Banks in Kenya: A Case of Selected Banks in Kisii Town, Kenya. International Journal of Economics, Commerce and Management, 4(11), 239-253.

Okoye, V., & Eze, O. R. (2013). Effect of Bank Lending Rate on the Performance of Nigerian Deposit Money Banks. International Journal of Business and Management Review, 1(1), 34-43.

Owino, M. O. (2013). The Effect of the Lending Policies on the Levels of Non-Performing Loans (NPLs) of Commercial Banks in Kenya. MSC Project, University of Nairobi.

Pagano, M., & Japelli, T. (2013). Information Sharing in Credit Markets. Journal of Finance, 3(12), 1693 – 1718.

Sheilah, A. L. (2011) Lending Methodologies and Loan losses and Default in a Microfinance Deposit Taking Institutions in Uganda; a research report presented to the Makerere University Uganda.

Thisika, L. M. & Muturi, W. (2017). Effects Of Credit Risk Management On Loan Performance In Kenyan Commercial Banks. International Journal of Economics, Commerce and Management, 5(9), 486-496.

Wangari, J. K. (2017). The Effect of Credit Information Sharing on Profitability of Commercial Banks in Kenya. MBA Project, University of Nairobi.


Refbacks

  • There are currently no refbacks.


Copyright (c) 2019 Salome Watiri Ndero, Joshua Matanda Wepukhulu, Jared Bitange Bogonko

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

The research works published in this journal are free to be accessed. They can be shared (copied and redistributed in any medium or format) and\or adapted (remixed, transformed, and built upon the material for any purpose, commercially and\or not commercially) under the following terms: attribution (appropriate credit must be given indicating original authors, research work name and publication name mentioning if changes were made) and without adding additional restrictions (without restricting others from doing anything the actual license permits). Authors retain the full copyright of their published research works and cannot revoke these freedoms as long as the license terms are followed.

Copyright © 2015 - 2018. European Journal of Economic and Financial Research (ISSN 2501-9430) is a registered trademark of Open Access Publishing GroupAll rights reserved.

This journal is a serial publication uniquely identified by an International Standard Serial Number (ISSN) serial number certificate issued by Romanian National Library. All the research works are uniquely identified by a CrossRef DOI digital object identifier supplied by indexing and repository platforms. All the research works published on this journal are meeting the Open Access Publishing requirements and standards formulated by Budapest Open Access Initiative (2002), the Bethesda Statement on Open Access Publishing (2003) and  Berlin Declaration on Open Access to Knowledge in the Sciences and Humanities (2003) and can be freely accessed, shared, modified, distributed and used in educational, commercial and non-commercial purposes under a Creative Commons Attribution 4.0 International License. Copyrights of the published research works are retained by authors.