Risk Assessment and Non-Performance of Loans in Commercial Banks in Kenya

Abstract

Kenya's major financial institutions, commercial banks, are significantly dependent on the country's financial intermediation system. However, the problem of defaulted loans, which has been brought on by poor credit management, has affected commercial banks in Kenya, reducing their capacity to lend and preventing the continual movement of money in and out, requiring a bank to keep engaging in a strong credit market. Therefore, the study aimed to examine the effects of risk assessment and non-performance of loans by commercial banks in Kenya. The capital asset pricing model and information asymmetry theories served as the research foundation. The study employs a descriptive and explanatory design approach, with a census used to determine the target population of 152 loan officers of 38 commercial banks. A data collection timetable served as a guide for the sourcing of both primary data, which was obtained through the use of structured questionnaires. The study used correlation and regression to show the relationship between the variables. Descriptive statistics, such as measures of central trends, tables, and charts, were used to depict the results. There were diagnostic tests for heteroskedasticity, multicollinearity and autocorrelation. The research adhered strictly to all ethical norms. Findings unveiled that risk assessment inversely and significantly affects non-performing loans. The study recommends that policymakers consider implementing a comprehensive regulatory framework that emphasises the importance of robust risk assessment practices. This framework could include mandatory guidelines for banks to adopt standardised risk assessment methodologies that incorporate both quantitative and qualitative analyses. Commercial banks should prioritise the integration of advanced data analytics and technology into their risk assessment processes.