MADDA WALABU UNIVERSITY

COLLEGE OF BUSINESS AND

ECONOMICS
DEPARTMENT OF ACCOUNTING AND
FINANCE

POST-GRADUATE PROGRAM ®
Article Review
On

The Effects of Credit Risk Management on

financial Performance of Commercial Banks
in Mombasa County
Submitted to; Dr. Dagnu Lulu (Ph.D.)

Prepared by; Habtamu Alebachew

Id №; PGR/18541/12

Januar
y 2020
 Bale,
robe Ethiopia

1. General Information of the Article

Article title Effects of Credit Risk Management on Financial

performance of Commercial Banks in Mombasa County

Authors 1. Peter Mutua Mutava*

School of Human Resource Development & Business
Programmes, Jomo Kenyatta University of Agriculture &
Technology
2. Abdullah Ibrahim Ali
School of Humanities & Social Sciences,Pwani University,
Year of publication November 17, 2016
Publisher Research Journal of Finance and Accounting
Journal Web Link: www.iiste.org
2. Reasons to review this article
 To get an understanding of the effect of credit risk on financial performance
 To find out a research gap, methodological gap and literature gap for the beyond
researches.
 To assess the major strength and weakness of the above article and to give general
comment
Statement of the problem
Lending has been, and still is, the mainstay of banking business, and this is truer to emerging
economies like Kenya where capital markets are not yet well developed (Mbole, 2004). To
most of the transition economies, however, and Kenya in particular, lending activities have
been controversial and a difficult matter. This is because business firms on one hand are
complaining about lack of credits and the excessively high standards set by banks, while
commercial banks on the other hand have suffered large losses on bad loans (Richard,
2006).It has been found out that in order to minimize loan losses and so as the credit risk, it
is essential for commercial banks having an effective credit risk management system in
place (Kimondo, Serakwane, & Davel, 2012). Given the asymmetric information that exists
between lenders and borrowers, banks must have a mechanism to ensure that they not only
evaluate default risk that is unknown to them ex ante in order to avoid adverse selection, but
also that can evolve ex post in order to avoid moral hazards (Richard, 2006). Are current
credit risk policies affecting banks performance? Is there a lax in implementation of credit
risk policies? This study thus attempted to answer these questions by evaluating the existing
credit risk management policies of the bank in order to identify their impact on
organizational performance and most importantly exploring ways of improving upon them.

Objective of the study

I. Establish the effect of liquidity risk management on financial performance.
II. Determine the effect of market risk management on the financial performance.
III. Determine the effect of default risk management on financial performance.

Type and Method of data collection

Questionnaires were used for data collection because as Baruch & Holtom,(2008) maintains
that questionnaires give respondents freedom to express their views or opinion and also to
make any suggestions. The researcher also involved the previous works from related
articles including published Financial Reports from Commercial Banks and data related
to those Banks available with the Central Bank of Kenya (CBK) annual reports on their
performance. To validate the research instruments the questionnaire were tested in two
pilot banks that were not included in the study, they were administered through drop and
pick later method. Data was analysed through statistical package for social science (SPSS
20.00) For Windows on a PC computer. Analysis was done through frequency counts,
percentages means and standard deviation and the information generated was presented
inform of charts, graphs and tables.

Findings
 The study shows that the banks update credit policies whenever there is a slight change
in the market, have a specific credit collection period and strictly adheres to maximum
levels of loans allowed to customers.
 The standard deviation for the item on the whether bigger loans are approved by higher
managers has a standard deviation of greater than one showing a wide spread in the
responses such that in some banks it is highly implemented while in others it is not
implemented at all.
 The banks have especially skilled personnel in market risk management and conduct
regular market analysis to detect any changes in the market but however do not
regularly consults with other players in the market, update business policies whenever
there is a slight change in the market and also do not consultants and other experts to
constantly conduct a market analysis. This makes market risk analysis an internal
affair of the banks without involving others.
 The analysis implies that the ability of the borrower to service the debt is considered
before giving a credit facility, the banks collaborates with other players such as CRB
before giving a loan, always take collateral security on loans given, borrowers must
provide the capital records as an indication of how much risk they themselves have
undertaken should the business fail, the banks thoroughly weigh the character of
borrower before approving a loan and that the borrower must be sufficiently trustworthy
 to repay the loan or generate a return on funds invested in the borrower's company.
However, it is seen that it not very clear whether the banks have a very effective default
identification and response system and whether debts by defaulting clients are recovered
from collateral very fast
Conclusion
The study shows the progressive importance of credit risk management and the
weaknesses the banks have in doing this. It is thus imperative for the recommendations to
be considered and given enough weight in order to ensure good performance.

Recommendations
The study recommends the following measures which will help improve credit risk
management in banks hence improve the financial performance.
I. The banks are advised to revise their credit risk management policies and be
broader by maintaining high liquidity, having stringent monetary policies,
Utilization of collateral, background check on applicants, regular market analysis,
collaboration with other players and using skilled personnel as opposed to the
traditional observation of default risk, liquidity risk and market risk. This is
because these measures are more action specific thus easily implemented and not
implied as in the case used before.
II. The banks are also advised to open up and share information with other players
on market risk thus involve consultants more in their market risk management.
This is from the fact that market risk analysis is an external activity and not
internal and from the fact that these consultants have vast expertise and
specialization in this field.
III. It is also imperative that the banks start thinking of more future oriented methods
of risk management other than the traditional detection and action method. The
banks should thus start using prediction and advance preventive measures
methods. This calls for effective strategic management and projections. This is
from the fact that the risks are coming so fast and wide thus catching up with
them is becoming more difficult. The banks should thus run ahead of the risks.
IV. The study calls for a revision to specifically determine whether the banks have
very effective default identification and response systems and whether debts by
defaulting clients are recovered from collateral very fast. This is because these
two areas are constantly neutral in a number of studies
V. Based on the recommendations it is also imperative to conduct a study on the best
methods to project credit risks in the banking industry so that the banks can use
these methods in projecting the future risks instead of detecting the risks once
they have occurred.
Strength
 Under the paper the researchers can clearly discuss general objective and specific
objectives that need to be achieve by the researchers.
 The researchers were used secondary data source (annual report from CBK and
their published annual report) companies. Secondary data has many advantages
such as; economical, Saves Time, Improves an understanding of the problem.
 Under the paper all three research questions are consistent with the general
research objective.
  In order to conduct the paper, the researcher uses questionnaire to gather relevant
information since it give freedom our samples to express their opinion.
 The researchers include better research gap from various researchers.
Weakness
 The study emphasized a limited number of variables that may affect market price
of shares and ignore other possible control variables.
 The authors of this study doesn’t clearly, concisely, and explicitly indicate the
null hypotheses regarding the outcomes of the research arising from theoretical
literature review.
 The researcher doesn’t include his empirical review under the review of
literature section. and also the significance of this article, limitations of the
research to create opportunities for other researchers in finding their gap.
 The research doesn’t show how those collected data can be analysed rather than
listing the way they are analysed.
Evaluation of the Article
 More over the objective of the study (generally and specifically) they are
attained. but, the study did not determine the effect of each risks on the
company’s financial performance. And I recommended to show their effect
whether on profitability, liquidity position and management efficiency.
 The article does not discus theories. For this reason, there would not be testing of
theories whether to accept or reject any theories that can be putted as the
weakness of the paper.

Expected contribution of the article

Since the main objective of the course financial institution and capital market is to build or
introduce everyone to the financial system of a nation that may consists the financial market,
instrument, institutions, service and its regulation. Mostly those depository financial institution
can give service of depositing and giving credit for their customers, while giving credit always
we have to think that our customers may be unable to pay back what can be expected from them
partially or totally. Then credit risk will happen and it will affect our financial performance. So
this article provides us those mechanisms to overcome or reduce the occurrence of credit risks
relating with, default of payment, market and liquidity.

The reviewed article is attached below to this file