CREDIT RISK MANAGEMENT PRACTICES, OWNERSHIP STRUCTURE AND FINANCIAL PERFORMANCE OF TIER TWO AND THREE COMMERCIAL BANKS IN KENYA

Abstract

Commercial banks are key drivers of economic development worldwide. The sustainability of these banks, just like any other organization, depends on their financial performance. However, commercial banks' financial performance is inclined to the risk management practices they have adopted since any credit advancement to borrowers is always attached to some credit risk. There was need to assess the relationship between credit risk management practices, ownership structure and financial performance of tier two and three commercial banks in Kenya. Therefore, this study sought to fill the contextual and conceptual gaps in the literature by assessing the credit risk management practices, ownership structure and financial performance of tier II and III commercial banks in Kenya. Specifically, the study evaluated the relationship between credit risk assessment, liquidity risk monitoring, credit risk mitigation practices, staff training, and the financial performance of tier-two and three commercial banks in Kenya. In addition, the study assessed the moderating effect of ownership structure on the relationship between credit risk management practices and the financial performance of tier-two and three commercial banks. A Cross-sectional research design was adopted with a target population of 312 employees drawn from the top management level of 30 tier-two and tier three commercial banks in Kenya. A sample of 175 participants was determined using the Yamane Taro formula and selected through a simple random sampling technique. Primary data was obtained using a structured questionnaire. The data collection instruments were subjected to construct, content, and face validity tests where an overall Cronbach’s alpha coefficient of 0.852 was obtained and accepted. The study analyzed data quantitatively using descriptive statistics such as mean and standard deviation and inferential statistics involving regression and correlation analysis. The study findings were presented using tables. The findings revealed that credit risk mitigation (r = 0.490, p < 0.05), staff training (r = 0.408, p < 0.05), liquidity risk monitoring (r = 0.231, p < 0.05), and ownership structure (r = 0.426, p < 0.05) had a positive and significant relationship with financial performance, while credit risk assessment (r = 0.057, p > 0.05) had a positive but insignificant correlation with financial performance. Overall, the study found that credit risk management practices understudy explained 58.3% change in the financial performance of the tier two and three commercial banks. Further, the study established that ownership structure had a significant moderating effect on the relationship tier two and tier three commercial banks as between credit management practices and financial performance of tier two and tier three commercial banks as evidenced by the increase in the coefficient of determination from 58.3% to 61.1%. The study concluded that credit risk assessment, credit risk mitigation and staff training have significant relationship with financial performance. However, liquidity risk monitoring has an insignificant relationship with financial performance of the banks. The study recommends that commercial banks strengthen their credit risk assessment, liquidity risk monitoring, credit risk mitigation, and staff training practices while leveraging ownership structure to enhance financial performance. The study finding will be significant to scholars, regulators, policy makers the management of tier two and three commercial banks