Relationship between credit risk management practices and non-performing loans among deposit taking savings and credit societies in Nairobi county Kenya.

Abstract

One of the primary functions of savings and credit societies is providing credit to their members. The societies have been facing an increasing trend in non-performing loans in the recent past due to the poor credit risk management processes. The Savings and Credit Cooperative Societies (SACCOs) non-performing loans are 9.6% as a ratio, which is well above the minimum 5% recommended by SACCO Societies Regulatory Authority (SASRA). The study aimed to determine the relationship between non-performing loans in Nairobi's deposit-taking SACCOs and credit risk management procedures. The particular aims of the study are to determine the correlation between the credit criteria adopted by deposit-taking SACCOs and the incidence of non-performing loans; and to determine how credit monitoring influences non-performing credits. It also checked how the credit control measures adopted by these organizations affected the non-performing loans and the risk assessment measures that the organizations adopted on non-performing loans. Management in deposit-taking SACCOs learned more on how credit risk management affects loans that are non-performing. The study was anchored on credit risk theory. The study targeted Nairobi County because of the aspect that there was a high rise in the number of SACCOs taking deposits. The population of the study consisted of 40 deposit-taking SACCOs in Nairobi, while a correlation research design was adopted. The 256 credit officers from the SACCOs constituted a census study that was used for the research. Stemmed questionnaires were used with the secondary data being in terms of the financial statements of the 40 deposit-taking SACCOs. The pretesting of the questionnaires was done for dependability through the use of Cronbach's alpha reliability test formula on 10% of the population of the study, that is, 5 deposit-taking SACCOs in Kiambu County. The instruments were good, the reliability coefficient attained was 0.74, above the suggested 0.7 threshold. The validity was assessed by experts from the community development and cooperative schools. The data were analyzed inferentially and descriptively using regression analysis in studying the relationship between different variables. Presentation of data was done by use of figures, tables, and charts. Conclusions: Such findings were bound to be useful to other government agencies and government regulators in the formulation of deposit-taking SACCO policies on credit risk management. Most of Kenyan SACCOs, which accepted deposits, applied credit assessment standards while evaluating loan applicants. The problem of non-performing loans was equally curtailed by the organizations through credit monitoring with a mean of 5.0. The findings from the study showed that the organizations were highly engaged in the identification and assessment of credit risk, having a mean of 3.45. To this end, the study identified the dependent variable as the nonperforming loans, and independent variables identified in this study as aspects of credit appraisal, monitoring credit, identification of credit risk, and assessment of credit risk, which related positively to the dependent variable. On this, the study thus concludes that credit risk management enhances significant improvement in effectively managing non-performing loans. The study recommended ways on how deposit-taking SACCOs can deal with the problem of non-performing loans through enhancement of level of credit appraisal, credit monitoring, risk identification, and risk assessment techniques.