An Analysis of Credit Risk Assessment through Credit Scoring Models among Commercial Banks in Kenya

Kioko, Peter Mwanzia (2011) An Analysis of Credit Risk Assessment through Credit Scoring Models among Commercial Banks in Kenya. Masters thesis, Kenyatta University.

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Abstract

Risk management is a cornerstone of prudent banking practice. All banks in the present day volatile environment are facing a large number of risks such as credit risk, liquidity risk, foreign exchange risk, market risk, interest rate risk among others. These risks may threaten a bank's survival and success. From literature reviewed, effective credit risk management is lacking in most of the banking institutions. Credit risk assessment has been identified as one of the key skills required for successful banking operation. From literature reviewed, banks have been urged to engage in effective credit risk management techniques able to determine risk of default in their loan advances. One of these ways is through the use of credit scoring models in credit risk assessment. The study sought to analyze credit risk assessment through credit scoring models within commercial banks in Kenya. It further sought to identify if there is any relationship between NPLs and credit scoring practices. Credit policy is also vital for effective risk management and was therefore analyzed. The study will be of great help to commercial banks, the public and academicians by providing further insights on credit scoring and credit risk assessment in banks. The study is a census therefore the population of the study consisted of all commercial banks operating within Nairobi. Data was collected using questionnaires which were administered to Personal banking officers of the various commercial banks through the headquarter offices. Descriptive data analysis techniques have been used in form of percentages and tables to show the various findings. Correlation analysis is used to determine the relationship between NPLs and credit scoring. These methods were chosen because the data collected is in frequencies as the variables are measured in categorical scale. The study established that, 60.6% of the banks surveyed use credit scoring models during credit risk assessment of the various loan applicants while 39.4% do not use any credit scoring models on credit risk assessment. The study established that other methods used to assess credit risk are credit committee and analysis of financial statements like balance sheet and the profit and loss accounts in case of business loans. For personal loans, field observations on personal property and employment details are sometimes used. On the types of credit scoring models used, the study established that, risk adjusted return on capital model was the one mostly used by banks at 60.6%. The study also established that, some banks use internally developed models for credit risk assessment. However, were not willing to disclose details about the models as part of their business strategies. The study established that, there is a significant relationship between asset quality and use of credit scoring models. The correlation is at - 0.773, implying a strong negative relationship between use of credit scoring models and size of asset quality ratio. Further analysis, on the same variables indicated that, banks which have low asset quality ratio indicate low levels of NPLs.

Item Type: Thesis (Masters)
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Divisions: Africana
Depositing User: Lee Colombino
Date Deposited: 05 Jun 2017 14:09
Last Modified: 05 Jun 2017 14:09
URI: http://thesisbank.jhia.ac.ke/id/eprint/1678

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