Credit risk management is considered one of
the more difficult banking industry activities, especially
during periods of low growth. The research aims to
examine the effect of credit risk management practice on
commercial banks' financial performance in Kenya.
These practices include capital buffer and credit
standards. The research was built on Credit buffer
hypothesis and shift ability theory. In this study, the
causal research was employed. The mean and standard
deviation were used to depict each variable in the study,
and quantitative data was examined using descriptive
statistics. Correlation statistics were used in this study to
show the connection between the variables. The data
analysis for the study was led by the multiple regression
model. Regarding Capital buffer and credit standards
the study found that they had significant effects to
financial performance of commercial banks in Kenya.
The researcher was able to conclude that proper capital
buffer enhances financial performance of commercial
banks in Kenya since it ensures that commercial banks
have enough cash and resources at their disposal to
ensure healthy business operations. It was also concluded
that poor credit standards in the banking sector
increases credit risk exposure to the commercial banks.
According to the study, commercial banks should make
sure that there is enough cash on hand to cover potential
future possibilities and unforeseen circumstances. A
properly managed inventory system is a very effective
lever for increasing working capital management which
becomes a strong capital buffer for commercial banks in
Kenya. The issuance of loans and other financial assets
that are known to often encourage defaults should be
regulated by commercial banks in order to increase
credit standards. In order to analyze their financial data
on loan applicants, commercial banks should construct
their internal credit risk assessment models to enhance
credit standards.
Keywords :
Capital Buffer, Credit Risk, Credit Standards.