Escolar Documentos
Profissional Documentos
Cultura Documentos
2(2): 72-80
Available online at: http//:www.journals.mku.ac.ke
MKU Journals, April 2012
Abstract
The objective of study was to assess various parameters pertinent to credit risk management as it affects
banks financial performance. Such parameters covered in the study were; default rate, bad debts costs
and cost per loan asset. Financial reports of 10 banks was used to analyze profit ability ratio for seven
years (2000-2006) comparing the profitability ratio to default rate, cost of debt collection an cost per
loan asset which was presented in descriptive, regression and correlation was used to analyze the data.
The study revealed that all these parameters have an inverse impact on banks financial performance,
however the default rate is the most predictor of bank financial performance vis--vis the other indicators of credit risk management. The recommendation is to advice banks to design and formulate strategies that will not only minimize the exposure of the banks to credit risk but will enhance profitability
and competitiveness of the banks.
Keywords: Return on assets, Cost per loans, Default rate, Bad debts cost
JEL Classification: G0
INTRODUCTION
Financial performance is companys ability to generate new
resources, from day- to- day operations, over a given period of
time; performance is gauged by net income and cash from
operations. A portfolio is a collection of investments held by an
institution or a private individual (Apps, 1996).Risk
management is the human activity which integrates recognition
of risk, risk assessment, developing strategies to manage it, and
mitigation of risk using managerial resources.( Apps, 1996).
Whereas Credit risk is the risk of loss due to a debtors nonpayment of a loan or other line of credit(either the principal or
interest (coupon) or both) (Campel, et. al., 1993) default rate is
the possibility that a borrower will default, by failing to repay
principal and interest in a timely manner (Campel, et. al.,
1993). A bank is a commercial or state institution that provides
financial services, including issuing money in various forms,
receiving deposits of money, lending money and processing
transactions and the creating of credit (Campel, et. al., 1993).
72
International Journal of Business and Public Management (ISSN: 2223-6244) Vol. 2(2): 72-80
LITERATURE REVIEW
Donald et al. (1996) defines Credit risk simply as the potential
that a bank borrower or counterpart will fail to meet its
obligations in accordance with agrees terms. The goal of credit
risk management is to maximize a banks risk- adjusted rate of
return by maintaining credit risk exposure within acceptable
parameters. Banks need to manage the credit risk inherent in
the entire portfolio as well as the risk in individual credits or
transactions. Banks should also consider the relationships
between credit risk and other risks. The effective management
of credit risk is a critical component of a comprehensive
approach to risk management and essential to the long-term
success of any banking organization.
There are three stages in the credit process: the first is the
simple risk control of the business avoiding being over
concentrated in any one sector, estimating the probability of
defaulting and assessing recovery. The second phase is the link
between economic capital and return. Clearly banks would like
to set minimum rates of return they expect to earn on their
portfolios after provisioning. The link between economic profit
and risk is the next stage in advancing the practice of credit risk
management. Finally the third stage is when risk management
is used as a strategic management tool to align RAROC (Risk
Adjustment Returns on Capital) with ROE (Return on Equity).
Each bank must understand what drives the share price of the
bank and thus must understand the link between economic
capital, intellectual property owners IPOs (Intellectual Property
Owners) and ROE. Once this paradigm is understood, banks
will be in a better competitive position to compete more
aggressively and likely service in the next decade (Lawrence,
2006). Success in credit risk management has a highly visible
impact on the results of the firm. For the management of credit
risk a profit and return focused activity within our broad base
of businesses.
Kenyas Central Banks concern has not only been over the low
level of risk management in the banks, but also in the fact that
those who do only concentrate on credit risk. This means the
eyes of the entire banking sector has handily been on
operational market liquidity, and reputation among other risks.
But even as banks are being pushed to comply with the
provisions of Basel I, some analyst think that too many
technological financial and institutional changes have occurred
making it necessary to raise the bar. The CBK itself took more
than 15 years to operationalise the Basel I accord having
established risk mitigation guidelines only in 2005 following a
banking sector survey it conducted in 2004. Concerns over the
relevance of Basel I has seen the CBK contemplate moving a
rung higher to implement the more advanced Basel 2
framework that was agreed in June 1999.
Benedikt, Marsh, Vall and Wagner (2006), examined credit risk
management policies for ten banks in the united states using a
multivariate model and found that banks that adopt advanced
credit risk management techniques (proxies by the issuance of
at least one collateralized loan obligation) experience a
permanent increase in their target loan level of around 50%.
Partial adjustment to this target, however, means that the
impact on actual loan levels is spread over several years. The
findings confirm the general efficiency- enhancing implications
73
International Journal of Business and Public Management (ISSN: 2223-6244) Vol. 2(2): 72-80
of new risk management techniques in a world with frictions
suggested in the theoretical literature.
METHODOLOGY
The research design used for the study was a descriptive
research design that basically involve obtaining information
concerning the current status of the phenomena to describe,
What exists with respect to variables or conditions in a
situation (Gardner et al 2004). This design was appropriate for
this study, as it gave the relevant information as it was. The
population of interest was the 48 banks that operate in Kenya.
For the purpose of this study only a bank is an institution
registered with the Kenya Bankers Association (KBA, 2006).
The study employed simple random sampling inorder to pick
10 banks. Simple Random sampling is sampling procedure that
assurers that each element in the population has an equal
chance of being selected. A sample of 10 banks was used in the
study. This constitutes 20.8 percent of the total population.
Secondary data was used for the study. The data was analyzed
by calculating the profit ability ratio for each year for the
period of study, trend analysis was done by comparing the
profitability ratio to default rate, costs of debt collection and
cost per loan asset. Further, the ratio were analysed using
regression statistical tool run using SPSS programmes version
eleven.
Definition of Variables
The return on Assets (ROA) is a ratio that measures company
earnings before interest & taxes (EBIT) against its total net
assets. The ratio is considered an indicator of how efficient a
company is using its assets to generate before contractual
obligation must be paid. It is calculated as: ROA= EBIT/ Total
Assets. Return on assets gives an indication of the capital
intensity of the banking industry, which will depend on the
industry; banks that require large initial investment will
generally have lower return on assets (Apps, 1996).
Cost per loan asset (CLA) is the average cost per loan advanced
to customer in monetary term. Purpose of this is to indicate
74
International Journal of Business and Public Management (ISSN: 2223-6244) Vol. 2(2): 72-80
FINDINGS
In this section the data collected for seven year (200-2006)
from ten banks have been analyzed using SPSS programme,
however much details are shown in appendix I. the selected
banks are: Kenya commercial Bank Ltd (KCB), Barclays Bank
Of Kenya (BBK), Consolidated Bank, CFC Bank, Equity Bank,
Standard Chartered Bank (Stan Chart), Cooperative Bank (Coop Bank), National Bank Of Kenya (NBK), Diamond trust
Bank (DTB) and NIC Bank
REFERENCES
Where:
Y= Return On Assets (RoA) ( The Dependent Variable)
= Constant Term
= Beta Coefficient
X1= Default Rate (DR)
X2= Bad Debts Cost (BDC)
X3= Cost per Loan Asset (CLA)
= Error term
Equation Modeling
Y= 3.425- 0.540 X1- 0.093 X2- 0.037X3 +
Observation of the t-test for the default rate (-4.729) indicate
that the null hypothesis is rejected therefore there is a
significant negative relationship between default rate and return
on assets (performance) of the banks.
Default rate has the most significant and negative relationship
with bank performance, costs per loan and bad debts cost has t
values of -0.359 and -0.0853. However they are not significant
as far as bank performance is concerned, we failed to reject the
null hypothesis. Its noted both variables (cost per loan and bad
debts cost are negatively not significant)
75
International Journal of Business and Public Management (ISSN: 2223-6244) Vol. 2(2): 72-80
APPENDICES
Table 1 Descriptive Statistics
Return On Assets
Default Rate
Bad Debts Cost
Cost per Loan Asset
mean
1.416
16.412
19.575
22.490
Std. Deviation
2.343
13.326
14.358
12.978
Table 2
Person
Correlation
Correlations
Return On
Assets
Return On Assets
Default rate
Bad debts
Cost per Loan Asset
Return On Assets
Default Rate
Bad debt cost
Cost per loan Asset
Return On Assets
Default Rate
Bad Debt Cost
Cost per loan Asset
Sig.(1- tailed)
.569 (a)
.356
Adjusted
Square
.326
1,000
-.590
-.318
-.192
.000
.004
.056
70
70
70
70
R
Std. Error of
the estimate
1.9230
R
square
change
.356
N
70
70
70
70
Default
Rate
-.590
1.000
.415
.285
.000
.000
.008
70
70
70
70
70
Bad
Debt
Cost
-.318
.415
1.000
.005
.004
.000
.
.482
70
70
70
70
Cost
per
Loan Asset
-.192
.285
.005
1.000
.056
.008
.482
.
70
70
70
70
F Change
Df1
Df2
Sig.
F
Change
12.139
66
.000
Predictors: (Constant), cost per loan Asset, bad debt cost, default rate
According to the F statistics below the variables used in the model fits well in the model. The model shows that the three risk
management indicators combine have a significant relationship (R= 0.596, P=0.00) with performance. It is also shows that they can
predict up to 32.6% of the variance in performance.
Table 4 ANOVA
Sum of Squares
df
Mean Square
F
Sig.
Regression
134.670
3
44.890
12.139
.000(a)
Residual
244.071
66
3.698
Total
378.741
69
Predictors:(Constant), cost per loan Asset, Bad Debt Cost, Default Rate Dependent Variables: Return On Assets.
The table above shows the ANOVA test of the fitness of the model. With an F statistics of 12.139 and p= 0.00, shows that the data
fits the model well and this indicates that the variables specified in the model are actual predictors of performance.
Table 5
Model
(Costant )
Coefficients (a)
Unstandardized Coefficients
B
3.425
Std. Error
.561
Standardized
Coefficients
Beta
76
Sig.
6.110
.000
International Journal of Business and Public Management (ISSN: 2223-6244) Vol. 2(2): 72-80
Default Rate
-.095
Bad Debt Cost
-.015
Cost per loan -.007
Asset
Dependent Variables: Return On Assets
BANK
KCB
.020
.018
.019
-.540
-.093
-.037
RATIOS
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
2006
8.53
8.0
0.2
2.7
2005
9.9
8.1
0.2
1.8
2004
19.7
14.1
0.2
1.0
2003
24.05
21.37
0.25
1.01
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
2006
26.99
11.0
0.3
0.5
TOTAL
ASSET
SPECFC
PROV
EBIT
642.00
565.00
878.00
1,331.00
4,684.00
4,530.00
4,360.00
87,326.00
74,338.00
66,349.00
57,750.00
57,193.00
62,289.00
65,889.00
1,024.00
1,380.00
958.00
12,463.00
12,352.00
2,355.00
1,343.00
640.00
581.00
(2,038.00)
(864.00)
(464.00)
2001
25.22
45.01
0.33
(1.39)
EBIT
3,437.00
2,916.00
2,753.00
2,442.00
2,125.00
1,891.00
1,702.00
7.00
6.00
444.00
473.00
16.00
12.00
(71.00)
12.00
4.71
2.20
(7.00)
2005
34.3
2.6
0.4
0.4
2004
48.9
10.2
0.4
-2.6
2003
40.11
7.19
0.40
0.49
TOTAL
COST
BDD
COST
TOTAL
ASSET
SPECFC
PROV
EBIT
2,269.00
133.00
20,024.00
67.00
753.00
11,457.00
6,707.00
4,502.00
2,417.00
1,768.00
1,358.00
104.00
157.00
345.00
136.00
92.50
49.20
35.25
17.20
EQUITY
BANK
2006
10,929.00
Non
performing
Ins
568.00
2005
2004
2003
2002
2001
2000
5,524.00
2,874.00
1,362.00
843.00
650.00
235.00
519.00
246.00
122.00
77.00
63.80
24.30
1,302.00
818.00
612.00
430.00
374.00
127.00
124.00
171.00
147.00
124.00
119.70
43.18
2005
8.6
2004
7.3
2003
8.22
2006
4.94
2000
22.46
43.16
0.30
(0.70)
SPECFC
PROV
YEAR
Default Rate
3,966.00
TOTAL
ASSET
BANK
RATIOS
.000
.397
.721
BDD
COST
2002
30.68
46.82
0.36
(3.56)
BANK
RATIOS
-4.729
-.0853
-.359
77
2002
35.49
8.19
0.44
0.22
2002
8.37
2001
36.20
8.01
0.45
0.12
2001
8.94
2000
36.69
12.99
0.49
(0.41)
2000
9.37
International Journal of Business and Public Management (ISSN: 2223-6244) Vol. 2(2): 72-80
5.9
0.2
3.8
9.5
0.2
3.0
20.9
0.3
2.0
24.02
0.45
2.05
TOTAL
COST
BDD
COST
TOTAL
ASSET
SPECFC
PROV
EBIT
3,708.00
408.00
81,014.00
639.00
2,634.00
72,842.00
67,113.00
64,111.00
58,271.00
52,414.00
49,516.00
627.00
295.00
264.00
2,452.00
1,833.00
2,789.00
2,582.00
2,362.00
2,175.00
2002
13.45
29.98
0.17
4.43
2001
13.62
35.02
0.17
4.51
2000
13.65
48.15
0,17
4.39
SPECFC
PROV
BANK
YEAR
STANDARD
CHRTRD
2006
37,762.00
Non
performing
Ins
2,646.00
2005
2004
2003
2002
2001
2000
34,042.00
26,557.00
18,924.00
17,972.00
17,680.00
17,036.00
2,371.00
2,192.00
2,092.00
2,794.00
2,787.00
2,694.00
3,4223.00
3,689.00
3,395.00
3,022.00
2,973.00
2,833.00
394.00
547.00
810.00
906.00
1,041.00
1,364.00
2005
6.5
11.5
0.1
3.4
2004
7.6
14.8
0.1
2.7
2003
9.95
23.86
0.18
4.35
RATIOS
2006
6.55
11.0
0.1
3.3
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
BANK
YEAR
COOP BANK
2006
2005
2004
2003
2002
2001
2000
28,037.00
29,089.00
27,009.00
20,165.00
16,123.00
13,250.00
11,632.00
RATIOS
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
2006
25.28
25.3
0.2
1.5
BANK
YEAR
NBK
2006
2005
2004
2003
2002
2001
2000
26,491.00
24,213.00
22,302.00
20,320.00
18,564.00
18,350.00
18,385.00
RATIOS
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
2006
39.70
52.3
0.2
1.7
Non
performing
Ins
9,486.00
13,250.00
12,935.00
11,370.00
10,354.00
8,250.00
7,223.00
2005
31.3
23.1
0.2
0.8
Non
performing
Ins
17,438.00
17,146.00
5,124.00
5,883.00
8,100.00
8,230.00
7,527.00
2005
41.5
45.5
0.2
1.8
28.84
0.51
2.04
TOTAL
COST
BDD
COST
TOTAL
ASSET
5,624.00
4,553.00
3,822.00
3,500.00
2,733.00
2,120.00
1,977.00
1,424.00
1,054.00
886.00
720.00
670.00
630.00
607.00
57,683.00
51,835.00
48,461.00
36,720.00
29,855.00
27,200.00
25,572.00
2004
32.1
23.2
0.1
0.4
2003
36.06
20.57
0.17
0.28
32.01
0.58
1.99
15,075.00
12,969.00
1,638.00
2002
39.11
24.52
0.17
0.05
2001
38.37
29.72
0.16
(2.68)
34.00
0.54
1.27
EBIT
852.00
440.00
207.00
102.00
16.00
(730.00)
(1,438.00)
2000
38.31
30.70
0.17
(5.62)
TOTAL
COST
BDD
COST
TOTAL
ASSET
SPECFC
PROV
EBIT
4,439.00
3,655.00
3,533.00
3,434.00
3,380.00
3,355.00
3,377.00
2,321.00
1,663.00
1,677.00
1,563.00
1,537.00
1,502.00
1,569.00
36,123.00
32,584.00
30,594.00
25,919.00
24,520.00
24,255.00
23,967.00
1,425.00
3,434.00
2,160.00
2,275.00
624.00
599.00
382.00
404.00
21.00
(720.00)
(2,206.00)
2002
30.38
45.47
0.18
0.09
2001
30.96
44.77
0.18
(2.97)
2004
13.0
47.5
0.2
1.2
78
2003
22.45
45.52
0.17
1.56
6,380.00
2000
29.05
46.46
0.18
(9.20)
International Journal of Business and Public Management (ISSN: 2223-6244) Vol. 2(2): 72-80
BANK
YEAR
BBK
2006
2005
2004
2003
2002
2001
2000
73,907.00
65,562.00
63,222.00
56,470.00
50,165.00
45,560.00
42,240.00
RATIOS
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
2006
7.76
10.2
0.1
3.8
2005
15.3
15.0
0.1
3.6
BANK
YEAR
CFC
2006
2005
2004
2003
2002
2001
2000
15,053.00
11,662.00
10,969.00
7,831.00
7,266.00
5,346.00
5,261.00
RATIOS
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
2006
8.33
12.1
0.1
2.3
BANK
YEAR
Total Lns
& Adv
DTBK
2006
2005
2004
2003
2002
2001
2000
13,832.00
10,318.00
7,137.00
4,882.00
3,750.00
2,230.00
1,486.00
RATIOS
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
2006
0.22
3.5
0.12
2.2
Non
performing
Ins
6,214.00
11,877.00
5,237.00
6,192.00
6,123.00
4,918.00
2,981.00
2005
6.0
9.7
0.1
1.7
2005
0.1
6.7
0.13
1.8
BDD
COST
TOTAL
ASSET
8,648.00
8,844.00
8,384.00
9,152.00
8,944.00
7,027.00
8,289.00
881.00
1,330.00
1,913.00
1,613.00
1,513.00
1,037.00
1,641.00
118,021.00
104,522.00
106,195.00
96,655.00
85,914.00
73,647.00
70,377.00
3,844.00
2,652.00
1,016.00
1,032.00
692.00
2002
10.88
16.92
0.18
2.08
2001
9.73
14.76
0.15
4.01
2004
7.0
22.8
0.1
3.5
Non
performing
Ins
1,367.00
749.00
548.00
532.00
465.00
250.00
180.00
Non
perform
ing Ins
30.00
6.00
18.00
45.00
123.00
223.00
391.00
TOTAL
COST
2003
9.88
17.62
0.16
3.48
TOTAL
COST
BDD
COST
TOTAL
ASSET
1,419.00
942.00
2,677.00
1,894.00
1,725.00
1,532.00
1,493.00
172.00
91.00
75.00
115.00
113.00
98.00
64.00
40,369.00
33,095.00
29,816.00
16,430.00
14,235.00
12,354.00
7,972.00
2004
4.7
2.8
0.24
1.5
2003
6.36
6.07
0.2
1.82
TOTAL
COST
BDD
COST
TOTAL
ASSET
1,679.00
1,373.00
578.00
447.00
896.00
900.00
883.00
59.00
92.00
36.00
45.00
31.00
35.00
28.00
21,737.00
16,384.00
11,167.00
8,659.00
6,274.00
5,516.00
5,081.00
2004
0.3
6.2
0.1
1.5
2003
0.91
10.07
0.1
1.61
79
2002
6.01
6.55
0.24
1.72
SPECF
C
PROV
72.00
50.00
92.00
2002
3.18
3.46
0.2
1.20
SPECFC
PROV
SPECFC
PROV
260.00
235.00
150.00
2001
4.47
6.40
0.29
1.63
EBIT
4,492.00
3,729.00
3,694.00
3,367.00
1,783.00
2,955.00
2,068.00
2000
6.59
19.80
0.20
2.94
EBIT
940.00
552.00
433.00
299.00
245.00
201.00
194.00
2000
3.31
4.29
0.28
2.43
EBIT
488.00
295.00
164.00
139.00
75.00
41.00
164.00
2001
9.09
3.89
0.40
0.74
2000
20.83
3.17
0.59
3.23
International Journal of Business and Public Management (ISSN: 2223-6244) Vol. 2(2): 72-80
BANK
YEAR
NIC
2006
2005
2004
2003
2002
2001
2000
1999
16,570.00
14,259.00
11,541.00
6,896.00
4,713.00
4,247.00
3,940.00
4,283.00
RATIOS
Default Rate
Bad Debt Cost
Cost per loan Asset
ROA
2006
3.63
10.2
0.08
1.8
Non
performing
Ins
624.00
175.00
214.00
134.00
346.00
431.00
419.00
354.00
2005
1.2
9.1
0.08
1.4
TOTAL
COST
BDD
COST
TOTAL
ASSET
1,306.00
1,116.00
782.00
585.00
491.00
477.00
489.00
557.00
133.00
101.00
20.00
57.00
88.00
70.00
113.00
228.00
26,052.00
20,700.00
16,643.00
10,990.00
9,329.00
8,396.00
7,442.00
7,212.00
2004
1.8
2.6
0.1
1.6
2003
1.91
9.74
0.1
2.45
80
2002
6.84
17.92
0.1
3.06
SPECFC
PROV
375.00
626.00
600.00
492.00
702.00
257.00
2001
9.21
14.68
0.11
4.21
EBIT
458.00
288.00
261.00
243.00
229.00
257.00
313.00
301.00
2000
9.61
23.11
0.12
4.21