CREDIT RISK AND OPERATIONAL PERFORMANCE OF COMMERCIAL BANKS LISTED AT THE NAIROBI SECURITIES EXCHANGE IN KENYA
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Abstract
This study sought to investigate how credit risk affects the operational performance of commercial banks listed on the Nairobi Securities Exchange (NSE) of Kenya between the years 2015 and 2024. This research was prompted by the consistent high levels of Cost to Income Ratio (CIR) that have been recorded in the banking industry of Kenya above the global standards of 40-55% while also recording high levels of non-performing loans above 14%. Based on the Credit Rationing theory, the research used a descriptive research methodology using the census approach targeting all 11 commercial banks listed on NSE. Panel secondary data were collected from the audited annual financial statements and analysed using the Statistical Package for Social Sciences (SPSS 25.0). Descriptive statistics indicated that the average proportion of expenses from operations was 53.9% of the operating income, while the average value of credit risk was 11.4% with minimal variations throughout the analysed period. Trend analysis results show a non-linear trend in both studied variables including the presence of the disruptions associated with the period of the COVID-19 pandemic. The results of correlation analysis reveal a statistically significant relationship between credit risk and CIR (r = 0.388, p < 0.001). The results of panel regression analysis prove that the credit risk significantly affects CIR positively (β = 0.4358, t = 4.350, p = 0.000) and accounts for 15.05% of the operational efficiency variation (R² = 0.1505), whereas the whole model proves its significance (F = 19.124, p = 0.000). These results demonstrate that growing NPLs negatively impact operational efficiency of banks via the "double penalty" effect through increasing the cost of provisions and reducing interest income.
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