Internal Controls And Credit Riskincommercial Banks Listed At Nairobi Securities Exchange,Kenya

ABSTRACT

Recently in the banking sectorsome banks have suffered severe losses, this hassignificantly gone up over the last 10 yearsdue to non-performing loans thus, necessitating stringent talks about internal control measures. Given the kind of operations they engage in, financial institutions and particularly, banks are exposed to serious risks including borrowers’ default. Banks have to do away with non-performing loans for them to grow and remain stable.Hence, this study’s main objective was to assess howinternal controls relates to credit risk using Kenya’s commercial banks contained in the list of NSE. The study reviewed the agency theory, information theory as well as the contingency theory. The researcher adopted a technique that is descriptive in nature. The study conducted a census of the 11 banks trading at the Kenya securities.The target respondents were the risk managers, compliance and monitoring managers, internal auditors and credit managersof all these commercial banks which are based in the context of Nairobi. Data was collected from primary source with the use of questionnaires.Descriptive and inferential statistics was applied for analysis of data using the SPSS software. The findings were demonstrated using graphs and tables. From inferential analysis findings, the study concludes that on the overall all the internal control components studied had a significant influence on credit risk. The regression coefficients p-values were less than 0.05 indicating a significant relationship between the dependent and independent variables. However, the findings showed that the efficiency of the checks in the banks are not assured since the association value indicated a positive relationship yet it should be inverse, an indicationof ineffective internal control systems. Hence the study recommends that: the management, policy makers and all banking industry players of commercial banks to institute structures that promote devotion to integrity and ethical conducts demonstrating authority and responsibility to enhance adequacy of banking activities; the banks’ board of directors and the administration team should also implement oversight responsibilities, demonstrating commitment to competence and enforcing accountability;every bank in Kenya should have proper quality control structures, effective audit programs and monitoring activities; enhancement of information systems, effective channels of communication and accurate reporting of operational, compliance, managerial and financial information in the commercial banks andfinally, the credit policy and other guidelines be easily accessible to all lending officers; any updates or changes to the policy be communicated immediately so as to minimize credit risk exposed to the banks.