INTERNAL CONTROLS AND CREDIT RISK IN COMMERCIAL BANKS LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Purpose: The general objective of this research was to examine the internal controls and credit risk in commercial banks listed in Nairobi Securities Exchange, Kenya.

Methodology: The cross sectional descriptive research design was used since it helps in establishing the association between constructs at a given point in time. The study conducted a census of the 11 banks trading at the Kenya securities market since the target population was accessible and easily manageable. The target respondents were the risk managers, compliance and monitoring managers, internal auditors and credit managers of all these commercial banks, all located in Nairobi. Data was collected from primary sources; the data collection tool being a questionnaire which contained questions structured in a five-point Likert scale thus ensured that all the respondents got exactly the same questions. Descriptive and inferential statistics was applied for analysis of data using the SPSS software. The findings were demonstrated using graphs and tables.

Results: All the dimensions of internal controls studied, that is, the risk assessment, control environment, control activities and information and commutation were found to have a significant influence on credit risk of the banks.

Recommendations: There is need for the management, policy makers and all banking industry players of commercial banks to institute structures that promote devotion to integrity and ethical conducts, demonstrate authority and responsibility to enhance adequacy of banking activities. The banks’ board of directors and the administration team should implement oversight responsibilities, demonstrating commitment to competence and enforcing accountability. Further, adherence to the set policies should be followed in all the financial institutions to enhance realization of banks’ objectives. Further, the study recommends that every bank in Kenya should have proper quality control structures, effective audit programs and monitoring activities. Since the CBK regulates the commercial banks, it should ensure that every bank set correct internal checks guidelines and observes their sufficiency and usefulness. The study recommends that 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.