Credit Risk Management, Gross Domestic Product and Financial Performance of Commercial Banks in Kenya

The banking industry is regarded as one of the most critical players that drives an economy of any country to the desired level, and without requisite channels, the sector can be adversely affected. As a consequence, the bank's performance is crucial in carrying out its mandate as a financial intermediary. However, bank performance is influenced by a myriad of factors, including firm-related factors and gross domestic product. Based on the research questions, the study analyzed the direct relationship between credit risk management concepts, such as lending requirements, credit monitoring, credit appraisal process and financial performance of commercial banks in Kenya. Further, the investigation proceeded to determine whether gross domestic product moderates the relationship between credit risk management and the financial performance of banks. The investigation was anchored on loanable funds theory, asymmetric information theory and Rostow’s economic growth model. As guided by the explanatory research design, the investigation covers all 39 commercial banks currently operating in Kenya. Data was collected using document analysis guided by longitudinal data over the period 2015 to 2022 were gathered thereby giving 288 observations. Data was then subjected to descriptive, correlation and relevant diagnostic test analysis was conducted. Furthermore, a random effect model was used in testing the study’s hypotheses. The results presentation was done using tables and figures. From the findings, there was a positive and significant relationship between lending requirements (β = .04608, p = .000<.05), credit appraisal process (β = .00399, p = .000<.05), as well as credit monitoring (β = 2.79353, p = .000<.05) and financial performance. In addition, gross domestic product lacked the moderating effect in the relationship between lending requirements (β = .0044, p = .293> .05), credit monitoring (β = .023456, p = .501>.05) and financial performance. On the contrary, there was a positive and significant moderating effect of gross domestic product in the relationship between credit appraisal process and financial performance (β = .0085, p = .023<.05). A conclusion was made that lending requirements, credit appraisal process and credit monitoring have a direct effect on financial performance of commercial banks. While annual economic growth significantly moderates the effect of the credit appraisal process on financial performance, it neither moderated the effect of either credit monitoring or lending requirements on the financial performance of commercial banks in Kenya. It is recommended that commercial banks put in place stringent lending requirements to reduce default rates and improve loan quality to enhance their sustainability and financial performance in the long run. The commercial banks ought to scrutinize the credit scores of the borrowers to ensure that the borrowers are lent money according to their ability to repay based on their past borrowing records. Commercial banks under study ought to have measures in place to enhance credit monitoring. The government of Kenya also have to have measures in place that can help stabilize the economic growth of Kenya. JEL: G21, G32, E44, E32, C23 Article visualizations: