Abstract:
Commercial banks play a vital role in the modern-day economies. The core business
of the banking sector worldwide is creation of credit to deserving and deficit units of
the economy, a role that also happens to be the main income generating activity for
the banks. This activity comes with huge risks; both to the lender and the borrower.
Banks are particularly subjected to a wide array of risks in the course of their
operations. These risks generally fall into three categories namely: financial,
operational, and environmental. Of these risks experienced, credit risk is of great
concern to banking management and regulators as this can easily lead to bank failure.
This study is seeking to investigate the effect of credit risk on financial performance
of commercial banks in Kenya. The study will operationalize credit risk through
capital to risk weighted assets, asset quality, loan loss provision as well as loan to
advance ratios while financial performance will be measured by return on equity
(ROE). Secondary data will be extracted from audited financial statements of all the
Book of Abstracts, 2018 38
44 commercial banks under the purview of Central Bank of Kenya (CBK) for the 10-
year period covering 2008 to 2017. The study will adopt longitudinal research design
using an in-depth analysis of entities over a lengthy period of time. Regression
analysis will be used to estimate the relationship between the independent and
dependent variables. The F and t ratios will be used at 95% confidence level to
determine the significance or otherwise of the overall model and the respective
coefficients of the independent variables respectively. Findings of the study will be
useful to academicians and management of commercial banks as well as policy
formulators
