EFFECT OF CREDIT DOCUMENTATION ON LOAN PORTFOLIO PERFORMANCE IN COMMERCIAL BANKS IN MOMBASA COUNTY: A CASE OF KENYA COMMERCIAL BANK

Abstract

The main objective of the study was to investigate the effect of credit documentation on loan portfolio performance among Kenyan commercial banks. The study targeted 76 management staff of the Kenya Commercial Bank. The study adopted descriptive research design. Stratified sampling technique was used to select the sample size. The sample of 64 was calculated using the mathematical approach developed by Miller and Brewer. A structured questionnaire was used to collect data from the respondents. A pilot study was conducted prior to undertaking the main study with the aim of testing the instrument’s reliability and validity. The collected data was analyzed both descriptively and inferentially. The study established that the bank usually finds out the customer’s past transactions before authorizing any loan. The findings revealed that majority of the respondents agreed with the statement that past transactions determine the amount of loan issued and the bank usually research on the customers’ commercial relationships with other entities before giving them loans. The study further established the bank always require the customer to provide credit reference report. The findings revealed that the bank always researches the customer’s credit history before issuing loans and the bank always determine the customer’s ability to pay before authorizing any loans. The study concluded that in order to minimize on non-performing loans, the bank usually searches for customer’s past transactions before authorizing any loan to the customer. This is done by checking the historical data of the customer from credit bureau. It was concluded that the amount of loan given to the applicant is dependent on the individuals past transactions and the bank usually research on the customers’ commercial relationships with other entities before giving them loans. The study recommended that banks should issue loans based on the amount to be repaid by the customer since it was established that repayment amount is an important determinant of our portfolio performance while loan repayment period is an important determinant of the bank’s loan portfolio performance. The bank should come up with a mechanism to justify the source of loan repayment prior to any loan authorization. Key Words: Credit Appraisal, Credit Security, Credit Reference, Credit Contract, Loan Portfolio Performance CITATION: Nyaga, G. M., & Omar, N. (2020). Effect of credit documentation on loan portfolio performance in commercial banks in Mombasa County: A case of Kenya Commercial Bank. The Strategic Journal of Business & Change Management, 7 (4), 792 – 806.