ASSESSING THE BANK SIZE MODERATING EFFECT ON THE RELATIONSHIP BETWEEN CREDIT RISK MANAGEMENT AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Authors: Adam Shisia*, Evans Kerosi & Martin Ronald Onsiro

ABSTRACT

Recognizing the diverse capacities of banks to manage credit risk, this study examines the moderating effect of bank size on the relationship between credit risk management and financial performance in Kenya’s commercial banking sector. A descriptive research design was adopted, utilizing panel data from 30 commercial banks over the period 2017 to 2022. Credit risk was measured using the non-performing loan (NPL) ratio, while total income served as the financial performance indicator. Data analysis was conducted using Stata software, incorporating interaction terms to assess the moderating role of bank size, measured by total assets. The results indicate that the interaction between credit risk management and bank size is statistically significant (p < 0.05), suggesting that larger banks are better positioned to manage credit risk and sustain financial performance. These findings support credit risk theory and highlight the importance of tailoring risk management strategies to institutional characteristics such as size. The study offers practical insights for commercial banks and regulators, emphasizing the need for differentiated approaches to credit risk based on organizational capacity. It recommends expanding future studies to include broader performance indicators beyond ROA and ROE and encourages the use of advanced techniques such as structural equation modeling and machine learning. Further research should also explore differences in risk management practices across developed and emerging economies, as well as between rural and urban banks in Kenya, to identify more context-specific strategies.

Keywords: Credit risk, Non-Performing Loan Ratio, Performance, bank size, Kenya

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