ABSTRACT

Inappropriate credit policies, as well as inadequate, limited institutional capacity by Kenya's financial sector, led to several of the banking institutions collapsing over what was termed as poor management of credit risks which resulted to increased amounts of loans that were not being serviced. The main aim of the research project was to establish the effects of internal controls on credit risk among the banks listed in Nairobi Securities Exchange. The distinctive goals included to find out the influence of internal control, assessing risk ,activities in control and monitoring among banking organizations listed in Nairobi Securities Exchange. The study was guided by liquidity preference theory, agency theory and modern portfolio theory. The study adopted a casual descriptive research design. The target population encompassed the eleven listed banks in Nairobi Securities Exchange where cencus was done. Both primary and secondary data were collected. The questionnaires were applied to gather data. The diagnostic tests include multicollinearity and normality. Data was evaluated using both descriptive and inferential statistics using SPSS. The findings show that there is a positive and significant link between monitoring and credit risk. The study found that assessment of the risk has a significant way on credit risk and that internal controls that are not strong such as poor ethical values have stimulated the involvement to fraud that leads to income loss and misuse of the income received. The study concluded that risk assessment P=.000 < 0.05, control activities P=.000 < 0.05, monitoring and control environment P=.001 < 0.05 have a significant effect on credit risk among commercial banks listed in Nairobi Securities Exchange. The study recommends that banks should implement proper risk assessment to guide their operations and also implement efficient control activities to guide their operations. Further, the study recommends that banks’ monitoring approaches should be guided towards effective tasks and achieving the goals of the organization. In regard to propositions for more studies, this investigation could be further advanced by looking at the effect on credit risk management in other institutions such as investment banks and microfinances. It will help in the management of credit unions, Savings and Loans Associations, investment banks and microfinances in Kenya .