Influence of Financial Inclusion on Credit Risk Performance in Kenyan Commercial Banks

Abstract

The main aim of this study was to establish the influence of financial inclusion on credit risk performance in Kenyan commercial banks. The study was anchored on asymmetric information Theory. The study adopted a longitudinal correlational research design. The study target population consisted of 37 commercial banks in Kenya. The study employed a census sampling technique to gather all the required necessary data from the existing population. A balanced panel of secondary data from the published audited financial statements for the period 2018 to 2023. The collected data was subjected to a diagnostic test before applying regression analysis. The collected data was analyzed using EViews-12 Statistical Package and descriptive statistics were computed to determine data characteristics and multiple regression was used to test and report hypotheses. From the regression results, financial inclusion explains 82.43% (adj R2=0.8243, p=0.000) of variance in credit risk performance. The regression coefficient revealed (β=0.027624, P=0.0303) showing that a unit increase in financial inclusion would lead to 2.7624% significant change in credit risk performance. Therefore, the null hypothesis was rejected. The study finally concluded that financial inclusion is found to increase credit risk performance in Kenyan commercial Banks. The study recommended that commercial banks’ management should be very sensitive in advancing financial inclusion programs which if not well undertaken can lead to an increase in credit risk and eventually affect the sustainability of commercial banks.  One issue noted is that commercial banks should develop stringent credit risk scoring models that have the capacity to capture the different unique risk profiles of the new customers to reduce information asymmetry. Additionally, Central Bank of Kenya should consider policies that can arrest transitional risk associated with increased financial inclusion that can reveal the credit history of formerly excluded population to ensure enhanced credit risk assessment.

Keywords:       Financial Inclusion, Credit Risk Performance, Kenyan Commercial Banks