Does Interest Rate Spread Improve Credit Management Practices and Financial Performance? Evidence from Commercial Banks Listed at Nairobi Security Exchange, Kenya

The link between credit management practices and the financial performance of listed commercial banks in Kenya remains underexplored. Although there are studies on the financial performance of listed commercial banks in Kenya, few have sought to explain this in the context of credit management practices. Much of the available local empirical literature is in the microfinance institutions context. Hence, this remains an area of empirical interest: this formed the motivation for the study. This study primarily aimed to investigate how the interest rate spread affects the relationship between credit management practices and the financial performance of Kenya's listed commercial banks. Specifically, it examined the impact of key credit management elements, such as credit risk assessment, on the financial outcomes of these banks. The Quantity Theory of Credit and Credit Market Theory informed the study. Using a longitudinal design, data were collected from all 12 NSE-listed banks, spanning periods before and after shifts in the interest rate spread, totaling 132 observations. A census approach was used to select the sampling units. Data analysis involved the application of descriptive statistics, including the calculation of means and standard deviations. To assess the research hypotheses, hierarchical regression models were employed. The results revealed that customer credit appraisal exerted a negative and significant association (β = –0.139, ρ < 0.05). Moreover, the analysis revealed that interest rate spread negatively and significantly moderated the relationship between customer credit appraisal and financial performance (β = -0.025, ρ < 0.05). The study concludes that robust credit risk management practices have a positive impact on the financial performance of listed commercial banks, highlighting their essential role in maintaining sound risk oversight. Additionally, the findings suggest that the lending collection period does not significantly impact financial performance, indicating that other variables may have a greater influence on financial performance. It was also established that interest rate spread moderates the relationship between customer credit appraisal and the financial performance linkage among listed commercial banks in Kenya. This will optimize the quality and allocation of credit, ensuring positive financial performance. Managers should monitor and strategically adjust interest rate spreads to balance their credit portfolio risks and returns, leveraging favorable spreads to enhance profitability while mitigating adverse impacts on credit performance. Bank managers should focus on enhancing credit risk control measures and evaluating customer credit more effectively. They should be aware of how external factors, such as interest rates, can influence their operations. Regulatory bodies might consider creating frameworks to standardize credit risk assessments and provide guidelines on managing interest rate variations effectively. Policies promoting transparency regarding interest rates can enable consumers and businesses to make more informed decisions, potentially strengthening the link between credit controls and performance.