Determinants of Effective Debt Collection in Commercial Banks in Kenya

A Research Project Submitted to the Chandaria School of Business in Partial Fulfillment of the requirement for the Degree of Masters of Business Administration (MBA)Financial institutions have faced difficulties due to many reasons. The main cause of the serious banking problems is mainly attributed to credit default by borrowers. This is as a result of poor credit management, poor management of the loan portfolio or economic and other circumstances that can lead to deterioration in the quality of a bank’s loan book. Unstable economic times lead to higher default rate as borrowers are unable to repay their loan due to the shrinking purchasing power. The purpose of this study was to determine the determinants of effective debt collection practices in Kenyan commercial banks. The researcher was seeking to establish: i) To what extent does staff competency affect the effectiveness of debt collection in commercial banks? ii) What is the effect of resources on the effectiveness of debt collection in commercial banks? (iii) To what extent does information management affect effectiveness of debt collection in commercial banks? The total population of the study was 1118 credit managers/supervisors or branch managers of the 37 commercial banks. A sample size of 118 respondents was selected through random sampling technique, which represents a 10% of the population. The data was collected using a questionnaire. Secondary data on the level of Nonperforming loans/Gross loans was also collected. The data collected was analyzed using descriptive statistics such as frequencies and measures of central tendency such as mean. The data was analyzed using SPSS software (statistical package for social sciences). Tables and pie charts were used to present the findings. Results indicated that staff competence was highly emphasized in the banks. The results have shown that most respondents believe that new employees get good induction training, the induction training included training on task relating to the job and that on the job training was crucial for improving employee performance. Majority also believed that the training offered to them had widened their knowledge gap and had assisted them adjust to the work environment. It is also the belief of most of the respondents that the banks offered short term training which enhance staff competency and that the banks encouraged staff exchange programs as a means of training the staff. This implies that an increase in the effectiveness of staff competence influences the non-performing loans negatively. The study findings also indicated that the banks have set aside enough resources to facilitate and mobilize the employees working in the debt collection departments to carry out their duties effectively and efficiently. The study findings indicate that majority of the respondents agreed with the statements that the bank provides vehicles for staff mobilization while carrying out their duties, the bank provides airtime for staff in debt collection department for follow up calls, the bank has enough number of staff in the debt collection department, the employees of the bank are well remunerated to avoid corruption issues and the bank has invested heavily in technological resources to ensure smooth work flow of employees. Correlation results led to the conclusion that the relationship between financial resources and non-performing loans is negative and significant. Results also revealed that the banks had invested in management information systems which were easy to use and compatible with other bank systems in place. Based on the results we note that a large portion on the respondents believed that the bank had invested in a management information system that is user friendly, the information system that the bank had invested in has helped minimize administrative costs, that the core banking system was compatible with the other information systems in the bank and that the banks’ core information system could accommodate the banks growth, and that the information system being used by the bank had helped to enhance employee performance and productivity. The respondents also believed that employees had time and freedom to chat freely with their colleagues. Correlation results show that the relationship between management information system and nonperforming loans was significantly negative. Based on the results from the study, the researcher’s recommendation is that the banks need to enhance staff competence through proper induction at the point of recruitment as well as continuous training for the existing employees. This will have an impact on the effectiveness of debt collection processes within the bank. The management should also create a platform where information on the general performance of the bank can be shared with other employees. The banks also need to allocate ample resources to be used for debt collection. The study also recommends that banks should invest more in Information technology which will positively enhance debt collection processes within the banks and as a result lower the ratio of Non-performing loans. The management information systems that the banks adopt should be easy to use, cost efficient in terms of operation and administration, compatible with other systems in use within the bank and flexible enough to accommodate growth of the bank when it occurs