The Effects Of Credit Policy On The Performance Of Commercial Banks

Abstract

Client credit arises when there is a time lag between the delivery of goods and services and when payment is paid or received from the customer (Kakuru 2000). It's philosophy of lend now and receive payment later. Most commercial Banks offer loans to their customer and expect repayment on a future date (Atim, 1997) There is risk associated with loan extension to clients. There is a likely hood that the loan extended to the bank client may not be recovered as expected and these poses a great risk to most commercial banks (Opio 2003). Therefore commercial banks must gain an acceptable level of confidence before extending credit to their clients. Different clients behave differently as regards loan repayments. Recovery problems of loans by commercial banks create a lot of nonperforming assets (NP A) which greatly affects the profitability of commercial banks (Khoury 2004). The profitability of an organization determines its degree of survival (Ross & Westerd 1998). The organizations that fail to earn sufficient profits are normally unable to sustain their operations. Thus, profitability avails the organization with numerous advantages (Buckle, 2000). The object of commercial banks is to minimize costs associated with credit while maximize the benefits of client credit, ultimately profit (Pandey 1995). Credit management is therefore key in most Commercial banks. However many commercial banks continue to experience high default rates which have greatly affected their profitability.