Credit risk management strategies and loan delinquencies in highly innovative (digital) banks: The case of steward bank.

Abstract

The main objective of the research study was to analyze the effectiveness of credit risk management strategies and loan delinquencies in highly innovative and digitized banks. The research used Steward bank as a case study. This main objective was augmented by secondary research objectives which were; to establish the forms of innovative credit risk management strategies used by Steward Bank in mitigating loan delinquencies, to determine the effectiveness of Steward Bank’s innovative credit risk management strategies in mitigating loan delinquencies, to find out challenges affecting Steward Bank in implementing its innovative credit risk management strategies that it uses in mitigating loan delinquencies and to determine ways that Steward Bank can use to address challenges affecting it in implementing its innovative credit risk management strategies in mitigating loan delinquencies. The study was guided by the Liquidity Theory of Credit, the Portfolio theory and the Credit Risk Theory. Quantitative research method was adopted in this study. The research was based on the positivist philosophy that is quantitative based. The research design was explanatory in nature and it adopted a deductive research approach. The population was made up of 36 employees in the Credit and Risk department, Asset and Liability Management Committee as well as the Credit Risk Management Committee of Steward Bank. A sample size of 33 was adopted using simple random sampling technique. A structured research questionnaire (in Google Forms format) was used to collect primary data for this study. A structured research questionnaire (in Google Forms format) was used to collect primary data for this study. SPSS Version 23.0 and Micro soft Excel 2013 were used for statistical data analysis. Regression and Pearson’s Correlation Results were also used to show the direction and strengths or significance of the relationship between credit risk management strategies and loan delinquencies in highly innovative and digitized banks. The study found out that Steward bank has digitized loan management systems that assist credit or loan officers to determine the capacity of prospective borrowers to repay the loan, systems that are able to supervise and monitor borrower’s actions as well as digitized loan management systems that facilitate repayment of loans and collection of amounts due from clients. From the Regression and Correlational results, the study found out that statistically there is a strong positive relationship between innovative credit risk management systems and loan delinquencies that is the digitized loan management systems are very effective in mitigating and reducing the level of NPLs. The study also found out that information asymmetry, the turbulent and changing business environment affects the ability of Steward bank to determine weights and criteria for judging creditworthiness of borrowers. The major conclusion was that digitized loan management systems are effective in assessing prospective borrowers using the 5Cs hence are very effective in mitigating and reducing the level of delinquent loans. The major recommendation of this research was that the bank should devise online dashboards that are capable of effectively supervise and monitor the borrower’s actions and financial statements movement after issuance. The study also recommended that the relevant regulatory authorities should consider setting up institutional and regulatory frameworks to enable the use of credit derivatives and structured products to leverage credit losses by banks because they ensure liquidity and the trading of credit risk in a secondary market. Future researches on similar topics were recommended to focus on other banks as case studies and adopt either purely qualitative or a mixed.