MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY.

SCHOOL OF BUSINESS AND ECONOMICS.

DEPARTMENT: ACCOUNTING AND FINANCE.

REG NO: BS205/104502/20.

NAME: NDIRANGU JOYCE WANGUI.

UNIT: CREDIT MANAGEMENT.

A review of the Kenyan aspect on credit recovery. Theories of credit recovery, challenges

associated with credit recovery, ways to improve on credit recovery, the legal aspect of

credit recovery and the risks associated with credit recovery. The Kenyan perspective on

credit recovery.

Credit recovery is a crucial process for any lending institution, including those in Kenya. It

involves the collection of unpaid debts or outstanding loans from borrowers. Credit recovery is

an important aspect of lending, as it enables lenders to recover their funds in case borrowers

default on their loans. In Kenya, the credit recovery process is guided by various legal

requirements, including the theories of credit recovery. In Kenya, credit recovery is a significant

challenge for lenders, as there are numerous legal and practical considerations to consider. In this

review, we will explore the theories of credit recovery, challenges faced in credit recovery, ways

of improvement, the legal aspect of credit, and the risks associated with credit risk.

Theories of Credit Recovery:

In Kenya, there are several theories of credit recovery that guide the process of debt collection.

There are several theories and concepts associated with credit recovery and credit management.

Agency Theory: This theory suggests that when lenders provide credit, they are delegating the

responsibility to manage and recover the debt to the borrower. The borrower, therefore, becomes

the agent of the lender and is responsible for managing and recovering the debt.

Credit Scoring Theory: This theory suggests that lenders can use statistical models and data

analysis techniques to evaluate a borrower's creditworthiness. Credit scoring models can help

lenders assess the risk of lending to a particular borrower and make informed decisions about

credit management and recovery.

Behavioral Economics Theory: This theory suggests that people do not always make rational

decisions about credit and debt. Borrowers may be influenced by cognitive biases and emotional

factors when making decisions about borrowing and repayment. Lenders must take these factors

into account when developing credit management and recovery strategies.

Creditworthiness Theory: This theory emphasizes the importance of assessing a borrower's

creditworthiness before granting credit. This involves evaluating the borrower's ability to repay

the debt, as well as their willingness to do so.

Collateral Theory: This theory emphasizes the importance of collateral in credit management and

recovery. Collateral is a form of security that lenders can use to recover their losses in the event

of a default. Lenders must carefully evaluate the value and quality of collateral when assessing a

borrower's creditworthiness.

Capital Adequacy Theory: This theory emphasizes the importance of having sufficient capital

reserves to absorb losses from non-performing loans. Banks and other lenders must maintain

adequate capital reserves to ensure they can absorb potential losses from credit defaults and other

risks.

Debt Overhang Theory: This theory suggests that excessive debt can hinder economic growth

and financial stability. When borrowers have too much debt, they may be unable to invest in new

projects or pay back their debts, which can lead to a debt overhang and economic stagnation.

Time Value of Money: This concept suggests that money has a time value and is worth more

today than it will be in the future. When lenders provide credit, they must take into account the

time value of money and charge an appropriate interest rate to compensate for the risk and

opportunity cost of lending.

Moral Hazard Theory: This theory suggests that borrowers may take excessive risks if they

believe that lenders will bail them out if they default on their debts. To prevent moral hazard,

lenders must carefully assess a borrower's creditworthiness and ensure that they have sufficient

collateral to cover potential losses.

Loss Given Default: This concept refers to the amount of money that a lender will lose if a

borrower defaults on their debt. To manage credit risk, lenders must assess the potential loss

given default and take steps to minimize their losses.

The 'Legal Remedy' theory - allows lenders to use legal action to recover their funds.

The 'Social Pressure' approach- This theory focuses on leveraging social networks to apply

pressure on borrowers to pay back their debts, using tactics such as public shaming or peer

pressure.

Challenges Faced in Credit Recovery:

In Kenya, there are several challenges faced in credit recovery, including:

Inadequate customer information: Lenders may face challenges in recovering credit due to

inadequate or inaccurate customer information. This can make it difficult to assess

creditworthiness, monitor credit performance, and identify potential default risks.

Economic and market factors: Economic and market factors such as changes in interest rates,

inflation, and market volatility can make it difficult for borrowers to repay their loans, leading to

credit defaults and challenges in credit recovery.

Legal and regulatory challenges: Legal and regulatory challenges such as delays in the court

system, changing regulations, and compliance requirements can make it difficult for lenders to

recover credit in a timely and cost-effective manner.

Operational challenges: Lenders may face operational challenges such as outdated technology,

inefficient processes, and inadequate resources that can make credit recovery more difficult.

Customer behavior: Customers may intentionally default on their loans, making it difficult for

lenders to recover credit. Customers may also engage in fraudulent activities or conceal their

financial situation, making it challenging for lenders to assess creditworthiness and manage

credit risk.

Political instability: Political instability can create uncertainty in the economy and financial

markets, which can negatively impact the credit performance of borrowers and make credit

recovery more difficult.

Lack of proper documentation- It is the main experienced problem in credit recovery. Many

lenders do not properly document their loan agreements, making it difficult to prove that a

borrower owes them money.

Poor credit culture- with many people viewing loans as gifts, as a norm rather than obligations.

This makes it difficult for lenders to enforce loan agreements and recover their funds.

High levels of fraud- with many borrowers providing false information to lenders or using fake

collateral to secure loans. This makes it difficult for lenders to identify risky borrowers and

recover their funds in case of default.

Lack of legal infrastructure- Many lenders struggle to enforce debt recovery legally due to a lack

of legal infrastructure in Kenya.

Inadequate customer information: Many lenders do not have sufficient customer information to

track borrowers who default on their loans.

Ways of Improvement.
Kenya's banking industry has been plagued by non-performing loans (NPLs) for several years,

and credit recovery has become a crucial area of focus for banks. To address this, the Central

Bank of Kenya has put in place regulations and guidelines to guide the credit management and

recovery process. To improve credit recovery in Kenya, several measures can be taken,

including:

Use of debt collectors. Debt collection agencies are licensed by the Central Bank of Kenya to

help banks recover unpaid debts. They employ various methods, such as negotiation and legal

action, to recover the debts on behalf of the banks.

Use of credit bureaus. Credit bureaus in Kenya are responsible for collecting and maintaining

credit information on individuals and businesses. This information is used by banks and other

lenders to make informed decisions about lending and credit management.

Strengthen credit risk assessment: Lenders can improve credit recovery by strengthening their

credit risk assessment processes. This involves collecting and analyzing more comprehensive

and accurate customer information, verifying the information provided by customers, and using

credit scoring models to assess creditworthiness.

Implement robust credit monitoring systems: Lenders can improve credit recovery by

implementing robust credit monitoring systems. This involves setting up early warning systems

to detect signs of credit default and regularly monitoring the credit performance of customers to

identify potential problems early.

Adopt a proactive debt recovery strategy: Lenders can improve credit recovery by adopting a

proactive debt recovery strategy. This involves establishing a clear policy on debt recovery and

following up on overdue payments promptly. Lenders can also use innovative approaches such

as offering customers flexible repayment plans and incentives for prompt repayment.
Strengthen legal and regulatory compliance: Lenders can improve credit recovery by

strengthening their legal and regulatory compliance processes. This involves ensuring that they

comply with all relevant laws and regulations, including those related to credit recovery, data

privacy, and anti-money laundering.

Leverage technology and data analytics: Lenders can improve credit recovery by leveraging

technology and data analytics. This involves using advanced analytics tools to identify potential

default risks, monitor credit performance, and optimize debt recovery strategies. Lenders can

also use digital channels to streamline debt collection and improve customer engagement.

Building a credit culture: The government and lending institutions should work together to build

a credit culture in Kenya, emphasizing the importance of paying back debts and the

consequences of defaulting.

Improving customer information: Lenders should invest in customer information management

systems to track borrowers who default on their loans and ensure they can be held accountable.

Lenders need to focus on proper documentation and credit culture. They need to ensure that all

loan agreements are properly documented, and borrowers understand the terms of their loans.

Lenders need to promote a credit culture that emphasizes the importance of repaying loans and

honoring loan agreements.

Strengthening legal infrastructure: The government needs to strengthen the legal infrastructure to

provide lenders with effective legal recourse to recover debts. In addition, some banks have

implemented credit recovery programs to help borrowers who have fallen behind on their

payments. These programs may include restructuring of loans or offering repayment plans that

are more manageable for the borrower. By implementing these measures, lenders can improve

their credit recovery performance, reduce credit losses, and enhance customer satisfaction.
.

Legal Aspect of Credit:

In Kenya, credit recovery and credit management activities are governed by a range of legal and

regulatory frameworks. These laws provide lenders with legal recourse to recover debts and

protect borrowers from predatory lending practices. The regulations outline the legal remedies

available to lenders in case of default, including the use of legal action and repossession of

collateral. Here are some of the key laws and regulations that apply:

The Banking Act, 2020: This law provides for the licensing and regulation of banks and other

financial institutions in Kenya. It sets out the regulatory framework for credit recovery and credit

management activities, including the requirements for loan classification and provisioning, risk

management, and reporting.

The Insolvency Act, 2015: This law provides for the administration of bankruptcies,

receiverships, and other insolvency proceedings in Kenya. It sets out the legal framework for the

recovery of debts through court-supervised processes, such as insolvency and bankruptcy

proceedings.

The Central Bank of Kenya Prudential Guidelines: These guidelines set out the regulatory

framework for banks and other financial institutions in Kenya. They provide detailed

requirements for credit risk management, including loan classification, provisioning, and

reporting.

The Consumer Protection Act, 2012: This law provides for the protection of consumers in

Kenya. It sets out the legal framework for the handling of consumer complaints and disputes

related to credit recovery and credit management activities.

The Data Protection Act, 2019: This law provides for the protection of personal data in Kenya. It

sets out the legal framework for the handling of customer data by banks and other financial

institutions, including the requirements for data privacy and security.

The Hire Purchase Act, Cap 507: This law regulates the hire purchase transactions in Kenya,

including the repossession of goods in the event of a default. It sets out the legal framework for

the recovery of debt related to hire purchase transactions.

The Money Lenders Act, Cap 273: This law regulates the activities of money lenders in Kenya,

including the licensing and regulation of money lending businesses. It sets out the legal

framework for the recovery of debt related to money lending transactions.

The Credit Reference Bureau Regulations, 2013: These regulations provide for the licensing and

regulation of credit reference bureaus in Kenya. They set out the legal framework for the

collection and sharing of credit information among lenders, which is used to assess

creditworthiness and manage credit risk.

The Proceeds of Crime and Anti-Money Laundering Act, 2009: This law provides for the

prevention, detection, and prosecution of money laundering and the financing of terrorism in

Kenya. It sets out the legal framework for the reporting of suspicious transactions and the

freezing of assets related to money laundering and terrorist financing.

The Financial Reporting Centre Regulations, 2015: These regulations provide for the reporting

of suspicious transactions related to money laundering and terrorist financing. They set out the

legal framework for the collection, analysis, and dissemination of financial intelligence related to

money laundering and terrorist financing.

Lenders in Kenya must comply with these laws and regulations when conducting credit recovery

and credit management activities. Failure to comply with these requirements can result in legal

and financial penalties, reputational damage, and other negative consequences.

Risks Associated with Credit Risk:

There are several risks associated with credit recovery and credit management. Here are some of

the key risks to consider:

Credit Risk: This is the risk that a borrower will default on their debt obligations. Lenders must

carefully assess the creditworthiness of borrowers and take steps to minimize credit risk, such as

requiring collateral or imposing stricter repayment terms.

Legal and Regulatory Risk: Credit recovery and credit management activities are subject to legal

and regulatory requirements. Failure to comply with these requirements can result in legal and

financial penalties, reputational damage, and other negative consequences.

Operational Risk: Credit recovery and credit management activities involve complex processes

and systems that are susceptible to operational failures. This can include errors in data

processing, system failures, and human error.

Reputation Risk: Negative publicity or public perception of a lender's credit recovery and credit

management practices can damage the lender's reputation and lead to a loss of business.

Market Risk: Economic and market conditions can affect the performance of loans and the

ability of borrowers to repay their debts. Lenders must carefully monitor market conditions and

adjust their credit recovery and credit management strategies accordingly.

Liquidity Risk: Credit recovery and credit management activities can tie up a significant amount

of capital and reduce a lender's liquidity. Lenders must carefully manage their liquidity and

ensure they have sufficient reserves to cover potential losses.

The risk of default, which the main risk associated with credit risk in Kenya. It can result in

significant financial losses for lenders.

The risk of fraud, as borrowers may provide false information or use fake collateral to secure

loans.

It's important for lenders to carefully manage these risks when developing credit recovery and

credit management strategies. This involves developing robust risk management frameworks,

monitoring and analyzing risk exposure, and implementing appropriate controls and mitigation

strategies.

Kenyan perspective on credit recovery

In Kenya, credit recovery is a critical issue for lenders, particularly those in the financial services

industry. The high level of non-performing loans (NPLs) in the country, coupled with the

challenges associated with recovering credit, has significant implications for the financial sector's

stability and growth. The Kenyan perspective on credit recovery is that it is a complex and

multifaceted process that requires a combination of strategies and tactics to be effective. Some of

the key challenges facing lenders in Kenya include inadequate customer information, economic

and market factors, legal and regulatory challenges, operational challenges, customer behavior,

and political instability.

To improve credit recovery, lenders are adopting a range of strategies such as strengthening

credit risk assessment, implementing proactive debt recovery strategies, leveraging technology

and data analytics, and improving legal and regulatory compliance. Additionally, lenders are
focusing on educating and engaging customers to promote responsible borrowing and repayment

practices

In conclusion, credit recovery is an important aspect of lending in Kenya. However, the process

is faced with several challenges, including a lack of proper documentation, poor credit culture,

and high levels of fraud. To improve the credit recovery process, lenders need to focus on proper

documentation, credit culture, and risk mitigation strategies. Additionally, they need to comply

with the legal requirements governing the credit recovery process to ensure that they can recover

their funds in case of default.