Relationship between Credit Risk Management and Financial Performance of Grain Milling Firms in Mombasa County, Kenya

Abstract

This study sought to determine the effect of credit risk management on financial performance of grain milling firms in Mombasa County, Kenya. The study used descriptive research design that permitted the researcher to explain the characteristics of the research variables. Correlation analysis and regression analysis was used to determine the relationship between the variables. It was observed from the study findings that there was a significant positive correlation between credit period and ROA. The relationship between credit period and ROE had a weak positive correlation. Secondly, a significant positive correlation existed between ROE and liquidity as measured by the quick ratio. Liquidity and ROA also portrayed a significant positive correlation. Thirdly, there was a significant negative correlation between overdue accounts and ROA. This also corresponded to a significant negative correlation between overdue accounts and ROE. Lastly, we observed an insignificant positive correlation between size and ROA. This also corresponded to a significant positive correlation between overdue accounts and ROE. The regression coefficients also postulated a positive significant relationship between ROE and credit period with a beta of 0.001. The study concluded that having overdue accounts negatively affects the ROA and ROE of a company hence the study recommended that managers should strive to enforce prompt payment of company debtors. The study also concluded that credit period as measured by average collection period significantly affected financial performance of grain milling firms in Mombasa County depicted by significant positive correlation between credit period and ROA. The study therefore recommended that credit should be cautiously extended to customers so as to increase financial performance.