Credit Risk Management Practices and Profitability of Regulated Digital Credit Providers in Kenya

The profitability of digital credit providers in Kenya is a concern, as many firms lend unsecured personal loans, increasing credit risk. The decrease in loan amounts extended by these providers reflects lower profitability. The purpose of this study was to determine how credit risk management practices affect the profitability of Kenya's regulated digital credit providers. The specific objectives were to explore the effect of borrowers' screening, credit scoring, credit reminder practice, and credit risk control on profitability. The study focused on all 22 digital credit providers licensed and regulated by the Central Bank of Kenya as of January 2023. A census was necessary due to the small population. This study was based on the credit risk theory and the profit innovation theory. An explanatory research design with a quantitative methodology was used. Data was gathered using questionnaires. The data were analysed using descriptive statistics (mean, frequencies, standard deviation, and percentages) as well as inferential statistics (correlation and regression analyses). Before proceeding with inferential analysis, diagnostic tests such as normality, multicollinearity, heteroscedasticity, and autocorrelation were performed. The results were presented using tables, charts, and graphs. The study found that borrowers' screening had a significant positive impact on profitability (β = 0.146, p < 0.05). Credit scoring had a significant positive impact on profitability (β = 0.327, p < 0.05). Credit reminder had a significant beneficial effect on profitability (β = 0.298, p < 0.05). Credit risk control practices significantly increased profitability (β = 0.357, p < 0.05). The regression model accounted for 81.2% of profitability variation, and ANOVA confirmed the significance of credit risk management practices (F = 42.204, p < 0.05). All individual regression coefficients were positive and statistically significant, indicating a positive impact on profitability. The study concludes that digital credit providers improve their borrowers' screening processes, invest in sophisticated credit scoring techniques, optimize credit reminder practices, and strengthen credit risk management measures. Keywords: Credit Risk, Management Practices, Profitability, Regulated Digital, Credit Providers