Effect of Credit Risk on Third-party Payment Processing among Retailers in Nairobi County, Kenya

This paper addresses the effect of credit risk on third-party payment processing among retailers in Nairobi County, Kenya. The study was guided by the positivism research philosophy and applied a descriptive cross-sectional research design targeting 226 retailers under the registered payment service providers regulated by the Central Bank of Kenya. The sample size of 144 heads of finance and compliance, and risk managers/heads of payments was drawn using stratified sampling technique. Primary data was collected through a self-administered questionnaire, which was designed based on the research objectives. Secondary data regarding firm size (total assets) was gathered from the financial statements. Both descriptive and inferential statistical methods were employed for analysis. The descriptive statistics revealed that default risk had the highest average of 3.90, followed by interest rate risk with an average of 3.64. Regression analysis results showed that credit risk positively and statistically influences third-party payment processing among retailers in Nairobi County, Kenya (r2 = .282, β =.312, t=6.838, p<.05); hence, the null hypothesis was rejected. The study concludes that credit risk influences third-party processing among retailers in Nairobi County, Kenya. Consequently, the study recommends that managers of the retailers in Nairobi County should implement robust credit risk mitigation mechanisms. This may include implementing effective credit scoring models, establishing sound underwriting practices, including monitoring borrower creditworthiness regularly to minimize credit risks, diversifying exposure to credit risk, stress testing and maintaining adequate capitalization. This may significantly improve the third-party payment processing of the retailers.