Effect of Non-Performing Loans on Financial Performance of Commercial Banks in Kenya
Journal Title: International Journal of Finance Accounting and Economics - Year 2018, Vol 1, Issue 3
Abstract
Commercial banks in Kenya have suffered significant loan repayment default problems resulting into decreased employment levels and liquidity problems. Interest rate changes have also contributed to non-performing loans. Non-performing loans are associated with bank failures because borrowers do not pay their loans in time which leads to financial crises for commercial banks in Kenya. Due to the nature of their business, commercial banks expose themselves to the risks of default from borrowers and this risk is known as credit risk. If the non-performing loans are kept existing and continuously rolled over the resources are locked up in unprofitable sector thus hindering the economic growth and impairing the economic efficiency. This study sought to establish the relationship between interest rate regulations and non-performing loans on financial performance of commercial banks in Kenya. The study used questionnaires to collect primary data and used secondary data for period 2013 – 2017 from Bank’s Annual Reports. Descriptive research design and census survey method was used whereby all the 43 commercial banks registered in Kenya for period 2013 – 2017 were selected. The target population was 86 officers: 43 bank managers and 43 credit managers of all the 43 commercial banks registered in Kenya. Inferential statistics was used where multiple linear regression analysis was used to analyze the data. The data was presented in tables, graphs and pie charts. The findings of the study revealed that poor credit assessment, unfair competition among banks, willful default by borrowers and their knowledge limitation, fund diversion for unintended purpose, over/under financing by banks, bank size, interest rates changes, growth in loans, inflation ascribe to the causes of loan default and they affect financial performance of commercial banks in Kenya. The study also revealed that there exist a relationship between interest rate regulations and non-performing loans of commercial banks. The study concludes that interest rate regulations contribute to non-performing loans which affects the financial performance of commercial banks in Kenya in terms of ROA and ROE. The study recommends that commercial banks should have a mechanism of identifying loan defaulters and take necessary action, charge their clients interest rate as per the regulations of CBK, enhance regular credit risk monitoring of their loan portfolios to reduce the level of non-performing loans
Authors and Affiliations
Hellen Araka, Vitalis Mogwambo, Simiyo Otieno
Keywords
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