Bank Specific Characteristics, Prudential Regulations and Non- Performing Loans of Commercial Banks Listed At Nairobi Securities Exchange, Kenya

Abstract

The Kenyan banking industry have in the recent past reported a high level of non-performing loans(NPLs). This development has had a negative impact in the industry with key stakeholders raising alarm over the deteriorating trend in the loan quality. The study sought to assess the relationship between bank specific characteristics, prudential regulations and non-performing loans among commercial banks listed at Nairobi Securities Exchange, Kenya. The specific objectives of the study were: to determine the relationship between bank size, credit size, lending rate, capital adequacy, liquidity and NPLs. Inflation was used as a moderating variable. The study collected secondary data of nine commercial banks between the period 2012 to 2017. Panel regression with fixed effects method was used for analyzing the collected data at 5% level of significance. The credit size and liquidity had a p-value of 0.04 and 0.045 respectively indicating a significant effect on the level of NPLs. Bank size, lending rate and capital adequacy ratio had p-value of 0.560, 0.10 and 0.982 respectively indicating an insignificant effect on the level of NPLs. Inflation, had a significant moderating effect on the relationship between bank specific characteristics and NPLs (p=0.049) and an insignificant moderating effect on the prudential regulations and NPLs (p=0.263). The study recommended investment in human resource assigned to the credit units to mirror the growth in credit size. The CBK should enhance its credit and liquidity regulation supervision. The regulator should also sensitize the lenders on the effect of inflation on their internal operations and also create a proactive regulatory environment to prevent factors that may lead to hikes in liquidity volume.