Lending Behaviour and Non-Performing Loans of Commercial Banks in Kenya
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Date
2022
Authors
Mulwa, Fridah Wayua
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Commercial banks in Kenya are a crucial finance pillar in the economy because they grant loans to businesses and individuals facilitate growth of businesses and investments. However, commercial banks in Kenya face a huge drawback with Non-performing loans because for the past five years Non-Performing loans have doubled from 5.6% to 12.7% and in the first quarter of 2019 non-performing loans had increased by 27.5 billion Kenyan shillings which is an increase of 8.7% with NPLs of 345 Billion Kenyan Shillings. Several research studies have conducted on NPLs of commercial banks in Kenya however, none of them considered using competition as moderation variable for their studies. Therefore, there was a literature gap and to address it this research study investigated the effect of lending behavior and non-performing loans of commercial banks in Kenya. The specific objectives evaluated the impact of loan growth, liquidity level, bank size, loan portfolio diversification and lending rate on NPLs of the Kenyan commercial banks. Lastly, to assess the moderation impact of competition on lending behavior and NPLs of commercial banks in Kenya. The following theories guided the research study; financial intermediation theory, information asymmetry theory, credit rationing theory, liquidity preference theory and finance learning theory. Causal research design and census sampling was used to conduct a study on the 38 commercial banks that had been on consistent operation from 2014-2018. Secondary sources of data consisted the audited financial statements of commercial banks in Kenya taken from their official websites and annual bank supervision reports from the CBK. Data analysis will be done using STATA Version 13. The research was be presented using descriptive statistics that is; mean, mode, standard deviation, median maximum and minimum, skewness and kurtosis while inferential statistics will be Pearson correlation coefficient and dynamic panel regression model. In addition, diagnostic tests of multi-collinearity, unit root, linearity, heteroscedasticity and normality tests were conducted. Firstly, the effect of loan growth on NPLs of Kenyan commercial banks was positive and insignificant from the research study. Secondly, the study findings were that the impact of lending rate on NPLs of the Kenyan commercial banks was negative and insignificant. Thirdly loan portfolio diversification effect on NPLs of the Kenyan commercial banks was negative and significant. Further the research study provided evidence that the effect of liquidity level on NPLs of the Kenyan commercial banks was insignificant and negative. Lastly, the moderation effect of competition on NPLs of the Kenyan commercial banks was significant. Recommendations from the research study are; that commercial banks management should price their loan products at relatively high prices though not exorbitant to lock out high risk borrowers and also discourage borrowers with low credit worthiness who borrow when interest rates are low to reduce increase in NPLs. Secondly, commercial banks should provide the customers with a variety of loan products and also invest in less risky loan like government bonds and bills will have no likelihood to be defaulted and lend to borrowers in different sectors to spread risks and avoid sector concentration. Further, commercial banks with a large asset base should assess credit worthiness of their customers like capacity, collateral and condition to reduce loan defaulters. Lastly, he CBK should look into the issue of the Kenyan market being overbanked and increase on the minimum capital requirements to encourage mergers and acquisitions
Description
A Research Project Submitted to the School of Business in Partial Fulfilment of the Requirement for the Award of Degree of Masters of Business Administration (Finance Option) of Kenyatta University July, 2022
Keywords
Commercial Banks in Kenya, Lending Behaviour of Banks, Non-Performing Loans, Loans of Commercial Banks, Lending Behaviour and Non-Performing Loans of Commercial Banks in Kenya