Interest Rates and Non-Performing Loans of Commercial Banks in Kenya
Robert, Eric Kinyoti
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In the last ten years (2010 to 2019), NPLs in Kenyan commercial banks has been rising. Between the year 2011 and 2018, NPLs increased from 4.4 per cent and 12.7 per cent. High interest rates contribute to NPLs as they influence the borrowers’ capacities to service the loans. However, despite the decrease in interest rates, after introduction of interest rate capping in 2016 non-performing loans have still been increasing. It was therefore essential to examine influence of interest rates on NPLs in Kenyan commercial banks. Therefore, general study objective was to assess the association between IR and Kenyan commercial banks’ NPLs. Specific objectives were to examine influence of credit size, bank lending rates and interest on deposit on NPLs. The study sought to evaluate moderating effect of CBR on association between interest rate and NPLs. The study was guided by classical theory of interest rate, Keynes theory of liquidity reference, information asymmetry theory as well as adverse selection theory. An explanatory research approach was adopted. Group of interest comprised all 39 commercial banks operating in Kenya that were currently operational. Since the sample size was small (39) a bank census was carried out and duration between 2016 and 2020 was covered in this study. The study deployed secondary data, which was acquired from Kenyan commercial banks’ financial statements and from CBK supervision reports. Moreover, the study made use of a data extraction tool to collect secondary data. In analysis of data, the researcher used inferential and also descriptive statistics and all statistical analysis was carried out with the support of STATA version 14. Descriptive statistics comprised of frequency distributions, percentages, mean, variances as well as standard deviation. On the other hand, inferential statistics were carried out using regression analysis, which was fixed effect based on the results from Hausman test. Diagnostic tests that were done include normality test, heteroscedasticity test, autocorrelation test, linear test, Hausman test, multicollinearity test, and the UR test. The study found that IOD measured in terms of Interest on Money Deposited has significant and inverse effect on the NPLs (Ratio of gross NPLs to gross loans) of Kenyan commercial banks. The research discovered that BLR measured in terms of Commercial banks weighted average rates, has a significant and positive effect on NPLs of Kenyan commercial banks. In addition, CS measured using amount of loans and advances has insignificant negative effect on NPLs. Additionally, CBR has no moderating influence on the link between IR and NPLs in Kenyan commercial banks. The study therefore recommends that the commercial banks in Kenya ought to lower the interest rate charged on deposits since increasing rate of interest lowers demand for loans and also leads to loan default by the borrowers. In addition, the commercial banks’ management in Kenya should develop proper strategies to increase the lending interest rates such as increasing the spread between federal funds rate and the rate that customers are charged by the bank in order to increase the loans’ profitability. Moreover, the management of commercial banks should put proper measures to lower the credit size since huge loans size leads to high possibility of defaulters. Moreover, lowering the credit size increases the number of loan borrowers which consequently increases the profitability.