An investigation of factors that contribute to non-performing loans: a case of commerical banks in Kenya

Abstract

This study focuses on assessment of factors that contributes to the level of nonperforming loans in commercial bank in Kenya. The management of non-performing loan has been a major challenge facing financial institutions. In the 1990s and the preceding years, the trend of NPLs was on increase. This led to collapse of many banks and other financial institutions and several others were put under statutory management. However those that survived the collapse learnt that poor management of loans extended to borrowers was a major cause of the heavy blow.

They thus learnt that poor credit management techniques by managers often plays part in NPLs (CBK, 1997) Improved credit risk management, has however reversed the earlier trend of NPLs. According to CBK 2004 the NPL were estimated at 31.1 % in June 200 I, 29.5% in June 2002 and 26% in December 2003. Nonetheless this percentage is still high and may eventually see the closure on many banks.

The objective of this study therefore was to establish magnitude of lack of awareness by borrowers on products being offered, risk assessment methods, risk management methods, economic environment and technological obsoleteness on NPLs. To achieve the objective of the assessment, primary data of the research was collected through administering questionnaires to 22 loan staffs of selected commercial banks (credit department). The data was then analyzed using Spearman's correlation coefficient statistical method. Tables and descriptive statistics were further used to represent the data. The deduction there from was used to assess the factors that contribute to the level of non-performing loans in commercial banks in Kenya. From the findings, it so emerged that among the five factors tested risk assessment methods have the highest correlation coefficient hence the main contributor to NPLS. This is however followed by lack of awareness by borrowers on products being offered. While risk management methods had the least share in the NPLs. The findings thereof can be of use to the management of financial institution as they will provide them with increased knowledge and understanding of exposure to risk and better control of NPLs, hence increased profit.