Debt Recovery Strategies and Loans Performance in Tier I Commercial Banks in Kenya
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Date
2024-10
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Publisher
Kenyatta University
Abstract
There has been a significant increase in loan defaults among commercial banks subsequently resulting in loss of employees and liquidity issues. Therefore, this study examined debt recovery strategies and loan performance of Tier I commercial banks and its specific objectives were to: determine effect of proactive debt recovery strategy on loan performance of commercial banks in Kenya; establish effect of reactive debt recovery strategy on loan performance of commercial banks in Kenya; and assess effect of third-party debt recovery strategy on loan performance of commercial banks in Kenya. Stakeholder theory, information asymmetry theory, and financial instability theory were used as its theoretical framework. The positivist research philosophy that employed a descriptive research design was adopted. The target population was 39 commercial banks from which the 9 Tier I banks were purposively selected into the sample size as the unit of analysis. In each bank, 5 loan departmental managers (personal/household, transport/communication, trade, building/construction, and real estate) were selected as respondents. The primary data was quantitative and was collected using a structured questionnaire that was tested for validity and reliability. The “drop and pick later” method of administration was adopted. The Statistical Package for the Social Sciences was used to perform descriptive, diagnostic tests, correlation, and regression analysis was used to analyse data. There was a positive association between third-party strategy and loan performance while proactive and reactive strategies did not have any association. However, the proactive strategy had a negative effect on loan performance while a positive effect was found between third-party strategy and loan performance. There was a negative and statistically significant effect of proactive strategy (β = - 0.437, p < 0.05); there was a positive but statistically insignificant effect of proactive strategy on loan performance (β = 0.248, p > 0.05); and a positive and statistically significant effect of third-party strategy and loan performance (β = 0.658, p < 0.05) was found. The study concludes that proactive strategy had negative effect on loan performance while third-party strategy had a positive effect on loan performance. The reactive strategy did not contribute to loan performance. The study recommends for further policy and regulatory framework for processing and monitoring credit worthiness of borrowers to reduce the chances of loan defaults. Further, a regulatory environment that provides support for more involvement of third-party debt recovery services to provide opportunities for commercial banks to focus on their core competencies.
Description
A Project Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Business Administration (Finance Option) of Kenyatta University, October 2024.
Supervisor
Fredrick W. S. Ndede