The significance of factors contributing to non-performing loans in commercial banks in Kenya ( a census of commercial banks in Nairobi)
Non-performing loans has been a persistent problem in Kenyan commercial banks. Several factors leading to non-performing loans had been identified but the significant contribution of each factor had not been identified. This study aimed at determining the significance of the factors contributing to non-performing loans problem in commercial banks in Kenya. The objectives of the study were to determine the bank related factors, such as bank management and the monitoring and control of loans, and their effects and significance on non performing loans, to find out the role that the economic factors in Kenya play in non-performing loans in the commercial banks and to establish the effects of customer related factors in the issue of non- performing loans in commercial banks in Kenya. A census of commercial banks in Nairobi was done. The study targeted all the 46 commercial banks operating in Nairobi. Despite the study being a census, the researcher selected only one respondent to represent each bank. The respondents were the credit managers of the 46 commercial banks. The factors leading to non-performing loans were divided into three categories, bank related factors, economic factors and customer related factors. To rank the factors according to their significance, a likert scale continuum was used then Factor Analysis was used to determine their significance. The researcher also used the Statistical Package for Social Sciences in the data analysis. The analyzed data was then be presented using tables, charts, graphs and cross tabulations. The study determined challenges of loan defaults and non-performing loans and also established how the commercial banks in Kenya were responding to loan defaults and non-performing loans. The major objective of the study was to establish the significance of the major factors leading to loan defaults and non-performing loan problem. The factors had been divided into three categories; bank related factors, economic factors and customer related factors. From the study, the factor identified to have the highest contribution to NPL problem is borrowers' company dissolution. The second factor was death of the borrower. The others factors which followed were, Poor monitoring and control of loans by bank management and Bankruptcy of the debtor. Diversion of funds by the borrower from the intended purpose had the least significant contribution in leading to non-performing loans. The study found out that .the other factors which lead to non-performing loans were: knowing your customer, security issues, (failure by guarantors,) company merger and interbank competition. The study came up with the various recommendations: Confidentiality should be established in the Banking Act and extended to loans in default as well as loans in good standing. The fear of disclosure would encourage potential borrowers to repay loans in time. The bank should have a right to disclose its business dealings with a customer to a third party the information concerning its business dealings with the customer. Also, the bank must shift emphasis away from reliance on collateral to viability of projects in assessing credit. Large credit risks and other specialized services would be undertaken at the Head Office where expertise would be concentrated. Lastly the researcher recommends information system- Decisions support Systems - DSS to act as CRBs should be put into use. These systems should be under the custody of Kenya Bankers Association - KBA or CBK to offer credibility and control.