Macro Economic Factors and Non-Performing Loans in Commercial Banks in Kenya
Loading...
Date
2023
Authors
Kigamwa, Jacqueline Nyongi
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Studies portray Non-Performing Loans as an accurate pointer to the health status of a bank; where a high percentage of these loans indicates the institution is unable to collect the interest and principal for the amount advanced to the customers. In response to this, the researcher sought to study the effect of macro-economic factors on Non-Performing Loans in commercial banks in Kenya. The study was guided by four objectives, namely; to establish the effect of interest rate on non-performing loans in commercial banks in Kenya, to determine the effect of inflation rate on non-performing loans in commercial banks in Kenya, to establish the effect of exchange rate on non-performing loans in commercial banks in Kenya and to determine the effect of Gross Domestic Product on non-performing loans in commercial banks in Kenya. The study was based on four theories; moral hazard, asymmetric information, agency and the interest theory. Descriptive research design was applied. The target population was 42 commercial banks. The sample frame size was 210 objects. The study used secondary data from Central Bank of Kenya annual supervision reports and Kenya Bankers Association. The number of entries of the data were grouped into four quarters per year of study. Data was analyzed using descriptive and inferential statistics namely, correlation and panel data regression with the help of Statistical Package for Social Sciences(version 22.0). The key findings were as follows: the relationship between real interest rate and non-performing loans was positive; the relationship between inflation and non-performing loans was negative; the relationship between exchange rate and non-performing loans was as follows: for the following three currencies USD, GBP, and EURO this was positive; for JPY this was negative. The effect of real gross domestic product was insignificant. The study also found that changes in exchange rates were a major contributor to non-performing loans followed by Inflation, then Real Interest rate and lastly gross domestic product. The study recommends the following to Central Bank of Kenya and Government of Kenya-stabilize exchange market by maintaining desirable exchange rates; employ fiscal policy to control inflation; manage interest rates and money in circulation. It also recommends the following to the commercial banks and Kenya Bankers Association- formation of a platform for banks to exchange information on borrowers’ creditworthiness; banks to shift their focus from how to increase assets (loans) to early detection of non-performing loans; change consumer behavior by introducing risk-based pricing rule that will be dependent on a customer’s borrowing & loan repayment discipline; offer struggling customers a loan restructure option as guided by Central Bank of Kenya during Covid19 period; increase lending in secure loans;lastly, KBA to organize quarterly meetings where banks with high non-performing loans meet with banks that have low non-performing loans so as to learn measures that these banks have implemented.
Description
A Project Submitted in Partial Fulfilment for the Requirements of the Award of Degree of Master of Business Administration (Finance) in the School of Business, Economics and Tourism of Kenyatta University, March 2023.
Keywords
Macro Economic Factors, Non-Performing Loans, Commercial Banks, Kenya