Macro Economic Factors and Nonperforming Loans in the Kenyan Banking Industry
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Date
2023
Authors
Kigamwa, Jacqueline Nyongi
Mutwiri, Nathan Mwenda
Journal Title
Journal ISSN
Volume Title
Publisher
IAJEF
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. This in
turn may produce a domino effect
characterized by decreasing profits for the
banks due to most banks relying on these
assets(loans) and advances as their largest
income creators. The rise in Non
Performing Loans also indicates high
default rate. In response to this, the
researcher sought to study the effect of
macro-economic factors on Non
Performing Loans in Kenyan commercial
banks. The study was guided by two
objectives, namely; to establish the effect of
interest rate on non performing loans in
commercial banks in Kenya and to
determine the effect of inflation rate on non
performing loans in commercial banks in
Kenya. The study was based on four
theories; moral hazard, assymetric
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 KBA. 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 SPSS(version
22.0). Analysis of the data was through
application of inferential statistics and
descriptive statistics. The key findings were
as follows: the relationship between real
interest rate and NPLs was positive; the
relationship between inflation and NPLs
was negative; the relationship between
exchange rate and NPLs was both a positive
and negative relationship. The study
recommends the following to CBK 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. KBA to organize quarterly
meetings where banks with high NPLs meet
with banks that have low NPLs so as to
learn measures that these banks have
implemented.
Description
Article
Keywords
Macro economic factors, Nonperforming loans, banking industry, interest rate, inflation rate
Citation
Kigamwa, J. N., & Mutwiri, N. M. (2023). Macro economic factors and non-performing loans in the Kenyan banking industry. International Academic Journal of Economics and Finance, 3 (8), 279, 291, 2.