James MuturiAnzagi, Sylvia Avilia2022-04-222022-04-222021http://ir-library.ku.ac.ke/handle/123456789/23652A Research Project Submitted to the School of Business in Partial Fulfilment of the Requirement for the Award of the Degree of Master of Business Administration (Finance) of Kenyatta University, October 2021A steady increase in non-performing loans poses great threat to the asset quality, earnings as well as capital of commercial banks in Kenya, evidenced by the general decline on equity returns at 1.84 percent per annum from 2012-2017. This is mainly because loans are the biggest operational assets and a source of income of most lending institutions, and therefore a volatile environment characterized by rising non-performing loans will not only affect the banking sector, but also have a ripple effect on the overall health of the financial system. Other studies done on this subject employed multiple regression analysis with varying results published, with some based on a single indicator with studies done in different countries. To close this research gap, this research aimed to establish the effect of macroeconomic variables on nonperforming loans of commercial banks in Kenya. Consequently, the specific objectives of this study were to examine the effect of interest rate, inflation, gross domestic product and unemployment on nonperforming loans of commercial banks in Kenya. The theories used to anchor the study are the Life Cycle Consumption Theory, Trade-off Theory, and Financial Theory. The study employed descriptive research design which was based on secondary data on a yearly basis from 2012-2017.The targeted population of the study solidly comprised of the 43 commercial banks in Kenya. Census design was used in the study with data collected through a data collection guide. The data was analyzed using the NPL ratio within the structure of the panel regression model where diagnostic test for normality, multicollinearity, homoscedasticity, linearity tests were carried out before making inferences. The null hypotheses of the study were tested based on 0.05 significance level. The study found that there is significant and negative effect of inflation on nonperforming loans of commercial banks in Kenya with the recommendation that bank managers ought to fully anticipate price level fluctuations in the administration of loans to help in minimizing loan defaults. The study further found that there is a significant positive effect of lending interest rate on the nonperforming loans on commercial banks in Kenya. Therefore, the study recommended that bank managers ensure efficient credit risk management as well as placing interest rates on loans that are in line with the underlying economic conditions of the country. Further, the study established that unemployment rate has insignificant positive effect on the nonperforming loans of commercial banks in Kenya. Lastly, the regression output established that the gross domestic product significantly and negatively affects nonperforming loans of commercial banks in Kenya, with the recommendation that the government should stimulate economic activities in the country to increase employment opportunities as well as to boost our local industries through patronage of locally manufactured goods that will in turn help in ensuring good performance of firms, thereby enhancing their ability to service loans.enMacroeconomic VariablesNon - Performing LoansCommercial BanksKenyaThesis