Non-Performing Loans and Financial Performance of Commercial Banks in Kenya
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Date
2018-11
Authors
Towett, Benard Cheruiyot
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
All financial institution all over the world are facing the enormous risks of the non-performing
loans which has led to the decline in the portfolio quality of the non-performing loans. The nonperforming
loans are not in existence for any particular institution or even an economy but they
affect both developed and developing economies. The Central Bank of Kenya prudential
guideline classifies loans that either the principal or interest are past due for more than ninety
days as non-performing loans. The general objective of this study was to establish the effects of
non-performing loans on the financial performance (return on assets) of commercial banks in
Kenya. The specific objectives of the study were: To identify the influence of the size of
nonperforming loans on financial performance of commercial banks, to investigate the
relationship between age of non-performing loans and financial performance on commercial
banks, to identify the relationship between collateral of non-performing loans with respect to
financial performance of commercial banks and to investigate the effects of cost of nonperforming
loans on the performance of the commercial banks. The study was guided by the
credit crunch theory, moral hazard theory and the theory of performance. The study population
was all the commercial banks in Kenya. The mode of data collection was extraction of collated
secondary data in the form of annual banking supervisory reports by the Central Bank of Kenya
derived from respective published annual financials of commercial banks. The study period was
five years starting from the year 2011 to year 2016. The dependent variable in the study was the
financial performance of commercial banks in Kenya while the independent variables were size,
age, collateral and cost of nonperforming loans. The study used a regression analysis to find the
relationship between the independent variables and the dependent variables. The study found a
negative significant relationship between nonperforming loan size, age and cost with the return
on assets of commercial banks in Kenya. The study found a positive significant relationship
between financial performances of commercial banks in Kenya with the value of collateral of
nonperforming loans. The study found a negative significant relationship between the financial
performance of commercial banks in Kenya and the size of nonperforming loans, age of
nonperforming loans and cost of nonperforming loans. The study findings supported moral
hazard theory that states that moral hazard problems may be occasioned by asymmetric
information which makes it difficult to distinguish between good and bad borrowers. The study
recommends loan policies, practices and watching mechanism that will ensure reduce transition
of loans from watch to substandard category and or eliminate movement of loans from
substandard to doubtful as such movements have commercial implication on the overall financial
performance of commercial banks in Kenya. The study recommends issuance of short term
credit facilities in appreciation of the expected credit life loan provisioning that is coming into
effect by the adoption of IFRS 9 on 01/01/2018. The study also recommend a proper and
working relationship management of loan facilities and a monitoring mechanisms and actions on
early warning signs of nonperforming loans with appropriate corrective actions.
Description
A Research Project Submitted In Partial Fulfilment for the of the Award of the Degree of Master of Business Administration in Finance, Kenyatta University