MACRO ECONOMIC FACTORS AND NON-PERFORMING LOANS IN THE KENYAN BANKING INDUSTRY
MACRO ECONOMIC FACTORS AND NON-PERFORMING LOANS IN THE KENYAN BANKING INDUSTRY
Jacqueline Nyongi Kigamwa - Master’s student, Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
Dr. Nathan Mwenda Mutwiri - Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
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.
