Mr Bank Specific Determinants of Nonperforming Loans in Kenya

Abstract

Purpose: This paper aims to explore the bank-specific determinants of Nonperforming Loans in Kenya. To achieve this objective, the study considers four bank-specific variables that are expected to affect the magnitude of non-performing loans. These variables are bank size as measured by banks' total assets, loan-to-deposit ratio, capital adequacy ratio, and interest rates.

Methodology: The study used a causal research design. Aggregated data on all 43 Kenyan banks were collected from secondary sources. Time series regression was applied to the data.

Results: The study finds that there is a positive relationship between bank size and non-performing loans. It also observes that there is a negative relationship between loans-to-deposit ratio and non-performing loans. The study further observes that there is a negative correlation between capital adequacy ratio and non-performing loans in Kenya. Finally, the study establishes that there is a positive relationship between the interest rate and non-performing loans in Kenya.

Implications: The study recommends that banks should revise their interest rates downwards to enable borrowers to afford the loans and avert the cases of default. Banks should also invest in proper infrastructure for screening borrowers to avoid cases of loan default.