Factors Influencing Performance of Unsecured Bank Loan Portfolios: a Case of Selected Commercial Banks in Nairobi County, Kenya

Abstract

Most commercial banks in Kenya and the world at large have been facing a myriad of challenges that relate to credit risk management. The study assessed the different factors that influence performance of unsecured bank loan portfolios, in selected banks in Kenya with focus on Nairobi County. The objectives that guided the study were economic factors, socio-demographic factors, bank related and environmental factors. The study was guided by loan pricing, moral hazard, information and adverse selection theories. A cross-sectional survey research design was implemented. The study targeted employees working in the credit and finance/accounts departments of the selected commercial banks. There were a total of 250 employees targeted in this research. A sample of 152 respondents was preferred. Both purposeful and simple random sampling methods were employed. The study adopted a structured questionnaire to collect data. The questionnaire was initially examined to establish both its validity and reliability. The software used for data analysis was SPSS.This captured both descriptive and inferential statistics. The findings of the research demonstrated that the combination of interest rates, credit risk policy, and bank‟s operating environment and social demographic factors influenced the performance of unsecured loan portfolios positively. It was concluded that commercial banks charged a higher interest rate on unsecured loans than on secured loans. The study recommended that banks should price their loans in such a way that the lending interest rate is high enough to cover for costs and earn profits and low enough for the borrowers to afford with ease. In addition, the Kenyan governing body for banks, (CBK) should also set up solid standards and controls to screen unsecured loaning by business banks with the aim that institutions do not go over the edge on their unsecured loaning to their clients and non-clients that may turn out to be difficult to recoup, thus leading to the collapse and even closure of some business banks in the long-term.