The Relationship Between Monetary Policy and Non Performing Loans in Deposit Taking Saving and Credit Cooperative Societies in Nairobi County, Kenya

Abstract

Monetary policy foster stability of loan prices, interest rates and exchange rates. Monetary regulations exist for safeguarding the banking industry against systemic risk, protecting consumers from excessive charges such as loan interest charges and finally to achieve high financial returns in credit unions. In Kenya, regulated SACCOs objective is to increase lending and volume of deposits. Introduction of Central Bank rate as a monetary policy tools lead to loan supply of less liquid SACCOS, deposit base and induce SACCOs ability to perform their expected roles within the financial system. The study examined the relationship between monetary policies governing DTS and on loan performance in Deposit Taking SACCOs in Kenya by answering the question. The objective of the study was to examine the relationship between monetary policy and nonperforming loans Deposit Taking SACCOs (DTS) in Nairobi County, Kenya. The study adopted descriptive survey research design. The population of this study was all 29 licensed DTS in Nairobi Kenya. The study adopted a census survey where all the 29 DTS form part of the study. The study collected secondary data from financial reports of deposit taking SACCO. Data was analyzed through description statistics, means and standard deviations. Inferential statistics, correlation and regression analysis was also done. The study established that interest rate significantly and positively predict loan performance in SACCOs and that open market operations predict negatively and significant influence on loan performance in SACCOs hence increase in interest rate and open market operations decrease loan performance in SACCOs. The study revealed that retained earnings predict significant and negatively relationship with loan performance in Deposit Taking SACCOs and that increase in retained earnings would lead to increase in NPLs in SACCO. The study revealed that size of the Deposit Taking SACCOs predict significant and negative relationship with loan performance in Deposit Taking SACCOs. The study concluded that increase in retained earnings would increase loan performance in Deposit Taking SACCOs as its lower level of NPLs and that exist a strong positive and significant relationship between SACCOs size and NPLs demonstrating that increase in Deposit Taking SACCOs’ assets lead to decrease in level of Nonperforming loans. The study concluded that NPLs of the Deposit Taking SACCOs was significantly and negatively predicted by cash reserve ratio as increase in cash reserve adequacy and monetary expansion led to increase in level of NPLs as reasons behind the banking fragility. The study concluded that interest rate significantly and positively predict NPLs in Deposit Taking SACCOs. The study concluded that retained earnings predict significant and negatively relationship with loan performance in Deposit Taking SACCOs and that increase in retain earnings would lead to increase in NPLs in SACCOs. The study recommend that the financial regulatory authorities such as CBK and SASRA should formulate policies that should foster SACCOs involvement in investing in treasury bills , open Market operations as interest rate significantly and positively predict loan performance in Deposit Taking SACCOs. The study recommend that management of Deposit Taking SACCOs should devise measures to reduce occurrence of accumulated losses and increase retained earnings to foster retain reserves.