The Effect of Selected Macro Economic Variables on Non-performing Loans in Commercial Banks in Kenya

Abstract

Nonperforming loans indicate the quality of banks’ assets and is a vital pointer, among other indicators of economic performance and the banking sector performance in a country. However, in spite of collaborative efforts from players in the banking sector and regulating institutions, NPL levels registered in advanced economies as well as third world economies remain high. The banking industry in Kenya is considered among the most established, rapidly developing and leading in East Africa, thereby claiming the position of financial leader regionally. This study therefore, examines the effect of selected macro economic variables on NPLs in commercial banks in Kenya. The research used a descriptive research design and focused on the 42 banking institutions in Kenya. The research utilized secondary data and considered quarterly data for a period of 10 years from 2007 to 2016. Data was analyzed using descriptive and inferential statistics, which included correlation and pooled regression analysis. The Gretl statistical software was used to analyze the collected data. The findings established an insignificant negative relationship between the non-performing loan ratio and interest rates but a significant negative relationship between gross domestic product and the non-performing loan ratio. The result also found that the non-performing loan ratio had an insignificant positive relationship with exchange rates whereas the consumer price index had a significant positive relationship with the nonperforming loan ratio while money supply had a significant negative relationship with the non-performing loan ratio. The study concluded that the level of nonperforming loans among Kenyan banks is influenced by economic growth, inflation and money supply. The study recommended that the government and other policy-making institutions should develop effective strategic mechanism to reduce the adverse effect of inflations and to institute policy measures, which ensure good economic performance and optimal amounts of supplied currency.