Effect of financial literacy of customers on loan perfomance of commercial banks in Kenya

Abstract

In recent years financial literacy study has been used to gauge the state of competency of individuals’ understanding of financial knowledge and prudent use of acquired money. Researchers supporting financial literacy see it as a basic necessity for individuals transacting with financial institutions. On the contrary, other scholars perceive excessive knowledge in finance leads to overconfidence resulting to costly mistakes in financial decisions. There are forty two commercial banks in Kenya offering financial services, one of the requirement by the central bank of Kenya is to submit audited annual reports which covers credit status, liquidity risk and loan performance. The banking sector as at December 2017 reported seven percent non-performing loans in there reports. Therefore this study was meant to find out effect of financial literacy of bank customers on the performance of loans among commercial banks operating in Kenya. Participants in this study were the customers from the 42 commercial banks in Kenya. Descriptive research design was used in describing the characteristics of the population under study in order to find the relationship. Method used to identify the sample size was simple random sampling design. Primary and secondary data collection was used in this study. Primary data was collected using administered questionnaires to respondents and secondary data was collected from the published audited reports from the banks for the year 2017 since this was a cross sectional study. The response rate of the tools administered was 73% and the test of reliability had a coefficient of 0.837 which is above the minimum acceptable level of 0.6. Descriptive results showed the highest number of customers were of the age between 26-35 years, there are more male customers (66%) than female customers (34%), the highest financial literacy activity by respondents was the critical analysis of price of goods before purchasing at a mean of 4.25 and the lowest activity was savings at 2.26.The regression model results indicates that variables under study had significant relationship, financial literacy (β = 0.028 P<0.05), age of customers (β = 0.054 p<0.05) and loan repayment period (β = -0.036 P< 0.05). The adjusted R2 was found to be 0.521 depicting independent variability of 52.1% of the dependent variable loan performance. The results indicate a significant relationship between the independent variable financial literacy and dependent variable loan performance. The findings conclude that the level of financial literacy of customers would affect the loan performance of commercial banks in Kenya, there is a strong positive correlation. Recommendations from this study is that banks need to invest in financial literacy training amongst the customers before advancing loan in order to improve on loan performance. The government also needs to put measures that will encourage the citizenry on financial literacy awareness through policies and formal curriculum development.