Effects of Selected Macroeconomic Variables on the Performance of Business Loans Issued by Commercial Banks in Kenya

Abstract

This study was carried out to find out the effects of selected macro-economic variables on the performance of business loans issued by commercial banks in Kenya. The dependent variable under study was performance of business loans issued by commercial banks in Kenya. Independent variables included selected macroeconomic variables such as inflation, interest rate, exchange rate and economic growth. Data was collected from the CBK and CRB detailing business loans issued by the 43 banks. The macro economic data was collected from KNBS registry. The justification for the study was premised on the conflicting empirical findings advanced by other previous studies. Moreover, the theories anchoring the relationship in the performance of macroeconomic variables and the performance of loans give conflicting prepositions. The loanable funds theory of interest and the liquidity preference theory of interest and money avers that there is a positive relationship between default and macroeconomic variables. Yet the moral hazard theory opines that there is no relationship between the macroeconomic variables and default. The two-tailed correlation analysis indicated that inflation and interest rate are positively correlated to non-performing loans On the other hand, exchange rate and economic growth was found to be negatively correlated with non-performing loans. The ordinary least square regression technique found a statistically significant positive relationship between interest rate, exchange rate and non-performing loans. Yet there was a negative relationship between exchange rate, economic growth rate and non-performing loans.