The relationship between non-performing loans management practices and financial performance of commercial banks in Kenya

Abstract

Most developing economies that undergo the process of financial liberalization have banking systems that are burdened by a large proportion of bad loans and risky credits. Bad loans have created several problems for commercial banks in Kenya hindering efficient functioning of banks. It is for this reason that commercial banks need to adopt non-performing loans management practices so as to improve financial performance. This study seeks to establish the relationship between for non-performing loans management practices and financial performance of commercial banks in Kenya. A causal design was adopted as the research design major emphasis was on determining a cause-and-effect relationship between non-performing loans management practices and financial performance of commercial banks in Kenya. The population of this study consisted of all 46 commercial banks in Kenya. The primary data was collected using structured questionnaires and consisted of responses offered on management techniques that commercial banks apply in managing their non-performing loans. The research was both quantitative and qualitative in nature. The data collected was checked for completeness and analyzed using the statistical package for social sciences (SPSS version 17) package. Tables and charts were used for presentation of the analyzed data. The study concludes that there is a need for commercial bank to adopt non-performing loans management practices. Such practices include; ensuring sufficient collaterals, limiting lending to various kinds of businesses, loan securitization, ensuring clear assessment framework of lending facilities and use of procedures in solving on problematic loans among others. The study further concludes that there was a positive relationship between non-performing loans management practices and the financial performance of commercial banks in Kenya which implies that adoption of nonperforming loans management practices leads to improved financial performance of commercial banks in Kenya.