Effects of Macro-economic Factors on Non-performing Loans of Commercial Banks in Kenya

Abstract

The increase in NPLs of a commercial bank is a major concern for the bank, of which necessitates the review of its lending policies. The reduction in the amount available to borrowers affect financial intermediation and aggravates economic deterioration. It therefore becomes a loop in which adverse macroeconomic factors such as increase in inflation rate or interest rate increases NPLs in Kenyan commercial banks. This study looks the effects of macroeconomic factors on NPLs in commercial banks in Kenya. The research used a descriptive and cross-sectional research design and focused on the whole banking industry focusing on the 39 commercial banks. The study used secondary data and utilized quarterly data for a ten-year period starting from 2010 to 2019. The model used for this research is a multiple regression model. The research used NPL ratio as the dependent variable with GDP, BOP, Interest Rates, Exchange rates, Inflation rate and Money Supply as the independent variables. NPLs were seen to be increasing and GDP, BOP and Inflation had an influence on NPLs. The study recommends banking managements and government agencies to formulate policies that would mitigate the fluctuations in interest rates and inflation rates respectively and develop strategic mechanisms that would ensure GDP growth, optimal currency levels in the market and a reduction in BOP deficit.