Macro-economic Variables and Loan Default Rate: Evidence From the Banking Industry in Kenya
Abstract
In most of the global economies, one of the key sectors in boosting the economic
growth is the banking industry. It facilitates the allocation of capital from surplus to
deficit units. In essence, the sector determines the growth of countries‟ economies
and future sustainability by offering varying services, such as permitting cross-border
money transfers and assuring structured interaction between borrowers and savers. In a
nation, enhancing client trust improves banking sector stability, which is important
for long-term economic growth. However, the global banking sector has seen a rise in
bad debts since 2007 when global financial crisis occurred, the global banking sector
has seen a rise in bad debts, primarily as a result of Non-Performing Loans (NPLs)
being treated as a balance sheet cost, resulting in a reduction in a bank‟s financial
performance. The goal of this study is to determine the influence of macroeconomic
variables on the default rate in the banking industry in Kenya. The research was
influenced by the Arbitrage Pricing Theory (APT) and the Credit Portfolio View
(CPV) model. The study used a descriptive research design. The population of the
study was all the commercial banks licensed in Kenya of which a census study was
undertaken. Quarterly and secondary data for the period 2011-2020 was collected
from CBK website and analyzed by the study; the data collected was time series data.
The current research utilized inferential statistics that entail multiple linear regression
and correlation analyses. The results of the research showed that there is a positive
significant correlation between the lending interest rate and default rate while there is a
negative significant correlation economic growth and default rate as well as inflation
rate and default rate. However, the study also established that fluctuation in exchange
rates doesn‟t have a significant correlation with the default rate at the 5% significance
level. The study also indicated that the coefficient of determination of the study was
18.6% and there was a significant effect of these macroeconomic variables on loan
default rate for commercial banks in Kenya. Policy recommendations are made to the
government officials and policy formulators in the financial sector, mainly the
regulator, the CBK, and the Treasury, to majorly focus on the lending interest rate,
economic growth, and inflation macro-economic variables when trying to mitigate the
default rate of financial institutions. Further recommendations are generated towards
financial institution‟s practitioners and consultants to monitor the lending interest
rate, economic growth, and inflation macro-economic variables in order to regulate
credit expansion in order to mitigate credit risk.
Publisher
University of Nairobi
Subject
Macro-economic VariablesRights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1311]
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