Effect of Financial Technology on Non-performing Loans Among Commercial Banks in Kenya

Abstract

Financial technology continues to change and shape the banking sector in Kenya. The Kenyan banking sector has focused increasingly on fintech as a strategic instrument to achieve organization goal of reducing costs and maximizing revenues. KCB has been promoting KCB MPESA and adopted Fuliza in 2019, Equity has been using Equitel and Eazzy banking app, NCBA bank has been offering Mshwari and recently Fuliza. Other banks also have some aspect of mobile lending through their digital platforms. The big question is whether the financial performance resulting from the use of fintech has improved. This might not be a straight forward relationship as fintech comes with the risk of increased NPLs. The goal of this research was to assess the influence of fintech on Kenyan commercial banks' non-performing loan (NPL) levels. Sufficiency of bank capital and the bank's size (log total assets) served as the model's guiding factors (core capital to risk weighted assets). A descriptive approach was used to the study. There were 42 commercial banks in Kenya that were studied in this research. For the analysis, data from CBK and yearly financial statements from 2016 to 2020 was gathered. This study was conducted among 38 banks that supplied detailed data for the five years in question. Regression and correlation analysis were used to assess the study assumptions and find a connection between fintech and NPLs. NPL variation was explained by the specified independent factors with an R2 of 0.063. This meant that the non-study factors account for 93.7 percent of the fluctuations in NPLs. Findings from a one-way ANOVA indicated that the model was statistically significant. The study further found that fintech (β=0.184, p=0.143) had a positive but not significant effect on the level of NPLs among banks in Kenya. The study also found that bank size (β=-0.358, p=0.016) and capital adequacy (β=0.211, p=0.037) had significant effect on the level of NPLs among banks in Kenya. The research indicates that management of commercial banks should maintain issuing mobile loans since this does not raise the risk of NPLs. Policy makers such as CBK should come out with regulations and standards that would make it simple for banks to provide fintech solutions to their clientele. It also suggests that banks in Kenya should increase their asset base since bigger financial institutions are better equipped to benefit from economies of scale and have stronger systems that help them to better manage NPLs than smaller financial institutions. The paper recommends more research into the impact of fintech on other financial institutions, such as microfinance banks and SACCOs. In the future, more study might focus on the causes of NPLs in Kenyan commercial banks.