The Effect of Loan Defaults on Financial Performance of Commercial Banks

Abstract

Commercial2banks in2Kenya have2been facing performance issues in2the last2five years where the banking2sector showed a decline in2profits by 30% in 2020. The banks have also been experiencing rising levels of loan defaults. This study sought. This research utilized the descriptive research2design to determine2the effect2of loan defaults on financial2performance of 42 commercial2banks in Kenya2between 2016 and 2020. This paper utilized secondary2data from the annual2reports got from the2Central bank of2Kenya website. The study utilized annual bank data for analysis. Data2analysis was2done using descriptive2statistics and regression analysis2with the use of SPSS 25. From the analysis, the results showed thatloan defaults2had a positive but insignificant effect on financial2performance of the sampled commercial2banks. This leads to the conclusion that loan defaults had no effect on financial2performance of commercial2banks. This shows that the loan defaults do not make any significant contribution to the financial performance of commercial banks in Kenya. Firm size showed a positive and significant regression2coefficient. This leads to the conclusion that firm size has a positive effect2on financial performance2of commercial2banks in Kenya. The2study also concludes that commercial2banks increase their size to enhance their financial performance. On the2other hand, liquidity showed a negative and significant regression coefficient. This study, hence, concludes that liquidity a negative2effect on financial2performance of commercial2banks in Kenya. Leverage showed a positive and significant regression2coefficient. Therefore, this study concludes that leverage has a positive2effect on financial2performance of commercial2banks in Kenya. The study2recommends that commercial2banks in their attempt to manage loan defaults, there is need to consider other factors like assets, liquidity and leverage.