Determinants of non-performing loans in Kenya

Abstract

Non-performing loans (NPLs) are tending towards a worrying level in Kenya, a trend that could eventually cripple the financial sector in Kenya. As at January 2001, the level stood at 39% of the total loans in the Kenyan Commercial Banks. This study sets out to inquire into the factors that have been instrumental in the creation of these non-performing loans and the extent to which each of these factors has contributed to this trend. The population of study was the commercial Banks in Kenya and specifically all the Branches in Nairobi. A sample was drawn from this population - 35 banks with no government shareholding and 20 banks in which the government has shareholdings. Questionnaires were distributed to the banks that had been sampled. The response rate was 75% and 62.85% for the Banks with government shareholding and those without government shareholding respectively. The factors that were investigated were: interest rates, government influence, exchange rate fluctuations, decline in economic growth, poor management of businesses, culture, lack of a credit reference bureau, delays in approval, under-financing of projects, misrepresentation of projects and lending that is only based on security. The respondents resoundingly indicated the decline in economic growth as the most significant cause of NPLs in Kenya. This factor cuts across board for the banks without government shareholding as well as those in which the government has a shareholding. Another interesting observation from the findings is that whereas government influence has been seen as more influential within those banks that the government has a shareholding, it has no doubt had a significant impact within the banks that the government has no shareholding. This influence has been demonstrated at the policy and political levels. The tourism industry is a case in point. The other factors were also' identified as significant, with varying degrees of impact.