Determinants of Business Collaterals and Loan Portfolio Quality of Commercial Banks’ Branches in Kisumu Municipality, Kenya

Abstract

The banking industry in Kenya is now characterized by increasing competition and innovation. This phenomenon has led to most banks adopting cutting edge technology to improve the quality of their loan portfolio. This paper tries to establish how determinants of business collateral impact on loan portfolio quality among the commercial banks within the banking sector. The study focuses on how loan portfolio quality of the commercial banks is affected by determinants of business collaterals. The main value of this study is to establish the relationship between determinants of business collaterals and loan portfolio quality from a Kenyan perspective. Relevant recommendations aimed at enhancing the banking sector based on the topic of the study are also made. The study is not only useful to the policy makers and academicians, but also to entrepreneurs interested in the banking sector. The study established the relationship between determinants of business collateral and loan portfolio quality. Survey of existing literature on the subject was done and interviews were held to 23 respondents to establish existing very significant existing determinants of business collaterals to loan portfolio quality. Data from 23 respondents was collected using questionnaire developed. Information obtained was analyzed. Regression and correlation analysis was used to determine relationships among variables. The research study found out that 84.21% of commercial banks in Kenya have existed for over 10 years, finding also showed that majority of the commercial banks are privately and publicly owned. The findings indicate that all commercial banks require collateral for any loan to be processed. Results of the study reveal strong relationship between legal environment, microeconomic uncertainty and firm and loan characteristics as determinants of business collateral to loan portfolio quality predicting 72.94% of changes in loan portfolio quality. Therefore from the results, these are the major determinants of business collateral and loan portfolio quality. The study also shows that decisions on what collaterals to be pledged are mainly guided by the board members of the commercial banks. This study had limitations. Some of the respondents did not return the questionnaires even after follow ups were done. Thirty questionnaires were issued but only twenty three were returned. There was difficulty in accessing the respondents due to their busy schedules and getting information, which they felt, was confidential. In addition to this the responses were based on the judgment of the interviewees and this could be subjective.