The relationship between loan policy and financial performance of commercial banks in kenya.
Abstract
Nature of loan terms and conditions have a large effect on the bank's competitiveness, the
loan policies a bank adopts affect the volume of loan applications
that a bank attracts (
Said
and Mohd, 2011).
The nature of the credit policies adopted by the banks influence the
volumes of the loans procured by the banks and thus the competitiveness of the bank in
lending and thus the performance in the industry (
Sangmi
, 2010).
The study sought to answer
the following research questions; what are the loan policies adopted by Commercial Banks’
in Kenya? What is the relationship between loan policy and financial performance of
commercial banks in Kenya?
This study adopted
a descriptive survey research design. The target population of this study
was all the 43 commercial banks in Kenya (CBK, 2012). The sample size for the study was
13 commercial banks. Stratified random sampling technique and simple random sampling
techniqu
e were used to obtain a sample size of 13 commercial banks. The secondary data was
collected from the published annual reports spanning five years (2009
-
2013) for the sampled
commercial banks. Regression analysis was used to test the relationship between l
oan policy
and financial performance of commercial banks in Kenya.
From the findings, the
provision
for bad and doubtful debts
was positively related to
the
financial performance of the Kenyan commercial banks. Declining
loan default rate
significantly en
hanced the financial performance of the Kenyan commercial banks.
Collateral
significantly enhanced the financial performance of the Kenyan commercial banks.
There is a
positive relationship between loan policy and
financial performance of the Kenyan
commer
cial banks
.
The management of
the commercial banks
should institute strict loan recovery measures in
order to reduce the amounts spent on
provisions for bad and doubtful debts
. This would in
turn increase the banks’ interest earnings on loans, significantl
y enhancing the financial
performance of the commercial banks.
The management of
the commercial banks
should
conduct due diligence of its clients to correctly establish capacity of the customer to repay.
This will in turn grow the banks’ performing loans t
hereby further enhancing their financial
performance
Publisher
University of Nairobi