Interest rates volatility on nonperforming loans portfolio of listed commercial banks in Kenya
Abstract
Interest rate is the price a borrower pays for the use of money they borrow from a
lender/financial institutions or fee paid on borrowed assets. The core function of any
financial institution is to facilitate mobilization of savings, diversification and pooling of
risks and allocation of resources. Nonperforming loan is a loan whose principal or
interest remains unpaid 90 days or more after due date. This is the money lent to an
individual that does not earn income and full payment of principal and interest is no
longer anticipated. The objective of this study was to establish the relationship between
the volatility in interest rates, 91-Day Treasury Bill Rate and nonperforming loans. The
study used several theories to explain variations in interest rates. Some of these theories
include: loanable funds theory; loan pricing theory and credit market theory. The study
adopted a longitudinal case research design. The population of this study was the eleven
listed commercial banks in Kenya. The study used secondary data which was collected
between 2002 and 2013 from the central bank of Kenya. The study established that 91Day
Treasury Bill Rate and interest rate volatility positively influenced nonperforming
loans of commercial banks listed at the NSE at varying degrees at one point in time. The
study also established that 91-Day Treasury Bill Rate and interest rate volatility had a
negative effect on the nonperforming loans portfolio at some point. The study concludes
that on average, the two independent variables influenced the nonperforming loans
portfolio to a variation of 91.5%. The study recommended that the Country handles its
macroeconomic variables appropriately as the changes in the macroeconomics like
exchange rates and inflation bring about devaluation of the currency and affect the
performance of the commercial banks. The study also recommends that policies should
be put in place to stabilize the performance of commercial banks in Kenya